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1996

0QTR1

AAPL

https://www.sec.gov/Archives/edgar/data/320193/0000320193-96-000002.txt

-----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, JRFFcMaRQwjz5KsdafKA5AHsRYvUf8t6Ig0pcrqFHKhpIJl/FOz3gEjHy3yZPGQN rRmgyQ9KcIWSGbH5lZiNew== <SEC-DOCUMENT>0000320193-96-000002.txt : 19960216 <SEC-HEADER>0000320193-96-000002.hdr.sgml : 19960216 ACCESSION NUMBER: 0000320193-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951229 FILED AS OF DATE: 19960212 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: 96516045 BUSINESS ADDRESS: STREET 1: 20525 MARIANI AVE CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961010 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> ___________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 29, 1995 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 Identification No.] of incorporation or organization] 1 Infinite Loop 95014 Cupertino California [Zip Code] [Address of principal executive offices] 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 [ ] 123,656,178 shares of Common Stock Issued and Outstanding as of February 2, 1996 ___________________________________________________________________________ <PAGE> 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 December 29, December 30, 1995 1994 Net sales $ 3,148 $ 2,832 Costs and expenses: Cost of sales 2,673 2,018 Research and development 153 132 Selling, general and administrative 441 415 Restructuring costs -- (17) 3,267 2,548 Operating income (loss) (119) 284 Interest and other income (expense), net 10 15 Income (loss) before income taxes (109) 299 Income tax provision (benefit) (40) 111 Net income (loss) $ (69) $ 188 Earnings (loss) per common and common equivalent share $(0.56) $ 1.55 Cash dividends paid per common share $ .12 $ .12 Common and common equivalent shares used in the calculations of earnings (loss) per share (in thousands) 122,994 121,600 See accompanying notes. 2 <PAGE> APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In millions) December 29, September 29, 1995 1995 (Unaudited) Current assets: Cash and cash equivalents $ 824 $ 756 Short-term investments 276 196 Accounts receivable, net of allowance for doubtful accounts of $92 ($87 at September 29, 1995) 1,944 1,931 Inventories: Purchased parts 707 841 Work in process 250 291 Finished goods 990 643 1,947 1,775 Deferred tax assets 302 251 Other current assets 258 315 Total current assets 5,551 5,224 Property, plant, and equipment: Land and buildings 516 504 Machinery and equipment 646 638 Office furniture and equipment 143 145 Leasehold improvements 199 205 1,504 1,492 Accumulated depreciation and amortization (792) (781) Net property, plant, and equipment 712 711 Other assets 290 296 $ 6,553 $ 6,231 See accompanying notes. 3 <PAGE> APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions) December 29, September 29, 1995 1995 (Unaudited) Current liabilities: Short-term borrowings $ 498 $ 461 Accounts payable 1,431 1,165 Accrued compensation and employee benefits 125 131 Accrued marketing and distribution 284 206 Other current liabilities 367 362 Total current liabilities 2,705 2,325 Long-term debt 304 303 Deferred tax liabilities 750 702 Shareholders' equity: Common stock, no par value; 320,000,000 authorized; 123,118,433 shares issued and outstanding at December 29, 1995 (122,921,601 shares at September 29, 1995) 404 398 Retained earnings 2,380 2,464 Accumulated translation adjustment and other 10 39 Total shareholders' equity 2,794 2,901 $ 6,553 $ 6,231 See accompanying notes. 4 <PAGE> APPLE COMPUTER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) THREE MONTHS ENDED December 29, December 30, 1995 1994 Cash and cash equivalents, beginning of the period $ 756 $ 1,203 Operations: Net income (loss) (69) 188 Adjustments to reconcile net income (loss) to cash generated by operations: Depreciation and amortization 42 38 Net book value of property, plant, and equipment retirements 1 5 Changes in assets and liabilities: Accounts receivable (13) (18) Inventories (172) 4 Deferred tax assets (51) 24 Other current assets 57 77 Accounts payable 266 74 Income taxes payable (67) (31) Accrued marketing and distribution 78 97 Other current liabilities 67 (66) Deferred tax liabilities 48 61 Cash generated by operations 187 453 Investments: Purchase of short-term investments (244) (410) Proceeds from sale of short-term investments 164 25 Purchase of property, plant, and equipment (31) (22) Other (36) (12) Cash used for investment activities (147) (419) Financing: Increase (decrease) in short-term borrowings 37 (83) Increase (decrease) in long-term borrowings 1 (1) Increases in common stock, net of related tax benefits 5 9 Cash dividends (15) (14) Cash generated by (used for) financing activities 28 (89) Total cash generated (used) 68 (55) Cash and cash equivalents, end of the period $ 824 $ 1,148 See accompanying notes. 5 <PAGE> 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 29, 1995, included in its Annual Report on Form 10-K for the year ended September 29, 1995 (the "1995 Form 10-K"). 2. Interest and other income (expense), net, consists of the following: (In millions) Three Months Ended December 29, December 30, 1995 1994 Interest income $ 17 $ 19 Interest expense (17) (7) Gain on foreign exchange instruments 18 9 Net premiums and discounts paid on forward and option foreign exchange instruments (7) (3) Other income (expense), net (1) (3) $ 10 $ 15 3. The Company's cash equivalents consist primarily of U.S. Government securities, Euro-dollar deposits, and commercial paper with maturities of three months or less at the date of purchase. Short-term investments consist principally of Euro-dollar deposits and commercial paper with maturities between three and twelve months. The Company's marketable equity securities consist of securities issued by U.S. corporations and are included in "Other assets" on the accompanying balance sheet. The Company's cash equivalents, short-term investments, and marketable equity securities are classified and accounted for as available-for-sale and are generally held until maturity. The adjustments recorded to shareholders' equity for unrealized holding gains (losses) on available-for-sale cash equivalents and short-term investments were not material, either individually or in the aggregate, at December 29, 1995. The net adjustment recorded to shareholders' equity for unrealized holding gains (losses) related to marketable equity securities was an unrealized gain of approximately $18 million at December 29, 1995. The realized gains (losses) recorded to earnings on sales of available-for-sale securities, either individually or in the aggregate, were not material for the three months ended December 29, 1995. 4. U.S. income taxes have not been provided on a cumulative total of $400 million of undistributed earnings of certain of the Company's foreign subsidiaries. It is intended that these earnings will be indefinitely invested in operations outside of the United States. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed. Except for such indefinitely invested earnings, the Company provides for federal and state income taxes currently on undistributed earnings of foreign subsidiaries. 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 for the years 1984 through 1988, and most of the issues in dispute for these years have been resolved. On June 29, 1995, the IRS issued a notice of deficiency proposing increases to the amount of the Company's federal income taxes for the years 1989 through 1991. The Company has filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate provision has been made for any adjustments that may result from these tax examinations. 5. Earnings per share is computed using the weighted average number of common and dilutive common equivalent shares attributable to stock options outstanding during the period. Loss per share is computed using the weighted average number of common shares outstanding during the period. 6 <PAGE> 6. Certain prior year amounts on the Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation. 7. No dividend has been declared for the first quarter of 1996, and the Board of Directors does not anticipate that dividends will be declared in the near future given the financial condition of the Company. 8. The information set forth in Item 1 of Part II hereof is hereby incorporated by reference. 7 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on Apple's fiscal calendar. (Tabular information: Dollars in millions, except per share amounts) Except for historical information contained herein, the statements set forth in this Item 2 are forward-looking and involve risks and uncertainties. For information regarding potential factors that could affect the Company's financial results refer to pages 11 - 15 of this Management Discussion and Analysis of Financial Condition and Results of Operations under the heading "Factors That May Affect Future Results and Financial Condition." Results of Operations First First Quarter Quarter 1996 1995 Change Net sales $ 3,148 $ 2,832 11.2% Gross margin $ 475 $ 814 -41.6% Percentage of net sales 15.1% 28.7% Operating expenses (excluding restructuring costs) $ 594 $ 547 8.6% Percentage of net sales 18.9% 19.3% Restructuring costs $ -- $ (17) -- Percentage of net sales -- -0.6% Net income (loss) $ (69) $ 188 -136.7% Earnings (loss) per share $ (0.56) $ 1.55 -136.1% Net Sales Net sales for the first quarter of 1996 increased over the comparable period of 1995, primarily resulting from a combination of unit growth and slightly higher average aggregate revenue per Macintosh (registered trademark) computer unit. Total Macintosh computer unit sales increased 12% in the first quarter of 1996, over the comparable period of 1995. This unit sales growth principally resulted from strong sales of the Company's PowerPC (registered trademark) products, which accounted for over 78% of total unit shipments at the end of the first quarter of 1996, compared with 26% in the comparable period of 1995. Specifically, unit sale increases were within the Power Macintosh (trademark) and the Performa (registered trademark) families of desktop personal computers. This unit growth was partially offset by declining unit sales of certain of the Company's older product offerings. The increase in average aggregate revenue per Macintosh computer unit of approximately 7% in the first quarter of 1996 over the comparable period of 1995 was driven by a shift in mix towards the Company's newer products and products with multi-media configurations. Specifically, the Company recorded increased revenue from the sale of products within the Power Macintosh family of personal computers. International net sales grew 19% in the first quarter of 1996, over the comparable period of 1995, primarily reflecting strong net sales growth in Japan and certain countries within Europe. International net sales represented 51% of total net sales for the first quarter of 1996, compared with 47% for the corresponding period of 1995. Domestic net sales grew approximately 4% in the first quarter of 1996, over the comparable period of 1995. In general, the Company's resellers typically 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 $365 million at February 2, 1996, from approximately $618 million at December 1, 1995, primarily due to the Company satisfying product backlog that existed at December 1, 1995. 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 sharply 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. 8 <PAGE> 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 decreased both in amount and as a percentage of net sales during the first quarter of 1996, over the comparable period of 1995. The decrease in gross margin as a percentage of net sales was primarily a result of: aggressive pricing actions in Japan in response to extreme competitive actions by other companies attempting to gain market share; pricing actions in both the U.S. and Europe on certain configurations of entry level and PowerBook (registered trademark) products in order to stimulate demand; lower of cost or market adjustments charged to cost of sales due to pricing certain products in specific markets (particularly Japan) at below manufactured cost in response to competitive actions; and implementing changes in production plans in response to lower than expected demand, which necessitated the financial write-off of components, canceling component orders and incurring cancellation charges. Pressures on gross margin are continuing in the second quarter of 1996 as the Company has taken further initiatives to lower prices and reduce inventories. These actions could result in further inventory charges, expenses related to changes in production plans and cancellation charges. The decrease in gross margin levels in the first quarter of 1996 compared with the corresponding period of 1995 was somewhat offset by a weaker U.S. dollar relative to certain foreign currencies. 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. It is anticipated that gross margins will continue to remain under pressure and will remain below prior years' levels due to a variety of factors, including continued industrywide pricing pressures around the world, increased competition, compressed product life cycles, and the need to reduce current inventory levels. Gross margins declined in the first quarter of 1996 compared with the fourth quarter of 1995 and are likely to decline further in the second quarter of 1996. Research and Development First First Quarter Quarter 1996 1995 Change Research and development $ 153 $ 132 15.9% Percentage of net sales 4.9% 4.7% Research and development expenditures increased in amount in the first quarter of 1996 when compared with the corresponding period of 1995. This increase is primarily due to higher project and headcount related spending as the Company continues to invest in the development of new products and technologies. As a percentage of net sales, research and development expenditures remained relatively consistent in the first quarter of 1996 when compared with the corresponding period of 1995. 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. Going forward, the Company intends to simplify its product portfolio to focus its offerings primarily on innovative, differentiated and best-of-class products in its key market segments in education, business and the home. 9 <PAGE> First First Quarter Quarter Selling, General and 1996 1995 Change Administrative Selling, general and $ 441 $ 415 6.3% administrative Percentage of net sales 14.0% 14.7% Selling, general and administrative expenses increased in amount in the first quarter of 1996 when compared with the corresponding period of 1995. This increase was primarily a result of increased spending related to marketing and advertising programs. Selling, general and administrative expenses decreased as a percentage of net sales in the first quarter of 1996 when compared with the corresponding period of 1995, primarily as a result of an increase in the level of net sales and the Company's ongoing efforts to manage operating expense growth as a percentage of net sales. The Company will continue to face the challenge of managing selling, general and administrative expenses, particularly in light of the Company's expectation of continued pressure on gross margins and continued competitive pressures worldwide. Restructuring Costs First First Quarter Quarter 1996 1995 Change Restructuring costs -- $ (17) -- Percentage of net sales -- (0.6%) -- For information regarding the Company's current restructuring actions, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Factors That May Affect Future Results and Financial Condition" under the subheading "Restructuring of Operations." Interest and Other Income First First (Expense), Net Quarter Quarter 1996 1995 Change Interest and other income (expense), net $ 10 $ 15 -33.3% Interest and other income (expense), net decreased to $10 million in income in the first quarter of 1996 compared with $15 million in income during the same period in 1995. This $5 million decrease in interest and other income (expense), net is comprised of $14 million unfavorable variance related to: increased interest expense as a result of higher debt balances and borrowing rates; increased foreign exchange hedging costs due to higher foreign currency receivable balances; and decreased interest income as cash balances were lower. The unfavorable change in interest and other income was offset in part by a $9 million increase in income related primarily to realized and unrealized foreign exchange hedging gains in the first quarter of 1996 compared with the same period in 1995. The Company expects that its cost of funds will increase as a result of the recent downgrading of its short- and long-term debt to P-3 and Baa3, respectively, by Moody's Investor Services, and to B and BB-, respectively, by Standard and Poor's Rating Agency. Income Tax Provision First First (Benefit) Quarter Quarter 1996 1995 Change Income tax provision (benefit) $ (40) $ 111 -136.0% Effective tax rate 37% 37% The information contained in Note 4 of the Notes to Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this discussion. 10 <PAGE> Factors That May Affect Future Results and Financial Condition The Company's future operating results and financial condition are dependent on the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and 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; the effect any reaction to such competitive pressures has on inventory levels and inventory valuations; the effects of significant adverse publicity; the impact of uncertainties concerning the Company's strategic direction and financial condition on revenue and liquidity; the effect of continued degradation in the Company's liquidity; and the need for and effect of any business restructuring actions. The Company expects to report an operating loss for the second quarter of 1996 that will significantly exceed the operating loss of $69 million, after taxes, reported in the first quarter of 1996. The anticipated operating loss, which is largely attributable to declining sales due to marketplace uncertainty about the Company's strategic direction and prospects, does not include the financial impact of charges related to restructuring actions. Restructuring of Operations As announced on January 17, 1996, the Company is currently implementing a reorganization plan which is aimed at beginning to bring the Company's business model in line with major strategic goals and at the same time to move toward improving the cost and competitiveness of its operations. Initial actions planned to begin in the second quarter of 1996 will focus on streamlining the Company's business operations. These initial actions are expected to result in pre-tax charges of at least $125 million, and are primarily comprised of headcount reductions in the selling, general and administrative areas of at least 1,300 full-time employees, as well as evaluating the Company's various business investments. The Company expects to incur future restructuring charges as the several phases of the business reorganization are developed and implemented. These plans may include, among other actions, outsourcing of certain administrative and manufacturing functions. In addition, the Company intends to refine its product plans by reducing the number of products within certain categories in an effort to improve overall contribution. The Company's future operating results and financial condition could be adversely affected by its ability to effectively manage the transition to the new business model and cost structure. Implementation of the Company's restructuring actions may adversely affect the Company's ability to retain and motivate employees. In addition, while the restructuring actions are expected to lower the fixed cost of operations, it could also reduce the direct control that the Company currently has over various functions which may be outsourced. As such, the Company cannot determine the ultimate effect on the quality or efficiency of work performed in the event of outsourcing various functions. 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. 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 manufacturing 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 that were not anticipated in the design of those products. Accordingly, the Company cannot determine the ultimate effect that new products will have on its sales or results of operations. 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. The preceding may also be offset by other factors, 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 product previously in backlog. 11 <PAGE> 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 product. The measurement of demand for newly introduced products is further complicated by the availability of different product configurations, which may include various types of built-in peripherals and software. Configurations may also require certain localization (such as language) for various markets and, as a result, demand in different geographic areas may be a function of the availability of third-party software in those localized versions. For example, the availability of European-language versions of software products manufactured by U.S. producers may lag behind the availability of U.S. versions by a quarter or more. This may result in lower initial demand for the Company's new products outside the United States, even though localized versions of the Company's products may be available. As part of its restructuring plan, the Company may reduce the number of new product introductions and intends to reduce the number of products in certain categories within its product portfolio in order to focus its offerings on the Company's key markets and reduce required investments. This simplification within product lines may have an adverse effect on sales and on the Company's results of operations and financial condition in the future. Competition The personal computer industry is highly competitive and continues to be characterized by consolidations in the hardware and software industries, aggressive pricing practices, and downward pressure on gross margins. For example, in Japan, other companies have initiated extreme competitive actions in order to gain market share, and as a result, the Company has implemented aggressive pricing and promotional activities. In the first quarter of 1996, the Company's results of operations and financial condition were, and in the near future are expected to be, adversely affected by industrywide pricing pressures and downward pressures on gross margins. The Company's future operating results and financial condition may also be affected by the Company's ability to offer customers competitive technologies while effectively managing the impact on inventory levels and the potential for customer confusion created by product proliferation. The Company's future operating results and financial condition may also 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. On November 7, 1994, the Company reached an agreement with International Business Machines Corporation ("IBM") and Motorola, Inc. on a new hardware reference platform for the PowerPC microprocessor that is intended to deliver a much wider range of operating system and application choices for computer customers. As a result of this agreement, the Company is moving forward with its efforts to make the Macintosh operating system available on the common platform. In line with its efforts, on November 13, 1995, the Company, IBM, and Motorola, Inc. announced the availability of the "PowerPC Platform" specifications, which define a "unified" personal computer architecture and combine the Power Macintosh platform and the PC environment. Accordingly, 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. The Company is currently the primary maker of hardware that uses the Macintosh operating system, and it has a minority market share in the personal computer market, which is dominated by makers of computers that run the MS-DOS (registered trademark) and Microsoft Windows (trademark) operating systems. The Company's future operating results and financial condition may be affected by its ability to increase market share in its personal computer business. As part of its efforts to increase overall market share, the Company announced the licensing of the Macintosh operating system to other personal computer vendors in January 1995, and several vendors currently sell product that utilize the Macintosh operating system. The success of the Company's efforts to increase its overall market share through licensing of the Macintosh operating system will depend in part on the Company's ability to manage the risks associated with competing with companies producing Macintosh OS-based computer systems. Accordingly, the Company cannot determine the ultimate effect that licensing of the Macintosh operating system will have on its product pricing and unit sales or future operating results and financial condition. The Company believes that licensing the operating system will result in a broader installed base on which software vendors can develop and provide technical innovations for the Macintosh platform. However, there can be no assurance that the installed base will be broadened by the licensing of the operating system or that licensing will result in an increase in the number of application software titles or the rate at which vendors will bring to market application software based on the Macintosh operating system. The Company's principal competitor in producing operating system software, Microsoft Corporation, is a large, well-financed corporation which has a dominant position in various segments of the personal computer software industry. As a result of the introduction of Windows 95 in August 1995, the Company has taken and will continue to take steps to address the additional 12 <PAGE> challenges to and competitive pressures on its efforts in developing and marketing the Company's products. Accordingly, the Company's future operating results and financial condition could be adversely affected should the Company be unable to effectively manage the competitive pressure and other challenges presented by the introduction of Windows 95. Certain of the Company's personal computer products are capable of running application software designed for the MS-DOS or Windows operating systems ("Cross-Platform Products"), through software emulation of Intel Corporation microprocessor chips by use of software specifically designed for the Company's products, either those based on the Motorola 68000 series of microprocessors or those based on the PowerPC microprocessor. The Company has also introduced products that include both the RISC-based PowerPC 601 microprocessor and the 486 DX2/66 microprocessor, which enable users to switch between the Macintosh and DOS or Windows computing environments. The Company plans to supply customers who purchase Cross-Platform Products capable of running the MS-DOS or Windows 3.1 operating system with operating system software under a licensing agreement with Microsoft. This license agreement expired on December 31, 1995 (the "Old License Agreement"). The Company has attempted to license Windows 95 software from Microsoft but has been unable to do so because of the Company's unwillingness to consent to Microsoft's demand under Microsoft's proposed license agreement (the "New License Agreement") that the Company agree not to sue Microsoft if Microsoft infringes any of the Company's patents. Microsoft has also informed the Company that it will not renew the Old License Agreement unless the Company accepts the New License Agreement. Accordingly, the Company is currently unable to supply customers with any of Microsoft's operating systems on Cross-Platform Products except for such product that was in inventory as of December 31, 1995. Although customers could obtain copies of such software from other sources, the Company is unable to predict the effect of such a situation on the demand for Cross- Platform Products. Although Cross-Platform Products represented only a small portion of the Company's unit sales during 1995, the Company is unable to predict the effect of such a situation on the Company's future operating results. 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 the third-party developers' perception and analysis of the relative benefits of developing 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 earned, and the costs of developing such software products. Microsoft Corporation is an important developer of application software for the Company's products. Accordingly, Microsoft's interest in producing application software for the Company's products may be influenced by Microsoft's perception of its interests as an operating system vendor. The Company's ability to produce and market competitive products is also dependent on the ability of IBM and Motorola, Inc., the suppliers of the PowerPC RISC microprocessor for certain of the Company's products, to continue to supply to the Company 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. IBM produces personal computers based on the Intel microprocessors as well as on the PowerPC microprocessor, and is also the developer of OS/2, a competing operating system to the Company's Macintosh operating system. Accordingly, IBM's interest in supplying the Company with improved versions of 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 future operating results and financial condition may also be affected by the Company's ability to successfully expand and capitalize on its investments in other markets, such as the markets for Internet services and personal digital assistant (PDA) products. 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 international factors, such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. 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 13 <PAGE> 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 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 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 short-term borrowings and long-term debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest rate swap and option transactions. Certain of these swaps 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 interest rate swap and option 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 effective 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 and option positions 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 as such, may adversely affect the Company's operating results and financial position. The Company generally does not engage in leveraged hedging. Inventory and Supply In line with the Company's efforts to redesign its business model, the Company intends to streamline its product offerings in its key market segments in education, business and the home. However, this simplification of product lines may result in inventory reserves or cancellation fees related to custom component inventory purchased for anticipated product introductions that may be canceled. Furthermore, the Company may incur lower of cost or market adjustments in order to sell through current product offerings which may be discontinued in the near term. The Company's ability to satisfy demand for its products may be limited by the availability of key components. 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 produce products. Specific microprocessors manufactured by Motorola, Inc. and IBM are currently available only from single sources, while 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 ASICs). Continued availability of these components may be affected if producers were to decide to concentrate on the production of common components instead of custom components. Such product supply constraints and corresponding increased costs could adversely affect the Company's future operating results and financial condition, including loss of market share. In the past, the Company's operating results and financial condition have been and may in the future be adversely affected by the Company's ability to manage inventory levels and lead times required to obtain components in order to be more responsive to short-term shifts in 14 <PAGE> customer demand patterns. In addition, if unit sales growth for current or future product offerings is not realized, the Company's results of operations and financial condition could be adversely affected. 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 a result of the Company's restructuring plan, the proportion of its products produced under such arrangements may increase. While such arrangements may lower the fixed cost of operations, it may also reduce the direct control the Company currently has over production, and it is uncertain what the effect such lowered control will have on the quality of the products manufactured or the flexibility of the Company to respond to changing market conditions. Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company remains at least initially responsible to the ultimate consumer for warranty service. Accordingly, in the event of product defects or warranty liability, the Company may remain at least primarily liable. Any unanticipated product defect or warrant liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future operating results and financial condition. 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. The Company also distributes product through 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 weakens or if resellers within consumer channels decide not to continue to distribute the Company's products. Uncertainty over the demand for the Company's products may cause resellers to reduce the 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. In the second quarter of 1996, the Company is experiencing a reduction in ordering by resellers from historical levesl in certain regions due to uncertainty concerning the Company's condition. Other Factors The majority of the Company's research and development activities, its corporate headquarters, and other critical business operations 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 the effect of such regulation will have on the Company's future operating results and financial condition. The Company is currently in the process of replacing its current transaction systems (which include order management, distribution, and finance) with a single integrated system as part of its ongoing effort to increase operational efficiency. The Company's future operating results and financial condition could be adversely affected if it is unable to implement and effectively manage the transition to this new integrated system. Because of the foregoing factors, as well as other factors affecting 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 short-term borrowings, increased to $602 million at December 29, 1995, from $491 million at September 29, 1995. 15 <PAGE> Cash generated by operations during the first three months of 1996 totaled $187 million. Cash was generated primarily as a result of higher accounts payable levels, reflecting longer payment terms obtained from vendors as well as growth in inventory levels. Cash generated by operations was partially offset by cash used for the purchase of inventory. Despite the higher sales level achieved during the first quarter of 1996 compared with the same period of 1995, less cash was generated by operations in 1996 primarily because of the growth in inventory and the operating loss incurred primarily due to competitive pricing actions. Net cash used for the purchase of property, plant, and equipment totaled $31 million in the first three months of 1996, and was primarily made up of increases in manufacturing machinery and equipment and buildings. The Company anticipates that capital expenditures in 1996 will decline relative to 1995 expenditure levels. Short-term borrowings at December 29, 1995, were approximately $37 million higher than at September 29, 1995. These borrowings were primarily made to fund expected working capital growth in certain markets worldwide. Domestically, $88 million of U.S. commercial paper was issued and $10 million of short-term borrowings were incurred from U.S. banks during the first quarter of 1996. Outside the United States, short-term borrowings decreased by $61 million. Apple Japan, Inc. and Apple Computer BV (Netherlands), subsidiaries of the Company, held short-term borrowings from several banks, totaling approximately $197 million and $203 million, respectively, at December 29, 1995. These loans mature in March 1996 and April 1996, respectively. In the second quarter of 1996, the Company largely discontinued its issuance of commercial paper. The Company's balance of long-term debt remained relatively constant during the first quarter of 1996. Substantially the entire amount of long-term borrowings represents $300 million aggregate principal amount of 6.5% unsecured notes issued under an omnibus shelf registration statement filed with the Securities and Exchange Commission in 1994. This shelf registration was for the registration of debt and other securities for an aggregate offering amount of $500 million. The notes were sold at 99.925% of par, for an effective yield to maturity of 6.51%. The notes pay interest semi-annually and mature on February 15, 2004. The Company expects that it will borrow in the near to intermediate term to finance its working capital needs and capital expenditures, particularly because it is unlikely that the Company will continue to generate cash from operations in this time frame. The Internal Revenue Service 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 for the years 1984 through 1988, and most of the issues in dispute for these years have been resolved. On June 29, 1995, the IRS issued a notice of deficiency proposing increases to the amount of the Company's federal income taxes for the years 1989 through 1991. The Company has filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate provision has been made for any adjustments that may result from these tax examinations. As noted on page 10 under the subheading "Interest and other income(expense), net, the Company expects that its cost of funds will increase in 1996. In addition, the Company may be required to pledge collateral with respect to certain of its borrowings and to agree to more stringent covenants than in the past. The Company is seeking alternative sources of liquidity and is discussing financing alternatives with several financial institutions. Although the Company believes it will be able to arrange short- and intermediate-term financing that will cover its needs, it currently does not have commitments from lenders to provide such funding. The Company believes that its balances of cash, cash equivalents, and short-term investments, together with short- and long-term borrowings that the Company believes it will be able to obtain, will be sufficient to meet its short- and long-term operating cash requirements, including the impact of planned restructuring actions, on a short- and long-term basis. 16 <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings Management is not aware of any pending legal proceedings to which the Company is a party that are likely to have a material adverse effect on the Company's financial condition and results of operations as reported in the accompanying financial statements. In January 1996, two purported class action complaints naming the Company and its directors as defendants were filed in Superior Court in the state of California, styled as Abraham and Evelyn Kostick Trust v. Peter O. Crisp, et al., and Manson v. Peter O. Crisp, et al. These complaints seek injunctive relief and unspecified compensatory damages based on substantially identical allegations of acts of mismanagement resulting in a depressed price for the Company. The Company has reviewed the allegations of the complaints and believes they are without merit, and intends to defend itself vigorously. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit Number Description 10.A.5 1990 Stock Option Plan, revised December 1995. 10.A.6 Apple Computer, Inc. Employee Stock Purchase Plan, as amended December 6, 1995. 10.A.7 1996 Senior/Executive Incentive Bonus Plan. 10.A.19 Executive Severance Plan as amended and restated effective as of January 15, 1996. 10.A.23 Separation Agreement dated December 1, 1995, between Registrant and Daniel Eilers. 10.A.24 Separation Agreement dated October 31, 1995, between Registrant and Joseph A. Graziano. 10.A.25 Summary of Principal Terms of Employment between Registrant and Gilbert F. Amelio. 11 Computation of per share earnings 27 Financial Data Schedule b) Reports on Form 8-K None. 17 <PAGE> SIGNATURE 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) DATE: February 12, 1996 BY /s/ Jeanne Seeley Jeanne Seeley Vice President, Finance and Corporate Controller (Chief Accounting Officer) 18 <PAGE> APPLE COMPUTER, INC. INDEX TO EXHIBITS Exhibit Description Page Number Index 10.A.5 1990 Stock Option Plan, revised 20 December 1995. 10.A.6 Apple Computer, Inc. Employee Stock 33 Purchase Plan, as amended December 6, 1995. 10.A.7 1996 Senior/Executive Incentive Bonus 41 Plan. 10.A.19 Executive Severance Plan as amended 52 and restated effective as of January 15, 1996. 10.A.23 Separation Agreement dated December 107 1, 1995, between Registrant and Daniel Eilers. 10.A.24 Separation Agreement dated October 121 31, 1995, between Registrant and Joseph A. Graziano. 10.A.25 Summary of Principal Terms of 130 Employment between Registrant and Gilbert F. Amelio. 11 Computation of per share earnings 135 27 Financial Data Schedule 136 19 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>2 <TEXT> EXHIBIT 10.A.5 APPLE COMPUTER, INC. 1990 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 1990 Stock Option Plan are to attract and retain high quality personnel for positions of substantial responsibility, to provide additional incentive to Employees of the Company, its Subsidiaries and its Affiliated Companies and to promote the success of the Company's business. This Plan succeeds to and replaces the Company's 1981 Stock Option Plan. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, and the regulations promulgated thereunder. Stock appreciation rights ("SARs") may be granted under the Plan in connection with Options or independently of Options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees, as shall be administering the Plan from time to time pursuant to Section 4 of the Plan. (b) "Affiliated Company" means a corporation which is not a Subsidiary but with respect to which the Company owns, directly or indirectly through one or more Subsidiaries, at least 20% of the total voting power, unless the Administrator determines in its discretion that such corporation is not an Affiliated Company. (c) "Board" means the Board of Directors of the Company. (d) "Common Stock" means the Common Stock, no par value, of the Company. (e) "Company" means Apple Computer, Inc., a California corporation, or its successor. (f) "Committee" means a Committee, if any, appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 20 <PAGE> (h) "Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary or Affiliated Company. Continuous Status as an Employee shall not be considered interrupted in the case of: (i) medical leave, provided that such leave is for a period of not more than four months; (ii) military leave; (iii) family leave, provided that such leave is for a period of not more than four months; (iv) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than four months, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to Employees in writing; or (v) in the case of transfers between locations of the Company or between the Company, its Subsidiaries,its successor or its Affiliated Companies. (i) "Director" means a member of the Board. (j) "Employee" means any person, including Officers and Directors, employed by and on the payroll of the Company, any Subsidiary or any Affiliated Company. The payment of Directors' fees by the Company shall not be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) for the last market trading day prior to the time of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable. (ii) If the Common Stock is regularly quoted on the NASDAQ System (but not on the National Market System) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock for the last day on which there are quoted prices prior to the time of determination. (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (m) "Officer" means an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (n) "Nonstatutory Stock Option" means an Option that is not an Incentive Stock Option. 21 <PAGE> (o) "Incentive Stock Option" means an Option that satisfies the provisions of Section 422 of the Code and is expressly designated by the Administrator at the time of grant as an incentive stock option. (p) "Option" means an Option granted pursuant to the Plan. (q) "Optioned Stock" means the Common Stock subject to an Option or SAR. (r) "Optionee" means an Employee who receives an Option or SAR. (s) "Parent" corporation shall have the meaning defined in Section 424(e) of the Code. (t) "Plan" means this 1990 Stock Option Plan. (u) "SAR" means a stock appreciation right granted pursuant to Section 9 below. (v) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (w) "Subsidiary" corporation has the meaning defined in Section 424(f) of the Code. In addition, the terms "Rule 16b-3" and "Applicable Laws", the term "Insiders", the term "Tax Date" and the terms "Change in Control" and "Change in Control Price", shall have the meanings set forth, respectively, in Sections 4, 9, 10 and 12 below. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs may be granted and exercised is 51,200,000 Shares (including Shares issued under the 1981 Stock Option Plan, to which this Plan is a successor). The Shares may be authorized but unissued or reacquired Common Stock. In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan. 22 <PAGE> If an Option or SAR issued under this Plan or under the Company's 1981 Stock Option Plan should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless this Plan shall have been terminated, become available for other Options or SARs under this Plan. However, should the Company reacquire Shares which were issued pursuant to the exercise of an Option or SAR, such Shares shall not become available for future grant under the Plan. 4. Administration of the Plan. (a) Composition of Administrator. (1) Multiple Administrative Bodies. If permitted by Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto, as in effect at the time that discretion is being exercised with respect to the Plan ("Rule 16b-3"), and by the legal requirements relating to the administration of stock plans such as the Plan, if any, of applicable securities laws, California corporate law and the Code (collectively, "Applicable Laws"), the Plan may (but need not) be administered by different administrative bodies with respect to (A) Directors who are not Employees, (B) Directors who are Employees, (C) Officers who are not Directors and (D) Employees who are neither Directors nor Officers. (2) Administration with respect to Directors and Officers. With respect to grants and awards to Employees who are also Officers or Directors of the Company, the Plan may be administered by (A) the Board, if the Board may administer the Plan in compliance with Rule 16b- 3 as it applies to a plan intended to qualify thereunder as a discretionary grant or award plan, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted (I) in such a manner as to permit the Plan and grants and awards thereunder to comply with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary grant or award plan and (II) in such a manner as to satisfy the Applicable Laws. (3) Administration with respect to Other Persons. With respect to grants and awards to Employees who are neither Directors nor Officers of the Company, the Plan may be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. (4) General. Once a Committee has been appointed pursuant to subsection (2) or (3) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under subsection (2) to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary grant or award plan. 23 <PAGE> (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock in accordance with Section 2(l) of the Plan; (ii) to determine, in accordance with Section 8(a) of the Plan, the exercise price per Share of Options and SARs to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options and SARs shall be granted and the number of Shares to be represented by each Option or SAR (including without limitation whether or not a corporation shall be excluded from the definition of Affiliated Company under Section 2(b)); (iv) to interpret the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or SAR granted hereunder (including, but not limited to, any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or SAR and/or the Shares relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vi) to approve forms of agreement for use under the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to modify or amend each Option or SAR (with the consent of the Optionee) or accelerate the exercise date of any Option or SAR; (ix) to reduce the exercise price of any Option or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or SAR shall have declined since the date the Option or SAR was granted; (x) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or SAR previously granted by the Administrator; and (xi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) Effect of Decisions by the Administrator. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. Eligibility. Options and SARs may be granted only to Employees. An Employee who has been granted an Option or SAR may, if he or she is otherwise eligible, be granted an additional Option or Options, SAR or SARs. Each Option shall be evidenced by a written Option agreement, which shall expressly identify the Options as Incentive Stock Options or as Nonstatutory Stock Options, and which shall be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options and options granted under other plans of the Company or any Parent or Subsidiary that are designated as incentive stock options are exercisable for the first time by an Optionee during any calendar year exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted, and (ii) the Fair Market Value of the Shares shall be determined as of the time the Option or other incentive stock option with respect to such Shares is granted. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options or Options in exchange for the surrender and cancellation of any or all outstanding Options, other options, SARs or other stock appreciation rights. 24 <PAGE> Neither the Plan nor any Option or SAR agreement shall confer upon any Optionee any right with respect to continuation of employment by the Company (or any Parent, Subsidiary or Affiliated Company), nor shall it interfere in any way with the Optionee's right or the right of the Company (or any Parent, Subsidiary or Affiliated Company) to terminate the Optionee's employment at any time or for any reason. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board or its approval by vote of the holders of a majority of the outstanding Shares of the Company entitled to vote on the adoption of the Plan, whichever is earlier. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Option agreement. 8. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator, but shall in no event be less than 100% of the Fair Market Value of Common Stock, determined as of the date of grant of the Option. In the event that the Administrator shall reduce the exercise price, the exercise price shall be no less than 100% of the Fair Market Value as of the date of that reduction. In no event shall the per Share exercise price be less than 110% of the Fair Market Value per Share as of the date of grant in the case of an Incentive Stock Option granted to an Optionee who, immediately before the grant of such Option, owns Shares representing more than 10% of the voting power or value of all classes of stock of the Company or any Parent or Subsidiary. (b) Method of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist of (i) cash, (ii) check, (iii) promissory note, (iv) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vi) if the Optionee is subject to Section 16 of the Exchange Act, by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the Optionee to take and pay for the Shares not more than twelve (12) months after the date of delivery of the subscription agreement, or (vii) any combination of the foregoing methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 25 <PAGE> 9. Stock Appreciation Rights. (a) Granted in Connection with Options. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options: (i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of an SAR; provided, however, that such limit shall not restrict the exercisability of the related Option. (ii) When an SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable. (iii) An SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires. (iv) An SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option. (b) Independent SARs. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options: (i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; provided, however, that the Administrator may place limits on the amount that may be paid upon exercise of an SAR. (ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's SAR agreement. (c) Form of Payment. The Company's obligation arising upon the exercise of an SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of an SAR shall be valued at their Fair Market Value as of the date of exercise. 26 <PAGE> (d) Rule 16b-3. SARs granted to persons who are subject to Section 16 of the Exchange Act ("Insiders") shall contain such additional restrictions as may be required to be contained in the plan or SAR agreement in order for the SAR to qualify for the maximum exemption provided by Rule 16b-3. 10. Method of Exercise. (a) Procedure for Exercise; Rights as a Shareholder. Any Option or SAR granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan. An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option or SAR by the person entitled to exercise the Option or SAR and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator (and, in the case of an Incentive Stock Option, determined at the time of grant) and permitted by the Option agreement, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. An Option or SAR may not be exercised with respect to a fraction of a Share. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Exercise of an SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised. (b) Rule 16b-3. Options and SARs granted to Insiders must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to be contained in the Plan or the agreement to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (c) Termination of Continuous Employment. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. 27 <PAGE> (d) Death of Optionee. In the event of the death of an Optionee: (1) Who is at the time of death an Employee and who shall have been in Continuous Status as an Employee since the date of grant of the Option, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or (2) Within ninety (90) days after the termination of Continuous Status as an Employee, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (e) Stock Withholding to Satisfy Withholding Tax Obligations. When an Optionee incurs tax liability in connection with the exercise of an Option or SAR, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; (ii) once made, the election shall be irrevocable as to the particular Shares of the Option or SAR as to which the election is made unless revocation of the election is permitted by Rule 16b-3 and the Code; and 28 <PAGE> (iii) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option or SAR is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 11. Non-Transferability of Options. Options and SARs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. The designation of a beneficiary by an Optionee or holder of an SAR does not constitute a transfer. An Option or an SAR may be exercised, during the lifetime of the Optionee or SAR holder, only by the Optionee or SAR holder or by a transferee permitted by this Section 11. 12. Adjustments Upon Changes in Capitalization or Merger. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option and SAR, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options or SARs have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or SAR, as well as the price per Share covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option or SAR. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options and SARs will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option or SAR shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option or SAR as to all or any part of the Optioned Stock or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable. 29 <PAGE> (c) Sale of Assets or Merger. Subject to the provisions of paragraph (d) hereof, in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option and SAR shall be assumed or an equivalent option or stock appreciation right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option or SAR as to all of the Optioned Stock, including Shares as to which the Option or SAR would not otherwise be exercisable. If the Administrator makes an Option or SAR fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Optionee that the Option or SAR shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option or SAR will terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the per share consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger. (d) Change in Control. In the event of a "Change in Control" of the Company, as defined in paragraph (e) below, unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply: (1) Any Options and SARs outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and (2) The value of all outstanding Options and SARs shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options and SARs shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option or SAR. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option or SAR by bequest or inheritance. 30 <PAGE> (e) Definition of "Change in Control". For purposes of this Section 12, a "Change in Control" means the happening of any of the following: (i) When any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. (f) Change in Control Price. For purposes of this Section 12, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the "60-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period. 13. Time of Granting Options and SARs. The date of grant of an Option or SAR shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or SAR. Notice of the determination shall be given to each Employee to whom an Option or SAR is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan, as it may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any other Applicable Law), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as is required. (b) Effect of Amendment or Termination. Any such amendment, alteration, suspension or termination of the Plan shall not impair the rights of any Optionee or SAR holder under any grant theretofore made without his or her consent. Such Options and SARs shall remain in full force and effect as if this Plan had not been amended or terminated. 15. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an Option or SAR unless the exercise of such Option or SAR and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 31 <PAGE> As a condition to the exercise of an Option or SAR or the issuance of Shares upon exercise of an Option or SAR, the Company may require the person exercising such Option or SAR to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the non- issuance or sale of such Shares as to which such requisite authority shall not have been obtained. 16. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 32 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <TEXT> EXHIBIT 10.A.6 APPLE COMPUTER, INC. EMPLOYEE STOCK PURCHASE PLAN (as amended through December 6, 1995) The following constitute the provisions of the Employee Stock Purchase Plan (herein called the "Plan") of Apple Computer, Inc. (herein called the "Company"). 1. Purpose. The purpose of the Plan is to provide employees of the Company and its subsidiaries with an opportunity to purchase Common Stock of the Company through payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Common Stock" shall mean the Common Stock, no par value, of the Company. (c) "Company" shall mean Apple Computer, Inc., a California corporation. (d) "Compensation" shall mean all regular straight time earnings, payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and commissions (except to the extent that the exclusion of any such items is specifically directed by the Board or its committee). (e) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (f) "Employee" means any person, including an officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (g) "Plan" shall mean this Employee Stock Purchase Plan. (h) "Section 16 Person" shall mean any person participating in the Plan who has been designated by the Board of Directors as having authority to carry out policy-making functions such that the person is subject to the reporting and short-swing profit regulations of Section 16 of the Securities Exchange Act of 1934. 33 <PAGE> (i) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (j) "1934 Act Section 16" shall mean Section 16 of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. 3. Eligibility. (a) Any Employee as defined in Section 2 who shall be employed by the Company or one of its Designated Subsidiaries on the date his or her participation in the Plan is effective shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423(b) of the Internal Revenue Code of 1986, as amended; provided that no Section 16 Person who has terminated his or her participation in any offering period shall be eligible to participate in the Plan during any offering period commencing less than six months after such election to terminate. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee would own shares and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any Subsidiary of the Company, or (ii) which permits his or her rights to purchase shares under all employee stock purchase plans of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the fair market value of the shares (determined at the time such option is granted) for each calendar year in which such stock option is outstanding at any time. 4. Offering Dates. The Plan shall be implemented by one offering during each six-month period of the Plan, commencing on or about January 1, 1981 and continuing thereafter until terminated in accordance with Section 19 hereof. The Board of Directors of the Company shall have the power to change the duration of offering periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first offering period to be affected. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions on the form provided by the Company and filing it with the Company's payroll office prior to the applicable offering date. Once filed, the subscription agreement shall remain effective for all subsequent offering periods until the participant withdraws from the Plan as provided in Section 10 hereof or files another subscription agreement. (b) Payroll deductions for a participant shall commence on the first payroll following the commencement offering date and shall continue at the same rate until such time as the participant withdraws from the Plan as provided in Section 10 hereof or another subscription agreement is filed which changes the rate of payroll deductions. 34 <PAGE> 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each payday during subsequent offering periods at a rate not exceeding ten percent (10%) of the Compensation which he or she received on such payday, and the aggregate of such payroll deductions during any offering period shall not exceed ten percent (10%) of his or her aggregate Compensation during said offering period. (b) All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10, or may lower, but not increase, the rate of his or her payroll deductions (within the limitations set forth in subsection (a) above) during an offering period by completing and filing with the Company a new authorization for payroll deductions. The change in rate shall be effective within fifteen (15) days following the Company's receipt of the new authorization; except in the case of a change in the rate of participation of a Section 16 Person, in which case the change shall be effective no earlier than the offering period commencing on or after the end of such fifteen-day period. (d) A participant may increase his or her rate of payroll deductions (within the limitations set forth in subsection (a) above) to be effective for the next offering period by completing and filing with the Company a new authorization for payroll deductions at least fifteen (15) days before the beginning of said offering period. 7. Grant of Option. (a) At the beginning of each six-month offering period, each eligible Employee participating in the Plan shall be granted an option to purchase (at the per share option price) up to a number of shares of the Company's Common Stock determined by dividing the Employee's accumulated payroll deductions (not to exceed an amount equal to ten percent (10%) of his or her Compensation during the applicable offering period) by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the date of the commencement of said offering period, or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the date of the expiration of the offering period, subject to the limitations set forth in Sections 3(b) and 12 hereof, and subject to the following limitation: The number of shares of the Company's Common Stock subject to any option granted to an Employee pursuant to this Plan shall not exceed two hundred percent (200%) of the number of shares of the Company's Common Stock determined by dividing an amount equal to ten percent (10%) of the Employee's semi-annual Compensation as of the date of the commencement of the applicable offering period by eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the date of the commencement of said offering period. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b) herein. 35 <PAGE> (b) The option price per share of such shares shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company at the commencement of the six-month offering period; or (ii) 85% of the fair market value of a share of the Common Stock of the Company at the time the option is exercised at the termination of the six-month offering period. The fair market value of the Company's Common Stock on a given date shall be the mean of the reported bid and asked prices for that date, or if the Common Stock is listed on an exchange or quoted on the Nasdaq National Market, the closing sale price on such exchange or quotation system for that date. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of shares will be exercised automatically at the end of the offering period, and the maximum number of full shares subject to option will be purchased for him or her at the applicable option price with the accumulated payroll deductions in his or her account. During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery; Roll-Over of Fractional Share Interests. (a) As promptly as practicable after the termination of each offering, the Company shall arrange for the delivery to each participant, as appropriate, of a certificate representing the number of full shares purchased upon exercise of his or her option. No fractional shares shall be issued. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of shares at the termination of each offering period which is insufficient to purchase a full share of Common Stock of the Company subject to option shall remain in such participant's account and shall be applied to the next succeeding offering period unless the participant has withdrawn as to future offering periods, in which case such cash shall be returned to said participant. Any cash attributable to shares in excess of the number of shares subject to option to the participant (as determined in accordance with Section 7(a) hereof) shall be returned to the participant. (b) A Section 16 Person purchasing shares pursuant to this Plan in any offering period shall not directly nor indirectly sell such shares or any beneficial interest in such shares for a period of six months following the end of such offering period where such sale would constitute a violation under 1934 Act Section 16. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account under the Plan at any time prior to the end of the offering period by giving written notice to the Company. All of the participant's payroll deductions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the offering period. 36 <PAGE> (b) Upon termination of the participant's employment prior to the end of the offering period for any reason, including retirement or death, the payroll deductions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in the continuous employ of the Company or one of its Designated Subsidiaries for at least twenty (20) hours per week during the offering period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his or her account will be returned to him or her and his or her option terminated. (d) Except as provided in Section 3(a) with respect to Section 16 Persons, a participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. However, a new subscription agreement will have to be filed in such case. 11. No Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be eleven million five hundred thousand (11,500,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18. The shares to be sold to participants under the Plan may, at the election of the Company, be either treasury shares or shares authorized but unissued. If at the termination of any offering period the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) hereof exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall promptly notify the participants, and shall, in its sole discretion (i) make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable, (ii) terminate the offering period without issuance of any shares or (iii) obtain shareholder approval of an increase in the number of shares authorized under the Plan such that all options could be exercised in full. The Company may delay determining which of (i), (ii) or (iii) above it shall decide to effect, and may accordingly delay issuances of any shares under the Plan, for such time as is necessary to attempt to obtain shareholder approval of any increase in shares authorized under the Plan. The Company shall promptly notify participants of its determination to effect (i), (ii) or (iii) above upon making such decision. A participant may withdraw all but not less than all the payroll deductions credited to his or her account under the Plan at any time prior to such notification from the Company. In the event the Company determines to effect (i) or (ii) above, it shall promptly upon such determination return to each participant all payroll deductions not applied towards the purchase of shares. (b) The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. 37 <PAGE> (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and the spouse of the participant. 13. Administration. The Plan shall be administered by a committee of members of the Board of Directors, which committee shall be appointed by the Board. The administration, interpretation or application of the Plan by such committee shall be final, conclusive and binding upon all participants. Members of the committee shall not be permitted to participate in the Plan. 14. Designation of Beneficiary. (a) A participant may indicate in his or her subscription agreement, or may file a written designation of beneficiary with respect to, a person who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of the offering period but prior to delivery to him or her of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the end of the offering period. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees semi-annually within a reasonable period of time following the stock purchase date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased, the amount of cash rolled over into the next offering period and the remaining cash balance, if any. 38 <PAGE> 18. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into or exercisable for shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option under the Plan, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any participant under any option theretofore granted without his or her consent. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or with Section 423 of the Internal Revenue Code of 1986, as amended (or any successor statute or rule or other applicable law, rule or regulation), such shareholder approval to be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect options already granted hereunder and such options shall remain in full force and effect as if this Plan had not been amended or terminated. 39 <PAGE> 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. All notices or other communications to a participant by the Company shall be deemed to have been duly given when sent by the Company by regular mail to the address of the participant on the human resources records of the Company or when posted on Applelink or any substitute general electronic messaging and bulletin board system utilized by the Company. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that (i) the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law, and (ii) in the case of a Section 16 Person, (a) the acquisition of such shares will not cause a violation of the 1934 Act Section 16 and (b) he or she will not directly or indirectly sell such shares or any beneficial interest in such shares for a period of six months following the end of such offering period where such sale would constitute a violation of the 1934 Act Section 16. 40 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> EXHIBIT 10.A.7 FY96 SENIOR/EXECUTIVE INCENTIVE BONUS PLAN PURPOSE The purpose of the Senior/Executive Incentive Bonus Plan "The Plan" is to focus the efforts of Senior Management towards predetermined, specific goals and objectives which are of critical importance to the success of the organization. The program specifically: - encourages participants to achieve outstanding results toward company and individual objectives, - strengthens the ability of the organization to attract and retain high caliber,key management personnel, and - provides a leveraged compensation program that is based on performance towards objectives, with superior performance resulting in aggressive compensation levels. ELIGIBILITY The following employees are eligible to participate in the Senior/Executive Bonus Plan: - Chief Executive Officer - Vice Presidents - Geography Presidents - Senior Directors - Senior Vice Presidents - Directors Full year participants in the Senior/Executive Incentive Bonus Plan may not participate in other bonus plans without the approval of the Division President and the HR Director. However, nominal gift certificates and awards are acceptable, provided they are less than $500. INCENTIVE BONUS GUIDELINES Bonus targets for eligible participants in the Senior/Executive Incentive Bonus Plan will be set individually and expressed as a percent of base salary as of the beginning of the fiscal year according to salary grade. If an individual's salary grade changes between the beginning and the end of the year, the bonus target may be adjusted on a prorated basis (see Administrative Procedures). PERFORMANCE MEASUREMENTS There are two main components used to determine the bonus payout amounts after the end of the applicable biannual payment period (see Bonus Payouts): the Financial Performance Measurements and the Individual Performance Measurements . Details of these measurements are described below. - Financial Performance Measurements The Financial Performance Measurements consist of Market Share, Operating Margin, Inventory Turns, Day Sales Outstanding, Corporate Return on Capital Employed (ROCE), and Time to Market. All Plan participants will be measured on either Corporate or Division Business Measurements as described in the Weighting of Performance Measurements section. 41 <PAGE> - Individual Performance Measurements The Individual Performance Measurement is based on the participant's performance against two to four objectives that are aligned with Corporate/Division strategic objectives. Weighting of Performance Measurements The annual bonus target for Vice Presidents and above is weighted 100% on Financial Performance Measurements. The annual bonus target for Directors is weighted 70% on Financial Performance Measurements and 30% on Individual Performance Measurements. These weightings are shown in the table below. The financial results used in determining financial performance are based on the participant's position and area of responsibility and will be either a Corporate or Division measurement. Functional Staff (e.g., Finance, Human Resources, Information Systems and Legal) within a Division will be measured on the overall Division's Business Measurements. Other line or staff participants within a division may be measured on the Division's Business Measurements which are specific to their area of responsibility (e.g., Entry Mac Products, Power Books, Imaging, etc.). Details of the weighting of Financial and Individual Performance Measurements are as follows: FINANCIAL PERFORMANCE MEASUREMENTS (1) TOTL TOTL % % Mkt Corp Oper Inv DaySales Time Fin Ind Shr ROCE Mar Turns O/S To Perf Perf Mkt Meas Meas Apple Leadership Team (ALT) - CEO-CFO-SVPHR-General Counsel 50% 50% 100% - WWOps - Head 50% 50% 100% - Research & Development - Head 50% 50% 100% - GEO Pres. (Americas,Eur,Pac) 50% 50% 100% Vice Presidents (Corp. & Div.) - Corporate Staff - All VP's 50% 50% 100% - WWOps - All VP's (2) 40% 30% 30% 100% - R & D - All VP's 40% 20% 40% 100% - Entertainment & NM - All VP's 50% 50% 100% - GEO VP's (Americas,Eur,Pac) 50% 20% 15% 15% 100% Directors & SIA's (Corp. & Div.) - Corp Staff - All Dirs & SIA's 35% 35% 70% 30% - WWOps - All Dirs & SIA's (2) 30% 20% 20% 70% 30% - R & D - All Dirs & SIA's 30% 15% 25% 70% 30% - Ent & NM - All Dirs & SIA's 35% 35% 70% 30% - GEO Dirs&SIA's(Amer,Eur,Pac) 30% 20% 10% 10% 70% 30% (1)Financial Performance Measurements may be based on Worldwide, Geography, Regional or Functional levels depending upon the area of responsibility. For example, Market Share Measurements will be at a Worldwide, Geography, Regional or Country level. Operating Margin may be at a Functional Level such as Mac Desktops or Servers and Technology, etc. (2)WWOPS will be measured on Corporate or Geography Measurements. Geo. Measurements apply to those with specific geographic responsibility (e.g. Cork will use Europe Measurements, Singapore will use Pacific Measurements, and Fountain and Sacramento will use Americas Measurements). Any exceptions to using these financial performance measurements must be approved by the Senior Vice President of Human Resources. DETAILS OF AWARD DETERMINATION: Target payouts (less deductions and withholdings) will be based on the expectation of meeting financial and, if applicable, individual performance goals. If the thresholds are met, period-end payouts will be calculated in each segment as described below. 42 <PAGE> FINANCIAL PERFORMANCE MEASUREMENTS - Corporate Performance Measurements Corporate Performance Measurements will be Market Share, Return on Capital Employed (ROCE) and Inventory Turns. If the threshold is met, the bonus target will be multiplied by a percentage from 50% through 175% depending on Corporate Performance. If the threshold is not met, there will be no payout for that performance segment. - Division/Geography Performance Measurements Division/Geography Performance Measurements will be Market Share, Operating Margin, Inventory Turns, Day Sales Outstanding, and Time to Market. If the threshold is met, the bonus target will be multiplied by a minimum percentage which varies by Performance Measurement (see Payout Table in each segment) through a maximum percentage of 175% depending on Division/Geography Performance. If the threshold is not met, there will be no payout for that performance segment. Plan numbers and actual performance will be monitored by the Worldwide Planning Group and the Worldwide Market Tracking Group. If for any reason there is a significant change in a Division's/Geography's plan during the plan payment period, upon joint recommendation of Human Resources and Worldwide Planning or Worldwide Market Tracking and with the approval of the Chief Executive Officer, plan targets may be changed or another alternative may be implemented. If for any reason, including reorganization, a Division/Geography Business Measurement is no longer applicable for the entire payment period, the Division Business Measurement will be replaced by the higher Division, Geography or Corporate Business Measurement. PAYOUT TABLES: The bonus payouts at various achievements to plan for the Financial Measures are shown in the following tables. Actual payouts in between the values shown in the tables will be calculated on the actual incremental % achievement to plan. With the exception of Market Share and Time to Market, Accelerators and Decelerators are used when achievement to plan is above or below 100%. For Market Share and Time to Market, Accelerators and Decelerators are used when achievement to plan is above or below 110%. Market Share Segment This Segment will measure Market Share Percentage Achievement of Reported Market Share Gain versus Target Market Share Gain as shown in the Market Share Payout Table below: FIRST HALF FY96 Market Share Payout Table % Achievement Reported Market Share % % Gain vs. Target Bonus Per Market Share Gain Payout Point MAXIMUM 150% 175.0% 1.30% 140% 162.0% 1.30% 130% 149.0% 1.30% 120% 136.0% 1.30% 110% 123.0% 1.30% PLAN 100% 110.0% Accelerators Decelerators 90% 103.3% 0.67% 80% 96.7% 0.67% 70% 90.0% 0.67% 60% 83.3% 0.67% 50% 76.7% 0.67% 40% 70.0% 0.67% 30% 63.3% 0.67% 20% 56.7% 0.67% THRESHOLD 10% 50.0% 0.67% Below 10% 0.0% 43 <PAGE> First Half FY96 Supplemental Market Share Payout Table (This table to be used only for Target Market Share Gain Goals of Less Than 0.20 of a point.) Bonus Market Share Points Payout MAXIMUM 0.50 0.40 0.30 0.20 0.10 0.00 -0.10 Or Less 175.00% 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 158.75% 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 142.50% 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40 126.25% PLAN 0.10 0.00 -0.10 -0.20 -0.30 -0.40 -0.50 110.00% Accelerators Decelerators 0.00 -0.10 -0.20 -0.30 -0.40 -0.50 -0.60 93.75% THRESHOLD -0.02 -0.12 -0.22 -0.33 -0.44 -0.55 -0.66 80.00% Below -0.02 -0.12 -0.22 -0.33 -0.44 -0.55 -0.66 0.00% For example, a country has a Target Market Share Goal of -0.10 and achieves a Reported Market Share Gain above target of 0.05. The Bonus Payout percentage would be 134.375%. Apple Market Share Targets Apple market share targets will be based on Apple's semi-annual market share goals as approved by Apple's Board of Directors preceding the measurement period. The Apple Leadership Team will be responsible for allocating overall targets to individual countries/regions. Reported Apple Market Share Gain (Loss) Market share gain or (loss) will be based on Apple Market Share data for the total first half fiscal year 1995 (Q1 and Q2 FY95) as compared to Apple Market Share data for the total first half fiscal year 1996 (Q1 and Q2 FY96) as reported by Apple's Market Tracking Group. The Apple Market Share Gain or (Loss) will be the difference between the Apple Market Share over the two periods (first half FY95 versus first half FY96). Apple Market Share is defined as Apple's actual CPU's (including servers) sold during the Bonus Metric Measurement period divided by the reported market CPU's (including servers) sold during the same period (as tracked by the Corporate Market Tracking group). For examples of Market Share calculations refer to the Reported Market Share section in the Market Share Examples table below. Market share gain or (loss) calculations for countries or regions that are not measured quarterly by Apple's Market Tracking Group (all countries/regions excluding U.S., Japan, and Western European countries) will be sized by Apple's Market Tracking Group based on the most recent market data available. If there is no new data available, the original market size will be used to calculate the reported Market Share. Apple Total Geography Market Share Apple Total Geography Market Share is a roll-up of all the countries and/or regions market share numbers within the total geography being measured. 44 <PAGE> Time To Market Segment This segment will measure achievement of product delivery commitments in the Research & Development Organization. Time to Market is defined as the Golden Master Target (software) or the Introduction Date (hardware) as defined and approved through the Apple New Product Production (ANPP) Product Proposal Review (PPR). If the achievement is 8 or more weeks ahead of schedule, the maximum bonus of 175% is payable. If the achievement is 8 or more weeks behind schedule, no bonus is payable. The bonus payable will be determined based on the following table. Time To Market Payout Table (Division Only) ACHIEVEMENT # WEEKS TO % % TARGET PAYOUT PER WEEK MAXIMUM > = 8 175.0% 8.125% 7 166.9% 8.125% 6 158.8% 8.125% # Weeks 5 150.6% 8.125% Ahead Of - - - - -> 4 142.5% 8.125% Target Date 3 134.4% 8.125% 2 126.3% 8.125% 1 118.1% 8.125% PLAN 0 110% Accelerators Decelerators - 1 96.1% 13.929% # Weeks - 2 82.1% 13.929% Slipped From - - - -> - 3 68.2% 13.929% Target Date - 4 54.3% 13.929% - 5 40.4% 13.929% - 6 26.4% 13.929% THRESHOLD - 7 12.5% 13.929% < = - 8 0.0% NOTE: Actual payouts in between the values shown will be calculated on the actual incremental % achievement to plan based on a seven day week. For example, if achievement is 1 day ahead of schedule, the payout would be 111.16%. Corporate ROCE and Operating Margin Segments - Corporate ROCE Segment This segment measures Return on Capital Employee achieved to Plan. ROCE is defined as Operating Profit less Cash Taxes Paid, divided by Average Capital Employed (Total Assets excluding Cash, less Current Liabilities (excluding Short Term Notes Payable) plus Capitalized Operating Leases). - Operating Margin Segment This segment measures Operating Margin achieved to Plan. Operating Margin is defined as Gross Margin Less Operating Expenses. 45 <PAGE> Once minimum thresholds are met, bonus payouts for both Corporate ROCE and Operating Margin can range from 50% to 175% based on the following payout table: Corporate ROCE and Operating Margin Payout Table % To % Bonus % Per Each Plan Payout Point MAXIMUM 125% 175% 3.00% 120% 160% 3.00% 115% 145% 3.00% 110% 130% 3.00% 105% 115% 3.00% PLAN 100% 100% Accelerators Decelerators 95% 75% 5.00% THRESHOLD 90% 50% 5.00% < 90% 0% Inventory Turns Segment This segment measures Inventory Turns achieved to Plan. Inventory Turns is defined as the number of times inventory is converted into cost of goods sold (excluding all service business). Plan participants employed in a worldwide operations role with worldwide responsibilities are measured on worldwide inventory turns. Most participants employed in a Geography are measured on Geography inventory turns. Regional operations groups and manufacturing site participants are measured on regional inventory turns. Please refer to the Glossary of Terms section of this document for more details of how the Inventory Turns metric is defined. Once the minimum threshold is met, bonus payouts for Inventory Turns can range from 50% to 175% based on the following payout table: Inventory Turns Payout Table % To % Bonus % Per Each Plan Payout Point MAXIMUM 123% 175% 3.26% 115% 150% 3.26% 105% 116% 3.26% PLAN 100% 100% Accelerators Decelerators 95% 75% 5.00% THRESHOLD 90% 50% 5.00% < 90% 0% 46 <PAGE> Day Sales Outstanding Segment This segment measures Day Sales Outstanding (DSO) achieved to Plan. Day Sales Outstanding is defined as the measure for average length of time Apple must wait after making a sale before receiving payment. Once the minimum threshold is met, bonus payouts for DSO can range from 50% to 175% based on the following payout table: Day Sales Outstanding Payout Table % To % Bonus % Per Each Plan Payout Point MAXIMUM 115% 175% 5.0% 110% 150% 5.0% 105% 125% 5.0% PLAN 100% 100% Accelerators Decelerators 95% 75% 5.0% THRESHOLD 90% 50% 5.0% < 90% 0% INDIVIDUAL PERFORMANCE MEASUREMENT (Directors only): The Individual Performance measurement is based on the participant's performance against two to four key strategic, predetermined objectives. The Individual Performance Measurement objectives are determined jointly by the participant and the supervising manager. Each goal is weighted as to its importance. The overall weighting must equal 100%. Individual performance is determined by the supervising manager and is subject to approval by the Compensation Committee of the Board of Directors before any actual payout is issued. Individual performance is measured as follows: % of Individual Achievement Target Award Paid CONSISTENTLY EXCEEDED Individual Performance Goals 121% - 150% CONSISTENTLY MET ALL Individual Performance Goals 100% - 120% MET MOST Individual Performance Goals 80% - 99% DID NOT MEET Individual Performance Goals No Award Paid The overall assessment of the individual performance segment is calculated by multiplying the targeted dollar amount by the % achievement for each category as shown in the example below: Target Bonus = $40,000 Individual Performance segment = $12,000 (30% of Target Bonus) Weighting is calculated as shown below for each of the performance areas Overall individual performance weighting of 103% = a payout of $12,360 Individual Individual Individual Weighting Achievement X Target = Payout Quality Management 40% Met Most 85% Customer Satisfaction 30% Exceeded 130% Employee Alighment 30% Met all 100% Overall 100% 103% X $12,000 = $12,360 The percentage award achieved under the Individual Performance Measurement is then applied to the portion of the Target Bonus, i.e. 30%, to determine the actual Individual Performance portion of the award. 47 <PAGE> The target will be multiplied by a percentage up to a maximum of 150% depending on the supervising manager's overall assessment of the individual's performance against objectives. Ratings of all participants will then be reviewed at higher levels of management within the organization to ensure equity. This information will then be reviewed by the Compensation Committee of the Board of Directors and, depending on overall financial performance, individual percentage payouts may then be adjusted. If the Individual Performance portion of the bonus is determined to be zero, no Financial portion of the bonus will be payable. Exceptions to zero payment for Individual Performance below 80%, and/or paying the Financial portion of the bonus when the Individual Performance is below 80%, must be approved by the Division Head or Sr. Vice President, and the Division Human Resources Manager. (Note: Also see the Corrective Action/Disciplinary Situations section.) BONUS PAYOUT Senior/Executive Incentive Bonus Plan payouts (less deductions and withholdings) will be paid biannually. The first payment will be based on "1st Half" (Q1 and Q2) Financial Performance results and will be paid as soon as practicable, usually during May/June after the close of Q2. The second payment will be based on "2nd Half" (Q3 and Q4) Financial Performance results as well as Individual Performance results for the entire fiscal year (Q1 through Q4) and will be paid as soon as practicable, usually during November/December following the end of the plan year. Both awards are paid out of the Senior/Executive Bonus Pool Fund. There will be no Senior/Executive Incentive Bonus Plan payout on Financial or Individual performance if there is no Corporate operating profit or if there is a Corporate operating loss. In either case, the CEO has the option to recommend to the Compensation Committee of the Board of Directors appropriate individual awards. ADMINISTRATIVE PROCEDURES The purpose of administrative procedures is to provide for consistency of administration of the incentive plans. The following guidelines apply only when previously stated plan requirements have been met. Foreign Exchange Non U.S. operations are measured on a local currency basis. Foreign currency Plan rates will be used to determine both the Planned and actual performance of the entity for bonus calculation purposes. New Hires, Promotions and Transfers An employee who is hired, promoted or transferred into a position in which he or she is newly eligible to become a participant may receive a prorated award based on the months in the position (see Payout Proration Criteria section). Employees promoted or transferred from one eligible position into another eligible position will require a determination of whether a new target award and new objectives should be set. If the new target is different, awards will be prorated based on the number of months of service in each position during the plan year. (see Payout Proration Criteria section). Employees transferred into a position not eligible for participation in the Senior/Executive Bonus Plan will receive a prorated payment at the end of the plan year based on the number of months worked in the eligible position. If the employee transfers during the first biannual period, the employee will receive payment of the prorated Financial portion of the bonus with the normal payout in May/June. The prorated Individual portion (if applicable) will be paid at the end of the plan year provided the participant is employed by Apple on the last day of the year end payment period. (see next section) Payout Proration Criteria - New Hires and Promotions If eligibility for participation occurs on the 1st through the 14th of the month, any bonus payout will be based on the full month. If eligibility for participation occurs on or after the 15th of the month, no bonus is payable for that month. For example, if an eligible employee is hired on March 11th, any payout will be based on participation beginning March 1st. If the employee is hired on March 15th, any payout will be based on participation beginning April 1st. 48 <PAGE> - Transfers If a plan participant transfers from one organization to another, the respective organizational measurement will be prorated by the number of months the plan participant was in each organization. If the participant transfers before the 15th of the month, credit for that month will be assigned to the new organization. If the participant transfers on or after the 15th of the month, credit for that month will be assigned to the previous organization. - Transfers between the SIA Bonus Plan and the Senior/Executive Bonus Plan If a plan participant transfers between the SIA Bonus Plan and Senior/Executive Bonus Plan because of a promotion, demotion or other reason, the respective Plan measurement will be prorated by the number of months the plan participant was in each Plan. If the participant transfers before the 15th of the month, credit for that month will be assigned to the new Plan. If the participant transfers on or after the 15th of the month, credit for that month will be assigned to the previous Plan in which the employee was a participant. - Ineligibility Participants who become ineligible for participation in the Plan before the 15th of the month, will receive no credit for that month toward their bonus proration. Participants who become ineligible on or after the 15th of the month will receive a full-month credit towards their bonus proration. Terminations Plan participants who terminate their employment and are not employed by Apple on the last day of the first biannual payment period are not eligible to receive any award. If a plan participant terminates after the close of the first biannual payment period but prior to the actual distribution of the bonus payout such participant will be eligible to receive the Financial portion of the bonus award with the normal payout in May/June. They will not be eligible for the individual portion of the bonus award, nor will they be eligible for an award for the second biannual period. Plan participants who terminate their employment and are not employed by Apple on the last day of the plan year are not eligible to receive an award for the second biannual period, nor will they be eligible for the individual portion of the award. If a plan participant terminates after the end of the Plan Year but prior to the actual distribution of the bonus payout such participant will be eligible to receive a bonus plan award according to the terms of the Plan. Rehires Plan participants who terminate their employment during the Plan year, and who are rehired and are employed by Apple on the last day of the biannual payment period, are eligible to receive an award. Such an award will be prorated to reflect only the period of time the participant was employed by Apple and according to the above Payout Proration Criteria measured from the most recent rehire date. Disability or Death Awards will normally be prorated at the end of the plan year based on the amount of time the employee was an active participant (see Payout Proration Criteria section). In the case of a participant's death, any such award will be paid to the beneficiary as determined pursuant to the participant's designation of beneficiary under the employee's Apple life insurance plan. Corrective Actions/Disciplinary Situations If, during the applicable biannual bonus period or any time before the biannual bonus has actually been paid to the employee, management has determined that corrective action, discipline or demotion of an employee is appropriate, management may, in its discretion and in consultation with Human Resources, reduce or eliminate entirely the amount of bonus the employee would otherwise be eligible to receive. If, at the time a biannual bonus would otherwise be payable, such corrective action, discipline or demotion is being considered but has not yet been implemented, the entire bonus, or any portion of it, may be withheld until a decision on such action has been finalized and implemented. 49 <PAGE> Other Provisions Participation in this Plan is not an agreement (express or implied) between the Plan participant and Apple that the participant will be employed by Apple for any specific period of time, nor is there any agreement for continuing or long-term employment. The Plan participant and Apple each have the right to terminate the employment relationship at any time and for any reason. This at-will employment relationship can only be modified by an agreement signed by the participant and Apple's Senior Vice President of Human Resources. Any determination of performance, payment or other matters under this Plan by management and/or the Board of Directors is binding on all interested persons. Apple Computer Inc.'s obligation to pay out a Senior/Executive Incentive Bonus Plan award shall be unfunded and all payment of benefits shall be made from the general assets of Apple Computer, Inc. Title to and beneficial ownership of any assets of the 1996 Accrued Senior/Executive Incentive Bonus Plan accounts or any other assets which Apple Computer, Inc. may designate to pay bonuses under the Plan shall remain in and with Apple Computer, Inc.until payment to participants. This summary highlights the principle features of the bonus plan, but it does not describe every situation that can occur. Apple Computer, Inc. retains the right to interpret, revise, modify or delete the plan at its sole discretion at any time 50 <PAGE> Glossary of Terms Attachment A. - - Day Sales Outstanding: Measure For Average Length Of Time Apple Must Wait After Making A Sale Before Receiving Payment - - Inventory Turns: The number of times inventory is converted into cost of goods sold (excluding all service business). Most participants employed in a Geography are measured on Geography inventory turns. Operations groups and manufacturing site participants in Geographies are measured on regional inventory turns. Plan participants employed in a worldwide operations role are measured on worldwide inventory turns. Everyone else in a Geography is measured on Geography inventory turns. Geography inventory turns 1H Turns = Standard Cost of Goods Sold for 1H divided by average gross finished goods inventory for current & 2 prior fiscal quarter ends. Where the standard Cost of Goods Sold is the cost of goods sold at standard cost excluding other cost of goods sold (warranty, scrap, reserves etc.), and gross finished goods inventory is finished goods inventory at standard cost before reserves in-transits from OEM vendors. Regional inventory turns 1H Turns = Standard Cost of Goods Sold for 1H divided by average gross inventory for current & 2 prior fiscal quarter ends. Where standard Cost of Goods Sold is the cost of goods sold at standard cost excluding other cost of goods sold (warranty, scrap, reserves etc.), and gross inventory is raw materials, work- in-process, finished goods including in- transits from OEM vendors at standard cost before reserves. Worldwide inventory turns Current & prior 3 fiscal quarter's Total Cost of Goods Sold divided by average net inventory for current & 4 prior fiscal quarter ends. Where total Cost of Goods Sold is the total cost of goods sold including other cost of goods sold (warranty, scrap, reserves etc.), net inventory is total inventory at standard cost after reserves. - - Market Share Gain (Loss) The difference between Apple Market Share for a specified period in one fiscal year and Apple Market Share for the corresponding period of another fiscal year. - - Operating Margin: Gross Margin Less Operating Expenses - - Return On Capital Employed: (ROCE) Operating Profit Less Cash Taxes Paid Divided By Average Capital Employed (Total Assets Excluding Cash, Less Current Liabilities (Excluding Short Term Notes) Plus Capitalized Operating Leases) - - Time To Market: The Golden Master Target (software) or the Introduction Date (hardware) as defined and approved through the Apple New Product Production (ANPP) Product Proposal Review (PPR). 51 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>5 <TEXT> EXHIBIT 10.A.19 APPLE COMPUTER, INC. EXECUTIVE SEVERANCE PLAN (Established Effective as of June 1, 1991) (As Amended and Restated Effective as of January 15, 1996) 52 <PAGE> CONTENTS SECTION 1. ESTABLISHMENT AND PURPOSE 1.1 Establishment 1.2 Purpose 1.3 Supersession SECTION 2. DEFINITIONS 2.1 "Apple" 2.2 "Apple Disability Plan" 2.3 "Cash Out Payment" 2.4 "Company" 2.5 "Domestic Partner" 2.6 "Early Termination Date" 2.7 "Election and Release" 2.8 "Eligible Employee" 2.9 "Employee" 2.10 "Employer Group" 2.11 "ERISA" 2.12 "Extended Benefit Coverage" 2.13 "Family Leave of Absence" 2.14 "Month of Pay" 2.15 "Notification Date" 2.16 "Participant" 2.17 "Personal Leave of Absence" 2.18 "Plan" 2.19 "Plan Year" 2.20 "Prorated Bonus" 2.21 "Regular Employee" 2.22 "Regular Salary" 2.23 "Severance Benefits" 2.24 "Severance Payment" 2.25 "Termination Date" 2.26 "Termination Notice Period" 2.27 "Years of Service" SECTION 3. PARTICIPATION 3.1 Limited to Designated Eligible Employees 3.2 Commencement of Participation 3.3 Persons Who Shall Not Be Designated as Participants (a) Employment Termination (b) Resignation (c) Written Employment Contract (d) Redeployment or Layoff Plan (e) Host Country (f) Expatriate Employee (g) Personal Leave of Absence 3.4 Termination of Participation 3.5 Ineligible for Personal Leave 3.6 Family Leave Limitations 53 <PAGE> SECTION 4. TERMINATION NOTICE PERIOD 4.1 Term of Termination Notice Period 4.2 Suspension of Termination Notice Period (a) Disability (b) Temporary Assignment (c) Restart 4.3 Extension of Termination Notice Period Under Limited Circumstances 4.4 Continuation of Employment and Employee Benefits During Termination Notice Period 4.5 Additional Benefits During Termination Notice Period 4.6 Termination of Employee Benefits at End of Termination Notice Period SECTION 5. ELECTION TO RECEIVE SEVERANCE BENEFITS 5.1 Availability of Severance Benefits 5.2 Must Sign Election and Release 5.3 Effect of Failure To Elect Severance Benefits SECTION 6. CASH OUT PAYMENT 6.1 Availability of Cash Out Payment 6.2 Effect of Election To Receive a Cash Out Payment 6.3 Ineligible for Rehire 6.4 Ineligible for Temporary or Contract Work SECTION 7. AMOUNT AND PAYMENT OF BENEFITS UNDER THE PLAN 7.1 Severance Payment 7.2 Prorated Bonus 7.3 Extended Benefit Coverage 7.4 Cash Out Payment 7.5 Offset for Amounts Owed 7.6 Time of Payment of Benefits Under the Plan (a) Payment Before Termination (b) Form and Time of Payment 7.7 Death SECTION 8. SOURCE OF PAYMENTS AND EXPENSES 8.1 Source of Benefits 8.2 Expenses SECTION 9. ADMINISTRATION AND PLAN FIDUCIARIES 9.1 Plan Sponsor and Administrator 9.2 Administrative Responsibilities 9.3 Allocation and Delegation of Responsibilities 9.4 No Individual Liability 54 <PAGE> SECTION 10. CLAIMS AND APPEALS 10.1 Claims for Benefits (a) Time Limits for Submission of Initial Claim (b) Time Limits for Decision on Initial Claim (c) Deemed Denial 10.2 Review of Denied Claims (a) Request for Review (b) Decision on Review (c) Rules and Interpretations 10.3 Exhaustion of Remedies SECTION 11. GENERAL PROVISIONS 11.1 Legal Construction of the Plan 11.2 Relation of the Plan to Other Employee Benefit Plans 11.3 No Rights Created or Accrued 11.4 Relation of the Plan to Descriptive Matter 11.5 Non-alienation of Benefits SECTION 12. AMENDMENT AND TERMINATION 12.1 Amendment 12.2 Termination 12.3 Effect of Amendment or Termination SECTION 13. EXECUTION SUPPLEMENT TO THE APPLE COMPUTER, INC. EXECUTIVE SEVERANCE PLAN (EFFECTIVE AS OF JUNE 9, 1995) 55 <PAGE> APPLE COMPUTER, INC. EXECUTIVE SEVERANCE PLAN (ESP) (Established Effective as of June 1, 1991) (As Amended and Restated Effective as of January 15, 1996) 1 . ESTABLISHMENT AND PURPOSE. 1.1 Establishment. The Apple Computer, Inc. Executive Severance Plan was established effective as of June 1, 1991. The Plan was amended and restated effective as of January 15, 1996 to read as set forth herein; provided, however, that the amendments reflected in this restatement shall not apply to any Eligible Employee who was advised in writing prior to January 15, 1996 that he or she would be designated as a Participant, even if the Participant's Notification Date occurred on or after January 15, 1996. 1.2 Purpose. The purpose of the Plan is to establish the rules by which Apple will pay benefits provided under the Plan upon the designation of an Eligible Employee for termination. The Plan is intended to be, and shall be maintained and operated as, an employee welfare benefit plan under ERISA. 1.3 Supersession. This Plan supersedes any plan, program or practice previously in effect by which Apple may have provided separation allowances, termination allowances or other severance benefits to Employees, other than a written contract of employment or a written separation agreement providing such benefits. 56 <PAGE> The Plan specifically supersedes benefits provided under the Apple Computer, Inc. Redeployment Plan and the Apple Computer, Inc. Layoff Plan. An employee designated for termination under this Plan shall receive benefits under this Plan in lieu of any and all benefits to which the employee may claim to be entitled under Apple's Redeployment Plan or Layoff Plan. 57 <PAGE> SECTION 2 . DEFINITIONS. SECTION 2.1 "Apple" "Apple" means Apple Computer, Inc., a California corporation. SECTION 2.2 "Apple Disability Plan" "Apple Disability Plan" means any plan maintained by Apple for the purpose of providing short-term or long-term disability benefits for its employees. SECTION 2.3 "Cash Out Payment" "Cash Out Payment" means the benefit described in Sections 6 and 7.4. SECTION 2.4 "Company" "Company" means Apple Computer, Inc., a California corporation and those of its subsidiaries that it designates, in writing, to participate in the Plan. SECTION 2.5 "Domestic Partner" "Domestic Partner" means a Domestic Partner for Apple medical benefits as defined in the Apple Benefits Book. SECTION 2.6 "Early Termination Date" "Early Termination Date" means the date prior to a Participant's Termination Date on which the Participant voluntarily terminates his or her employment with the Company. 2.7 "Election and Release".cF..7 "Election and Release"; means the written Executive Severance Plan Election and Release agreement described in Section 5.2. 58 <PAGE> SECTION 2.7 "Eligible Employee" "Eligible Employee" means an Employee who is employed in any job with a grade designation of 94 or above or the equivalent thereof and who is not eligible to receive severance benefits under a written contract of employment or written separation agreement with the Company or under any other plan, program or practice by which Apple provides any separation allowance or under any federal, state, local or foreign law or regulation. SECTION 2.8 "Employee" "Employee" means a Regular Employee of the Company who is not hired for a fixed period of employment. SECTION 2.9 "Employer Group" "Employer Group" means Apple and all corporations owned 100%, directly or indirectly, by Apple. SECTION 2.10 "ERISA" "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and includes regulations promulgated thereunder by the Secretary of Labor. SECTION 2.11 "Extended Benefit Coverage" "Extended Benefit Coverage" means the benefit described in Sections 5.1 and 7.3. SECTION 2.12 "Family Leave of Absence" "Family Leave of Absence" means a leave of absence granted to allow an Employee to care for a newborn or newly adopted child, or to care for a family member with a serious health condition, as defined in the "Personal Time" section of the Apple Benefits Book. SECTION 2.13 "Month of Pay" "Month of Pay" means the Participant's Regular Salary, divided by the number of working hours per year (2080) and multiplied by the Participant's Standard Hours Worked Per Month. For purposes of this Section 2.14, a Participant's "Standard Hours Worked Per Month" is defined to be either (i) 173.33, in the case of an Eligible Employee regularly scheduled at his or her Notification 59 <PAGE> Date to work 40 hours per week or classified by Apple as a full-time Employee, or (ii) in the case of an Eligible Employee regularly scheduled at his or her Notification Date to work less than 40 hours per week or classified by Apple as a part-time Employee, the average number of hours he or she was scheduled to work per month (not to exceed 173.33) at Apple during the five years preceding the Participant's Notification Date, as shown on the Participant's personnel action notice(s). SECTION 2.14 "Notification Date" "Notification Date" means the date upon which a Participant receives notification of his or her participation in the Plan as described in Section 3.2. SECTION 2.15 "Participant" "Participant" means an Eligible Employee who has been designated as a Participant in the Plan pursuant to Section 3. SECTION 2.16 "Personal Leave of Absence" "Personal Leave of Absence" means an unpaid leave of absence granted for pursuits that are beneficial to the Company, extended vacations or other compelling personal reasons, as defined in Section 7 of the Apple Benefits Book. SECTION 2.17 "Plan" "Plan" means this Apple Computer, Inc. Executive Severance Plan, as adopted effective as of June 1, 1991, and as it may be amended (or terminated) from time to time. SECTION 2.18 "Plan Year" "Plan Year" means a period of 12 consecutive months beginning on April 1 and ending on March 31. SECTION 2.19 "Prorated Bonus" "Prorated Bonus" means the benefit, if any, described in Sections 5.1 and 7.2. SECTION 2.20 "Regular Employee" "Regular Employee" means an individual who is a common law employee of the Company and who is not a flexible workforce employee, co-op intern, college 60 <PAGE> intern, independent contractor, consultant or temporary agency worker employed by an outside agency. An individual's status as a "Regular Employee" shall be determined by Apple. Subject to Section 10.2 relating to Review of Denied Claims, all such determinations shall be conclusive and binding on all persons. SECTION 2.21 "Regular Salary" "Regular Salary" means the Participant's monthly base salary determined as of his or her Notification Date. SECTION 2.22 "Severance Benefits" "Severance Benefits" means, collectively, the Severance Payment, the Prorated Bonus, if any, and the Extended Benefit Coverage. SECTION 2.23 "Severance Payment" "Severance Payment" means the benefit described in Sections 5.1 and 7.1. SECTION 2.24 "Termination Date" "Termination Date" means the date specified as the Termination Date in an Eligible Employee's written notice of participation in the Plan, and is the date used to determine a Participant's Severance Benefits. SECTION 2.25 "Termination Notice Period" "Termination Notice Period" means the period described in Section 4.1. SECTION 2.26 "Years of Service" "Years of Service" means the number of days elapsed from the Participant's date of hire, measured from the earlier of a Participant's most recent hire date or adjusted hire date, through the Participant's Termination Date, divided by 365. For purposes of this Section 2.27, a Participant's "adjusted hire date" means his or her most recent hire date adjusted for eligible past service with the Company. 61 <PAGE> SECTION 3 . PARTICIPATION. SECTION 3.1 Limited to Designated Eligible Employees Only an Eligible Employee who receives the written notification described in Section 3.2 may participate in the Plan. No other person shall be a Participant in the Plan. SECTION 3.2 Commencement of Participation An Eligible Employee may become a Participant only if he or she receives written notification that he or she is a Participant. The notice shall be approved by the Division President and the Human Resources Vice President/Director of the Eligible Employee's division, or the designees of such persons, and shall state the Eligible Employee's Termination Date. The Eligible Employee's participation in the Plan and Termination Notice Period will begin on his or her Notification Date or such other plan participation date as may be provided in such written notice. SECTION 3.3 Persons Who Shall Not Be Designated as Participants An Eligible Employee shall not be designated as a Participant in the Plan or receive benefits under the Plan if: (a) Employment Termination A decision has been made to terminate his or her employment for any reason not related to the Company's decision to terminate the Employee because of business conditions; (b) Resignation He or she has resigned or has given notice of his or her resignation; 62 <PAGE> (c) Written Employment Contract He or she is employed under a written employment contract that provides greater severance or similar benefits than are provided by the Plan; (d) Redeployment or Layoff Plan He or she is currently a participant in any Apple Computer Inc. redeployment or layoff plan; (e) Host Country He or she is eligible to receive compensation or benefits under the laws of any other country (including, but not limited to, his or her host country) or under Company policy or guidelines established pursuant thereto, and those laws, policies, or guidelines require payments or benefits greater than or similar to those provided by the Plan; (f) Expatriate Employee If he or she is an expatriate Employee employed by the Company in the United States and has retained the United States as his or her "home country;" provided, however, that any such Employee who is repatriated in accordance with his or her assignment contract may be designated as a Participant under this Plan after such repatriation; or (g) Personal Leave of Absence He or she is on a Personal Leave of Absence. Whether benefits as described in Subsections 3(c) or (e) are greater than the benefits provided under the Plan shall be determined by Apple and such determinations shall be conclusive and binding on all persons. SECTION 3.4 Termination of Participation A Participant's Plan Participation shall terminate as of the earliest of the following dates: 63 <PAGE> (a) The date the Participant's employment with the Company is terminated for any reason (other than death) not related to the Company's decision to terminate the Participant because of business conditions; (b) The date the Participant accepts an offer of employment with any member of the Employer Group; or, (c) The date no further benefits are payable to the Participant under the Plan. SECTION 3.5 Ineligible for Personal Leave When an Eligible Employee becomes a Participant in the Plan, he or she will not be eligible to take a Personal Leave of Absence. SECTION 3.6 Family Leave Limitations When an Eligible Employee becomes a Participant in the Plan, he or she may still apply for a Family Leave of Absence. If an Eligible Employee is granted such a leave to care for a seriously ill family member or in connection with the birth of a child, his or her leave shall not extend beyond his or her Termination Date. 64 <PAGE> SECTION 4 . TERMINATION NOTICE PERIOD. SECTION 4.1 Term of Termination Notice Period For each Participant, the Termination Notice Period is the period beginning on the Participant's Notification Date or such other plan participation date as may be provided in the Participant's written notification of his or her participation in the Plan as described in Section 3.2, and, subject to Sections 4.2 and 4.3, ending upon then earliest of the following dates: (a) The Participant's Termination Date; (b) The Participant's Early Termination Date; (c) The date of the Participant's death; (d) The date the Participant accepts an offer of employment with any member of the Employer Group. If a Participant receives an offer of employment from any member of the Employer Group, the Participant must accept the offer before the end of the Termination Notice Period or the offer will be deemed to be rejected; (e) The date the Participant's employment is terminated for any reason not related to the Company's decision to terminate the Participant because of business conditions (including, without limitation, the Participant's misuse of confidential or proprietary information or violations of the standards described in Apple's Global Ethics brochure or any other Apple policy or guideline; or (f) Three months after the Participant's Notification Date or such other plan participation date as may be provided in the Participant's written notification of his or her participation in the Plan as described in Section 3.2. 65 <PAGE> SECTION 4.2 Suspension of Termination Notice Period Notwithstanding the provisions of Section 4.1, a Participant's Termination Notice Period shall be suspended if and during such time as one of the following conditions exists: (a) Disability. The Participant is eligible to receive or is receiving disability benefits under an Apple Disability Plan. (For this purpose, a Participant shall not be considered eligible to receive benefits under an Apple Disability Plan if he or she has failed to make timely application for such benefits following the onset of disability.) If the Participant is released to return to work with the Company within two years of the date his or her disability leave begins, the suspension shall end on the effective date of such release and the Participant's Termination Notice Period will resume. If the Participant is not released to return to work with the Company within two years of the date his or her disability leave begins, then the Termination Notice Period shall immediately end and the Participant will not be eligible to receive a Cash-Out Payment or Severance Benefits pursuant to Section 5. (b) Temporary Assignment. The Company, in its sole discretion, determines that the Participant's services are required in order to perform or complete an assignment. Upon actual completion of such a temporary assignment, the Participant's Termination Notice Period shall resume. The Participant's Termination Notice Period shall be suspended no more than six months under this Subsection (b); any exceptions must be approved in advance by the Senior Vice President of Human Resources or his or her designee. 66 <PAGE> (c) Restart. The Participant is receiving benefits under the Apple Restart Plan. The Participant's Termination Notice period shall be suspended for up to six weeks under this Subsection (c), provided that the Participant became eligible for sabbatical benefits under the Apple Restart Plan before or during the Termination Notice Period and applied for and received approval of such sabbatical benefits before his or her Termination Date. SECTION 4.3 Extension of Termination Notice Period Under Limited Circumstances. Notwithstanding the provisions of Section 4.1, a Participant may request an extension of his or her Termination Notice Period for up to a maximum of 14 additional calendar days. A request for such an extension must be made to the Corporate Employee Relations Director and will be approved only if the following conditions are satisfied: (a) The Participant first signs the Election and Release agreement described in Section 5.2 (and does not revoke such agreement during the seven days following its signing); (b) The Participant agrees in writing to the adjustment described in Section 7.1; (c) The extension sought is necessary and no longer than necessary: (i) To allow the Participant to become vested in a stock option granted under the terms of the Apple Computer, Inc. 1981 or 1990 Stock Option Plans; (ii) To allow the Participant to become vested in the Apple Executive Long Term Stock Option Plan; 67 <PAGE> (iii) To allow the Participant to become vested in and eligible for a distribution from Apple's Profit Sharing Plan; (iv) To enable the Participant to purchase stock under the Apple Employee Stock Purchase Plan for the purchase period in which the Participant's employment would otherwise terminate; or (v) To enable the Participant to deal with circumstances that Apple determines in its sole discretion to be so extraordinary as to warrant an extension. No extension shall be granted pursuant to this Section 4.3(c)(v) without the prior, written approval of the Participant's Division President or Vice President and the Senior Vice President of Human Resources. In no event may an extension granted under this Section 4.3(c)(v), when added to extensions under Section 4.3(c)(i), (ii), (iii) or (iv), total more than 14 calendar days. In no event shall any Participant who meets the eligibility requirements for the Apple Restart Plan as a result of an extension pursuant to this Section 4.3 be eligible to receive benefits under the Apple Restart Plan. SECTION 4.4 Continuation of Employment and Employee Benefits During Termination Notice Period. A Participant will continue to be an Employee and to receive his or her Regular Salary for the Termination Notice Period, but he or she will not be required to perform any work for the Company. The Participant's coverage under or participation in Apple's employee benefit plans or programs (if any) shall also continue during the Termination Notice Period, but coverage as an Employee shall terminate at the end of the Termination Notice Period in accordance with Section 4.6. During the Termination Notice Period the 68 <PAGE> Participant will have access, as appropriate, to Apple's Career Resource Center, Company Store, Cupertino Fitness Center and Child Care Center, as long as those facilities remain in operation. SECTION 4.5 Additional Benefits During Termination Notice Period. During the Termination Notice Period, a Participant may be eligible to receive certain job placement assistance or counseling, in accordance with procedures established by Apple. The availability of such assistance may vary depend ing upon business conditions at the time of the termination, the Participant's job location and such other factors as may be determined by Apple in its sole discretion. SECTION 4.6 Termination of Employee Benefits at End of Termination Notice Period. Except as otherwise required by law or as provided in Section 7.3 of the Plan, a Participant's coverage under or participation in any of Apple's employee benefit plans or programs that continues during the Termination Notice Period pursuant to this Plan shall cease as of the close of the Participant's Termination Notice Period. 69 <PAGE> SECTION 5 . ELECTION TO RECEIVE SEVERANCE BENEFITS. SECTION 5.1 Availability of Severance Benefits A Participant may elect, subject to the requirements of Section 5.2, to receive a Severance Payment, a Prorated Bonus, if any, and/or Extended Benefit Coverage under the Plan; provided, however, that a Participant whose employment is involuntarily terminated as described in Subsection 4.1(e) or who accepts another job with any member of the Employer Group during the Termination Notice Period shall not be eligible to elect such Severance Benefits. The election to receive Severance Benefits must be made during the Termination Notice Period or within twelve months after the last day of the Participant's employment. SECTION 5.2 Must Sign Election and Release. No Participant shall be entitled to receive Severance Benefits under the Plan unless he or she first has properly completed and executed the Executive Severance Plan Election and Release agreement provided to the Participant under the Plan, and does not revoke such agreement during the seven days following its signing. The Election and Release agreement shall provide that execution of such Election and Release agreement by the Participant will constitute a waiver and release of every claim the Participant might otherwise have against Apple, its subsidiaries, or any of their officers, directors or employees arising out of his or her employment or the termination of his or her employment with the Company. SECTION 5.3 Effect of Failure To Elect Severance Benefits If a Participant fails to elect Severance Benefits by signing and returning the Election and Release agreement described in Section 5.2 to the Corporate Employee Relations Director or the designee of such person during the period 70 <PAGE> described in Section 5.1, or if a Participant who has signed the Election and Release agreement revokes it within seven days, such Participant shall cease to be a Participant under the Plan. 71 <PAGE> SECTION 6 . CASH OUT PAYMENT. SECTION 6.1 Availability of Cash Out Payment A Cash Out Payment shall be paid to a Participant who elects to terminate his or her employment with the Company before the Participant's Termination Date; provided, however, that a Participant whose employment is involuntarily terminated as described in Section 4.1(e) or who accepts another job with any member of the Employer Group during the Termination Notice Period shall not be eligible for a Cash Out Payment. SECTION 6.2 Effect of Election To Receive a Cash Out Payment If a Participant makes the election described in Section 6.1, his or her Termination Notice Period shall end on the effective date of his or her termination of employment. The benefits described in Section 4.4 shall cease to be effective upon the termination of the Participant's Termination Notice Period. SECTION 6.3 Ineligible for Rehire In general, a Participant who receives a Cash Out Payment shall not be eligible for rehire by any member of the Employer Group before 60 days after his or her Termination Date. Any exceptions must be approved by the Division Senior Executive and the Division Human Resources Vice President or Director. If the Participant is rehired by the Company within 60 days after his or her Termination Date, Apple, in its sole discretion, may require the Participant to repay to Apple the entire amount of his or her Severance Payment and Prorated Bonus, if any. If the Participant is rehired by theCompany prior to his or her Termination Date, Apple, in its sole 72 <PAGE> discretion, may require the Participant also to repay to Apple the entire amount of his or her Cash Out payment. SECTION 6.4 Ineligible for Temporary or Contract Work. A Participant shall not be eligible to work as a temporary employee or independent contractor for any member of the Employer Group before 60 days after his or her Termination Date. Notwithstanding the foregoing, no Participant may work as a temporary employee or independent contractor in the same position he or she held when his or her Layoff Notice Period commenced. 73 <PAGE> SECTION 7 . AMOUNT AND PAYMENT OF BENEFITS UNDER THE PLAN. SECTION 7.1 Severance Payment The amount of Severance Payment payable to a Participant who elects to receive it pursuant to Section 5, shall be determined with reference to the Participant's Termination Date and shall be equal to the number of Months of Pay determined in accordance with the following table: Years of Service* Months of Pay 3 or less 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 or more 12 (maximum) Partial years of service in excess of three years shall be prorated by full month to determine a Participant's total Severance Payment. A Participant's Severance Payment shall be reduced by the compensation the Participant received with respect to any period during which his or her Termination Notice Period was extended pursuant to Section 4.3. SECTION 1.1 Prorated Bonus The amount of Prorated Bonus, if any, payable to a Participant who elects to receive it pursuant to Section 5, shall be determined with reference to the Participant's Termination Date and shall be equal to the Participant's actual bonus under the Company's Senior/Executive Incentive Bonus Plan or, if applicable, the Participant's actual bonus prorated for the amount of time from the beginning of Apple's fiscal year (generally, October 1) to the Participant's Termination Date. A Participant whose Termination Date falls 74 <PAGE> between the 1st and 14th day of any month shall receive a one-half-month credit towards their bonus proration. A Participant whose Notification Date occurs during one fiscal year but whose Termination Date occurs in the next fiscal year shall receive his or her actual bonus, if any, for the first fiscal year and the prorated portion of his or her actual bonus, if any, for the second fiscal year. SECTION 1.2 Extended Benefit Coverage A Participant who elects to receive Extended Benefit Coverage pursuant to Section 5 shall be eligible to continue to receive the same Company paid Medical and Dental coverages the Participant is receiving as of his or her Termination Date or, if applicable, Early Termination Date, extended as follows: Participant's Grade Level Period of Extended Company-Paid on Termination Date or Coverage From Termination Date Early Termination Date or Early Termination Date 97-100 12 Months 94-96 9 Months Notwithstanding the foregoing, a Participant's period of extended Benefit Coverage shall end if and when the Participant becomes eligible for similar coverage through another employer, including the employer of the Participant's spouse or Domestic Partner. Each Participant shall be given the opportunity to purchase continuing medical and dental coverage, as required under section 602 of ERISA and section 4980B of the Code, prior to the expiration of the Participant's current coverage or Extended Benefit Coverage, if elected. 75 <PAGE> SECTION 1.1 Cash Out Payment The Cash Out Payment is an amount equal to the Regular Salary that the Participant would have been paid had the Participant remained employed by the Company until the Participant's Termination Date. SECTION 1.2 Offset for Amounts Owed. The Company reserves the right to deduct from any lump sum Severance Benefit and/or Cash Out Payment payable to a Participant under the Plan any and all amounts owed by the Participant to the Company, including but not limited to overpayment of commissions or salary, unreimbursed cash, salary and travel advances, taxes, amounts due to the Company Store for purchases or Loan to Own Equipment, Custom Coverage, any other employee benefit plan deductions, and any unpaid loans. SECTION 1.3 Time of Payment of Benefits Under the Plan (a) Payment Before Termination No Participant shall be entitled to receive a Cash Out Payment under the Plan before the last day of his or her employment with the Company. No Participant shall be entitled to receive a Severance Payment, Prorated Bonus or Extended Benefit Coverage under the Plan until his or her employment with the Company has terminated and until the eighth day after the Participant has signed the Election and Release Agreement pursuant to Section 5.2, provided that the Participant has not subsequently revoked such agreement. (b) Form and Time of Payment. A Participant's Severance Payment and Cash Out Payment, if any, shall be paid as soon as reasonably practicable after the Participant's termination of employment. A Participant's Prorated Bonus, if any, shall be paid at or about the time that bonus payments are made to active employees who are eligible to receive bonuses under the Company's Senior/Executive Incentive Bonus Plan for the same year for which the Prorated Bonus is paid. The Company shall withhold appropriate federal, state and local income and employment taxes and shall make all applicable employee benefit plan and other deductions from any payments under the Plan; provided, however, that the Company shall not make Apple Computer, Inc. Savings and Investment Plan deductions from any Plan payments. SECTION 1.4 Death. If a Participant dies before his or her participation has terminated pursuant to Section 3.4, any Severance Payment, Prorated Bonus or Cash Out Payment to which the Participant would have been entitled under the Plan had the Participant voluntarily terminated employment with the Company on the date of his or her death shall be paid to the Participant's surviving spouse, or if there is no surviving spouse, to the Participant's designated beneficiary under Apple's group term life insurance plan, or if there is no such designated beneficiary, to the Participant's estate. Such Payments shall be made at the time and in the form determined pursuant to Section 7.6(b) and shall be made regardless of whether the Participant has signed an Election and Release. Extended Benefit Coverage will continue to be provided to the Participant's surviving eligible dependents in accordance with the terms of the Participant's coverage and Section 7.3. 76 <PAGE> SECTION 2 . SOURCE OF PAYMENTS AND EXPENSES. SECTION 2.1 Source of Benefits Any benefit payable under the Plan shall be unfunded and payable only from Apple's general assets. SECTION 2.2 Expenses. The expenses of operating and administering the Plan shall be borne entirely by Apple. 77 <PAGE> SECTION 3 . ADMINISTRATION AND PLAN FIDUCIARIES. SECTION 3.1 Plan Sponsor and Administrator Apple is the "plan sponsor" and the "administrator" of the Plan, within the meaning of ERISA. SECTION 3.2 Administrative Responsibilities Apple shall be the named fiduciary with the power and sole discretion to determine who is eligible for benefits under the Plan, to interpret the Plan and to prescribe such forms, make such rules, regulations and computations and prescribe such guidelines as it may determine are necessary or appropriate for the operation and administration of the Plan, to change the terms of such rules, regulations or guidelines, and to rescind such rules, regulations or guidelines. Such determinations of eligibility, rules, regulations, interpretations, computations and guidelines shall be conclusive and binding upon all persons. In administering the Plan, Apple shall at all times discharge its duties with respect to the Plan in accordance with the standards set forth in section 404(a)(1) of ERISA. SECTION 3.3 Allocation and Delegation of Responsibilities Apple may allocate any of its responsibilities for the operation and administration of the Plan among its officers, employees and agents. It may also delegate any of its responsibilities under the Plan by designating, in writing, another person to carry out such responsibilities. Any such written delegation shall become effective when executed by Apple's Corporate Employee Relations Manager or his or her designee, and the designated person shall then be responsible for carrying out the responsibilities described in such writing. 78 <PAGE> SECTION 3.4 No Individual Liability. It is declared to be the express purpose and intent of Apple that no individual liability shall attach to or be incurred by any member of the Board of Directors of Apple, by any officer of Apple, or by any employee, representative or agent of Apple, under, or by reason of the operation of, the Plan. 79 <PAGE> SECTION 4 . CLAIMS AND APPEALS. SECTION 4.1 Claims for Benefits A Participant shall be entitled to receive his or her benefits under the Plan upon filing with the Company the applicable documents as prescribed by Apple. Any Participant (or the surviving spouse or duly authorized representative of a deceased Participant) who believes himself or herself to be entitled to receive benefits that are different from the benefits that he or she has received or who believes that he or she has a claim to other relief arising out of the Company's decision to terminate the Participant may make a claim for benefits or such other relief under this Section 10.1. Such claim should be directed to the Participant's Division President or to the Division Vice President or Director of Human Resources. Apple's Corporate Employee Relations Director or his or her designee shall exercise oversight responsibility with respect to the claims and appeal processes. (a) Time Limits for Submission of Initial Claim No claim by a Participant (or by the surviving spouse or duly authorized representative of a deceased Participant) shall be valid unless it is made immediately and in no event later than 60 days following the receipt of the disputed benefit, a denial of a benefit or, in the case of a claim to other relief arising out of the Company's decision to terminate the Participant, the date on which the Participant's employment terminated. (b) Time Limits for Decision on Initial Claim If any claim is denied, in whole or in part, notice of such denial shall be given to the claimant in writing within 90 days, except that if special circumstances require that the time for consideration of the claim be 80 <PAGE> extended, notice of the extension shall be given in writing within 90 days, and notice of such denial shall thereafter be given within 180 days. Each period of 90 or 180 days referred to in the preceding sentence shall begin to run on the day the claim is received by the Participant's Division President or the Division Vice President or Director of Human Resources. A written notice of denial shall set forth, in a manner calculated to be understood by the claimant, specific reasons for the denial, specific references to the relevant Plan provisions on which it is based, a description of any information or material necessary to perfect the claim, an explanation of why such material is necessary and an explanation of the Plan's review procedure. A notice that additional time is necessary for consideration of a claim shall indicate the special circumstances requiring the extension of time and the date by which Apple expects to render its decision on the claim. (c) Deemed Denial If written notice of the denial of a claim for benefits or of the fact that an extension of time is necessary for processing the claim is not furnished within the time period specified in Section 10.1(b), the claim shall be deemed to have been denied, and the claimant shall be permitted to appeal such denial in accordance with the review procedure set forth in Section 10.2. 81 <PAGE> SECTION 4.2 Review of Denied Claims (a) Request for Review. A claimant whose application for benefits is denied in whole or in part, or the claimant's duly authorized representative, may appeal from the denial by submitting to Apple's Senior Vice President of Human Resources or his or her designee a request for a review of the application within 90 days after receiving written notice of the denial from Apple. Upon the request of a Claimant or his or her representative, Apple shall give the claimant or the representative an opportunity to review pertinent materials that pertain to his or her plan benefits, other than legally privileged documents, in preparing the request for a review. The request for a review shall be in writing and sent to the address set forth in the Summary Plan Description distributed to Participants or in later Plan information. The request for a review shall set forth all of the grounds on which it is based, all facts in support of the request and any other matters which the claimant deems pertinent. The Senior Vice President of Human Resources or designee may require the claimant to submit such additional facts, documents or other material as he or she may deem necessary or appropriate in making his or her review. (b) Decision on Review. The Senior Vice President of Human Resources or his or her designee shall act on each request for a review within 60 days after receipt, unless special circumstances require further time for processing and the claimant is advised of the extension. In no event shall the decision on review be rendered more than 120 days after the Senior Vice President of Human Resources or designeereceives the request for a review. The Senior Vice 82 <PAGE> President of Human Resources or designee shall give prompt, written notice of his or her decision to the claimant and to Apple. In the event that the Senior Vice President of Human Resources or his or her designee confirms the denial of the application for benefits in whole or in part, the notice shall set forth, in a manner calculated to be understood by the claimant, the specific reasons for the decision and specific references to the relevant Plan provisions on which the decision is based. (c) Rules and Interpretations The Corporate Employer Relations Director and Senior Vice President of Human Resources shall adopt such rules, procedures and interpretations of the Plan as they deem necessary or appropriate in carrying out their responsibilities under this Section 10. SECTION 4.3 Exhaustion of Remedies Decisions of the Senior Vice President of Human Resources or his or her designee shall be conclusive and binding on all persons. No legal action for benefits under the Plan or arising out of the Company's decision to terminate the Participant shall be brought unless and until the claimant (i) has submitted a claim in accordance with Section 10.1, (ii) has been notified by Apple that the claim is denied or the claim is deemed to be denied under Section 10.1(c), (iii) has filed a written request for review of the claim in accordance with Section 10.2, and (iv) has been notified in writing that the Senior Vice President of Human Resources or his or her designee has affirmed the denial of the claim; provided that legal action may be brought after Apple has failed to take any action on the claim within the time prescribed by Sections 10.1(b) and 10.2(c) above, respectively. 83 <PAGE> SECTION 5 . GENERAL PROVISIONS. SECTION 5.1 Legal Construction of the Plan The Plan shall be governed and construed in accordance with ERISA. SECTION 5.2 Relation of the Plan to Other Employee Benefit Plans Except as provided in Section 1.3, the benefits provided under the Plan shall be provided in addition to, and not in place of, any other benefit to which a Participant is or may be entitled under the terms of any other employee benefit plan established or maintained by Apple. The terms of this Plan shall not be construed to change, amend or modify the terms of any other such employee benefit plan. No term of any other employee benefit plan shall be construed to change, amend or modify any term of this Plan. SECTION 5.3 No Rights Created or Accrued Nothing in the Plan shall be construed as creating a contract of employment or as giving to an employee or agent of the Company a right to receive any benefit other than the benefits specifically provided under the terms of the Plan or a right to continue in the employment of the Company. Nothing in the Plan shall be construed to limit in any manner the right of the Company to discharge, demote, reclassify, transfer, relocate, or in any other manner treat or deal with any person in its employ, including, without limitation, any person who might otherwise have become (or remained) a Participant in the Plan absent such treatment or dealing, which right is hereby reserved. Nothing in this Plan shall be construed to change the at-will nature of the Participant's employment. No benefits shall be deemed to 84 <PAGE> accrue under the Plan at any time except the time at which they become payable under the Plan, and no right to a benefit under the Plan (other than the benefits under any employee benefit plans or programs in which the Participant continues to participate pursuant to Section 4.4) shall be deemed to vest prior to the termination of the Participant's employment. SECTION 5.4 Relation of the Plan to Descriptive Matter The Plan shall contain no terms or provisions except those set forth herein, or as hereafter amended in accordance with the provisions of Section 12. The provisions of the Plan shall control, and any description made in any other document shall not control, if ever any such description is deemed to be in conflict with any provision of the Plan. SECTION 5.5 Non-alienation of Benefits No benefits payable under the Plan shall be subject to anticipation, alienation, sale, transfer, assignment, pledge or other encumbrance, and any attempt to do so shall be void. 85 <PAGE> SECTION 6 . AMENDMENT AND TERMINATION. SECTION 6.1 Amendment. Apple may amend the Plan at any time, by a written instrument executed by Apple's Senior Vice President of Human Resources. SECTION 6.2 Termination. Apple may terminate the Plan, at any time and for any reason, by a written instrument executed by Apple's Senior Vice President of Human Resources. SECTION 6.3 Effect of Amendment or Termination. If a Participant's employment has terminated and the Participant is entitled to receive benefits under the Plan, no amendment to the Plan, and no termination of the Plan, shall thereafter operate to diminish or eliminate such Participant's entitlement to such benefits. 86 <PAGE> SECTION 7 . EXECUTION. To record the amendment and restatement of the Plan effective as of January 15, 1996, Apple's Senior Vice President of Human Resources has executed this document this 13th day of January, 1996. APPLE COMPUTER, INC. By_/s/_Kevin J. Sullivan_____ Kevin J. Sullivan Senior Vice President Human Resources 87 <PAGE> SUPPLEMENT TO THE APPLE COMPUTER, INC. EXECUTIVE SEVERANCE PLAN (Effective June 9, 1995) SECTION 1. ESTABLISHMENT AND PURPOSE. This Supplement (the "Supplement") to the Apple Computer, Inc. Executive Severance Plan (the "Plan") is hereby established effective as of the date it is approved by the Board of Directors of Apple (the "Board"). The purpose of this Supplement is to set forth the terms and provisions of the Plan that will apply in the event of a Change in Control of Apple. Capitalized words not otherwise defined herein shall have the meanings assigned to such words in the Plan. SECTION 2. ADDITIONAL BENEFITS. (a) Each Eligible Employee (i) whose employment with the Company is involuntary terminated by the Company for any reason during the Supplement Term, other than due to such Employee's misuse of confidential or proprietary information or a violation of the standards described in Apple's Global Ethics brochure or any other Apple policy or guideline or (ii) who resigns during the Supplement Term for Good Reason shall automatically become a Participant, whether or not such person is designated as a Participant in accordance with Section 3.1 of the Plan (hereinafter, a "Section 2(a) Participant"); provided, however, that no Eligible Employee described in 88 <PAGE> Section 3.3(c), (d), (e) or (f), or an Eligible Employee described in Section 3.3(b) who resigns other than for Good Reason, shall become a Section 2(a) Participant. In addition, during the Supplement Term, the definition of "Eligible Employee" in the Plan is revised to exclude reference to "any other plan, program or practice by which Apple provides any separation allowance" which is established on or after the Change in Control Date or which is implemented at any time with the intention, express or implied, of eliminating Apple's obligations under the Plan or this Supplement. Employees of the Company who are otherwise Eligible Employees and who are parties to a Retention Agreement shall continue to be eligible to be designated as Participants in the Plan if their employment terminates prior to the Change in Control Date or after the expiration of the term of their Retention Agreement. (b) Section 4.1(e) of the Plan is revised to prohibit the Company from ending the Termination Notice Period for any such Termination Notice Period that begins within the Supplement Term for any reason other than the Section 2(a) Participant's misuse of confidential or proprietary information or a violation of the standards described in Apple's Global Ethics brochure or any other Apple policy or guideline. (c) Section 4.3 of the Plan is revised to substitute "30 additional calendar days" for "14 additional calendar days" for any Termination Notice Period that begins during the Supplemental Term. 89 <PAGE> (d) Section 4.5 of the Plan is revised to require the Company to provide job placement assistance or counseling to each Section 2(a) Participant who requests such assistance; provided, however, that the individual Participant cost to Apple of providing such benefits to a Section 2(a) Participant need not exceed $7,500. (e) Section 7.1 of the Plan is revised for each Section 2(a) Participant as follows: Years of Service* Months of Pay 3 or less 8 4 10 5 12 6 14 7 16 8 18 9 20 10 22 11 or more 24 (maximum) _____________ * Years of Service will be determined as of the Participant's Termination Date. 90 <PAGE> (f) Section 7.2 of the Plan is revised for each Section 2(a) Participant as follows: In lieu of the Prorated Bonus, each Section 2(a) Participant shall receive a special severance bonus (the "Severance Bonus") equal to the greater of (i) the target annual bonus amount payable to the Section 2(a) Participant for the fiscal year in which the Notification Date occurs, or (ii) the target annual bonus amount payable to the Section 2(a) Participant for the last fiscal year ended prior to the Change in Control Date, in either case, calculated on the assumption that all applicable performance targets had been achieved. The Severance Bonus shall not be subject to any proration and shall otherwise be payable at such time and manner as the Prorated Bonus. (g) Section 7.3 of the Plan is revised for each Section 2(a) Participant as follows: Participant's Grade Level Period of Extended Coverage from on Termination Date or Termination Date or Early Termination Date Early Termination Date 97-100 24 months 94-96 18 months (h) The additional payments and benefits provided by this Section 2 of the Supplement are subject to the condition that the Section 2(a) Participant execute a release in the form and manner contemplated by Section 5.2 of the Plan. 91 <PAGE> SECTION 3. GROSS-UP PAYMENT. A new Section 7.8 is added to the Plan as follows: 7.8 Gross-Up Payment. (a) Right to Payment. Notwithstanding anything in the Plan or the Supplement to the contrary, if it is determined that any Payment to an Eligible Employee (whether or not such employee qualifies for benefits under the Plan or the Supplement and whether or not such employee is a Section 2(a) Participant at the time of determination) 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 such Eligible Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an amount that will place such Eligible Employee in the same after-tax economic position that such employee 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; 92 <PAGE> M equals the sum of the highest marginal rates1 for Taxes applicable to the Eligible Employee 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 to an Eligible Employee hereunder if the Accounting Firm determines that the Payments to such Eligible Employee are not subject to an Excise Tax. (b) Determination of Gross-Up Payment. Subject to the provisions of Section 7.8(c), all determinations required under this Section 7.8, 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 the Eligible Employee and the Company within fifteen days of the Change in Control Date, the date of the Eligible Employee's termination of employment with the Company and its subsidiaries or any other date reasonably requested by the Eligible Employee or the Company on which a determination under this Section 3 is necessary or advisable. The Company shall pay each Eligible Employee the initial Gross-Up Payment within 5 days of the receipt by the Company of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable to an Eligible Employee (or class of Eligible Employees), the Company shall cause 93 <PAGE> the Accounting Firm to provide such Eligible Employee (or each member of the class of Eligible Employees) with an opinion that the Accounting Firm has substantial authority under the Code and Regulations not to report an Excise Tax on the Eligible Employee's federal income tax return. Any determination by the Accounting Firm shall be binding upon the Eligible Employee 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 the Eligible Employee with respect to any Payment (hereinafter an "Underpayment"), the Company, after exhausting its remedies under Section 7.8(c) below, shall promptly pay to the Eligible Employee an additional Gross-Up Payment in respect of the Underpayment. (c) Procedures. As a condition to Apple's obligations hereunder to an Eligible Employee, each Eligible Employee shall be required to notify Apple in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Apple of a Gross-Up Payment by such Eligible Employee. Such notice shall be given as soon as practicable after the Eligible Employee knows of such claim and shall apprise Apple of the nature of the claim and the date on which the claim is requested to be paid. An Eligible Employee shall agree not to pay the claim until the expiration of the thirty-day period following the date on which the Eligible Employee notifies Apple, or such shorter period ending on the date the Taxes with respect to such claim are due (the "Notice Period"). If Apple notifies the Eligible Employee in writing prior to the expiration of the Notice Period that it desires to contest the claim, the Eligible Employee shall: (i) give Apple any information reasonably requested by Apple relating to the claim; 94 <PAGE> (ii) take such action in connection with the claim as Apple may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Apple and reasonably acceptable to the Eligible Employee; (iii) cooperate with Apple in good faith in contesting the claim; and (iv) permit Apple to participate in any proceedings relating to the claim. An Eligible Employee shall permit Apple to control all proceedings related to the claim and, at its option, permit Apple 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 Apple, an Eligible Employee shall 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 Apple shall determine; provided, however, that, if Apple directs such Eligible Employee to pay such claim and pursue a refund, Apple shall advance the amount of such payment to the Eligible Employee on an after-tax and interest-free basis (the "Advance"). Apple's control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and the Eligible Employee 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 Apple does not notify the Eligible Employee in writing prior to the end of the Notice Period of its desire to contest the claim, Apple shall pay to the Eligible Employee an additional Gross-Up Payment in respect of the excess parachute payments that are the subject of the claim, and the Eligible Employee shall be required 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. 95 <PAGE> (d) Repayments. If, after receipt by an Eligible Employee of an Advance, the Eligible Employee becomes entitled to a refund with respect to the claim to which such Advance relates, the Eligible Employee shall pay Apple the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by Eligible Employee of an Advance, a determination is made that the Eligible Employee shall not be entitled to any refund with respect to the claim and Apple does not promptly notify the Eligible Employee of its intent to contest the denial of refund, then the amount of the Advance shall not be required to be repaid by Eligible Employee and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to the Eligible Employee. (e) Further Assurances. Apple shall indemnify each Eligible Employee and hold each Eligible Employee harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by the Eligible Employee with respect to the exercise by Apple of any of its rights under this Section 7.8, including, without limitation, any Losses related to Apple's decision to contest a claim or any imputed income to the Eligible Employee resulting from any Advance or action taken on the Eligible Employee's behalf by Apple hereunder. Apple shall pay all legal fees and expenses incurred under this Section 7.8, and shall promptly reimburse each Eligible Employee for the reasonable expenses incurred by the Eligible Employee in connection with any actions taken by Apple or required to be taken by the Eligible Employee hereunder. Apple 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 7.8(b). 96 <PAGE> (f) Combined Payments. Anything in this Section 7.8 to the contrary notwithstanding, Apple shall have no obligation to pay an Eligible Employee a required Gross-Up Payment under this Section 7.8 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 an Eligible Employee under this Section 7.8 would result in the Combined Payments exceeding the Limit, Apple shall pay the Eligible Employee the portion, if any, of the Gross-Up Payment which can be paid to such employee without causing the aggregate amount of all Combined Payments to exceed the Limit. In the event that an Eligible Employee is entitled to a Gross-Up Payment under this Section 7.8 and other employees or former employees of the Company are also entitled to gross-up payments under this Section 7.8 or under the corresponding provisions of any other applicable Combined Arrangement and the aggregate amount of all such payments would cause the Limit on Combined Payments to be exceeded, Apple 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 bears to the aggregate amount of all such payments. Nothing in this Section 7.8(f) shall require any Eligible Employee to repay to Apple any amount that was previously paid to such employee under this Section 7.8. 97 <PAGE> SECTION 4. AMENDMENT AND ASSUMPTION. (a) Section 12.1 of the Plan is revised as follows: The Plan and this Supplement may not be amended or terminated by Apple on and after the occurrence of the Change in Control Date in any way that would reduce or eliminate the payments and benefits owing under the Plan and this Supplement to any Section 2(a) Participant. In addition, no amendment or termination which would be precluded under the previous sentence if made on or after the Change in Control Date shall be effective if made or first effective within the twelve month period ending on the Change in Control Date. (b) Apple 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 Apple expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that Apple would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve Apple of its obligations hereunder. SECTION 5. DEFINITIONS. For purposes of the Plan and this Supplement, the following capitalized words shall have the meanings set forth below: "Accounting Firm" shall mean Ernst & Young or, if such firm is unable or unwilling to perform such calculations, such other national accounting firm as shall be designated by Apple in accordance with the terms of the Retention Agreements. 98 <PAGE> "Change in Control" shall mean a change in control of Apple 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 Apple is then subject to such reporting requirement; provided, however, that, anything in the Plan or this Supplement 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 Apple representing 30% or more of the combined voting power of Apple's then outstanding securities entitled to vote in the election of directors of Apple; (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 Apple'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; 99 <PAGE> (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 percent of the combined voting power of the Company or other corporation resulting from such Transaction; (iv) all or substantially all of the assets of Apple are sold, liquidated or distributed; or (v) there is a "change in control" of Apple 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 Apple 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 Apple fails to satisfy its obligations to have the Plan and this Supplement assumed by any successor to Apple in accordance with Section 4(b) of this Supplement. 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 100 <PAGE> occur, then the Supplement 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 (A) to any Section 2(a) Participant whose termination of employment with Apple has occurred on and after the Change in Control Date and on or prior to the Reset Date or (B) if the Contemplated Change in Control subsequently occurs within three months of the Reset Date. Following the Reset Date, the provisions of the Plan and this Supplement shall remain in effect and a new Supplement Term shall commence upon the occurrence of a subsequent Change in Control Date. Notwithstanding the first sentence of this section, if an individual's employment with the Company terminates prior to the Change in Control Date and it is reasonably demonstrated that such 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, solely with respect to the affected Participant, the Change in Control Date shall mean the date immediately prior to the date of such Participant's termination of employment. "Combined Arrangements" shall mean this Supplement to the Plan (as the same may be amended from time to time) and the Retention Agreements. 101 <PAGE> "Combined Payments" shall mean the aggregate cash amount of (i) severance payments made to employees or former employees under Section 3(a) of the Retention Agreements or the corresponding provisions of the applicable Combined Arrangement, (ii) severance payments made to Section 2(a) Participants under Sections 2(e) and 2(f) of the Supplement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement, (iii) Gross-up Payments made to an Eligible Employee under Section 3 of the Supplement 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 employees or former employees under Section 6 of the Retention Agreements or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement, (v) payments made to employees or former employees under Section 5 of the Retention Agreements or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement and (vi) costs incurred by Apple in respect of a Section 2(a) Participant under Section 2(d) of the Supplement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "Common Stock" shall mean the common stock of Apple. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor provisions thereto. 102 <PAGE> "Good Reason" shall mean: (i) The relocation of the office of the Company where an Eligible Employee is 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 an Eligible Employee 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 the Eligible Employee's customary business travel obligations in the ordinary course of business prior to the Change in Control Date); or (ii) The Company's assignment of an Eligible Employee to a job with significantly reduced duties and responsibilities and which involves either (A) a reduction in the Eligible Employee's base salary or target bonus opportunity or (B) a drop of two grade designations or more; provided, however, that clause (B) shall not apply if the reduction in employee's grade designation causes such employee to cease to qualify as an Eligible Employee for purposes of the Plan and this Supplement; provided, however, that an event described above shall not constitute Good Reason unless it is communicated by the Eligible Employee to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to the Eligible Employee (including full retroactive correction with respect to any monetary matter) within 10 days of the Company's receipt of such written notice. 103 <PAGE> "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 Apple 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. 104 <PAGE> "Notification Date" shall mean, during the Supplement Term, the date an Eligible Employee is notified of his or her termination of employment or the end of the date on which the cure period referred to in the definition of Good Reason expires without the Company effecting the cure contemplated by such definition. "Payment" means (i) any amount due or paid to an Eligible Employee under the Plan or this Supplement, (ii) any amount that is due or paid to an Eligible Employee under any plan, program or arrangement of the Company, and (iii) any amount or benefit that is due or payable to an Eligible Employee under the Plan or this Supplement or under any plan, program or arrangement of the Company 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 of the "parachute payments" received by the Eligible Employee, 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 Apple's equity-based incentive plans or otherwise, (B) the acceleration of the time at which any payment or benefit is receivable by an Eligible Employee or (C) any contingent severance or other amounts that are payable to an Eligible Employee. "Regulations" shall mean the proposed, temporary and final regulations under Section 280G of the Code or any successor provision thereto. 105 <PAGE> "Retention Agreements" means the Retention Agreements, dated as of the date of this Supplement, to which Apple is a party and any Retention Agreement entered into after the date hereof which is specifically designated in the terms thereof as one of the Combined Arrangements. "Supplement Term" shall mean the period commencing on the Change in Control Date and ending on the second anniversary thereof. "Transaction Date" shall mean the date described in clause (i) of the definition of Change in Control Date. _______________________________ * Years of Service will be determined as of the Participant's Termination Date. 1 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. 106 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>6 <TEXT> EXHIBIT 10.A.23 Separation Agreement In consideration of the mutual agreements set forth below, Daniel Eilers ("Eilers") and Apple Computer, Inc. ("Apple") agree to the following terms and conditions of this Separation Agreement (the "Agreement"): 1. Nature of Business. Apple is in the business of designing, developing, producing, selling and marketing computer systems, related products and services. The business practices of Apple and the market conditions in which Apple operates change rapidly and these changes have necessitated prompt changes in management, and/or managers' responsibilities. These changes are needed from time to time in the high level management positions such as those for which Eilers has been employed. 2. Resignation from Office and Rescission of Retention Agreement. Employee shall resign from his position as Senior Vice President, World Wide Marketing & Customer Solutions of Apple, effective as of December 1, 1995. Eilers hereby resigns from all other positions he holds on behalf of Apple, its subsidiaries and affiliates effective as of December 1, 1995 (except as an employee), which positions are set forth at Exhibit A hereto. Eilers agrees to sign all appropriate and mutually agreeable documentation prepared by Apple to facilitate these resignations. Eilers and Apple agree that in exchange for the terms and conditions of this Agreement, the June 9, 1995 Retention Agreement between Eilers and Apple, a copy of which is attached hereto as Exhibit B, is hereby rescinded and that neither party has any further rights or obligations under the Retention Agreement. 107 <PAGE> 3. Employment Status/Termination. Subject to paragraph 11 below, from the date of this Agreement through February 1, 1996 ("Termination Date") or such earlier date as a result of an event under paragraph 11, Eilers will continue to devote his best efforts to Apple and will remain an employee of and fiduciary to Apple reporting to Edward B. Stead. On and after December 1, 1995, Eilers will not be required to perform any duties for or on behalf of Apple. Until Termination Date, Eilers shall continue to receive his regular salary and receive full employee benefits. Apple will designate Eilers as a participant in Apple's Executive Severance Plan ("Plan"), on or about December 1, 1995, and Eilers will become eligible to receive the appropriate compensation and benefits under that Plan valued as of February 1, 1996. 4. Compensation and Benefits Upon Termination. Subject to paragraph 11 below, at or before Termination Date, Apple will pay the following: a. Severance Payments. Under this Agreement and the Plan, Eilers is eligible to receive a lump sum severance payment based on 13 years and 6 months of employment and a proration of his FY '96 Senior/Executive Incentive Bonus Plan ("Bonus Plan"), less deductions, and a payout of his accrued vacation. Subject to paragraph 11 below, Apple will pay Eilers five hundred fifteen thousand, seven hundred fifty dollars ($515,750), less payroll tax deductions, and an additional amount equal to Eilers' accrued vacation through Termination Date, less payroll tax deductions, in full satisfaction of all Apple's obligations under the Plan, Bonus Plan and otherwise. Eilers shall be paid on or before Termination Date and such payment constitutes full compensation under the Plan , Bonus Plan and otherwise. There shall be no other payments to Eilers except as stated in this paragraph 4(a) and in paragraph 3 above and the amount of such payments shall at all times remain subject to paragraph 11. 108 <PAGE> b. Stock Options. Apple's Board of Directors (the "Board") previously granted Eilers options to purchase shares of Apple Common Stock under Apple's 1981 and 1990 Stock Option Plans (the "1981 and 1990 Plans") and options to purchase shares of stock under Apple's 1987 Executive Long Term Stock Option Plan ("ELTSOP"). Such options shall continue to vest and be exercisable in accordance with the terms of the grant agreement issued to Eilers with respect to such grants, and the terms of the 1981 and 1990 Stock Option Plans and the ELTSOP administered by the Board. c. Receipt of Documentation. Eilers acknowledges that he has previously received from Apple copies of pertinent portions of Apple's Executive Severance Plan, Apple's Senior/ Executive Bonus Program, Apple's 1981 and 1990 Stock Option Plans, Apple's ELTSOP, Apple's Vacation and Holiday Policies, and Apple's Benefit Plans relating to health care, life insurance, accidental death and disability, short and long term disability and Savings Plans. Eilers understands and agrees to be bound by the written terms and conditions of these various plans, policies or programs, and agrees that Apple has reserved the right and option, in its sole discretion, to change, interpret, modify or terminate these and all other plans, policies or programs at any time without Eilers's consent so long as such action does not conflict with or reduce Eiler's rights under this Agreement. d. Outplacement. Apple will provide Eilers with the following outplacement benefits: (1) Until August 1, 1996, or such earlier date as the parties may agree, Apple will maintain as active Eilers' phone number and phone line at (408) 974-2303 so that Eilers may continue to receive calls with voice mail box access. Eilers agrees that his voice mail greeting will refer callers of a personal nature to another number and will instruct callers with Apple business to either leave a message or to another Apple phone number. Eilers agrees to forward to Edward B. Stead any calls for and on behalf of Apple. Apple will maintain Eilers' name and number in Apple's directory so that Apple operators will continue to be able to transfer calls to Dan Eilers' phone number and phone line. 109 <PAGE> (2) Until August 1, 1996, Apple will forward any personal mail directed to Eilers but received by Apple to Eilers' home address. (3) Apple will provide Eilers with a non-employee AppleLink account, at Apple's expense, through August 1, 1996. (4) Apple will provide Eilers with an outplacement office through December 1, 1996, or such earlier date as the parties may agree to, otherwise in accordance with the outplacement benefits under the Plan. e. No Other Benefits. Eilers will not be entitled to receive any other compensation, bonus or benefits provided by, through or on behalf of Apple, its affiliates or subsidiaries, other than benefits that are vested as of Termination Date and that are payable in accordance with the terms of any applicable Benefit Plan, or otherwise provided for herein. 5. Confidentiality. The terms of this Agreement are confidential. Neither Eilers nor Apple will at any time disclose to any third party the fact or terms of this Agreement, except as authorized by this agreement or as required by law. Eilers may also make such disclosure to his immediate family members, his tax advisor and/or lawyer, all of whom shall be instructed to keep the information disclosed to them confidential; any disclosure by any such party shall be deemed a disclosure by Eilers. Apple and Eilers shall not disparage each other in their communications in response to all inquiries from the press, public media or any other third parties regarding this Agreement or Eilers's employment termination. 6. Trade Secrets, Proprietary and Confidential Information. Eilers agrees to comply with Apple's "Proprietary Rights and Information Agreement" which is attached hereto as Exhibit C to this Agreement. In addition, Eilers agrees to continue to abide by the principles and guidelines in Apple's Global Ethics brochure, the terms of which are incorporated herein to the extent it applies to employees through Termination Date and to former employees thereafter. 110 <PAGE> On or before Termination Date, Eilers agrees to promptly return to Apple or its records retention designee all Apple proprietary and confidential information, including but not limited to all business plans, financial records, inventions, discoveries, improvements, computer programs, designs, documentation, notes, plans, drawings and copies thereof to Apple. Apple hereby gives to Eilers the equipment identified at Exhibit D and all manuals and documents which came with such equipment. Eilers and Apple agree that this section regarding Trade Secrets, Proprietary and Confidential Information shall survive the termination of this Agreement. 7. Fiduciary Duties/Non-Solicitation. Eilers further recognizes that Apple's work force constitutes an important and vital aspect of its business. Eilers agrees that during his employment with Apple he shall not solicit, or assist others employed by Apple to become employed by any firm, company or other business enterprise without the consent of and direction from Apple. Through February 1, 1997, Eilers agrees that he shall not solicit, or assist others employed by Apple to become employed by any firm, company or other business enterprise. Eilers further represents that he has no time prior to the date this Agreement is signed solicited or encouraged any employee to leave Apple without the consent of and direction from Apple. Nothing in this Agreement will prevent Eilers from providing favorable recommendations or favorable references on behalf of persons who previously worked with Eilers. Eilers and Apple also agree, that upon a breach or violation or threatened breach or violation of any confidentiality, trade secrets, or non-solicitation agreement by Eilers contained herein, or if any provision of Sections 5, 6, or 7 of this Agreement, Apple, in addition to all other remedies which might be available to it, shall be entitled as a matter of right to equitable relief in any court of competent jurisdiction, including the right to obtain injunctive relief or specific performance. Eilers and Apple agree that the remedies at law for any such breach or violation are not fully adequate and that the injuries to Apple as a result of the continuation of any breach or violation are incapable of full calculation in monetary terms and therefore constitute irreparable harm. This paragraph 7 shall survive the termination of this Agreement. 111 <PAGE> 8. Indemnification. All rights of indemnification previously provided by Apple to Eilers by Apple's By-Laws and/or by the Indemnification Agreement dated May 19, 1992 shall continue in full force and effect in accordance with their terms, following the date of this Agreement. A copy of Eilers's Indemnification Agreement is attached hereto as Exhibit E to this Agreement. 9. Successors. Apple will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Apple to expressly assume and agree to perform this Agreement in the manner and to the same extent that Apple would be required to perform it if no such succession had taken place. Failure of Apple to obtain such assumption and agreement prior to the effectiveness of any such succession shall entitle Eilers to the benefits listed in paragraphs 3 and 4 of this Agreement, subject to the terms and conditions therein. 10. Governing Law. The validity, interpretation, effect, and enforcement of this Agreement shall be governed by the laws of the State of California without regard to its choice of law principles. 11. Entire Agreement. This Agreement, and Exhibits A, B, C, D & E to this Agreement, set forth the entire Agreement and understanding between Eilers and Apple, and supersede any other negotiations, agreements, understandings, oral agreements, representations or past or future practices, whether written or oral, by Apple, except as otherwise provided herein. This Agreement may be amended only by written agreement, signed by the parties to be bound by the amendment. Parol evidence will be inadmissible to show agreement by and between the parties to any term or condition contrary to or in addition to the terms and conditions contained in this Agreement. Each Apple plan or policy referred to herein directly or by implication (except the 1981 and 1990 Stock Option Plans) is incorporated herein only insofar as it does not contradict this Agreement. If any inconsistencies exist between this Agreement and any such plan, policy or program, this Agreement shall control. If any inconsistencies exist between this Agreement and any such plan or policy, this Agreement and the 1981 and 1990 Stock Option Plans, those stock plans shall control. 112 <PAGE> Nothing in any such plan, policy, or this Agreement shall change the At Will nature of Eilers's employment under this Agreement by which either party can terminate Eilers's employment without regard to cause. Eilers understands and agrees that Apple is obligated to make the payments outlined in paragraph 3 and 4 of this Agreement in the event Eilers's employment terminates before Termination Date for any reason other than: a. by Apple for "Business Reasons" as defined below; b. by Eilers for any reason, except if Eilers's employment is terminated for any material breach by Apple of this Agreement. In this event, Eilers will be entitled to the payments outlined in paragraph 3 and 4 adjusted according to the actual, accelerated Termination Date and offsetting any payments made to his prior to the actual, accelerated Termination Date; For purposes of this Agreement only, "Business Reasons" shall mean that Eilers is terminated for any of the following reasons: (i) engaging in unfair or unlawful competition with Apple; or (ii) inducing any customer of Apple to breach any contract with Apple; or (iii)making any unauthorized disclosure of or otherwise misusing any of the secrets or confidential information of Apple; or (iv) committing any act of embezzlement, fraud or material theft with respect to any Apple property; or (v) violating any Apple policy or guideline or the terms of this Agreement; or (vi)causing material loss, damage or injury to or otherwise endangered the property, reputation or employees of Apple; or 113 <PAGE> (vii)engaging in malfeasance, negligence or misconduct, or failing to perform reasonable duties and responsibilities consistent with your duties and responsibilities to Apple; or (viii)failure to act in accordance with specific, reasonable and lawful instructions from Apple's Chief Executive Officer, or his delegate. 12. Right to Advice of Counsel. Eilers understands that he has the right to have this Agreement reviewed by his lawyer and acknowledges that Apple has encouraged his to consult with his lawyer so that he is fully aware of his rights and obligations under this Agreement. Eilers acknowledges that he has done so. 13. Modification. This Agreement may not be amended, modified, changed or discharged in any respect except as agreed in writing and signed by Eilers and the Chief Executive Officer of Apple Computer, Inc. 14. Severability and Interpretation. In the event that any provision or any portion of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, such provision or portion thereof shall be considered separate and apart from the remainder of this Agreement and the other provisions shall remain fully valid and enforceable, provided that, if paragraph 2, 5, 6, 7, 19 or 21 are held to be invalid or unenforceable in response to a motion, argument or other act by Eilers, then Apple, at its sole discretion, may rescind the Agreement and recover all consideration paid to Eilers under the Agreement. 114 <PAGE> 15. Notices. All notices required by this Agreement shall by given in writing either by personal delivery or by first class mail, return receipt requested. Notices shall be addressed as follows: To Apple: Apple Computer, Inc. 1 Infinite Loop, Mail Stop 38-I Cupertino, California 95014 Attention: General Counsel To Eilers : 1224 Miraflores Way Los Altos, CA 94024 or in each case to such other address as Eilers or Apple shall notify the other. Notice given by mail shall be deemed given five (5) days following the date of mailing. 16. Miscellaneous. The rights and obligations of Apple under this Agreement shall inure to the benefit of and shall be binding upon the present and future subsidiaries of Apple, any and all subsidiaries of a subsidiary, all affiliated corporations, and successors and assigns of Apple. No assignment of this Agreement by Apple will relieve Apple of its obligations. Eilers shall not assign any of his rights and/or obligations under this Agreement and any such attempted assignment will be void. This Agreement shall be binding upon and inure to the benefit of Eilers, his heirs, executors, administrators, or other legal representatives and their legal assigns. 17. Damage Limitation. At Termination Date, Eilers shall not be entitled to recover any compensation, benefits or damages except as specifically described in this Agreement. This damage waiver provides that no damages (including without limitation, special, consequential, general, liquidated or punitive damages) shall be sought or due from Apple. 115 <PAGE> 18. Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. 19. Release. Eilers hereby completely releases and forever discharges Michael Spindler, Apple, its officers, directors, agents, employees, attorneys, insurers, subsidiaries and affiliates ("Apple Parties") from, and covenants not to sue any Apple Party with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages (including but not limited to general, special, punitive, liquidated and compensatory damages) and causes of action of every kind, nature and character, known and unknown, in law or equity, connected with Eilers's employment relationship with the Apple Parties, or any other act or omission of any Apple Party which may have occurred prior to the date this Agreement is signed. Eilers further agrees that by his acceptance and negotiation of the payment provided for in paragraph (4) of this Agreement, he thereby completely releases and forever discharges the Apple Parties from, and covenants not to sue any Apple Party with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages (including but not limited to general, special, punitive, liquidated and compensatory damages) and causes of action of every kind, nature and character, known and unknown, in law or equity, connected with Eilers's employment relationship with the Apple Parties, or the termination of such relationship, or any other act or omission of any Apple Party which may have occurred prior to Termination Date. This release and discharge includes, but is not limited to, all "wrongful discharge" claims; all claims relating to any contracts of employment express or implied; any covenant of good faith and fair dealing express or implied; any tort of any nature: any federal, state, or municipal statute or ordinance; any claims under the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 1981, and any other laws and regulations relating to employment discrimination and any and all claims for attorney's fees and costs. Eilers specifically acknowledges that the foregoing release includes a complete release and discharge of all Apple Parties from any and all claims, damages of any kind, and claims for attorneys fees and costs, under the Age Discrimination in Employment Act of 1967 ("ADEA") as amended by the Older Worker 116 <PAGE> Benefit Protection Act ("OWBPA"). Eilers and Apple agree that part of the consideration payable to Eilers under this Agreement is consideration that Eilers would not otherwise be entitled to and is in consideration for Eilers's release of claims under the ADEA as amended by the OWBPA. Eilers acknowledges that he understands the protections provided by the OWBPA and that the provisions of the OWBPA have been met by the terms of this Agreement. Eilers states that he knowingly and voluntarily enters into this Agreement. Eilers acknowledges that this Agreement is written in a manner calculated to be understood by him. Eilers further acknowledges that this Agreement refers without limitation to rights under the Age Discrimination in Employment Act. Eilers understands that by this Agreement, he does not waive rights or claims that may arise after Termination Date. Eilers acknowledges that he is entering this Agreement in exchange for consideration in addition to anything of value to which he already is entitled due to his employment with Apple. Further, Eilers acknowledges that this release of claims under the OWBPA is not requested in connection with an exit incentive program or other employment termination program offered to a group or class of employees within the meaning of OWBPA. Notwithstanding this provision, Eilers acknowledges that he has been allowed up to forty five (45) days from the date that he received this Agreement to accept its terms. Eilers acknowledges he has consulted with an attorney about the Agreement. Eilers acknowledges that after he signs the Agreement, he will then be given seven (7) days following the date on which he signs the Agreement to revoke it and that this Agreement will only become effective after this seven (7) day period has lapsed. Any such revocation must be in writing signed by Eilers and immediately delivered to Apple's General Counsel. Eilers has read and expressly waives Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIS MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 117 <PAGE> This waiver is not a mere recital, but is a known waiver of rights and benefits. This is a bargained-for provision of this Agreement and is further consideration for the covenants and conditions contained herein. The Apple Parties hereby release and forever discharge Eilers, his agents and attorneys from, and covenant not to sue Eilers, his agents and attorneys with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages, and causes of action ("claims") arising from his employment relationship with Apple to the extent permitted by law and public policy, except for any claims arising from any intentional acts of misconduct, or any other act taken in bad faith or without a reasonable belief that it was in the best interests of the Apple Parties. 20. Cooperation. Eilers agrees that he will make himself available at reasonable times and intervals to participate in the conduct of and preparation for any pending or future litigation to which Apple is a party and in which his experience or knowledge may be relevant. Eilers shall be reimbursed for reasonable travel and out-of-pocket expenses incurred by virtue of his cooperation as described in this paragraph. In no respect shall this provision be deemed to pertain to or affect the nature or substance of Eilers testimony at deposition or trial or in any other truthful testimony at deposition or trial or in any other circumstances. 21. Remedies in Event of Future Dispute. a. Except as provided in subparagraph (b) below, in the event of any future dispute, controversy or claim between the parties arising from or relating to this Agreement, its breach, any matter addressed by this Agreement, and/or Eilers's employment with Apple through Termination Date, the parties will first attempt to resolve the dispute through confidential mediation to be conducted in San Francisco by a member of the firm of Gregoria, Haldeman & Piazza, Mediated Negotiations, 625 Market Street, Suite 400, San Francisco, California 94105. If the parties' dispute is not resolved through mediation, it will be resolved through binding confidential arbitration to be conducted by the American Arbitration Association in San Francisco, pursuant to its California 118 <PAGE> Employment Dispute Resolution Rules, and judgment upon the award rendered by the Arbitrator(s) may be entered by any court having jurisdiction of the matter. The prevailing party in such arbitration shall be entitled to recover from the losing party, not only the amount of any judgment awarded in its favor, but also any and all costs and expenses, incurred in arbitrating the dispute or in preparing for such arbitration. b. In the event that a dispute arises concerning compliance with this Agreement, either party will be entitled to obtain from a court with jurisdiction over the parties preliminary and permanent injunctive relief to enjoin or restrict the other party from such breach or to enjoin or restrict a third party from inducing any such breach, and other appropriate relief, including money damages. In seeking any such relief, however, the moving party will retain the right to have any remaining portion of the controversy resolved by binding confidential arbitration in accordance with subparagraph (a) above. 119 <PAGE> By signing the below, the parties agree to the terms hereof, including the Exhibits hereto, and agree that this document, and Exhibits A, B, C, D & E hereto, sets forth their entire agreement, except as otherwise expressly provided herein. APPLE COMPUTER, INC. Date 1/18/96 By _/s/ Edward B. Stead_____________ Edward B. Stead Vice President and General Counsel Apple Computer, Inc. I have read, understand, and agree to the foregoing: Date 12/11/95 By _/s/ Daniel Eilers ________________ Daniel Eilers APPROVED AS TO FORM: Date 12/12/95 By _/s/ Cynthia Carlson_____________ Cynthia Carlson, Esq. Gray, Cary, Ware & Freidenrich Attorneys for Daniel Eilers 120 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>7 <TEXT> EXHIBIT 10.A.24 Separation Agreement In consideration of the mutual agreements set forth below, Joseph A. Graziano ("Graziano") and Apple Computer, Inc. ("Apple") agree to the following terms and conditions of this Separation Agreement (the "Agreement"): 1. Nature of Business. Apple is in the business of designing, developing, producing, selling and marketing computer systems, related products and services. The business practices of Apple and the market conditions in which Apple operates change rapidly and these changes have necessitated prompt changes in management, and/or managers' responsibilities. These changes are needed from time to time in the high level management positions such as those for which Graziano has been employed. 2. Resignations and Rescission of Retention Agreement. Employee has resigned from his position on Apple's Board of Directors effective as of October 3, 1995 and from his position as Chief Financial Officer effective as of October 31, 1995. Graziano also hereby resigns effective October 31, 1995 from all other positions he holds on behalf of Apple, its subsidiaries and affiliates (except for his position as an employee), which positions are set forth at Exhibit A hereto. Graziano agrees to sign at Apple's request all appropriate mutually agreeable documentation prepared by Apple to facilitate these resignations. Graziano and Apple agree that in exchange for the terms and conditions of this Agreement, the June 9, 1995 Retention Agreement between Graziano and Apple, a copy of which is attached hereto as Exhibit B, is hereby rescinded and that neither party has any further rights or obligations under the Retention Agreement. 3. Employment Status/Termination. Subject to paragraph 2 above and paragraph 11 below, from October 31, 1995 through January 2, 1996 ("Termination Date") or such earlier date as a result of an event under paragraph 11, Graziano will continue to devote his best efforts to Apple and will remain an employee of Apple as provided in this paragraph, reporting to Edward B. Stead. Until January 2, 1996, Graziano will remain an appointed vice-president of Apple and continue to receive his regular salary and full executive level medical insurance benefits. On or about October 31, 1995, Apple will designate Graziano as a participant in Apple's Executive Severance Plan ("Plan") and Graziano will become eligible to receive benefits under the Plan valued as of December 31, 1995. To the extent this Agreement varies from the terms and conditions of the Plan or Apple's Senior/Executive Bonus Program ("Bonus Plan"), this Agreement shall govern. 4. Compensation and Benefits Upon Termination. Subject to paragraph 11 below, on or about Termination Date, Apple will pay the following: 121 <PAGE> a. Severance Payments. Graziano is eligible to receive a lump sum severance payment under the Plan based on his 6 years' and 6 months' employment and a proration of his FY '96 bonus, less deductions. Subject to paragraph 11 below, on or about Termination Date, Apple will pay Graziano three hundred forty thousand, six-hundred twenty-six dollars ($340,626.00), less deductions, in full satisfaction of all Apple's obligations to pay severance benefits under the Plan, Bonus Plan, and any and all other written or oral agreements between Graziano and Apple including but not limited to, the employment agreement dated June 14, 1989, a copy of which is attached hereto as Exhibit C. On or about Termination Date and subject to paragraph 11 below, Apple will pay Graziano an additional lump sum payment of fifty nine thousand, three hundred seventy four dollars ($59,374), less deductions, in consideration of the covenants and promises made in this Agreement expressly including the promises and covenants contained in paragraph 7 of this Agreement. Except as provided for below in Paragraph 4(b), there shall be no other payments to Graziano except as stated in this paragraph 4(a) and in paragraph 3 above and the amount of such payments shall at all times remain subject to paragraph 11. b. Stock Options. Apple's Board of Directors (the "Board") previously granted Graziano options to purchase shares of Apple Common Stock under Apple's 1981 and 1990 Stock Option Plans (the "1981 and 1990 Plans") and options to purchase shares of stock under Apple's 1987 Executive Long Term Stock Option Plan ("ELTSOP"). Nothing in this Agreement shall alter the terms and conditions of such options and such options shall continue to vest and be exercisable in accordance with the terms of the grant agreement issued to Graziano with respect to such grants, and the terms of the 1981 and 1990 Stock Option Plans and the ELTSOP administered by the Board. Notwithstanding this paragraph, the administrator of the ELTSOP has determined that the three (3) month period relating to the exercise of options after termination of employment as provided for in Section 9(e) of the ELTSOP shall be extended to twelve (12) months with respect to those outstanding stock options granted to Graziano only under the ELTSOP which are vested and exercisable on or before January 2, 1996. c Receipt of Documentation. Graziano acknowledges that he has previously received from Apple copies of pertinent portions of Apple's Executive Severance Plan, Apple's Senior/Executive Bonus Program, Apple's 1981 and 1990 Stock Option Plans, Apple's ELTSOP, Apple's Vacation and Holiday Policies, and Apple's Benefit Plans relating to health care, life insurance, accidental death and disability, short and long term disability and Savings Plans. Graziano understands and agrees to be bound by the written terms and conditions of these various plans, policies or programs, unless expressly provided for otherwise under this Agreement or in the Plan, and agrees that Apple has reserved the right and option, in its sole discretion, to change, interpret, modify or terminate these and all other plans, policies or programs at any time without Graziano's consent so long as such action does not conflict with or reduce Graziano's rights under this Agreement. e. No Other Benefits. Graziano will not be entitled to receive any other compensation, bonus or benefits provided by, through or on behalf of Apple, its affiliates or subsidiaries, other than benefits that are vested as of Termination Date and that are payable in accordance with the terms of any applicable Benefit Plan, or otherwise provided for herein. 5. Confidentiality. The terms of this Agreement are confidential. Neither Graziano nor Apple will at any time disclose to any third party the fact or terms of this Agreement, except as 122 <PAGE> authorized by this agreement or as required by law. Graziano may also make such disclosure to his spouse, tax advisor and/or lawyer, all of whom shall be instructed to keep the information disclosed to them confidential; any disclosure by any such party shall be deemed a disclosure by Graziano. Apple and Graziano shall not disparage each other in their communications in response to all inquiries from the press, public media or any other third parties regarding this Agreement or Graziano's employment termination. If Apple makes a press statement which disparages Graziano, then Graziano may invoke the procedures outlined in paragraph 21 of this Agreement. If Graziano makes a press statement which disparages Apple, then Apple may invoke the procedures outlined in paragraph 21 of this Agreement. 6. Trade Secrets, Proprietary and Confidential Information. Graziano agrees to comply with Apple's "Proprietary Rights and Information Agreement" which is attached hereto as Exhibit D to this Agreement. In addition, Graziano agrees to continue to abide by the principles and guidelines in Apple's Global Ethics brochure, the terms of which are incorporated herein to the extent it applies to employee through Termination Date and to former employees thereafter. On or before Termination Date, Graziano agrees to promptly return to Apple or its records retention designee, all Apple proprietary and confidential information, including but not limited to all inventions, discoveries, improvements, computer programs, designs, documentation, notes, plans, drawings and copies thereof to Apple. Graziano shall be entitled to keep as his own personal property the equipment listed at Exhibit E together with manuals and product data information associated with such equipment. Graziano and Apple agree that this section regarding Trade Secrets, Proprietary and Confidential Information shall survive the termination of this Agreement. 7. Non-Competition/Non-Solicitation. Graziano further recognizes that Apple's work force constitutes an important and vital aspect of its business. Graziano agrees, therefore, that both during his employment with Apple, and thereafter until January 2, 1997, Graziano shall not solicit, or assist others employed by Apple, or any of its subsidiaries or affiliates, to become employed by any firm, company or other business enterprise. Graziano further represents that he has no time prior to this areement solicited or encouraged any employee to leave Apple. Nothing in this Agreement will prevent Graziano from providing favorable recommendations or favorable references on behalf of persons who previously worked with Graziano. Graziano will not, without the prior express written consent of Apple, compete with Apple on or before June 30, 1996 by engaging in or assisting others to develop or market products or services that are in competition with Apple products or services. Graziano's agreement not to compete is limited to the state of California. Nothing in this Agreement shall prohibit Graziano from serving as a member of the Boards of Directors of Stratacom, Intellicorp, Pixar and/or Sharedata. Graziano and Apple also agree, that upon a breach or violation or threatened breach or violation of any confidentiality, trade secrets, non- competition or non-solicitation agreement by Graziano contained herein, or if any provision of Sections 5, 6, or 7 of this Agreement, Apple, in 123 <PAGE> addition to all other remedies which might be available to it including rescission of the Agreement and repayment of the consideration paid to Graziano for the covenants or promises breached, shall be entitled as a matter of right to equitable relief in any court of competent jurisdiction, including the right to obtain injunctive relief or specific performance. Graziano and Apple agree that the remedies at law for any such breach or violation are not fully adequate and that the injuries to Apple as a result of the continuation of any breach or violation are incapable of full calculation in monetary terms and therefore constitute irreparable harm. This paragraph 7 shall survive the termination of this Agreement. 8. Indemnification. All rights of indemnification previously provided by Apple to Graziano by Apple's By-Laws and/or by the Indemnification Agreement dated June 14, 1989 shall continue in full force and effect in accordance with their terms, following the date of this Agreement. A copy of Graziano's Indemnification Agreement is attached hereto as Exhibit F to this Agreement. 9. Successors. Apple will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Apple to expressly assume and agree to perform this Agreement in the manner and to the same extent that Apple would be required to perform it if no such succession had taken place. Failure of Apple to obtain such assumption and agreement prior to the effectiveness of any such succession shall entitle Graziano to the benefits listed in paragraphs 3 and 4 of this Agreement, subject to the terms and conditions therein. 10. Governing Law. The validity, interpretation, effect, and enforcement of this Agreement shall be governed by the laws of the State of California without regard to its choice of law principles. 11. Entire Agreement. This Agreement, and Exhibits A, B, C, D, E & F to this Agreement, set forth the entire Agreement and understanding between Graziano and Apple, and supersede any other negotiations, written agreements, understandings, oral agreements, representations or past or future practices, whether written or oral, by Apple, including but not limited to, the employment agreement between Apple and Graziano dated June 14, 1989, except as otherwise provided for herein. This Agreement may be amended only by written agreement, signed by the parties to be bound by the amendment. Parol evidence will be inadmissible to show agreement by and between the parties to any term or condition contrary to or in addition to the terms and conditions contained in this Agreement. Each Apple plan or policy referred to herein directly or by implication (except the 1981 and 1990 Stock Option Plans and the ELTSOP) is incorporated herein only insofar as it does not contradict this Agreement. If any inconsistencies exist between this Agreement and any such plan or policy, this Agreement shall control. If any inconsistencies exist between this Agreement and the 1981 and 1990 Stock Option Plans or the ELTSOP, those stock plans shall control. Nothing in any such plan, policy, or this Agreement shall change the At Will nature of Graziano's employment under this Agreement and as provided under his employment agreement dated June 14, 1989 by which either party can terminate Graziano's employment without regard to cause. Notwithstanding any provision in this Agreement to the contrary, Graziano understands and agrees that Apple is obligated to make the payments outlined in paragraph 3 and 4 of this Agreement in the event Graziano's employment terminates before Termination Date for any reason other than: 124 <PAGE> a. by Apple for "Business Reasons" as defined below; b. by Graziano for any reason, except if Graziano's employment is terminated for any material breach by Apple of this Agreement. In this event, Graziano will be entitled to the payments outlined in paragraph 3 and 4 adjusted according to the actual, accelerated Termination Date and offsetting any payments made to him prior to the actual, accelerated Termination Date; For purposes of this Agreement only, "Business Reasons" shall mean that Graziano is terminated for any of the following reasons: (i) engaging in unfair or unlawful competition with Apple; or (ii) inducing any customer of Apple to breach any contract with Apple; or (iii) making any unauthorized disclosure of or otherwise misusing any of the secrets or confidential information of Apple; or (iv) committing any act of embezzlement, fraud or material theft with respect to any Apple property; or (v) violating any Apple policy or guideline or the terms of this Agreement; or (vi) causing material loss, damage or injury to or otherwise endangered the property, reputation or employees of Apple; or (vii) engaging in malfeasance, negligence or misconduct, or failing to perform reasonable duties and responsibilities consistent with your duties and responsibilities to Apple; or (viii)failure to act in accordance with specific, reasonable and lawful instructions from Apple's Chief Executive Officer, or his delegate. 12. Right to Advice of Counsel. Graziano understands that he has the right to have this Agreement reviewed by his lawyer and acknowledges that Apple has encouraged him to consult with his lawyer so that he is fully aware of his rights and obligations under this Agreement. Graziano acknowledges that he has done so. 13. Modification. This Agreement may not be amended, modified, changed or discharged in any respect except as agreed in writing and signed by Graziano and the Chief Executive Officer of Apple Computer, Inc. 125 <PAGE> 14. Severability and Interpretation. In the event that any provision or any portion of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, such provision or portion thereof shall be considered separate and apart from the remainder of this Agreement and the other provisions shall remain fully valid and enforceable, provided that, if paragraph 2, 5, 6, 7, 19 or 21 is held to be invalid or unenforceable in response to a motion, argument or other act by Graziano, then Apple, at its sole discretion, may rescind the Agreement and recover all consideration paid to Graziano under the Agreement. 15. Notices. All notices required by this Agreement shall by given in writing either by personal delivery or by first class mail, return receipt requested. Notices shall be addressed as follows: To Apple: Apple Computer, Inc. 1 Infinite Loop, Mail Stop 38-I Cupertino, California 95014 Attention: General Counsel To Graziano : 14055 Chester Avenue Saratoga, California 95070 or in each case to such other address as Graziano or Apple shall notify the other. Notice given by mail shall be deemed given five (5) days following the date of mailing. 16. Miscellaneous. The rights and obligations of Apple under this Agreement shall inure to the benefit of and shall be binding upon the present and future subsidiaries of Apple, any and all subsidiaries of a subsidiary, all affiliated corporations, and successors and assigns of Apple. No assignment of this Agreement by Apple will relieve Apple of its obligations. Graziano shall not assign any of his rights and/or obligations under this Agreement and any such attempted assignment will be void. This Agreement shall be binding upon and inure to the benefit of Graziano's heirs, executors, administrators, or other legal representatives and their legal assigns. 17. Damage Limitation. At Termination Date, Graziano shall not be entitled to recover any compensation, benefits or damages except as specifically described in this Agreement. This damage waiver provides that no damages (including without limitation, special, consequential, general, liquidated or punitive damages) shall be sought or due from Apple. 18. Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. 19. Release. Graziano hereby completely releases and forever discharges Michael Spindler, Apple, its officers, directors, agents, employees, attorneys, insurers, subsidiaries and affiliates ("Apple Parties") from, and covenants not to sue any Apple Party with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages (including but not limited to general, special, punitive, liquidated and compensatory damages) and causes of action of every kind, nature 126 <PAGE> and character, known and unknown, in law or equity, connected with Graziano's employment relationship with the Apple Parties, or any other act or omission of any Apple Party which may have occurred prior to the date this Agreement is signed. Graziano further agrees that by his acceptance and negotiation of the payment provided for in paragraph (4) of this Agreement, he thereby completely releases and forever discharges the Apple Parties from, and covenants not to sue any Apple Party with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages (including but not limited to general, special, punitive, liquidated and compensatory damages) and causes of action of every kind, nature and character, known and unknown, in law or equity, connected with Graziano's employment relationship with the Apple Parties, or the termination of such relationship, or any other act or omission of any Apple Party which may have occurred prior to Termination Date. This release and discharge includes, but is not limited to, all "wrongful discharge" claims; all claims relating to any contracts of employment, express or implied; any covenant of good faith and fair dealing, express or implied; any tort of any nature: any federal, state, or municipal statute or ordinance; any claims under the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 1981, and any other laws and regulations relating to employment discrimination and any and all claims for attorney's fees and costs. Graziano specifically acknowledges that the foregoing release includes a complete release and discharge of all Apple Parties from any and all claims, damages of any kind, and claims for attorneys fees and costs, under the Age Discrimination in Employment Act of 1967 ("ADEA") as amended by the Older Worker Benefit Protection Act ("OWBPA"). Graziano and Apple agree that part of the consideration payable to Graziano under this Agreement is consideration that Graziano would not otherwise be entitled to and is in consideration for Graziano's release of claims under the ADEA as amended by the OWBPA. Graziano acknowledges that he understands the protections provided by the OWBPA and that the provisions of the OWBPA have been met by the terms of this Agreement. Graziano states that he knowingly and voluntarily enters into this Agreement. Graziano acknowledges that this Agreement is written in a manner calculated to be understood by him. Graziano further acknowledges that this Agreement refers without limitation to rights under the Age Discrimination in Employment Act. Graziano understands that by this Agreement, he does not waive rights or claims that may arise after the date the Agreement is executed. Graziano acknowledges that he is entering this Agreement in exchange for consideration in addition to anything of value to which he already is entitled due to his employment with Apple. Further, Graziano acknowledges that this release of claims under the OWBPA is not requested in connection with an exit incentive program or other employment termination program offered to a group or class of employees within the meaning of OWBPA. Notwithstanding this provision, Graziano acknowledges that he has been allowed up to forty five (45) days from the date that he received this Agreement to accept its terms. Graziano acknowledges he has consulted with an attorney about the Agreement. Graziano acknowledges that after he signs the Agreement, he will then be given seven (7) days following the date on which he signs the Agreement to revoke it and that this Agreement will only become effective after this seven (7) day period has lapsed. Any such revocation must be in writing signed by Graziano and immediately delivered to Apple's General Counsel. Graziano has read and expressly waives Section 1542 of the California Civil Code, which provides as follows: 127 <PAGE> A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. This waiver is not a mere recital, but is a known waiver of rights and benefits. This is a bargained-for provision of this Agreement and is further consideration for the covenants and conditions contained herein. The Apple Parties hereby release and forever discharge Graziano, his agents and attorneys from, and covenant not to sue Graziano, his agents and attorneys with respect to, all claims, rights, demands, actions, obligations, debts, sums of money, damages, and causes of action ("claims") arising from his employment relationship with Apple to the extent permitted by law and public policy, except for any claims arising from any intentional acts of misconduct, or any other act taken in bad faith or without a reasonable belief that it was in the best interests of the Apple Parties. 20. Cooperation. Graziano agrees that he will make himself available at reasonable times and intervals to participate in the conduct of and preparation for any pending or future litigation to which Apple is a party and in which his experience or knowledge may be relevant. Graziano shall be reimbursed for his reasonable travel and out-of-pocket expenses incurred by virtue of his cooperation as described in this paragraph. In no respect shall this provision be deemed to pertain to or affect the nature or substance of Graziano testimony at deposition or trial or in any other truthful testimony at deposition or trial or in any other circumstances. 21. Remedies in Event of Future Dispute. a. Except as provided in subparagraph (b) below, in the event of any future dispute, controversy or claim between the parties arising from or relating to this Agreement, its breach, any matter addressed by this Agreement, and/or Graziano's employment with Apple through Termination Date, the parties will first attempt to resolve the dispute through confidential mediation to be conducted in San Francisco by a member of the firm of Gregoria, Haldeman & Piazza, Mediated Negotiations, 625 Market Street, Suite 400, San Francisco, California 94105. If the parties' dispute is not resolved through mediation, it will be resolved through binding confidential arbitration to be conducted by the American Arbitration Association in San Francisco, pursuant to its California Employment Dispute Resolution Rules, and judgment upon the award rendered by the Arbitrator(s) may be entered by any court having jurisdiction of the matter. The prevailing party in such arbitration shall be entitled to recover from the losing party, not only the amount of any judgment awarded in its favor, but also any and all costs and expenses, incurred in arbitrating the dispute or in preparing for such arbitration. b. In the event that a dispute arises concerning compliance with this Agreement, either party will be entitled to obtain from a court with jurisdiction over the parties preliminary and permanent injunctive relief to enjoin or restrict the other party from such breach or to enjoin or restrict a third party from inducing any such breach, and other appropriate relief, including money damages. In seeking any such relief, however, the moving party will retain the right to have any remaining portion of the controversy resolved by binding confidential arbitration in accordance with subparagraph (a) above. 128 <PAGE> By signing the below, the parties agree to the terms hereof, including the Exhibits hereto, and agree that this document, and Exhibits A, B, C, D, E & F hereto, set forth their entire agreement, except as otherwise expressly provided herein. APPLE COMPUTER, INC. By _/s/ Michael Spindler__________ Date 12/20/95 Michael Spindler Chief Executive Officer Apple Computer, Inc. I have read, understand, and agree to the foregoing: By _/s/ Joseph A. Graziano________ Date 12/19/95 Joseph A. Graziano APPROVED AS TO FORM: By _____________________________ Date Greg Gallo, Esq. Gray, Cary, Ware & Freidenrich Attorneys for Joseph Graziano 129 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>8 <TEXT> Exhibit 10.A.25 Summary of Principal Terms of Employment The following sets forth the principal terms of the employment agreement between Apple Computer, Inc. (the "Company") and Gilbert F. Amelio (the "Executive"). The Company and the Executive will negotiate a definitive written agreement in accordance with the terms set forth below: TERM: 5 years, commencing as soon as practicable after the date hereof (the "Effective Date"). TITLE: Chairman and Chief Executive Officer. BASE SALARY: $990,000 per annum. SIGNING BONUS: $200,000 payable reasonably promptly following the Effective Date. LOAN: Reasonably promptly following the Effective Date, subject to delivery of a promissory note and other loan documentation, the Company or one of its subsidiaries will lend Executive $5,000,000 (the "Loan"). 20% of the original principal amount of the Loan will be due and payable on each anniversary of the Effective Date. The Loan will bear interest (compounded semiannually and payable annually). Any unpaid principal and interest on the Loan will be due and payable on the date of the Executive's termination or resignation of employment. ANNUAL BONUS: Executive will be eligible to earn an annual bonus for each whole or partial fiscal year of the Company during the term. The annual bonus will consist of the sum of the "Component A Bonus" and the "Component B Bonus." The bonus target for the Component A Bonus for each 12-month fiscal year will equal 1 times Executive's annual rate of base salary. The bonus target for partial fiscal years in the term will be prorated to take into account the number of days in the fiscal year occurring during the term. The amount of the Component A Bonus for each fiscal year may range from 50% to 300% of target based upon performance (it being understood that amounts in excess of 200% will be based on extraordinary performance)[; provided, however, that the minimum Component A Bonus for the first fiscal year of the term shall be 50% of the target for that year]. 130 <PAGE> The Component B Bonus for each fiscal year ending during the term shall be $1 million (it being understood that the aggregate amount of Component B Bonuses paid during the term may not exceed $5 million). The annual bonus for each fiscal year will be paid within 120 days following the end of the applicable year. OPTION GRANT: Subject to shareholder approval, the Company will grant the Executive an option covering one million shares of common stock. The per share exercise price will be the fair market value of a share of stock on the day prior to the date the option is granted by the Compensation Committee. The option will vest as follows: - 20% of the option will vest and become exercisable on the Initial Vesting Date. - 20% of the option will vest and become exercisable on each of the second through fifth anniversaries of the Effective Date. Vesting of the option on the vesting dates described above will occur only if the Executive is employed with the Company on the applicable vesting date and shareholder approval of the option grant is obtained. The option will be subject to the standard terms of the Company's Stock Option Plan, and will be forfeited if not approved by the Company's stockholders at the first meeting thereof to occur after the Effective Date. The "Initial Vesting Date" shall mean (A) if a change in control of the Company does not occur on or prior to the first anniversary of the Effective Date, the later of (i) the first anniversary of the Effective Date and (ii) the date of stockholder approval of the option grant and performance share arrangement, and (B) if a change in control of the Company occurs on or prior to the first anniversary of the Effective Date, the earlier to occur of (i) the expiration of the Election Window (as defined below) and (ii) 18 months after the Effective Date, but in no event will vesting occur prior to the later to occur of the first anniversary of the Effective Date and the date of shareholder approval of the equity arrangements. PERFORMANCE STOCK: Subject to shareholder approval, the Executive will be afforded an opportunity to earn a specified target amount of shares of stock for each fiscal year of the term based upon the achievement of performance objectives established in good faith for each year by the Compensation Committee and approved by the Board of Directors. The target amount for each 12- month fiscal year will be 200,000 shares. The target amount for partial fiscal years will be prorated to take into account the number of days in the fiscal year occurring during the term. No more than 1,000,000 performance shares may be earned during the term. 131 <PAGE> The performance shares for the first fiscal year will be awarded to the Executive if the performance goals established for that year have been achieved and the Executive's employment with the Company has continued past the Initial Vesting Date. The performance shares for each subsequent fiscal year will be awarded at the start of the year (or on the Initial Vesting Date, if later), but will be forfeited at the end of the year if the performance goals applicable to that fiscal year are not achieved. [In the manner determined by the Compensation Committee, the Executive will be eligible to earn fewer performance shares for a fiscal year than the target amount specified if performance does not meet the goal established by the Compensation Committee for the applicable fiscal year.] Equitable adjustment will be made to the share targets in the event of a Change in Control. All rights with respect to the award of performance shares will be terminated and any outstanding performance shares will be forfeited if the performance share arrangement is not approved by the Company's stockholders at the first meeting thereof to occur after the Effective Date. EFFECT OF TERMINATION OF EMPLOYMENT: Following a Change in Control a. Right to Resign in Election Window. If a Change in Control of the Company occurs on or prior to the first anniversary of the Effective Date, the Executive shall have the right to resign within the 30-day window period beginning six months following the date of the Change in Control (the "Election Window"). In the event of such a resignation, the Executive will receive an "all in" cash lump sum payment of $10 million, less the aggregate amount of all Component B Bonuses previously paid to the Executive. The Executive will forfeit the option, all rights to performance shares and any outstanding performance shares and the right to any additional future payments from the Company. b. Termination by the Company. If following a Change in Control, the Company terminates his employment other than for Cause prior to the end of the Election Window, the Executive will receive an "all in" cash lump sum payment of $10 million, less the aggregate amount of all Component B Bonuses previously paid to the Executive. The Executive will forfeit the option, all rights to performance shares, any outstanding performance shares and the right to any additional future payments from the Company. 132 <PAGE> No Change in Control During the First Year. a. Prior to the Initial Vesting Date. If the Executive resigns for Good Reason or is terminated without Cause prior to the Initial Vesting Date, he will receive an "all in" cash lump sum payment of $10 million, less the aggregate amount of all Component B Bonuses previously paid to the Executive. The Executive will forfeit the option, all rights to performance shares, any outstanding performance shares and the right to any additional future payments from the Company. b. After the Initial Vesting Date. If the Executive resigns for Good Reason or is terminated without Cause on or after the Initial Vesting Date, he will be entitled to the following: - a lump sum severance payment equal to the salary and annual target bonus that would have been payable to him for the remaining term of employment, less the aggregate amount of all Component B Bonuses previously paid to the Executive. - he will retain all performance shares that have vested prior to the date of such termination of employment and he will be eligible to vest in the performance shares that would have vested at the end of the fiscal year in which the termination of employment occurs if the Company meets the applicable performance objectives for that fiscal year. All other rights to performance shares or outstanding performance shares will be forfeited. - he will retain the options that have vested prior to the date of such termination of employment. Vested options will remain exercisable for 90 days following termination of employment. Any remaining portion of the option will be forfeited. The definitions of Good Reason and Cause will be negotiated in good faith (it being understood that Good Reason will not include a change in title, duties or responsibilities following a Change in Control that occurs on or prior to the first anniversary of the Effective Date). 133 <PAGE> Setoff. In the event the Executive's employment ends for any reason, the full amount of the outstanding principal and interest of the Loan shall become due and payable, and the Company will have the right to apply any and all amounts payable to the Executive (including any severance or termination payments described above) to the payment of the full amount of the then outstanding principal and interest on the Loan. Any remaining amount of outstanding principal and interest that is not paid in the manner contemplated by the previous sentence will be payable by the Executive within 5 days of the date of termination or resignation. EXCISE TAX: Severance payments will be grossed up to take into account the golden parachute excise tax. STOCKHOLDER APPROVAL: The Company will use reasonable efforts to obtain stockholder approval of the option and the performance share arrangement. As noted above, the option and performance share arrangement will be void ab initio and of no further force and effect if such stockholder approval is not obtained. [In the event such stockholder approval is not obtained, the Company and the Executive agree to negotiate in good faith an alternative long- term performance arrangement to submit to the stockholders for approval.] AIRPLANE LEASE: The Company agrees to lease for business reasons the Executive's airplane on terms to be negotiated. OTHER TERMS: The definitive employment agreement will contain other reasonable and customary provisions. 134 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>9 <TEXT> EXHIBIT 11 APPLE COMPUTER, INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (In thousands, except per share amounts) Three Months Ended December 29, December 30, 1995 1994 Primary Earnings (Loss) Per Share Earnings (Loss) Net income (loss) applicable to common stock $( 68,686) $ 188,186 Shares Weighted average number of common shares outstanding 122,994 119,806 Adjustment for dilutive effect of outstanding stock options -- 1,794 Weighted average number of commonshares used in the calculation of loss per share 122,994 -- Weighted average number of common and common equivalent shares used in the calcuation of primary earnings per share -- 121,600 Loss per common share $( 0.56) -- Primary earnings per common share -- $ 1.55 Fully Diluted Earnings (Loss) Per Share Earnings (Loss) Net income (loss) applicable to common stock $( 68,686) $ 188,186 Shares Weighted average number of common shares outstanding 122,994 119,806 Adjustment for dilutive effect of outstanding stock options -- 1,850 Weighted average number of common shares used in the calculation of loss per share 122,994 -- Weighted average number of common and common equivalentshares used in the calculation of fully diluted earnings per share -- 121,656 Loss per common share $( 0.56) -- Fully diluted earnings per common share -- $ 1.55 135 <PAGE> EXHIBIT 27 APPLE COMPUTER, INC. FINANCIAL DATA SCHEDULE (In millions, except per share amounts) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>10 <DESCRIPTION>ART. 5 FDS FOR THE FIRST QUARTER OF FY96 FORM 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-27-1996 <PERIOD-END> DEC-29-1995 <CASH> 824 <SECURITIES> 276 <RECEIVABLES> 2,036 <ALLOWANCES> 92 <INVENTORY> 1,947 <CURRENT-ASSETS> 5,551 <PP&E> 1,504 <DEPRECIATION> 792 <TOTAL-ASSETS> 6,553 <CURRENT-LIABILITIES> 2,705 <BONDS> 304 <COMMON> 404 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 2,390 <TOTAL-LIABILITY-AND-EQUITY> 6,553 <SALES> 3,148 <TOTAL-REVENUES> 3,148 <CGS> 2,673 <TOTAL-COSTS> 2,673 <OTHER-EXPENSES> 594 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 17 <INCOME-PRETAX> (109) <INCOME-TAX> (40) <INCOME-CONTINUING> (69) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (69) <EPS-PRIMARY> (0.56) <EPS-DILUTED> (0.56) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

ADM

https://www.sec.gov/Archives/edgar/data/7084/0000007084-96-000003.txt

-----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, OSfE0mwwpKY0AmrcRT1y3rqVz8iqu96cUfSzLrRQn4sZQbL3LYbRuJ7JnbyLKygm JgB+PhFRwYzfzJ50Zp8u6g== <SEC-DOCUMENT>0000007084-96-000003.txt : 19960216 <SEC-HEADER>0000007084-96-000003.hdr.sgml : 19960216 ACCESSION NUMBER: 0000007084-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960209 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCHER DANIELS MIDLAND CO CENTRAL INDEX KEY: 0000007084 STANDARD INDUSTRIAL CLASSIFICATION: FATS & OILS [2070] IRS NUMBER: 410129150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00044 FILM NUMBER: 96517740 BUSINESS ADDRESS: STREET 1: 4666 FARIES PKWY CITY: DECATUR STATE: IL ZIP: 62526 BUSINESS PHONE: 2174245200 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q FOR 12/31/95 <TEXT> PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 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 1-44 ARCHER-DANIELS-MIDLAND COMPANY (Exact name of registrant as specified in its charter) Delaware 41-0129150 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 4666 Faries Parkway Box 1470 Decatur, Illinois 62525 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code217-424-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value--520,578,484 shares (January 31, 1996) 1 PAGE 2 PART I - FINANCIAL INFORMATION ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, 1995 1994 ------------------------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $3,415,058 $3,221,804 Cost of products sold and other operating costs 3,018,206 2,744,179 _________ _________ Gross Profit 396,852 477,625 Selling, general and administrative 128,519 122,094 expenses _________ _________ Earnings From Operations 268,333 355,531 Other income (expense) 74,046 (29,459) _________ _________ Earnings Before Income Taxes 342,379 326,072 Income taxes 116,409 105,974 _________ _________ Net Earnings $ $ 225,970 220,098 ========= ========= Average number of shares outstanding 524,143 541,861 Net earnings per common share $.41 $.43 Dividends per common share $.024 $.05 </TABLE> See notes to consolidated financial statements. 2 PAGE 3 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1995 1994 ----------------- - --------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating $6,237,02 income $6,535,796 7 Cost of products sold and other operating costs 5,814,613 5,414,583 _________ __________ _ Gross Profit 721,183 822,444 Selling, general and administrative expenses 227,240 222,403 _________ __________ _ Earnings From Operations 493,943 600,041 Other income (expense) 95,561 (45,015) _________ __________ _ Earnings Before Income Taxes 589,504 555,026 Income taxes 200,432 180,384 _________ __________ _ $ $ Net Earnings 389,072 374,642 ========= ========== = Average number of shares outstanding 527,429 541,597 Net earnings per common share $ $ .74 .69 Dividends per common share $ $.074 .039 </TABLE> See notes to consolidated financial statements. 3 PAGE 4 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1995 1995 ------------------------- (In thousands) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ $ 454,593 773,903 Marketable securities 330,651 664,690 Receivables 1,062,469 1,013,562 Inventories 2,350,840 1,473,896 Prepaid expenses 112,918 105,904 _________ __________ __ _ Total Current Assets 4,630,781 3,712,645 Investments and Other Assets Investments in and advances to affiliates 544,357 502,698 Long-term marketable securities 1,351,830 1,604,219 Other assets 206,761 175,044 _________ __________ __ _ 2,102,948 2,281,961 Property, Plant and Equipment Land 114,044 113,098 Buildings 1,160,009 1,109,249 Machinery and equipment 5,686,244 5,443,561 Construction in progress 649,834 642,825 Less allowances for (3,703,49 depreciation 4) (3,546,452 ) _________ __________ ___ _ 3,906,637 3,762,281 _________ __________ __ _ $10,640,3 $9,756,887 66 ========= ========== == = </TABLE> See notes to consolidated financial statements. 4 PAGE 5 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1995 1995 ------------------------- (In thousands) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt $ 294,336 $ - Accounts payable 1,091,077 725,046 Accrued expenses 524,211 431,725 Current maturities of long-term debt 15,134 15,614 ________ _________ Total Current Liabilities 1,924,758 1,172,385 Long-Term Debt 2,073,507 2,070,095 Deferred Credits Income taxes 556,007 538,351 Other 103,833 121,891 __________ ________ 659,840 660,242 Shareholders' Equity Common stock 3,498,209 3,668,977 Reinvested earnings 2,484,052 2,185,188 ___________ _________ 5,982,261 5,854,165 __________ ________ $10,640,366 $9,756,887 ========== ========= </TABLE> See notes to consolidated financial statements. 5 PAGE 6 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1995 1994 ----------------------- (In thousands) <S> <C> <C> Operating Activities Net earnings $389,072 $374,642 Adjustments to reconcile to net cash provided by operations Depreciation and amortization 194,407 191,975 Deferred income taxes 58,938 13,774 Amortization of long-term debt discount12,434 10,830 Other (95,017) 18,212 Changes in operating assets and liabilities Receivables (92,723) (4,733) Inventories (891,458) (453,444) Prepaid expenses (7,167) (15,366) Accounts payable and accrued expenses433,713 272,362 _________ _________ Total Operating Activities 2,199 408,252 Investing Activities Purchases of property, plant and equipment(354,510)(318,6 08) Business acquisitions (26,120) (11,000) Investments in and advances to affiliates(56,482)(91,478) Purchases of marketable securities (279,702) (1,346,294) Proceeds from sales of marketable securities965,659 1,271 ,350 Other (1,241) - _________ _________ Total Investing Activities 247,604 (496,030) Financing Activities Long-term debt borrowings 6,305 18,465 Long-term debt payments (8,434) (22,820) Net borrowings under line of credit agreements296,336 78,8 44 Purchases of treasury stock (187,948) (3,928) Cash dividends and other (36,752) (20,774) _________ _________ Total Financing Activities 69,507 49,787 _________ _________ Increase (Decrease) In Cash and Cash Equivalents 319,310 (37,991) Cash and Cash Equivalents Beginning of Period454,593 316,394 _________ _________ Cash and Cash Equivalents End of Period$ 773,903 $ 278, 403 ======== ======== </TABLE> See notes to consolidated financial statements. 6 PAGE 7 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending June 30, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1995. Note 2. Other Income (Expense) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1995 1994 1995 1994 ------------------------------------- (In thousands) (In thousands) <S> <C> <C> <C> <C> Investment income $ 37,328 $ 29,674 $ 79,151 $ 61,936 Interest expense (42,556) (43,723)(82,633) (86,492) Gain (loss) on marketable securities transactions 67,181 (7,117) 67,869 (11,941) Other, including equity in earnings of affiliates 12,093 (8,293) 31,174 (8,518) _______ _______ _______ _______ $ 74,046 $ (29,459)$ 95,561 $(45,015) ======= ======= ======= ======= </TABLE> Note 3. Per Share Data All references to share and per share information have been adjusted for the 5 percent stock dividend paid September 18, 1995. 7 PAGE 8 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4. Antitrust Investigation and Related Litigation The Company, along with a number of other domestic and foreign companies, is the subject of a grand jury investigation into possible violations of federal antitrust laws and possible related crimes in the food additives industry. The investigation is directed towards possible price-fixing with respect to lysine, citric acid and high fructose corn syrup. Neither the Company nor any director, officer or employee has been charged in connection with the investigation. Following public announcement of the investigation, the Company and certain of its directors and executive officers were named as defendants in a number of putative class actions alleging violations of antitrust and securities laws relating to the Company's marketing practices in the food additives industry, specifically with respect to lysine, citric acid and high fructose corn syrup. The plaintiffs generally request unspecified compensatory and punitive damages, costs, expenses and unspecified relief. The Company and the individuals named as defendants intend to vigorously defend these class actions unless they can be settled on terms deemed acceptable by the parties. These matters could result in the Company being subject to monetary damages, fines, penalties and other sanctions and expenses. The ultimate outcome of the investigation and the putative class actions cannot presently be determined. However, the Company has made a provision related to the lysine contingency, which amount is not material to its consolidated financial statements for the quarter ended December 31, 1995. In the Company's opinion the ultimate resolution of this contingency, to the extent not provided for, will not have a material adverse effect on the Company's consolidated financial condition or annual results of operations, but it could be material to the consolidated operating results of a particular future quarter if resolved unfavorably. Because of the early stage of the investigation as it relates to citric acid and high fructose corn syrup, no provision for any liability that may result therefrom has been made in the accompanying consolidated financial statements. Shareholder derivative actions also have been filed against certain of the Company's directors and executive officers and nominally against the Company alleging that the individuals named as defendants breached their fiduciary duties to the Company and seeking monetary damages and other relief on behalf of the Company from the individuals named as defendants. The Company has sought or intends to seek dismissal of these derivative actions on the ground that they cannot be maintained unless the plaintiffs first brought their complaints to the Company's Board of Directors, which they did not. The Company from time to time, in the ordinary course of business, is named as a defendant in various other lawsuits. In management's opinion, the gross liability from such other lawsuits, including environmental exposure, with or without insurance recoveries is not considered to be material to the Company's consolidated financial condition or results of operations. 8 PAGE 9 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION The Company is in one business segment - procuring, transporting, storing, processing and merchandising agricultural commodities and products. The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as: weather; plantings; government (domestic and foreign) farm programs and policies; changes in global demand created by population growth and higher standards of living; and global production of similar and competitive crops. Generally, changes in the price of agricultural commodities can be passed through to the price of processed products. Ethanol is one of a limited few of the Company's processed products which must be priced to compete with products produced from other raw materials. The Company follows a policy of hedging substantially all inventory and related purchase and sale contracts. In addition, the Company from time to time will hedge anticipated production, generally not exceeding six months requirements. These hedges are made to reduce price risk of market fluctuations and risk of crop failure. The instruments used are principally readily marketable exchange traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. Also, the underlying commodity can be delivered against such contracts. To obtain a proper matching of revenue and expense, gains or losses arising from open and closed hedging transactions are included in inventory as a cost of the commodities and reflected in the income statement when the product is sold. Inflation, over time, has an impact on agricultural commodity prices. The Company's business is capital intensive and inflation could impact the cost of capital investment. OPERATIONS Net sales and other operating income increased $193 million to $3.4 billion for the quarter and increased $299 million to $6.5 billion for the six months due primarily to increases in average selling prices of 7 percent and 16 percent, respectively. These increases were partially offset by a 6 percent decrease in volume of products sold for the quarter and by the decrease due to the sale of the Company's Supreme Sugar subsidiary and British Arkady bakery ingredient business and the contribution of the Company's formula feed operation to an unconsolidated joint venture. A summary of net sales and other operating income by classes of products and services is as follows: <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1995 1994 1995 1994 _______________ ______________ ___ ___ (In millions) (In millions) <S> <C> <C> <C> <C> Oilseed products $ 2,073 $ $ 3,92 $ 1,922 9 3,599 Corn products 1,290 674 607 1,282 Wheat and other milled 831 products 429 360 713 Other products 486 239 333 643 ______ ______ ______ ______ $ $ $ 6,53 $ 3,415 3,222 6 6,237 ====== ====== ====== ====== </TABLE> 9 PAGE 10 Sales of oilseed products increased 8 percent for the quarter and 9 percent for the six months due primarily to increased average selling prices reflecting the higher cost of raw materials. Sales volumes were lower in the quarter as weaker export markets for both vegetable oil and meal products more than offset the strong demand for domestic meal products. Sales of corn products increased 11 percent to $674 million for the quarter and 1 percent to $1.3 billion for the six months due primarily to increased sales volumes resulting from strong demand for beverage and industrial alcohol as well as for various bioproducts, including lysine, MSG and citric acid. These volume increases were partially offset by lower average selling prices for the Company's sweetener and fuel alcohol products. Sales of wheat and other milled products increased 19 percent for the quarter and 17 percent for the six months due principally to increased average selling prices reflecting the higher cost of raw materials. The decrease in sales of other products for both the quarter and six months was due principally to the sale of the Company's Supreme Sugar subsidiary and British Arkady bakery ingredient business as well as the contribution of the Company's formula feed operation to an unconsolidated joint venture. Cost of products sold and other operating costs increased $274 million to $3 billion for the quarter and increased $400 million to $5.8 billion for the six months due primarily to increases in raw material commodity prices of 11 percent and 15 percent, respectively. The effect of commodity price increases on Last- In, First-Out (LIFO)inventory valuations resulted in an increase in LIFO inventory valuation reserves, a charge to cost of products sold and a reduction in gross profits of $59 million for the quarter and $72 million for the six months ended December 31, 1995. For the six months ended December 31, 1994, the effect of commodity price decreases on LIFO inventory valuations resulted in a decrease in LIFO inventory valuation reserves and a credit to cost of products sold and gross profits of $9 million. The effect of LIFO valuations were minimal in the quarter ended December 31, 1994. LIFO inventory valuations reserves at December 31, 1995 were $122 million compared to $55 million at December 31, 1994. The $81 million decrease in gross profit for the quarter resulted primarily from a $45 million decrease due to the net effect of higher raw material commodity prices versus increased average selling prices and a $26 million decrease due to lower sales volumes. The $101 million decrease in gross profit for the six months can be attributed primarily to a $76 million decrease due to the net effect of higher raw material commodity prices versus increased average selling prices and to a $25 million decrease due to divested operations. Selling, general and administrative expenses increased $6 million to $129 million for the quarter and increased $5 million to $227 million for the six months due primarily to an increase in legal and litigation related expenses and general cost increases which were partially offset by expenses attributable to recently divested operations and reduced bad debt expense. The increase in other income for the quarter and six months was due principally to $67 million of gains on marketable securities transactions realized during the quarter. To a lesser extent, other income increased for both the quarter and six months due to increased equity in earnings of unconsolidated affiliates and to increased investment income due primarily to higher interest rates. For the six months, the increase in other income included a $15 million gain on the sale of the Company's Supreme Sugar subsidiary. The increase in income taxes for both the quarter and six months resulted primarily from higher pretax earnings and to a lesser extent from higher effective income tax rates. The Company's effective income tax rate of 34 percent for both the quarter and six months compares to a rate of 33 percent for the comparable periods of a year ago. 10 PAGE 11 LIQUIDITY AND CAPITAL RESOURCES During the six months ended December 31, 1995, the Company continued to show substantial liquidity as working capital increased $166 million to $2.7 billion. Capital resources were strengthened by a $128 million increase in net worth to $6 billion. This increase was net of treasury stock repurchases of $188 million for the six months. The Company's ratio of long- term liabilities to total capital at December 31, 1995 was approximately 24 percent. As discussed in Note 4 to the unaudited consolidated financial statements, the Company, along with a number of other domestic and foreign companies, is the subject of a grand jury investigation into possible violations of federal antitrust laws and possible related crimes in the food additives industry. Neither the Company nor any director, officer or employee has been charged in connection with the investigation. In addition, related civil class actions are pending. These matters could result in the Company being subject to monetary damages, fines, penalties and other sanctions and expenses. The ultimate outcome of the investigation and the putative class actions cannot presently be determined. However, the Company has made a provision related to the lysine contingency, which amount is not material to its consolidated financial statements for the quarter ended December 31, 1995. In the Company's opinion the ultimate resolution of this contingency, to the extent not provided for, will not have a material adverse effect on the Company's consolidated financial condition or annual results of operations, but it could be material to the consolidated operating results of a particular future quarter if resolved unfavorably. Because of the early stage of the investigation as it relates to citric acid and high fructose corn syrup, no provision for any liability that may result therefrom has been made in the accompanying unaudited consolidated financial statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company, along with a number of other domestic and foreign companies, is the subject of an investigation being conducted by a grand jury in the Northern District of Illinois in Chicago, into possible violations of federal antitrust laws and possible related crimes in the food additives industry. This investigation is directed towards possible price- fixing with respect to lysine, citric acid, and high fructose corn syrup. Federal grand juries in other jurisdictions also may have been convened to investigate certain of these matters. Neither the Company nor any director, officer or employee of the Company has been charged in connection with this investigation. 11 PAGE 12 Following public announcement in June 1995 of the investigation, the Company and certain of its directors and executive officers were named as defendants in at least seventeen putative class action suits on behalf of all purchasers of securities of the Company during the period between certain dates in 1992 and 1995. Fourteen of these suits were consolidated under the name In Re Archer-Daniels- Midland Company Securities Litigation, United States District Court, Northern District of Illinois, Civil Action No. 95-C-3979, and a consolidated complaint was filed on September 22, 1995. The consolidated complaint alleges that the defendants made material misrepresentations and omissions with respect to the Company and its operations and with respect to actions of the Company and its officers regarding antitrust violations, as a result of which market prices of the Company's securities were artificially inflated during the putative class period. The consolidated complaint alleges that the conduct complained of violates federal securities laws. The plaintiffs request unspecified compensatory damages, costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative class. On October 31, 1995, the Court granted the defendants' motion to transfer the consolidated action to the Central District of Illinois (wherein it now bears Case Number 95-2287) where at least three similar actions are also pending. The Company and the individual defendants have moved to dismiss this consolidated complaint. The Company, along with other companies, has been named as a defendant in at least twenty-eight putative class action antitrust suits involving the sale of high fructose corn syrup. Twenty-two of these actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of high fructose corn syrup during certain periods in the 1990s. One such action was filed on July 21, 1995 in the United States District Court for the Northern District of Alabama and is encaptioned Golden Eagle, Inc. v. Archer-Daniels- Midland Co., et al., Civil Action No. 95-D-1888-J. This and other similar actions have been transferred to the United States District Court for the Central District of Illinois and assigned Master File No. 95- 1477. The Company, along with other companies, also has been named as a defendant in at least six putative class action antitrust suits filed in California state court involving the sale of high fructose corn syrup. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. Two of the putative classes comprise certain direct purchasers of high fructose corn syrup in the State of California during certain periods in the 1990s. One such action was filed on October 17, 1995 in Superior Court for the County Stanislaus, California and encaptioned St. Stan's Brewing Co. v. Archer-Daniels- Midland Co., et al., Civil Action No. 37237. The other four putative classes comprise certain indirect purchasers of high fructose corn syrup in the State of California during certain periods in the 1990s. One such action was filed on July 21, 1995 in the Superior Court of the County of Los Angeles, California and is encaptioned Borgeson v. Archer-Daniels-Midland Co., et al., Civil Action No. BC131940. 12 PAGE 13 The Company has been named as a defendant in at least fourteen putative class action antitrust suits involving the sale of lysine. Nine of these actions allege violations of federal antitrust laws, including allegations that certain entities agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of lysine for certain periods in the 1990s. One such action was filed on July 26, 1995 in the United States District Court for Central District of Illinois and is encaptioned Walker Farms, Inc. v. Archer-Daniels- Midland Co., Civil Action No. 95-2186. This and other similar actions have been transferred to the United States District Court for the Northern District of Illinois and assigned Master File No. 95-7679. The Company also has been named as a defendant in at least one non-class action federal antitrust suit involving the sale of lysine. This action was filed on November 13, 1995 in the United States District Court for the Eastern District of Missouri and is encaptioned Purina Mills, Inc., et al. v. Archer-Daniels-Midland Co., Civil Action No. 95-CV-2227. It alleges violations of federal antitrust laws, including allegations that certain entities agreed to fix, stabilize and maintain at artificially high levels the price of lysine, and seeks an injunction against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The Company also has been named as a defendant in at least two putative class action antitrust suits filed in California state court, at least two putative class action antitrust suits filed in Alabama state court, and at least one putative class action antitrust suit filed in Georgia state court involving the sale of lysine. The California actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. The putative classes in the California actions comprise certain indirect purchasers of lysine in the State of California during certain periods in the 1990s. One such action was filed on September 29, 1995 in the Superior Court of the County of San Diego, California, and is encaptioned Equine Competition Products, Inc. v. Archer-Daniels-Midland Co. et al., Civil Action No. 693014. The Alabama actions allege violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in the Alabama actions comprise certain indirect purchasers of lysine during certain periods in the 1990s. One such action was filed on August 17, 1995 in the Circuit Court of DeKalb County, Alabama, and is encaptioned Ashley v. Archer-Daniels- Midland Co. et al., Civil Action No. 95-336. The Georgia action, encaptioned Long v. Archer-Daniels- Midland Co., et al., Civil Action No. E-43829, and originally filed in Fulton County Superior Court, alleges a restraint of trade in violation of Georgia common law and the Georgia state RICO Act. This action, which was removed to federal court and there amended, includes allegations that the defendants conspired to maintain the price of lysine at artificially high levels and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, attorneys fees and costs and other unspecified relief. The putative claim in the action comprises certain indirect purchasers of lysine during the period January 1, 1990 until the present. The Company has moved to dismiss the complaint and plaintiff has opposed this action and filed an amended complaint. 13 PAGE 14 The Company, along with other companies, has been named as a defendant in at least seven putative class action antitrust suits involving the sale of citric acid. Six of these actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of citric acid, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of citric acid for certain periods in the 1990s. One such action was filed on August 18, 1995, in the United States District Court for the Northern District of California, and is encaptioned 7-Up Bottling Co. of Philadelphia, Inc. v. Archer-Daniels-Midland Co. et al., Civil Action No. 95- 2963. Other similar actions have been transferred to this same court. The Company, along with other companies, also has been named as a defendant in at least one putative class action antitrust suit filed in Alabama state court involving the sale of citric acid. This action alleges violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of citric acid, and seeks an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Alabama action comprises certain indirect purchasers of citric acid in the State of Alabama from July 1993 until July 1995. This action was filed on July 27, 1995 in Circuit Court of Walker County, Alabama and is encaptioned Seven Up Bottling Co. of Jasper, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-436. The Company, along with other companies, has been named as a defendant in at least three putative class action antitrust suits involving the sale of both high fructose corn syrup and citric acid. Two of these actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. The putative class in one of these cases comprises certain direct purchasers of high fructose corn syrup and citric acid in the State of California during the period January 1, 1992 until at least October 1995. This action was filed on October 11, 1995 in the Superior Court of Stanislaus County, California and is entitled Gangi Bros. Packing Co. v. Archer-Daniels-Midland Co., et al., Civil Action No. 37217. The putative class in the other case comprises certain indirect purchasers of high fructose corn syrup and citric acid in the state of California during the period October 12, 1991 until November 20, 1995. This action was filed on November 20, 1995 in the Superior Court of San Francisco County and is encaptioned MCFH, Inc. v. Archer-Daniels-Midland Company Co., et al., Civil Action No. 974120. The Company, along with other companies, also has been named as a defendant in at least one putative class action antitrust suit filed in West Virginia state court involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the West Virginia antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the West Virginia action comprises certain entities within the State of West Virginia that purchased products containing high fructose corn syrup and/or citric acid for resale from at least 1992 until 1994. This action was filed on October 26, 1995, in the Circuit Court for Boone County, West Virginia, and is encaptioned Freda's v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-C-125. 14 PAGE 15 The Company, along with other companies, has been named as a defendant in at least six putative class action antitrust suits involving the sale of high fructose corn syrup, citric acid and lysine. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, citric acid and lysine, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. One of the putative classes comprises certain direct purchasers of high fructose corn syrup, citric acid or lysine in the State of California during a certain period in the 1990s. This action was filed on December 18, 1995 in the Superior Court for the County Stanislaus, California and is encaptioned Nu Laid Foods, Inc. v. Archer-Daniels- Midland Co., et al., Civil Action No. 39693. The other five putative classes comprise certain indirect purchasers of high fructose corn syrup, citric acid and lysine in the State of California during certain periods in the 1990s. One such action was filed on December 14, 1995 in the Superior Court for the County Stanislaus, California and is encaptioned Batson v. Archer- Daniels-Midland Co., et al., Civil Action No. 39680. Also following the public announcement of the grand jury investigation in June 1995, three shareholder derivative suits were filed against certain of the Company's directors and executive officers and nominally against the Company in the United States District Court for the Northern District of Illinois and at least fourteen similar shareholder derivative suits were filed in the Delaware Court of Chancery. The derivative suits filed in federal court in Illinois were consolidated under the name Felzen, et al. v. Andreas, et al, Civil Action Nos. 95-C-4006, 95- C-4535, and a consolidated amended derivative complaint was filed on September 29, 1995. This complaint names all current directors of the Company and one former director as defendants and names the Company as a nominal defendant. It alleges breach of fiduciary duty, waste of corporate assets, abuse of control and gross mismanagement, based on the antitrust allegations described above as well as other alleged wrongdoing. On October 31, 1995, the Court granted the defendants' motion to transfer the Illinois consolidated derivative action to the Central District of Illinois, wherein it now bears the case number 95-2279. The Company and individual defendants have moved to dismiss this complaint. The Company and its directors also have been named as defendants in a putative class action suit encaptioned Loudon v. Archer-Daniels-Midland Company, et al., Civil Action No. 14638, filed in the Delaware Court of Chancery on October 20, 1995. This action alleges violations of Delaware state law and seeks invalidation of the election of the Company's directors on the basis of alleged omissions from the proxy statement issued by the Company prior to its October 19, 1995 annual meeting. The defendants have moved to dismiss this action. The Company and its directors also have been named as defendants in a similar suit filed on November 1, 1995 in the United States District Court for the Central District of Illinois, encaptioned Buckley v. Archer-Daniels- Midland Company, et al., Civil Action No. 95-C-2269, alleging violations of analogous provisions of federal securities law. The defendants moved to dismiss this action and the plaintiff has filed an amended complaint. 15 PAGE 16 The Company and the individual defendants named in the actions described above intend to vigorously defend them unless they can be settled on terms deemed acceptable to the parties. The antitrust investigation and related litigation is also discussed in note 4 to the unaudited consolidated financial statements and in management's discussion of operations and financial condition. Reference is made to Item 3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995 for a discussion of additional legal proceedings. Item 4. Submission of matters to a vote of Security Holders: The Annual Meeting of Shareholders was held on October 19, 1995. Proxies for the Annual Meeting were solicited pursuant to Regulation 14. There was no solicitation in opposition to the Board of Director nominees as listed in the proxy statement and all of such nominees were elected as follows: <TABLE> <CAPTION> Nominee Shares Cast Shares For Withheld ______________ _______________ ___________ <S> <C> <C> D. O. Andreas 355,356,046 84,637,946 Ralph Bruce 355,741,655 84,252,337 J. H. Daniels 355,788,126 84,205,866 G. O. Coan 355,762,802 84,231,190 L. W. Andreas 355,450,339 84,543,653 S. M. Archer, Jr. 355,797,616 84,196,376 R. A. Goldberg 355,708,614 84,285,378 J. K. Vanier 355,840,768 84,153,224 M. L. Andreas 355,299,832 84,694,160 Mrs. N. A. Rockefeller 355,620,653 84,373,339 M. D. Andreas 354,390,438 85,603,554 H. D. Hale 355,512,903 84,481,089 O. G. Webb 355,800,084 84,193,908 J. R. Randall 355,809,611 84,184,381 F. Ross Johnson 355,609,869 84,384,123 R. S. Strauss 355,667,768 84,326,224 M. B. Mulroney 355,778,425 84,215,567 There were no abstentions or broker non-votes regarding the election of directors. The appointment by the Board of Directors of Ernst & Young LLP as Independent Accountants to audit the accounts of the Company for the fiscal year ending June 30, 1996 was ratified as follows: Shares Cast Shares Shares Broker For Withheld Abstaining Non-Votes ____________ _________ __________ __________ 431,978,007 6,224,330 1,791,655 0 The shareholder proposal relative to diversity on the Company's Board of Directors was defeated as follows: Shares Cast Shares Cast Shares Broker For Against Abstaining Non-Votes __________ ___________ _________ ___________ 65,939,588 280,246,433 17,804,593 76,003,378 </TABLE> Item 6. Exhibits and Reports on Form 8-K a) Notice of annual meeting and proxy statement dated September 13, 1995 incorporated as an exhibit herein by reference. b) A Form 8-K was not filed during the quarter ended December 31, 1995. 16 PAGE 17 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARCHER-DANIELS-MIDLAND COMPANY /s/ D. J. Schmalz D. J. Schmalz Vice President and Chief Financial Officer /s/ R. P. Reising R. P. Reising Vice President, Secretary and General Counsel Dated: February 13, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE FOR 10-Q 12/31/95 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 773,903 <SECURITIES> 330,651 <RECEIVABLES> 1,062,469 <ALLOWANCES> 0 <INVENTORY> 2,350,840 <CURRENT-ASSETS> 4,630,781 <PP&E> 7,610,131 <DEPRECIATION> 3,703,494 <TOTAL-ASSETS> 10,640,366 <CURRENT-LIABILITIES> 1,884,343 <BONDS> 2,073,507 <COMMON> 3,498,209 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 2,484,052 <TOTAL-LIABILITY-AND-EQUITY> 10,640,366 <SALES> 6,535,796 <TOTAL-REVENUES> 6,535,796 <CGS> 5,814,613 <TOTAL-COSTS> 5,814,613 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 82,633 <INCOME-PRETAX> 589,504 <INCOME-TAX> 200,432 <INCOME-CONTINUING> 389,072 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 389,072 <EPS-PRIMARY> .74 <EPS-DILUTED> .74 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

ADP

https://www.sec.gov/Archives/edgar/data/8670/0000008670-96-000002.txt

-----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, WKrPEqqgH1bdJIp+zu2cCh4gc572s2bkgyFm7ib0j8SdAdobMA7Qvlg2kylM1oOl pA90yyZ30xgEpNFw/0vDKQ== <SEC-DOCUMENT>0000008670-96-000002.txt : 19960603 <SEC-HEADER>0000008670-96-000002.hdr.sgml : 19960603 ACCESSION NUMBER: 0000008670-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC CENTRAL INDEX KEY: 0000008670 STANDARD INDUSTRIAL CLASSIFICATION: 7374 IRS NUMBER: 221467904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05397 FILM NUMBER: 96516985 BUSINESS ADDRESS: STREET 1: ONE ADP BOULVARD CITY: ROSELAND STATE: NJ ZIP: 07068 BUSINESS PHONE: 2019945000 MAIL ADDRESS: STREET 1: ONE ADP BOULEVARD CITY: ROSELAND STATE: NJ ZIP: 07068 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>LIVE <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1995 Commission File Number 1-5397 Automatic Data Processing, Inc (Exact name of registrant as specified in its charter ) Delaware 22-1467904 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One ADP Boulevard, Roseland, New Jersey 07068 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code (201) 994-5000 No change Former name, former address & former fiscal year, if changed since last report. Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed with the commission and (2) has been subject to the filing requirements for at least the past 90 days. X Yes No As of January 31, 1996 there were 290,446,169 common shares outstanding. <PAGE> Form 10Q Part I. Financial Information Statements of Consolidated Earnings (In thousands, except per share amounts) Three Months Ended Six Months Ended December 31, December 31, 1995 1994 1995 1994 Revenue $819,723 $672,597 $1,566,817 $1,294,883 Operating expenses 342,690 268,107 659,467 520,804 General, administrative and selling expenses 210,343 183,923 425,365 372,852 Depreciation and amortization 48,618 39,751 93,089 77,509 Systems development and programming costs 58,867 46,464 113,046 90,819 Interest expense 8,605 6,252 14,450 12,199 669,123 544,497 1,305,417 1,074,183 EARNINGS BEFORE INCOME TAXES 150,600 128,100 261,400 220,700 Provision for income taxes 41,700 33,180 70,600 57,080 NET EARNINGS $108,900 $ 94,920 $ 190,800 $ 163,620 EARNINGS PER SHARE: $ .38 $ .33 $ .66 $ .58 Dividends per share $ .10 $ .075 $ .1875 $ .15 See notes to consolidated statements. <PAGE> Form 10Q Consolidated Balance Sheets (In thousands) December 31, June 30, Assets 1995 1995 Cash and cash equivalents $ 238,264 $ 313,612 Short-term marketable 263,300 384,009 securities Accounts receivable 511,036 377,145 Other current assets 216,841 136,377 Total current assets 1,229,441 1,211,143 Long-term marketable 553,579 594,268 securities Long-term receivables 185,175 189,858 Land and buildings 295,560 287,186 Data processing equipment 591,477 501,403 Furniture, leaseholds and 379,171 309,592 other 1,266,208 1,098,181 Less accumulated (797,760) (682,222) depreciation 468,448 415,959 Other assets 79,506 84,212 Intangibles 1,211,373 705,656 $3,727,522 $3,201,096 Liabilities and Shareholders' Equity Notes payable $ 50,350 $ - Accounts payable 119,339 65,955 Accrued expenses 607,264 385,040 & other current liabilities Income taxes 77,980 82,672 Current portion of long-term 1,811 9,556 debt Total current liabilities 856,744 543,223 Long-term debt 398,309 390,177 Other liabilities 98,451 66,865 Deferred income taxes 15,187 18,844 Deferred revenue 109,611 85,372 Shareholders' equity: Common stock 31,423 31,423 Capital in excess of par 386,179 351,908 value Retained earnings 2,319,612 2,182,838 Treasury stock (487,994) (469,554) 2,249,220 2,096,615 $3,727,522 $3,201,096 See notes to consolidated statements. <PAGE> Form 10Q Condensed Statements of Consolidated Cash Flows (In thousands) Six Months Ended December 31, 1995 1994 Cash Flows From Operating Activities: Net earnings $ 190,800 $ 163,620 Expenses not requiring 101,851 87,498 outlay of cash Changes in operating net 23,629 (74,812) assets Net cash flows from operating 316,280 176,306 activities Cash Flows From Investing Activities: Marketable securities 161,398 (56,042) Capital expenditures (79,455) (52,230) Other changes to property, plant 1,738 2,797 and equipment Additions to intangibles - (8,531) Acquisitions of businesses (481,915) (26,301) Net cash flows from investing (398,234) (140,307) activities Cash Flows From Financing Activities: Proceeds from issuance of notes 50,350 - (related to GSI acquisition) Repayments of long-term debt (9,549) (364) Proceeds from issuance of common 69,413 59,411 stock Repurchases of common stock (47,727) (1,999) Dividends paid (54,025) (42,543) Other (1,856) (970) Net cash flows from financing 6,606 13,535 activities Net change in cash and cash (75,348) 49,534 equivalents Cash and cash equivalents, at 313,612 238,626 beginning of period Cash and cash equivalents, at $ 238,264 $ 288,160 end of period See notes to consolidated statements. <PAGE> Form 10Q Notes to Consolidated Statements The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. All adjustments are of a normal recurring nature. These statements should be read in conjunction with the annual financial statements and related notes of the Company for the year ended June 30, 1995. Note A - Effective November 1, 1995, ADP acquired control of GSI Participations, a leading computer services company based in Paris, France. As of the close of the January 15, 1996 shareholder tender period, ADP had purchased approximately 100% of GSI for approx- imately $460 million in cash. Based on preliminary allocations of purchase price, this transaction resulted in approximately $485 million of goodwill and other intangibles. Amortization of these intangibles in the accompanying financial statements is based on an assumed blended amortization period of 25 years. The allocation of purchase price as reflected in the accompanying balance sheet is preliminary and subject to adjustment upon receipt of final appraisal information and management's final estimates as to the fair value of assets acquired and liabilities assumed. The financial results of GSI are included in ADP's consolidated results on a month lag. Accordingly, the consolidated results for the quarter ended December 31, 1995 include GSI's operations through November 30, 1995. On an unaudited pro forma basis, assuming that the acquisition had been made as of July 1, 1994, the consolidated revenues of ADP for the 6 months ended December 31, 1995, and 1994 would have increased by approximately $173 million and $207 million, respect- ively, and net earnings would have decreased by approx- imately $9 million ($.03 per share) and $18 million ($.06 per share), respectively. The Company believes these unaudited pro forma results of operations are not indicative of the actual results of operations that would have occurred had the purchase been made as of July 1, 1994 or of the results which will occur in the future. Note B - The results of operations for the six months ended December 31, 1995 may not be indicative of the results to be expected for the year ending June 30, 1996. Note C - Earnings per share are based on the weighted average number of shares outstanding, which for the quarters ended December 31, 1995 and 1994 were 288,001,000 and 283,436,000, respectively. The weighted average number of shares for the six months ended December 31, 1995 and 1994 were 287,866,000 and 282,500,000 respectively. <PAGE> Note D - As of January 1, 1996, the Company had a two-for- one stock split. All per share earnings and dividends and references to common stock in this report have been retroactively restated to reflect the increased number of common shares outstanding. <PAGE> Form 10Q MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Revenue and earnings again reached record levels during the quarter ended December 31, 1995. Revenue and revenue growth by ADP's major service groups are shown below: Revenue 3 Months Ended 6 Months Ended December 31, December 31, 1994 1995 1994 1995 ($ in millions) Employer Services (a) $ 397 $ 461 $ 765 $ 874 Brokerage Services 139 169 274 338 Dealer Services 109 132 204 258 Other (a) 28 58 52 97 $ 673 $ 820 $1295 $1567 Revenue Growth 3 Months Ended 6 Months Ended December 31, December 31, 1994 1995 1994 1995 Employer Services (a) 14% 16% 13% 14% Brokerage Services 6 22 6 23 Dealer Services 30 21 27 26 Other (a) 87 107 58 87 16% 22% 15% 21% (a) reclassified Consolidated revenue for the quarter of $820 million was up 22% from last year, with approximately 25% of the revenue growth coming from the recently completed acquisition of GSI. Revenue growth in Employer, Brokerage and Dealer Services, primarily from internal sources, was 16%, 22% and 21% respectively. These growth rates also include some acquisitions in each business unit. New client sales in Employer Services and trading volumes in Brokerage Services continued to be quite strong. The primary components of "Other revenue" are claims services, services for wholesalers, the non-employer services businesses of GSI and interest income. In addition, Other revenue has been reduced to adjust for the difference between actual interest income earned on invested tax filing funds and income credited to Employer Services at a standard rate of 7.8%. The revenue from two businesses providing payroll services in Europe have been reclassified from Other revenue and are now included in the Employer Services caption along with GSI's Employer Services operations. Pretax earnings for the quarter increased 18% from last year. Pretax margins were slightly lower than the prior year as a result of lower margins associated with certain acquisitions and new products. Systems development and programming investments increased to accelerate automation, migrate to new computing technologies, and develop new products. <PAGE> Form 10Q Net earnings for the quarter increased 15% to $109 million. The effective tax rate of 27.7% was slightly higher than previous periods, primarily because of lower municipal investment balances and the estimated impact of non-deductible intangibles arising from the GSI acquisition. Earnings per share for the quarter increased 15% to $.38 from $.33 last year. The Company previously announced a two-for-one common stock split effective January 1, 1996. All share and per share amounts are adjusted for the split. Effective November 1, 1995, ADP acquired control of GSI, a leading computer services company based in Paris, France. As of the close of the January 15, 1996 shareholder tender period, ADP had purchased virtually 100% of GSI. GSI is the leading European provider of payroll and human resource information services. GSI also provides facilities management, banking, clearing, and other information services in Europe. The financial results of GSI are included in ADP's consolidated results on a one month lag. Accordingly, the consolidated results for the quarter ended December 31, 1995 include GSI's operations through November 30, 1995. The GSI acquisition will dilute ADP's fiscal 1996 earnings per share by 1% to 2% and add $400 million in annualized revenue. With the acquisition of GSI, we now expect revenue growth of over 20% and earnings per share growth of close to 15% for the full year. FINANCIAL CONDITION The Company's financial condition and balance sheet remain exceptionally strong, and operations continue to generate a strong cash flow. At December 31, 1995, the Company had cash and marketable securities in excess of $1.0 billion. Shareholders equity exceeded $2.2 billion and the ratio of long-term debt to equity was 18%. The GSI purchase price of approximately $460 million was funded by borrowing approximately $93 million of short- term debt ($50 million as of December 31, 1995) with the remainder coming from the Company's cash and marketable securities. Capital expenditures for fiscal 1996 are expected to approximate $170 million, compared to $118 million in fiscal 1995. During the quarter, ADP purchased approximately 680,000 shares of common stock for treasury at an average price of about $33. The Company has remaining Board authorization to purchase up to 12.6 million additional shares to fund our equity related employee benefit plans. <PAGE> Form 10Q PART II. OTHER INFORMATION All items are either inapplicable or would result in negative responses and, therefore, have been omitted. <PAGE> Form 10Q 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. AUTOMATIC DATA PROCESSING, INC. (Registrant) Date: February 13, 1996 /s/ Fred D. Anderson, Jr. Fred D. Anderson, Jr. Chief Financial Officer and Corporate Vice President (Principal Financial Officer) (Title) <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 238264 <SECURITIES> 263300 <RECEIVABLES> 541689 <ALLOWANCES> 30653 <INVENTORY> 33471 <CURRENT-ASSETS> 1229441 <PP&E> 1266208 <DEPRECIATION> 797760 <TOTAL-ASSETS> 3727522 <CURRENT-LIABILITIES> 856744 <BONDS> 398309 <COMMON> 31423 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 2217797 <TOTAL-LIABILITY-AND-EQUITY> 3727522 <SALES> 0 <TOTAL-REVENUES> 1566817 <CGS> 0 <TOTAL-COSTS> 1286374 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 4593 <INTEREST-EXPENSE> 14450 <INCOME-PRETAX> 261400 <INCOME-TAX> 70600 <INCOME-CONTINUING> 190800 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 190800 <EPS-PRIMARY> .66 <EPS-DILUTED> .65 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

AIT

https://www.sec.gov/Archives/edgar/data/109563/0000950152-96-000438.txt

-----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, OPpc7SRsbWpvl/11OOZZtAXjTI71U6up1yHG5FbecwHA/fy6c8ASfcaReW+Zyock z7F5sgFdtG+ECyUcMi70XA== <SEC-DOCUMENT>0000950152-96-000438.txt : 19960216 <SEC-HEADER>0000950152-96-000438.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950152-96-000438 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEARINGS INC /OH/ CENTRAL INDEX KEY: 0000109563 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 340117420 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02299 FILM NUMBER: 96516969 BUSINESS ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2168818900 MAIL ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BROWN JIM STORES INC DATE OF NAME CHANGE: 19600201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>BEARINGS, INC. 10-Q <TEXT> <PAGE> 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 1995 ---------------------------------------------- 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 1-2299 ---------------- BEARINGS, INC. - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0117420 - ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3600 Euclid Avenue, Cleveland, Ohio 44115 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 881-2838 ------------------------ None - ----------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Shares of common stock outstanding on December 31, 1995 11,848,205 --------------------------------------- (No par Value) <PAGE> 2 BEARINGS, INC. -------------- INDEX - ----------------------------------------------------------------------------- Page No. Part I: FINANCIAL INFORMATION Item 1: Financial Statements Statements of Consolidated Income - Three Months and Six Months Ended December 31, 1995 and 1994 2 Consolidated Balance Sheets - December 31, 1995 and June 30, 1995 3 Statements of Consolidated Cash Flows Six Months Ended December 31, 1995 and 1994 4 Statements of Consolidated Shareholders' Equity - Six Months Ended December 31, 1995 and Year Ended June 30, 1995 5 Notes to Consolidated Financial Statements 6 - 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Part II: OTHER INFORMATION Item 1: Legal Proceedings 13 - 14 Item 4: Submission of Matters to a Vote of Security Holders 14 Item 6: Exhibits and Reports on Form 8-K 14 - 16 Signatures 17 <PAGE> 3 PART I: FINANCIAL INFORMATION ITEM I: Financial Statements BEARINGS, INC. AND SUBSIDIARIES ------------------------------- STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1995 1994 1995 1994 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net Sales $ 271,927 $ 249,906 $ 545,382 $ 497,511 ----------- ------------ ------------ ------------ Cost and Expenses Cost of sales 201,099 186,723 405,276 370,717 Selling, distribution and administrative 59,680 55,581 119,253 112,438 ------------ ------------ ------------ ------------ 260,779 242,304 524,529 483,155 ------------ ------------ ------------ ------------ Operating Income 11,148 7,602 20,853 14,356 ------------ ------------ ------------ ------------ Interest Interest expense 2,394 1,875 4,453 3,530 Interest income (78) (54) (123) (160) ------------ ------------ ------------ ------------ 2,316 1,821 4,330 3,370 ------------ ------------ ------------ ------------ Income Before Income Taxes 8,832 5,781 16,523 10,986 ------------ ------------ ------------ ------------ Income Taxes Federal 3,063 1,962 5,742 3,716 State and local 746 466 1,374 898 ------------ ------------ ------------ ------------ 3,809 2,428 7,116 4,614 ------------ ------------ ------------ ------------ Net Income $ 5,023 $ 3,353 $ 9,407 $ 6,372 ============ ============ ============ ============ Net Income per share $ 0.42 $ 0.29 $ 0.80 $ 0.56 ============ ============ ============ ============ Cash dividends per common share $ 0.14 $ 0.12 $ 0.26 $ 0.23 ============ ============ ============ ============ </TABLE> See notes to consolidated financial statements. 2 <PAGE> 4 BEARINGS, INC. AND SUBSIDIARIES ------------------------------- CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> December 31 June 30 1995 1995 ------------ -------------- (Unaudited) Assets -------- <S> <C> <C> Current assets Cash and temporary investments $ 7,025 $ 4,789 Accounts receivable, less allowance of $3,100 and $2,300 140,654 145,680 Inventories (at LIFO) 140,283 112,596 Other current assets 2,478 2,307 ---------- ---------- Total current assets 290,440 265,372 ---------- ---------- Property - at cost Land 11,680 11,783 Buildings 58,182 57,365 Equipment 71,623 68,926 ---------- ---------- 141,485 138,074 Less accumulated depreciation 61,918 58,802 ---------- ---------- Property - net 79,567 79,272 ---------- ---------- Other assets 20,263 14,587 ---------- ---------- TOTAL ASSETS $ 390,270 $ 359,231 ========== ========== Liabilities and Shareholders' Equity -------------------------------------- Current liabilities Notes payable $ 45,095 $ 18,575 Current portion of long-term debt 11,429 5,714 Accounts payable 51,226 53,722 Compensation and related benefits 16,992 18,248 Other accrued liabilities 14,375 15,558 ---------- ---------- Total current liabilities 139,117 111,817 Long-term debt 68,571 74,286 Deferred income taxes 918 918 Other liabilities 8,825 6,809 ---------- ---------- TOTAL LIABILITIES 217,431 193,830 ---------- ---------- Shareholders' Equity Preferred Stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 30,000 shares authorized; 13,954 shares issued 10,000 10,000 Additional paid-in capital 12,389 11,311 Income retained for use in the business 183,738 177,402 Less 2,106 and 2,266 treasury shares - at cost (27,753) (29,253) Less shares held in trust for deferred compensation plans (3,119) (1,426) Less unearned restricted common stock compensation (2,416) (2,633) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 172,839 165,401 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 390,270 $ 359,231 ========== ========== </TABLE> See notes to consolidated financial statements. 3 <PAGE> 5 BEARINGS, INC. AND SUBSIDIARIES ------------------------------- STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in thousands) <TABLE> <CAPTION> Six Months Ended December 31 ------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows from Operating Activities Net income $ 9,407 $ 6,372 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 6,885 6,654 Provision for losses on accounts receivable 1,477 640 Gain on sale of property (629) (104) Amortization of restricted common stock compensation and goodwill 455 249 Treasury shares contributed to employee benefit plans 1,821 1,429 Changes in current assets and liabilities, net of effects from acquisition of businesses: Accounts receivable 4,560 (1,750) Inventories (25,920) (22,839) Other current assets (156) 309 Accounts payable and accrued expenses (4,687) 11,517 Other - net 920 920 - ------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) Operating Activities (5,867) 3,397 - ------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Property purchases (7,768) (3,612) Proceeds from property sales 1,787 697 Acquisition of businesses, less cash acquired (4,253) 0 Other (4,917) (1,002) - ------------------------------------------------------------------------------------------------------ Net Cash used in Investing Activities (15,151) (3,917) - ------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net borrowings under line-of-credit agreements 26,520 (2,920) Exercise of stock options 1,112 3,849 Dividends paid (3,071) (2,604) Purchase of treasury shares (1,307) (3,823) - ------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) Financing Activities 23,254 (5,498) - ------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and temporary investments 2,236 (6,018) Cash and temporary investments at beginning of period 4,789 10,935 - ------------------------------------------------------------------------------------------------------ Cash and Temporary Investments at End of Period $ 7,025 $ 4,917 ====================================================================================================== Supplemental Cash Flow Information Cash paid during the period for: Income taxes $ 8,766 $ 6,194 Interest $ 3,998 $ 4,590 See notes to consolidated financial statements. </TABLE> 4 <PAGE> 6 <TABLE> BEARINGS, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY For the Six Months Ended December 31, 1995 (Unaudited) and Year Ended June 30, 1995 (Amounts in thousands) <CAPTION> Income Shares of Additional Retained Treasury Common Stock Common Paid-in for Use in Shares Outstanding Stock Capital the Business - at Cost - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at July 1, 1994 11,319 $10,000 $6,962 $165,807 ($32,278) Net income 16,909 Cash dividends - $.47 per share (5,397) Purchase of common stock for treasury (180) (3,874) Treasury shares issued for: 401-(k) Savings Plan contribution 140 1,124 1,788 Exercise of stock options 225 1,565 2,789 Restricted common stock awards 138 1,232 1,727 Deferred compensation plans 46 428 595 Amortization of restricted common stock compensation Other 83 - ----------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 11,688 10,000 11,311 177,402 (29,253) Net income 9,407 Cash dividends - $.26 per share (3,071) Purchase of common stock for treasury (55) (1,307) Treasury shares issued for: Retirement Savings Plan contribution 80 806 1,015 Exercise of stock options 93 (114) 1,226 Deferred compensation plans 41 373 547 Restricted stock awards 1 13 19 Amortization of restricted common stock compensation Other - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 11,848 $10,000 $12,389 $183,738 ($27,753) ======================================================================================================================= </TABLE> See notes to consolidated financial statements. <TABLE> <CAPTION> Shares Held in Unearned Trust for Restricted Total Deferred Common Stock Shareholders' Compensation Plans Compensation Equity <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------- Balance at July 1, 1994 $150,491 Net income 16,909 Cash dividends - $.47 per share (5,397) Purchase of common stock for treasury (3,874) Treasury shares issued for: 401-(k) Savings Plan contribution 2,912 Exercise of stock options 4,354 Restricted common stock awards ($2,959) Deferred compensation plans ($1,023) Amortization of restricted common stock compensation 326 326 Other (403) (320) - ------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 (1,426) (2,633) 165,401 Net income 9,407 Cash dividends - $.26 per share (3,071) Purchase of common stock for treasury (1,307) Treasury shares issued for: Retirement Savings Plan contribution 1,821 Exercise of stock options 1,112 Deferred compensation plans (920) Restricted stock awards (32) Amortization of restricted common stock compensation 249 249 Other (773) (773) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 ($3,119) ($2,416) $172,839 ============================================================================================================= </TABLE> <PAGE> 7 BEARINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) - ------------------------------------------------------------------------------ 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of December 31, 1995 and June 30, 1995, and the results of operations for the three months and six months ended December 31, 1995 and 1994, and cash flows for the six months ended December 31, 1995 and 1994. The results of operations for the three and six month periods ended December 31, 1995 are not necessarily indicative of the results to be expected for the fiscal year. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are made based on the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. 2. NET INCOME PER SHARE Net income per share was computed using the weighted average number of common shares outstanding for the period. All share and per share data have been restated to reflect a three for two stock split effective on December 4, 1995. Average shares outstanding for the computation of net income per share were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1995 1994 1995 1994 ------------------ ---------------- <S> <C> <C> <C> 11,821 11,562 11,771 11,463 </TABLE> 6 <PAGE> 8 BEARINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) - ------------------------------------------------------------------------------- 3. BUSINESS COMBINATIONS During the quarter ended September 30, 1995 the Company acquired the assets of two distributors of drive products and rubber products, for a total of $4,328. The acquisitions of these businesses were accounted for as purchases and their results of operations are included in the accompanying consolidated financial statements from their respective acquisition dates. Results of operations for these acquisitions are not material for all periods presented. Goodwill recognized in connection with these combinations is being amortized over 15 years. 4. LONG-TERM COMMITMENT In October 1995, Prudential Insurance Company of America committed to provide funding to the Cleveland-Cuyahoga County Port Authority (the Port) in connection with the Port's construction of the Company's new headquarters building in Cleveland, Ohio. The Company would be obligated for lease payments to the Port under this commitment. Alternatively, if the proceeds, totalling $15,655, are not used by the Port for construction, the Company may utilize such proceeds under a separate financing agreement for other corporate purposes or cancel as it deems appropriate. 5. RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which the Company will be required to adopt for the fiscal year ending June 30, 1997. As permitted by SFAS 123, the Company does not intend to change its method of accounting for stock-based compensation. The Company has not yet determined the pro forma disclosures for employee awards granted in the fiscal year ending June 30, 1996, which will be presented in the notes to financial statements for the year ending June 30, 1997. 7 <PAGE> 9 BEARINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) - ------------------------------------------------------------------------------- 6. RETIREMENT PLAN MERGER On July 1, 1995, The Bearings, Inc. Employees' Profit-Sharing Trust was merged into The Bearings, Inc 401(k) Savings Plan. The merged plan is known as The Bearings, Inc. Retirement Savings Plan. 7. SUBSEQUENT EVENT On February 9, 1996 the Company exchanged 486 shares of Bearings, Inc. common stock for Engineered Sales, Inc., a distributor of hydraulic, pneumatic and electro-hydraulic components, systems and related fluid power engineering services. The transaction is expected to be accounted for as a pooling of interests and is not expected to have a material effect on the Company's operating results. 8 <PAGE> 10 BEARINGS, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- The following is Management's discussion and analysis of certain significant factors which have affected the Company's: (1) financial condition at December 31, 1995 and June 30, 1995 and (2) results of operations during the periods included in the accompanying Statements of Consolidated Income and Consolidated Cash Flows. FINANCIAL CONDITION Liquidity and Working Capital - ----------------------------- Cash used in operating activities was $5.9 million in the six months ended December 31, 1995. This compares to $3.4 million of cash provided by operating activities in the same period a year ago. Cash flow from operations depends primarily upon generating operating income and controlling the investment in inventory and receivables. The Company has continuing programs to monitor and control these investments. During the six month period ended December 31, 1995 inventories increased approximately $25.9 million to service increased sales volume and to improve customer fill rates. Accounts receivable decreased by $4.6 million. Working capital at December 31, 1995 was $151.3 million compared to $153.6 million at June 30, 1995. The current ratio was 2.1 at December 31, 1995 and 2.4 at June 30, 1995. This decrease is primarily due to a portion of long-term debt becoming current and an increase in short-term notes payable from the increase in inventory. Capital Resources - ----------------- Capital resources are obtained from income retained in the business, borrowings under the Company's lines of credit and long-term debt. Average combined short-term and long-term borrowing was $106.8 million for the six months ended December 31, 1995 and $97.9 million during the year ended June 30, 1995. The average effective interest rate on the short-term borrowings for the six months ended December 31, 1995 increased to 6.55% from an average rate of 5.9% for the year ended June 30, 1995 due to higher prevailing short-term interest rates. The Company has $110 million of short-term lines of credit with commercial banks which provide for payment of interest at various interest rate options, none of which are in excess of the banks' prime rate. The Company had $45.1 million of borrowings under these short-term bank lines of credit at December 31, 1995. Unused bank lines of credit of $64.9 million are available for future short-term financing needs. 9 <PAGE> 11 BEARINGS, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Management expects that capital resources provided from operations, available lines of credit and long-term debt will be sufficient to finance normal working capital needs and capital expenditure programs. Management also believes that additional long-term debt and line of credit financing could be obtained if desired. RESULTS OF OPERATIONS - --------------------- A summary of the period-to-period changes in principal items included in the statements of consolidated income follows: Increase (Decrease) (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1995 and 1994 1995 and 1994 Percent Percent Amount Change Amount Change ------ ------ ------ ------ <S> <C> <C> <C> <C> Net sales $22,021 8.8% $47,871 9.6% Cost of sales 14,376 7.7% 34,559 9.3% Selling, distribution and administrative expenses 4,099 7.4% 6,815 6.1% Operating income 3,546 46.6% 6,497 45.3% Interest expense -net 495 27.2% 960 28.5% Income before income taxes 3,051 52.8% 5,537 50.4% Income taxes 1,381 56.9% 2,502 54.2% Net income 1,670 49.8% 3,035 47.6% </TABLE> 10 <PAGE> 12 BEARINGS, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - ------------------------------------------------------------------------------- Three Months ended December 31, 1995 and 1994 - --------------------------------------------- Increases in sales for the quarter were primarily due to volume and price increases. Gross profit, as a percentage of sales, increased from 25.3% to 26.0%. Selling, distribution and administrative expenses increased by 7.4% from higher compensation expense due to an increase in the number of associates from recent acquisitions and higher bad debt expense. Interest expense-net for the quarter increased by 27.2% from higher short-term interest rates, increased average borrowing and the amortized expense of terminating an interest rate swap agreement. During fiscal 1995, the Company terminated a two year interest rate swap agreement initiated in fiscal 1994. As of December 31, 1995 deferred interest cost of $.3 million from this termination remains to be amortized to interest expense over the remainder of the fiscal year ending June 30, 1996. The Company has no outstanding swap agreements or other derivative financial instruments at December 31, 1995. Income taxes as a percentage of income before taxes was 43.1% in the three months ended December 31, 1995 and 42.0% in the three months ended December 31, 1994. As a result of the above factors, net income increased by 49.8% compared to the same quarter of last year. Income per share increased by 44.8% due to an increase in income and the increase in the average shares outstanding. Six Months Ended December 31, 1995 and 1994 - ------------------------------------------- Increases in sales for the period were primarily due to volume and price increases. Gross profit, as a percentage of sales, increased from 25.5% to 25.7%. Selling, distribution and administrative expenses increased by 6.1% from higher bad debts, higher compensation expense and hospitalization costs from an increase in the number of associates due to recent acquisitions. Interest expense-net for the period increased by 28.5% from higher short-term interest rates, increased average borrowing and the amortized expense of terminating an interest rate swap agreement. During fiscal 1995, the Company terminated a two year interest rate swap agreement initiated in fiscal 1994. As of December 31, 1995 deferred interest cost of $.3 million from this termination remains to be amortized to interest expense over the remainder of the fiscal year ending June 30, 1996. The Company has no outstanding swap agreements or other derivative financial instruments at December 31, 1995. 11 <PAGE> 13 BEARINGS, INC. AND SUBSIDIARIES ------------------------------- ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - ------------------------------------------------------------------------------- Income taxes as a percentage of income before taxes was 43.1% in the six months ended December 31, 1995 and 42.0% in the six months ended December 31, 1994. As a result of the above factors, net income increased by 47.6% compared to the same period last year. Income per share increased by 42.9% due to an increase in income and the increase in the average shares outstanding. 12 <PAGE> 14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. ------------------ (a) The Company incorporates by reference herein the description of the cases captioned SAMMIE ADKINS, ET AL. V. A. P. GREEN INDUSTRIES, INC., ET AL., Summit County, Ohio, Court of Common Pleas, Case No. ACV 88-7-2398 (and related cases) found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 30, 1995. In December 1995 an additional case was filed in the same court naming Bearings, Inc. as a defendant. Notwithstanding possible indemnification from suppliers and insurance, the Company believes, based on circumstances presently known, that these cases are not material to its business or its financial condition. (b) The Company incorporates by reference herein the description of the cases captioned IN RE: ROBERT LEE BICKHAM, ET AL. V. METROPOLITAN LIFE INSURANCE CO., ET AL., 22nd Judicial District Court for the Parish of Washington, State of Louisiana, Case No. 70,760-E; and IDA MAE WILLIAMS, ET AL. V. METROPOLITAN LIFE INSURANCE COMPANY, ET AL., 22nd Judicial District Court for the Parish of Washington, State of Louisiana, Case No. 72,986-F, found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 30, 1995. Notwithstanding potential indemnification from suppliers and insurance, the Company believes, based on circumstances presently known, that these cases are not material to its business or its financial condition. (c) The Company also incorporates by reference herein the description of the case captioned KING BEARING, INC. V. CARYL EDMUND ORANGES, ET AL., Superior Court of the State of California, County of Orange, Case No. 53-42-31 found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 13 <PAGE> 15 30, 1995. The case is now pending in the California Court of Appeal. The Company believes that this case will have no material adverse effect on its business or financial condition. (d) Bearings, Inc. and/or one of its subsidiaries is a defendant in several employment-related lawsuits. Based on circumstances presently known, the Company believes that these cases are not material to its business or its financial condition. ITEM 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- At the Annual Meeting of Shareholders of the Company held on October 17, 1995, the Shareholders (i) reelected William G. Bares, Russel B. Every and John J. Kahl as Directors of Class II for a term expiring in 1998, and (ii) ratified the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending June 30, 1996. Substantially the same information required by this Item 4 was previously reported in Part II, Item 5 "Other Information" of the Company's Form 10-Q for the quarter ended September 30, 1995. ITEM 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. --------- Exhibit No. Description ----------- ----------- 4(a) Amended and Restated Articles of Incorporation of Bearings, Inc., filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4(a) to the Bearings, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 14 <PAGE> 16 4(b) Code of Regulations of Bearings, Inc., adopted September 6, 1988 (filed as Exhibit 4(b) to the Bearings, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(c) Certificate of Amendment of Amended and Restated Articles of Incorporation of Bearings, Inc. filed with the Ohio Secretary of State on October 27, 1988 (filed as Exhibit 4(c) to the Bearings, Inc. Form 10-Q for the Quarter Ended September 30, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(d) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4 to the Bearings, Inc. Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and incorporated here by reference). 4(e) Certificate of Amendment of Amended and Restated Articles of Incorporation of Bearings, Inc. filed with the Ohio Secretary of State on October 17, 1990 (filed as Exhibit 4(e) to the Bearings, Inc. Form 10-Q for the quarter ended September 30, 1990, SEC File No. 1-2299, and incorporated here by reference). 4(f) $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between Bearings, Inc. and The Prudential Insurance Company of America (filed as Exhibit 4(f) to the Bearings, Inc. Form 10-Q for the quarter ended September 30, 1992, SEC File No. 1-2299, and incorporated here by reference). 15 <PAGE> 17 10(a) Form of Executive Severance Agreement between the Company and 7 executive officers (filed as Exhibit 10(b) to the Bearings, Inc. Annual Report on Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and incorporated here by reference), together with schedule pursuant to Instruction 2 of Item 601(a) of Regulation S-K identifying the officers and setting forth the material details in which the agreements differ from the form of agreement that is filed. 10(b) Form of amendment dated January 17, 1991 amending the Executive Severance Agreements filed as Exhibit 10(b) to the Bearings, Inc. Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (filed as Exhibit 19(a) to the Bearings, Inc. Form 10-Q for the quarter ended December 31, 1990, SEC File No. 1-2299, and incorporated here by reference). The amendment is applicable to all executive officers named in the schedule filed as part of Exhibit 10(a) of this Report and that schedule is incorporated here by reference. 10(c) Bearings, Inc. Supplemental Defined Contribution Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8 (Registration No. 33-66509) filed on December 29, 1995, and incorporated here by reference). 11 Computation of Net Income Per Share. 27 Financial Data Schedule. (b) The Company did not file, nor was it required to file, a Report on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1995. 16 <PAGE> 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BEARINGS, INC. (Company) Date: February 13, 1996 By: /s/ John C. Robinson -------------------------------- John C. Robinson President & Chief Operating Officer Date: February 13, 1996 By: /s/ John R. Whitten -------------------------------- John R. Whitten Vice President-Finance & Treasurer 17 <PAGE> 19 BEARINGS, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1995 Exhibit No. Description Page - ----------- ----------- ---- 4(a) Amended and Restated Articles of Incorporation of Bearings, Inc., filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4(a) to the Bearings, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(b) Code of Regulations of Bearings, Inc., adopted September 6, 1988 (filed as Exhibit 4(b) to the Bearings, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(c) Certificate of Amendment of Amended and Restated Articles of Incorporation of Bearings, Inc., filed with the Ohio Secretary of State on October 27, 1988 (filed as Exhibit 4(c) to the Bearings, Inc. Form 10-Q for the Quarter Ended September 30, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(d) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) <PAGE> 20 filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4 to the Bearings, Inc. Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and incorporated here by reference). 4(e) Certificate of Amendment of Amended and Restated Articles of Incorporation of Bearings, Inc. filed with the Ohio Secretary of State on October 17, 1990 (filed as Exhibit 4(e) to the Bearings, Inc. Form 10-Q for the quarter ended September 30, 1990, SEC File No. 1-2299, and incorporated here by reference). 4(f) $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between Bearings, Inc. and The Prudential Insurance Company of America (filed as Exhibit 4(f) to the Bearings, Inc. Form 10-Q for the quarter ended September 30, 1992, SEC File No. 1-2299, and incorporated here by reference). 10(a) Form of Executive Severance Agreement Attached between the Company and 7 executive officers (filed as Exhibit 10(b) to the Bearings, Inc. Annual Report on Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and <PAGE> 21 incorporated here by reference), together with schedule pursuant to Instruction 2 of Item 601(a) of Regulation S-K identifying the officers and setting forth the material details in which the agreements differ from the form of agreement that is filed. 10(b) Form of amendment dated January 17, 1991 amending the Executive Severance Agreements filed as Exhibit 10(b) to the Bearings, Inc. Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (filed as Exhibit 19(a) to the Bearings, Inc. Form 10-Q for the quarter ended December 31, 1990, SEC File No. 1-2299, and incorporated here by reference). The amendment is applicable to all executive officers named in the schedule filed as part of Exhibit 10(a) of this Report and that schedule is incorporated here by reference. 10(c) Bearings, Inc. Supplemental Defined Contribution Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8 (Registration No. 33-66509) filed on December 29, 1995, and incorporated here by reference). <PAGE> 22 11 Computation of Net Income Per Attached Share. 27 Financial Data Schedule. Attached </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.A <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10(A) <TEXT> <PAGE> 1 EXHIBIT 10(a) BEARINGS, INC. FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1995 SCHEDULE The Executive Severance Agreements ("Agreements") presently in effect for seven (7) executive officers are substantially identical in all material respects. This revised schedule is included pursuant to Instruction 2 of Item 601(a) of Regulation S-K for the purpose of setting forth the material details in which the specific Agreements differ from the form of Agreement filed as Exhibit 10(b) to the Bearings, Inc. Form 10-K for the fiscal year ended June 30, 1989: <TABLE> <CAPTION> "Base Compensation" Multiple Pursuant Name Title to Paragraph 3(b) - ---- ----- ----------------- <S> <C> <C> J. C. Dannemiller Chairman & Chief Three (3) Executive Officer J. C. Robinson President & Chief Three (3) Operating Officer F. A. Martins Vice President- Two (2) Sales & Marketing R. C. Shaw Vice President- Two (2) Communications & Public Relations R. C. Stinson Vice President- Two (2) Administration, Human Resources, General Counsel & Secretary J. R. Whitten Vice President- Two (2) Finance & Treasurer M. O. Eisele Controller Two (2) </TABLE> <PAGE> 2 The continuation of employee benefit plans, programs and arrangements set forth in Paragraph 4 is three (3) years for Messrs. Dannemiller and Robinson, and two (2) years for the other executive officers listed. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 11 <TEXT> <PAGE> 1 EXHIBIT 11 BEARINGS, INC. AND SUBSIDIARIES ------------------------------- Computation of Net Income Per Share (Unaudited) (Thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1995 1994 1995 1994 --------- --------- --------- --------- <S> <C> <C> <C> <C> Average Shares Outstanding (B) ------------------------------ 1. Average common shares --------- -------- -------- -------- outstanding 11,821 11,562 11,771 11,463 2. Net additional shares outstanding assuming stock options exercised and proceeds used to purchase treasury stock 294 212 297 218 --------- -------- -------- -------- 3. Adjusted average common shares outstanding for fully diluted computation 12,115 11,774 12,068 11,681 ========= ======== ======== ======== Net Income ---------- 4. Net income as reported in statements of consolidated income $ 5,023 $ 3,353 $ 9,407 $ 6,372 ========= ======== ======== ======== Net Income Per Share (B) ------------------------ 5. Net income per average common share outstanding (4/1) $ 0.42 $ 0.29 $ 0.80 $ 0.56 ========= ======== ======== ======== 6. Net income per common share on a fully dilutive basis (4/3) $ 0.41 (A) $ 0.28 (A) $ 0.78 (A) $ 0.55 (A) ========= ======== ======== ======== </TABLE> (A) Fully diluted net income per share is not presented as the dilutive effect is less than 3%. (B) All share and per share data have been restated to reflect the three for two stock split effective December 4, 1995. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-START> JUL-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 7,025 <SECURITIES> 0 <RECEIVABLES> 143,754 <ALLOWANCES> 3,100 <INVENTORY> 140,283 <CURRENT-ASSETS> 290,440 <PP&E> 141,485 <DEPRECIATION> 61,918 <TOTAL-ASSETS> 390,270 <CURRENT-LIABILITIES> 139,117 <BONDS> 0 <COMMON> 10,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 162,839 <TOTAL-LIABILITY-AND-EQUITY> 390,270 <SALES> 545,382 <TOTAL-REVENUES> 545,382 <CGS> 405,276 <TOTAL-COSTS> 405,276 <OTHER-EXPENSES> 117,776 <LOSS-PROVISION> 1,477 <INTEREST-EXPENSE> 4,330 <INCOME-PRETAX> 16,523 <INCOME-TAX> 7,116 <INCOME-CONTINUING> 9,407 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 9,407 <EPS-PRIMARY> .80 <EPS-DILUTED> .78 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

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AMAT

https://www.sec.gov/Archives/edgar/data/6951/0000891618-96-000124.txt

-----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, FXVPJLePK+waOGO/HNlySRq+xqy0wVcaB+tSdgQNkcrIw5hNP7drrG+MB52P5G6S sUuSw1VHtNDMo0+NDYp9dw== <SEC-DOCUMENT>0000891618-96-000124.txt : 19960305 <SEC-HEADER>0000891618-96-000124.hdr.sgml : 19960305 ACCESSION NUMBER: 0000891618-96-000124 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960304 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MATERIALS INC /DE CENTRAL INDEX KEY: 0000006951 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 941655526 STATE OF INCORPORATION: DE FISCAL YEAR END: 1026 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06920 FILM NUMBER: 96531082 BUSINESS ADDRESS: STREET 1: 3050 BOWERS AVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4087275555 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MATERIALS TECHNOLOGY INC DATE OF NAME CHANGE: 19730319 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR PERIOD ENDED JANUARY 28, 1996 <TEXT> <PAGE> 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 JANUARY 28, 1996 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 0-6920 ------- APPLIED MATERIALS, INC. (Exact name of registrant as specified in its charter) Delaware 94-1655526 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3050 Bowers Avenue, Santa Clara, California 95054-3299 - -------------------------------------------------------------------------------- Address of principal executive offices (Zip Code) Registrant's telephone number, including area code (408) 727-5555 ------------------------ 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 . Number of shares outstanding of the issuer's common stock as of January 28, 1996: 179,442,000 ================================================================================ 1 <PAGE> 2 PART I. FINANCIAL INFORMATION APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> ======================================================================================================================== Three Months Ended Jan. 28, Jan. 29, (In thousands, except per share data) 1996 1995 ======================================================================================================================== <S> <C> <C> Net sales $ 1,040,580 $ 506,108 Costs and expenses: Cost of products sold 543,780 268,096 Research, development and engineering 110,352 59,996 Marketing and selling 77,282 44,145 General and administrative 49,555 31,818 ------------- ------------- Income from operations 259,611 102,053 Interest expense 5,168 5,582 Interest income 9,597 4,772 ------------- ------------- Income from consolidated companies before taxes 264,040 101,243 Provision for income taxes 92,414 35,435 ------------- ------------- Income from consolidated companies 171,626 65,808 Equity in net income/loss of joint venture - - ------------- ------------- Net income $ 171,626 $ 65,808 ------------- ------------- Earnings per share $ 0.93 $ 0.38 ------------- ------------- Average common shares and equivalents 184,001 172,616 ======================================================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 2 <PAGE> 3 APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS* <TABLE> <CAPTION> ================================================================================================================ Jan. 28, Oct. 29, (In thousands) 1996 1995 ================================================================================================================ <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 266,880 $ 285,845 Short-term investments 545,725 483,487 Accounts receivable, net 932,297 817,730 Inventories 479,662 427,413 Deferred income taxes 196,783 198,888 Other current assets 83,330 98,250 ------------- ------------- Total current assets 2,504,677 2,311,613 Property, plant and equipment, net 713,730 630,746 Other assets 24,104 23,020 ------------- ------------- Total assets $ 3,242,511 $ 2,965,379 ------------- ------------- LIABILITIES Current liabilities: AND Notes payable $ 58,844 $ 61,748 STOCKHOLDERS' Current portion of long-term debt 22,492 21,064 EQUITY Accounts payable and accrued expenses 757,063 659,572 Income taxes payable 131,174 119,347 ------------- ------------- Total current liabilities 969,573 861,731 Long-term debt 279,576 279,807 Deferred income taxes and other non-current obligations 50,162 40,338 ------------- ------------- Total liabilities 1,299,311 1,181,876 ------------- ------------- Stockholders' equity: Common stock 1,794 1,792 Additional paid-in capital 753,048 760,057 Retained earnings 1,171,605 999,979 Cumulative translation adjustments 16,753 21,675 ------------- ------------- Total stockholders' equity 1,943,200 1,783,503 ------------- ------------- Total liabilities and stockholders' equity $ 3,242,511 $ 2,965,379 ================================================================================================================ </TABLE> *Amounts as of January 28, 1996 are unaudited. Amounts as of October 29, 1995 were obtained from the October 29, 1995 audited financial statements. See accompanying notes to consolidated condensed financial statements. 3 <PAGE> 4 APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> ======================================================================================================================== Three Months Ended Jan. 28, Jan. 29, (In thousands) 1996 1995 ======================================================================================================================== <S> <C> <C> Cash flows from operating activities: Net income $ 171,626 $ 65,808 Adjustments required to reconcile net income to cash provided by operations: Deferred taxes 258 (677) Depreciation and amortization 29,724 15,604 Equity in net income/loss of joint venture - - Changes in assets and liabilities: Accounts receivable (127,742) (92,535) Inventories (55,111) (28,561) Other current assets 14,692 180 Other assets (1,399) (174) Accounts payable and accrued expenses 108,956 29,734 Income taxes payable 12,304 4,992 Other long-term liabilities 11,560 4,617 ------------- ------------- Cash provided by (used for) operations 164,868 (1,012) ------------- -------------- Cash flows from investing activities: Capital expenditures, net (117,746) (31,664) Proceeds from sales of short-term investments 104,962 62,721 Purchases of short-term investments (167,200) (13,426) ------------- ------------- Cash provided by (used for) investing (179,984) 17,631 -------------- ------------- Cash flows from financing activities: Short-term debt activity, net (574) 14,376 Long-term debt activity, net 3,660 (1,049) Common stock transactions, net (7,007) 606 -------------- ------------- Cash provided by (used for) financing (3,921) 13,933 -------------- ------------- Effect of exchange rate changes on cash 72 (303) ------------- ------------- Increase (decrease) in cash and cash equivalents (18,965) 30,249 Cash and cash equivalents at beginning of period 285,845 160,320 ------------- ------------- Cash and cash equivalents at end of period $ 266,880 $ 190,569 ======================================================================================================================== </TABLE> For the three months ended January 28, 1996, cash payments for interest and income taxes were $897 and $61,351, respectively, and for the three months ended January 29, 1995, cash payments for interest and income taxes were $1,373 and $29,458, respectively. See accompanying notes to consolidated condensed financial statements. 4 <PAGE> 5 APPLIED MATERIALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED JANUARY 28, 1996 (IN THOUSANDS) 1) Basis of Presentation In the opinion of management, the unaudited consolidated interim financial statements included herein have been prepared on a consistent basis with the October 29, 1995 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. Certain amounts in the consolidated statement of cash flows for the quarter ended January 29, 1995 have been reclassified to conform to the current quarter's presentation. 2) Earnings Per Share Earnings per share has been computed using the weighted average number of common shares and common equivalent shares from dilutive stock options. 3) Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first- out (FIFO) basis. The components of inventories are as follows: <TABLE> <CAPTION> January 28, 1996 October 29, 1995 ---------------- ---------------- <S> <C> <C> Customer service spares $ 157,286 $ 131,411 Systems raw materials 125,834 118,627 Work-in-process 164,903 139,537 Finished goods 31,639 37,838 ----------- ----------- $ 479,662 $ 427,413 =========== =========== </TABLE> 4) Accounts Payable and Accrued Expenses The components of accounts payable and accrued expenses are as follows: <TABLE> <CAPTION> January 28, 1996 October 29, 1995 ---------------- ---------------- <S> <C> <C> Accounts payable $ 236,965 $ 244,014 Compensation and employee benefits 97,171 109,388 Installation and warranty 158,868 133,035 Other 264,059 173,135 ----------- ----------- $ 757,063 $ 659,572 =========== =========== </TABLE> 5) Stockholders' Equity During the first quarter of fiscal 1996, the Company repurchased 200,000 shares of its common stock at an average price of $37.76 per share for a total of $7.6 million. These shares will be used in conjunction with the Stock Purchase Plan For Offshore Employees. 5 <PAGE> 6 APPLIED MATERIALS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS =============================================================================== RESULTS OF OPERATIONS The Company's net sales in the first quarter of fiscal 1996 of $1,041 million increased 106 percent from first quarter of fiscal 1995 net sales of $506 million. Record net sales resulted from increased demand for the Company's advanced wafer process technology, multi-chamber equipment and installed base support services. The increased demand for the Company's multi-chamber equipment reflects strong demand for advanced semiconductor devices and the industry's continued investment in systems capable of performing processes required for smaller device geometries, as well as the complex multi-level metal structures of the most advanced semiconductor devices. The increase in installed base support services revenue is attributable to a larger installed systems base and our global customers' requirements for high reliability and uptime specifications. Sales increased in the first quarter of fiscal 1996 in all regions and across all of the Company's product groups when compared to sales in the first quarter of 1995. These increases reflect the continuing globalization of the semiconductor industry and our customers' needs to increase capacity to meet the demand resulting from the more pervasive use of semiconductors in consumer products. Sales to North American customers comprised 38 percent of the Company's total net sales in the first quarter of fiscal 1996, versus 42 percent for the same period in fiscal 1995. Sales in Japan decreased to 21 percent in the first quarter of fiscal 1996 from 25 percent in the first quarter of fiscal 1995; sales in Europe increased to 21 percent from 15 percent; sales in Asia-Pacific increased to 12 percent from 10 percent; and sales in Korea remained at 8 percent of the Company's total net sales. New orders of $1,329 million were received during the first quarter of fiscal 1996, an increase of 80 percent from first quarter of 1995 new orders of $740 million. New orders in North America, Japan and Asia-Pacific were 37, 29 and 18 percent, respectively, of the Company's total new orders in the first quarter of fiscal 1996, compared to 23, 19 and 15 percent in the comparable period of fiscal 1995. New orders in Korea were 6 percent in the first quarter of 1996 compared to 32 percent for the comparable prior year period. It is anticipated that new orders in Korea for the second quarter of fiscal 1996 will increase significantly. New orders remained relatively consistent for Europe at 10 percent compared to 11 percent in the comparable period of fiscal 1995. The global semiconductor equipment market remains strong, yet each region exhibits unique investment patterns causing regional order growth 6 <PAGE> 7 rates to vary from quarter to quarter. Backlog at January 28, 1996 was $1,768 million, versus $1,509 million at October 29, 1995. The Company's gross margin as a percentage of sales increased from 47 percent in the first quarter of fiscal 1995 to 48 percent in the first quarter of fiscal 1996. The improved margin is attributable to higher sales volumes and increased production efficiencies. Operating expenses as a percentage of sales improved to 23 percent for the first quarter of fiscal 1996, compared to 27 percent in the first quarter of fiscal 1995. This improvement resulted primarily from the Company's accelerated revenue growth coupled with its management of the growth of operating expenses. Significant operations of the Company are conducted in Japanese yen, British pounds sterling and other European currencies. Forward exchange contracts and options are purchased to hedge certain existing firm commitments and anticipated foreign currency denominated transactions over the next year. Gains and losses on hedge contracts are reported as a component of the related transaction. Because the impact of movements in currency exchange rates on foreign exchange contracts offsets the related impact on the underlying items being hedged, these financial instruments do not subject the company to speculative risk that would otherwise result from changes in currency exchange rates. To date, exchange gains and losses have not had a significant effect on the Company's results of operations. The Company's effective tax rate for the first quarter of fiscal 1996 was 35 percent, consistent with fiscal 1995. Management anticipates that a 35 percent effective tax rate will continue throughout fiscal 1996. 7 <PAGE> 8 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition at January 28, 1996 remained strong. Current assets exceeded current liabilities by 2.6 times, compared to 2.7 times at October 29, 1995. During the first quarter of fiscal 1996, the Company increased cash, cash equivalents and short-term investments by $43 million. Cash provided by operations since October 29, 1995 was $165 million, resulting primarily from net income and increases in accounts payable and accrued expenses, offset by increased inventory and accounts receivable levels. The increase in accounts receivable was primarily due to increased sales volumes and increases in collection time in North America, Japan and Korea. Other uses of cash included investments in facilities and capital equipment of $118 million. Capital expenditures are expected to approximate $550 million for fiscal 1996. This amount includes funds for the continuation and/or completion of facilities expansion and investments in demonstration and test equipment, information systems and other capital equipment. At January 28, 1996, the Company's principal sources of liquidity consisted of $813 million of cash, cash equivalents and short-term investments, $194 million of unissued notes registered under the Company's medium-term note program and $187 million of available U.S. and foreign credit facilities. The Company's liquidity is affected by many factors, some of which are based on the normal on-going operations of the business and others of which relate to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the liquidity provided by existing sources, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the remainder of the fiscal year. DISCLOSURE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 When used in this Management's Discussion and Analysis, the words "anticipate", "estimate" and similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, including those discussed in this document and in the Form 8-K filed on February 13, 1996 with the SEC, that could cause actual results to differ materially from those projected. 8 <PAGE> 9 PART II OTHER INFORMATION Item 1. Legal Proceedings In the first of two lawsuits filed by the Company, captioned Applied Materials Inc. v. Advanced Semiconductor Materials America, Inc., Epsilon Technology, Inc. (doing business as ASM Epitaxy) and Advanced Semiconductor Materials International N.V. (collectively "ASM") (case no. C-91-20061-RMW), Judge William Ingram of the United States District Court for the Northern District of California ruled on April 26, 1994 that ASM's Epsilon I epitaxial reactor infringed three of the Company's United States patents and issued an injunction against ASM's use and sale of the ASM Epsilon I in the United States. ASM has appealed the decision and the injunction has been stayed pending the appeal only as to ASM products offered for sale as of April 1994. The stay order requires that ASM pay a fee, as security for the Company's interest, for each Epsilon I system sold by ASM in the United States after the date of the injunction. Judge Ronald M. Whyte of the same Court ruled that proceedings to resolve the issues of damages, willful infringement and ASM's counterclaims, which had been bifurcated for separate trial, will also be stayed, pending the appeal of Judge Ingram's decision. Oral arguments regarding this appeal were completed on June 5, 1995, before the Court of Appeals for the Federal Circuit. The Company is awaiting the decision of the Court of Appeals. The trial of the Company's second patent infringement lawsuit against ASM, captioned Applied Materials Inc. v. ASM (case no. C-92-20643-RMW), was concluded before Judge Whyte in May 1995. On November 1, 1995, the Court issued its judgment holding that two of the Company's United States patents were valid and infringed by ASM's reduced pressure epitaxial reactors and stated that a permanent injunction will be entered. A hearing was held in February, 1996 to determine the scope of the injunction and whether the injunction will be stayed pending an appeal by ASM, if any. The Company is awaiting the decision of the Court. A separate lawsuit filed by ASM against the Company involving one patent relating to the Company's single wafer epitaxial product line, captioned ASM America Inc. v. Applied Materials Inc. (case no. C-93-20853-RMW), has been scheduled for trial in July, 1996. The case is proceeding through final discovery and pretrial preparation, and is the subject of three motions by the Company for summary judgment set for hearing in February and March 1996. A separate action severed from ASM's case, captioned ASM America Inc. v. Applied Materials Inc. (case no. C-95-20169-RWM), involves one United States patent which relates to the Company's Precision 5000 product line. Trial has been scheduled for October, 1996, 9 <PAGE> 10 and discovery is proceeding. In these cases, ASM seeks injunctive relief, damages and such other relief as the Court may find appropriate. Further, the Company has filed a Declaratory Judgment action against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting that an ASM United States patent be held invalid and not infringed by the Company's single wafer epitaxial product line. Discovery is proceeding, and no trial date has been set. On July 7, 1995, ASM filed a lawsuit, captioned ASM America Inc. v. Applied Materials Inc. (case no. C95-20586-RMW), concerning alleged infringement of a United States patent by susceptors in chemical vapor deposition chambers. Discovery has commenced and no trial date has been set. ASM filed a motion for summary judgment on one of its patents in this suit and a hearing on this motion is set for April, 1996. In September 1994, General Signal Corporation filed a lawsuit against the Company (case no. 94-461-JJF) in the United States District Court, District of Delaware. General Signal alleges that the Company infringes five of General Signal's United States patents by making, using, selling or offering for sale multi-chamber wafer fabrication equipment, including for example, the Precision 5000 series machines. General Signal seeks an injunction, multiple damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. This lawsuit is currently in discovery. A trial date has been set for January 20, 1997. In January 1995, the Company filed a lawsuit against Novellus Systems, Inc. in the United States District Court, Northern District of California (case no. C-95-0243-MMC). This lawsuit alleges that Novellus' Concept One, Concept Two, and Maxxus FTEOS systems infringe the Company's United States patent relating to the TEOS-based, plasma enhanced CVD process for silicon oxide deposition. The lawsuit seeks an injunction, multiple damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. Damages and counterclaims have been bifurcated for separate trial. A jury trial has been scheduled for September 1996, before Judge Charles A. Legge. On September 15, 1995, the Company filed another lawsuit against Novellus alleging that Novellus' newly announced blanket tungsten interconnect process infringes the Company's United States patent relating to a tungsten CVD process. The Company also sought a declaration that a Novellus United States patent for a gas purge mechanism is not infringed by the Company and/or is invalid. Novellus answered by denying the allegations and counterclaimed by alleging that the Company's plasma enhanced TEOS CVD systems infringe a Novellus United States patent concerning a gas debubbler mechanism. Novellus also filed a new lawsuit as a plaintiff before the same court which contains the same claims 10 <PAGE> 11 and patents as those stated in the Company's September 15 lawsuit. Discovery is beginning, and no trial date has been set. In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. Management believes that it is unlikely that the outcome of these lawsuits or of the patent infringement inquiries will have a material adverse effect on the Company's financial position or results of operations. Item 5. Other Information The ratio of earnings to fixed charges for the three months ended January 28, 1996 and January 29, 1995 and each of the five years in the period ended October 29, 1995 is as follows: <TABLE> <CAPTION> Three Months Ended --------------------------- January 28, January 29, Fiscal Year ---------- ---------- ------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> 23.33x 11.68x 21.25x 13.37x 7.61x 3.63x 3.02x ===== ===== ===== ===== ==== ==== ==== </TABLE> Item 6. Exhibits and Reports on Form 8-K a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K: 27.0 Financial Data Schedule: filed electronically b) Report on Form 8-K was filed on December 21, 1995. The report contains the Company's press release, dated November 28, 1995, with respect to its financial results for the period ended October 29, 1995. 11 <PAGE> 12 SIGNATURE 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. APPLIED MATERIALS, INC. March 1, 1996 By: \s\Gerald F. Taylor ------------------------------ Gerald F. Taylor Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: \s\Michael K. O'Farrell ------------------------------ Michael K. O'Farrell Corporate Controller (Principal Accounting Officer) 12 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JANUARY 28, 1996. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> YEAR <FISCAL-YEAR-END> OCT-27-1996 <PERIOD-END> JAN-28-1996 <CASH> 266,880 <SECURITIES> 545,725 <RECEIVABLES> 935,632 <ALLOWANCES> 3,335 <INVENTORY> 479,662 <CURRENT-ASSETS> 2,504,677 <PP&E> 965,040 <DEPRECIATION> 251,309 <TOTAL-ASSETS> 3,242,511 <CURRENT-LIABILITIES> 969,573 <BONDS> 302,068 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,794 <OTHER-SE> 1,941,406 <TOTAL-LIABILITY-AND-EQUITY> 3,242,511 <SALES> 1,040,580 <TOTAL-REVENUES> 1,040,580 <CGS> 543,780 <TOTAL-COSTS> 543,780 <OTHER-EXPENSES> 111,714 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 5,168 <INCOME-PRETAX> 264,040 <INCOME-TAX> 92,414 <INCOME-CONTINUING> 171,626 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 171,626 <EPS-PRIMARY> 0.93 <EPS-DILUTED> 0.93 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

ANDW

https://www.sec.gov/Archives/edgar/data/317093/0000317093-96-000003.txt

-----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, GkEo07N8wbYNHfc85Ci0ZYsmtrRxKb4Rj4WX+txZp5774yMfvMKyk1XjPmLUDPiB 2pzPKugbBCbf73Ug920NxQ== <SEC-DOCUMENT>0000317093-96-000003.txt : 19960213 <SEC-HEADER>0000317093-96-000003.hdr.sgml : 19960213 ACCESSION NUMBER: 0000317093-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDREW CORP CENTRAL INDEX KEY: 0000317093 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 362092797 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09514 FILM NUMBER: 96515991 BUSINESS ADDRESS: STREET 1: 10500 W 153RD ST CITY: ORLAND PARK STATE: IL ZIP: 60462 BUSINESS PHONE: 7083493300 MAIL ADDRESS: STREET 1: 10500 WEST 153RD ST CITY: ORLANDO PARK STATE: IL ZIP: 60462 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q (12-31-95) <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995. 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 0-9514 ANDREW CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 36-2092797 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 10500 W. 153RD STREET, ORLAND PARK, ILLINOIS 60462 (Address of principal executive offices and zip code) (708) 349-3300 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value--39,041,799 shares as of February 7, 1996 <PAGE> INDEX ANDREW CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets--December 31, 1995 and September 30, 1995. Consolidated statements of income--Three months ended December 31, 1995 and 1994. Consolidated statements of cash flows--Three months ended December 31, 1995 and 1994. Notes to consolidated financial statements--December 31, 1995. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Exhibit 2 - Agreement and Plan of Merger between Andrew Corporation and The Antenna Company dated January 25, 1996. Exhibit 11 - Computation of Earnings per Share. SIGNATURES <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED BALANCE SHEET (In thousands) <CAPTION> December 31 September 30 1995 1995 --------- --------- (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 22,291 $ 45,085 Accounts receivable, less allowances (Dec. $3,466; Sep. $3,066) 150,228 141,732 Inventories Finished products 48,058 43,646 Materials and work in process 83,679 75,788 --------- --------- 131,737 119,434 Miscellaneous current assets 4,831 4,430 --------- --------- TOTAL CURRENT ASSETS 309,087 310,681 OTHER ASSETS Costs in excess of net assets of businesses acquired, less accumulated amortization (Dec. $17,186; Sep. $16,524) 42,198 35,667 Investments in and advances to affiliates 38,470 33,480 Investments and other assets 12,136 10,661 PROPERTY, PLANT, AND EQUIPMENT Land and land improvements 9,907 9,402 Building 63,612 55,069 Equipment 221,169 209,039 Allowances for depreciation and amortization (177,965) (172,970) --------- --------- 116,723 100,540 --------- --------- TOTAL ASSETS $ 518,614 $ 491,029 ========= ========= <FN> The balance sheet at September 30, 1995 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) (continued) <CAPTION> December 31 September 30 1995 1995 --------- --------- (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 29,011 $ 26,726 Accrued expenses and other liabilities 27,076 17,607 Compensation and related expenses 19,203 25,310 Income taxes 14,476 13,666 Current portion of long-term debt 4,545 4,545 --------- --------- TOTAL CURRENT LIABILITIES 94,311 87,854 DEFERRED LIABILITIES 5,654 7,087 LONG-TERM DEBT, LESS CURRENT PORTION 45,240 44,710 MINORITY INTEREST 6,782 STOCKHOLDERS' EQUITY Common Stock (par value, $.01 a share: 100,000,000 shares authorized; 45,653,823 shares issued, including treasury) 457 457 Additional paid-in capital 44,577 44,437 Foreign currency translation 354 1,076 Retained earnings 378,465 362,738 Treasury stock, at cost (6,619,787 shares Dec.; 6,648,675 shares Sep.) (57,226) (57,330) --------- --------- 366,627 351,378 --------- --------- TOTAL LIABILITIES AND EQUITY $ 518,614 $ 491,029 ========= ========= <FN> The balance sheet at September 30, 1995 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts) <CAPTION> Three Months Ended December 31 1995 1994 --------- --------- <S> <C> <C> SALES $ 164,031 $ 142,605 Cost of products sold 96,784 83,847 --------- --------- GROSS PROFIT 67,247 58,758 OPERATING EXPENSES Sales and administrative 34,555 34,115 Research and development 7,098 5,640 --------- --------- 41,653 39,755 OPERATING INCOME 25,594 19,003 OTHER Interest expense 1,208 1,383 Interest income (643) (636) Other expense 455 703 --------- --------- 1,020 1,450 INCOME BEFORE INCOME TAXES 24,574 17,553 Income taxes 8,847 6,319 --------- --------- NET INCOME $ 15,727 $ 11,234 ========= ========= NET INCOME PER AVERAGE SHARE OF COMMON STOCK OUTSTANDING $ 0.40 $ 0.28 ========= ========= AVERAGE SHARES OUTSTANDING 39,616 39,435 ========= ========= <FN> See Notes to Consolidated Financial Statements </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) <CAPTION> Three Months Ended December 31 ------------------------- 1995 1994 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATIONS Net Income $ 15,727 $ 11,234 ADJUSTMENTS TO NET INCOME Depreciation and amortization 6,812 5,280 (Increase) decrease in accounts receivable (5,171) 2,063 Increase in inventories (5,831) (10,461) Decrease (increase) in miscellaneous current and other assetS 155 (770) Increase in receivables from affiliates (532) (885) Decrease in accounts payable and other liabilities (750) (6,802) Other (72) (73) -------- -------- NET CASH FROM (USED IN) OPERATIONS 10,338 (414) INVESTING ACTIVITIES Capital expenditures (13,867) (8,234) Acquisition of business, net of cash acquired (14,453) -- Investments in and advances to affiliates (4,990) (2,237) Proceeds from sale of property, plant, and equipment 120 91 -------- -------- NET CASH USED IN INVESTING (33,190) (10,380) FINANCING ACTIVITIES Proceeds from long-term borrowings -- 3,800 Stock option plans 356 600 -------- -------- NET CASH FROM FINANCING ACTIVITIES 356 4,400 Foreign currency translation adjustments (298) (107) -------- -------- Decrease for the period (22,794) (6,501) Cash and equivalents at beginning of period 45,085 40,267 -------- -------- CASH AND EQUIVALENTS AT END OF PERIOD $ 22,291 $ 33,766 ======== ======== <FN> See Notes to Consolidated Financial Statements </FN> </TABLE> <PAGE> ANDREW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending September 30, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report on Form 10-K for the year ended September 30, 1995. NOTE B--ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires long-lived assets to be reviewed for impairment when events or circumstances indicate that an impairment exists. The company is required to adopt SFAS No. 121 during the first quarter of fiscal 1997. Adoption of this Statement will not have a material effect on the company's financial statements. NOTE C--ACQUISITION In December 1995 the company purchased a 51% interest in GAM Participacoes Ltda. ("GAM") for approximately $15.5 million in cash. The acquisition was accounted for as a purchase and, accordingly, the operating results of GAM have been included in the consolidated operating results since the date of acquisition. The company manufactures, distributes and sells antennas, waveguide, and towers and provides installation services. GAM is located in Brazil. Had GAM been acquired at the beginning of fiscal 1994, the pro-forma inclusion of its operating results would not have had a material effect on the company's reported consolidated net earnings for the quarters ended December 31, 1995 and 1994. NOTE D--SUBSEQUENT EVENT On January 25, 1996 the company signed a definitive agreement to acquire The Antenna Company, a manufacturer and distributor of wireless telephone antennas and accessories for mobile applications. The transaction will be accounted for as a pooling of interests. Andrew will exchange shares of its common stock for all the outstanding stock of privately held The Antenna Company. <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales for the quarter ended December 31, 1995 totaled $164.0 million, a 15% increase over the prior year quarter. The increase was primarily attributable to increased demand for the company's wireless communications products and services in Europe, Canada and the Pacific Rim. The commercial segment was the principal contributor to sales growth as weaker performances in the network products and government electronics businesses partially offset the strength in the commercial segment. As a percentage of sales, cost of products sold was 59% in the first quarter of both fiscal 1996 and 1995. Sales and administrative expense for the quarter increased marginally to $34.6 million, a $0.5 million increase over the prior year first quarter. As a percent of sales, sales and administrative expenses were 21%, down from 24% in the same period last year. The decrease was due to the higher rate of growth in sales as compared to the growth in expenses. Research and development expenditures for the first quarter increased $1.5 million, or 26% over the same period last year. The increase is primarily related to new technology development efforts within the commercial segment. LIQUIDITY AND CAPITAL RESOURCES Net cash from operations improved compared to the same period last year by $10.8 million. Earnings in the first quarter of fiscal 1996 combined with a reduced rate of increase in inventory provided increased cash flows. The improvements were partially offset by an increase in accounts receivable, primarily the result of the sales increases. In the first quarter of fiscal 1996 the company purchased a 51% interest in a manufacturing company in Brazil for $15.5 million in cash. <PAGE> PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 2 - Agreement and Plan of Merger between Andrew Corporation and The Antenna Company dated January 25, 1996. Exhibit 11 - Computation of earnings per share. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1995. <PAGE> 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. ANDREW CORPORATION Date February 12, 1996 /s/F. L. English --------------------- --------------- F. L. English Chairman, President and Chief Executive Officer Date February 12, 1996 /s/C. R. Nicholas --------------------- -------------- C. R. Nicholas Executive Vice President and Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2 <SEQUENCE>2 <DESCRIPTION>MERGER PLAN OF ANDREW CORP & ANTENNA COMPANY <TEXT> AGREEMENT AND PLAN OF MERGER between ANDREW CORPORATION and THE ANTENNA COMPANY ----------------- Dated January 25, 1996 ----------------- <PAGE> TABLE OF CONTENTS AGREEMENT AND PLAN OF MERGER ARTICLE I. THE MERGER............................................1 1.1. The Merger..............................................1 1.2. Closing.................................................1 1.3. Effective Time..........................................1 1.4. Effects of the Merger...................................1 1.5. Certificate of Incorporation and By-Laws................1 1.6. Directors and Officers..................................2 1.7. Andrew Common Stock.....................................2 1.8. Tax Consequences........................................2 ARTICLE II. CONVERSION AND EXCHANGE OF SHARES.....................2 2.1. Conversion of Antenna Common Stock......................2 2.2. Exchange of Shares......................................3 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ANTENNA.............4 3.1. Corporate Organization..................................4 3.2. Capitalization..........................................4 3.3. Authority; No Violation.................................5 3.4. Consents and Approvals..................................5 3.5. Reports.................................................6 3.6. Compliance with Applicable Law..........................6 3.7. Financial Statements....................................6 3.8. Absence of Certain Changes or Events....................6 3.9. Legal Proceedings and Restrictions......................7 3.10. Taxes and Tax Returns...................................7 3.11. Employee Benefits.......................................9 3.12. Employment and Labor Relations.........................11 3.13. Contracts..............................................11 3.14. Undisclosed Liabilities................................13 3.15. Environmental Liability................................13 3.16. Tangible Assets........................................14 3.17. Real Property..........................................14 3.18. Intellectual Property..................................14 3.19. Inventory..............................................15 3.20. Notes and Accounts Receivable..........................16 3.21. Bank Accounts and Powers of Attorney...................16 3.22. Guaranties.............................................16 3.23. Insurance..............................................16 3.24. Service Contracts and Warranties.......................16 3.25. Certain Relationships..................................16 3.26. S-4 Information........................................16 3.27. Broker's Fees..........................................17 3.28. Pooling of Interests...................................17 3.29. Certain Customer Relationships.........................17 3.30. Disclosure.............................................17 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ANDREW.............17 4.1. Corporate Organization.................................17 4.2. Capitalization.........................................18 4.3. Authority; No Violation................................18 4.4. Consents and Approvals.................................18 4.5. Financial Statements...................................19 4.6. Legal Proceedings......................................19 4.7. SEC Reports............................................19 4.8. S-4 Information........................................20 4.9. Broker's Fees..........................................20 4.10. Reorganization.........................................20 4.11. Disclosure.............................................20 ARTICLE V. COVENANTS RELATING TO CONDUCT OF BUSINESS............20 5.1. Conduct of Businesses Prior to the Effective Time......20 5.2. Antenna Forbearances...................................20 5.3. Andrew Forbearances....................................22 ARTICLE VI. ADDITIONAL AGREEMENTS................................22 6.1. Regulatory and Other Matters...........................22 6.2. Access to Information..................................22 6.3. Stockholders' Approval.................................23 6.4. NNM Listing............................................23 6.5. Affiliates.............................................23 6.6. Additional Agreements..................................23 6.7. Advice of Changes......................................23 6.8. Takeover Proposals.....................................23 6.9. Tax Matters............................................24 6.10. Exchange Act Reports...................................25 6.11. Combined Operations Financial Statements...............25 ARTICLE VII. CONDITIONS PRECEDENT.................................25 7.1. Conditions to Each Party's Obligation To Effect the Merger........................................25 7.2. Conditions to Obligations of Andrew....................26 7.3. Conditions to Obligations of Antenna...................27 ARTICLE VIII. TERMINATION AND AMENDMENT............................29 8.1. Termination............................................29 8.2. Effect of Termination..................................30 8.3. Amendment; Extension; Waiver...........................30 ARTICLE IX. GENERAL PROVISIONS...................................30 9.1. Expenses...............................................30 9.2. Notices................................................30 9.3. Interpretation.........................................31 9.4. Counterparts...........................................32 9.5. Entire Agreement.......................................32 9.6. Governing Law..........................................32 9.7. Severability...........................................32 9.8. Publicity..............................................32 9.9. Assignment; Third Party Beneficiaries..................32 9.10. Knowledge and Awareness................................32 9.11. Construction...........................................33 9.12. Pooling of Interests Accounting; Tax Free Reorganization....................................33 EXHIBITS A - Certificate of Merger B - Affiliate Letter C - Non-Competition and Confidentiality Agreement D - McDermott, Will & Emery Legal Opinion E - Antenna Certificate F - Antenna Shareholder's Certificate G - Gardner, Carton & Douglas Legal Opinion <PAGE> INDEX OF DEFINED TERMS Agreement............................................................. Recitals Andrew ............................................................... Recitals Andrew Common Stock ................................................. ss.2.1(a) Andrew Financial Statements Forms 10-Q ........................... ss.4.5 Andrew Stock Value .................................................... 2.1(a) Antenna ............................................................. Recital Antenna Plans ....................................................... ss.3.10(a) Antenna Common Stock ............................................ ss.2.1 Antenna Contract ................................................. ss.3.13 Antenna Financial Statements .................................... ss.3.7 Antenna Subsidiaries ............................................... ss.3.1(b) Certificate of Merger ........................................... ss.1.3 Closing ......................................................... ss.1.2 Closing Date .................................................... ss.1.2 Code ............................................................ ss.1.8 Common Certificate ................................................. ss.2.1(b) Confidentiality Agreement ....................................... ss.6.2 Consents......................................................... ss.3.4 Delaware Secretary .............................................. ss.1.3 DGCL ............................................................ ss.1.1 Disclosure Schedule ................................................. Art. III Effective Time .................................................. ss.1.3 Environmental Laws .................................................. ss.3.15(e) ERISA ............................................................... ss.3.11(a) ERISA Affiliates .................................................... ss.3.11(a) Exchange Act .................................................... ss.4.5 Exchange Ratio ..................................................... ss.2.1(a) GAAP ............................................................ ss.3.7 Governmental Authority .......................................... ss.3.4 Hazardous Material .................................................. ss.3.15(e) HSR Filing....................................................... ss.3.4 IBCA................................................................ ss.7.2(c) Intellectual Property ............................................ ss.3.18 Interim Financial Statements..................................... ss.3.7 IRS ................................................................. ss.3.11(b) Liens .............................................................. ss.3.2(b) Material Adverse Effect ......................................... ss.3.8 Merger ............................................................. Recital 1994 Balance Sheet ............................................... ss.3.14 NNM ................................................................ ss.2.1(a) Person.............................................................. ss.5.2(a) Primary Customers................................................. ss.3.29 Requisite Regulatory Approvals...................................... ss.7.1(a) Returns.............................................................. ss.3.10(c) S-4.............................................................. ss.3.4 SEC.............................................................. ss.3.4 Securities Act ................................................... ss.3.26 Surviving Corporation ........................................... ss.1.1 Takeover Proposal................................................ ss.6.8 Taxes................................................................ ss.3.10(c) <PAGE> AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated January 25, 1996 (the "Agreement"), by and between ANDREW CORPORATION, a Delaware corporation ("Andrew"), and THE ANTENNA COMPANY, an Illinois corporation ("Antenna"). WHEREAS, the Boards of Directors of Andrew and Antenna have determined that it is in the best interests of their respective companies and stockholders to consummate the business combination provided for in this Agreement in which Antenna, subject to the terms and conditions set forth herein, will merge with and into Andrew (the "Merger"); WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and to establish certain conditions to the Merger. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, the parties agree as follows: ARTICLE I. THE MERGER 1.1. The Merger. Subject to the terms and conditions of this Agreement, in accordance with the Delaware General Corporation Law (the "DGCL"), at the Effective Time (as hereinafter defined), Antenna shall merge with and into Andrew. Andrew shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation"), and shall continue its corporate existence under the laws of the State of Delaware. Upon consummation of the Merger, the separate corporate existence of Antenna shall terminate. 1.2. Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") will take place at 10:00 a.m., at the offices of Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois, not later than five business days after the satisfaction or waiver of the latest to occur of the conditions set forth in Article VII, unless extended by mutual agreement of the parties (the "Closing Date"). 1.3. Effective Time. The Merger shall become effective as set forth in a certificate of merger substantially in the form attached as Exhibit A (the "Certificate of Merger"), which shall be filed with the Secretary of State of the State of Delaware (the "Delaware Secretary") on the Closing Date. The term "Effective Time" shall be the date and time when the Merger becomes effective, as set forth in the Certificate of Merger. 1.4. Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the DGCL. 1.5. Certificate of Incorporation and By-Laws. Subject to the terms and conditions of this Agreement, at the Effective Time, the Certificate of Incorporation and By-Laws of Andrew shall be the Certificate of Incorporation and By-Laws of the Surviving Corporation until thereafter amended in accordance with applicable law. <PAGE> 1.6. Directors and Officers. The directors and officers of Andrew immediately prior to the Effective Time shall continue as the directors and officers of the Surviving Corporation, unless and until thereafter changed in accordance with the DGCL and the Surviving Corporation's Certificate of Incorporation and By-Laws. 1.7. Andrew Common Stock. At and after the Effective Time, each share of Andrew Common Stock issued and outstanding immediately prior thereto shall remain issued and outstanding and shall not be affected by the Merger. 1.8. Tax Consequences. Andrew and Antenna intend that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall constitute a "plan of reorganization" for the purposes of Section 368 of the Code. Andrew and Antenna also intend that the Merger be accounted for as a pooling of interests pursuant to Opinion No. 16 of the Accounting Principles Board. ARTICLE II. CONVERSION AND EXCHANGE OF SHARES 2.1. Conversion of Antenna Common Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Andrew, Antenna or any stockholder of Antenna: (a) Each share of the common stock, par value $0.10 per share, of Antenna (the "Antenna Common Stock") issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive shares of the common stock, par value $.01 per share, of Andrew (the "Andrew Common Stock") at an exchange ratio (the "Exchange Ratio") determined as follows: each share of Antenna Common Stock shall be exchanged for that number of shares of Andrew Common Stock equal to the quotient of (x) the number obtained by dividing $52,500,000 by the number of shares of Antenna Common Stock outstanding immediately prior to the Effective Time, divided by (y) the greater of $42.00, or the average of the high and low per share sale price of the Andrew Common Stock, as reported on the Nasdaq National Market (the "NNM") for each of the ten trading days immediately preceding and including the second trading day prior to the Closing, as reported in the NNM listings published in The Wall Street Journal (the "Andrew Stock Value"). No fractional shares of Andrew Common Stock shall be issued, and in lieu thereof, Andrew shall pay to each former stockholder of Antenna who otherwise would be entitled to receive such fractional share an amount in cash determined by multiplying (i) the greater of $42.00 or the Andrew Stock Value by (ii) the fraction of a share (rounded to the nearest thousandth when expressed as an Arabic number) of Andrew Common Stock to which such holder would otherwise be entitled to receive pursuant to this Section 2.1. <PAGE> (b) All of the shares of Antenna Common Stock converted into Andrew Common Stock pursuant to this Article shall no longer be outstanding and shall automatically be canceled and cease to exist at the Effective Time, and each certificate previously representing any such shares of Antenna Common Stock (a "Common Certificate") shall thereafter represent the right to receive (i) a certificate representing the number of whole shares of Andrew Common Stock and (ii) cash in lieu of fractional shares into which the shares of Antenna Common Stock represented by such Common Certificate have been converted. If, prior to the Effective Time, the outstanding shares of Andrew Common Stock or Antenna Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, then an appropriate and proportionate adjustment shall be made to the Exchange Ratio. (c) At the Effective Time, all shares of Antenna Common Stock that are owned by Antenna as treasury stock and all shares of Antenna Common Stock that are owned, directly or indirectly, by Antenna, Andrew or any of their respective wholly-owned subsidiaries shall be canceled and shall cease to exist, and no stock of Andrew or other consideration shall be delivered in exchange therefor. All shares of Andrew Common Stock that are owned by Antenna or any of its wholly-owned subsidiaries shall become treasury stock of Andrew. (d) After the Effective Time, there shall be no transfers on Antenna's stock transfer books of shares of Antenna Common Stock. 2.2. Exchange of Shares. (a) At the Closing, each shareholder of Antenna shall have the right to deliver to Andrew Common Certificates representing all of the issued and outstanding shares of Antenna Common Stock owned by such shareholder, duly endorsed for transfer or accompanied by duly executed stock powers, free and clear of all options, liens, claims, charges, restrictions and other encumbrances of any nature whatsoever, other than federal and state securities law restrictions. Upon proper surrender of a Common Certificate for exchange and cancellation to Andrew, and in accordance with and subject to the other provisions of this Agreement, the holder of such Common Certificate shall receive in exchange therefor (i) a certificate representing that number of whole shares of Andrew Common Stock to which such holder of Antenna Common Stock shall have become entitled, and (ii) a check representing the amount of any cash in lieu of fractional shares which such holder has the right to receive. The Common Certificate so surrendered shall forthwith be canceled. No interest shall be paid or accrued on any cash in lieu of fractional shares payable to holders of Common Certificates. (b) If any certificate representing shares of Andrew Common Stock is to be issued in a name other than that in which the Common Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the Common Certificate shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer, and that the person requesting such exchange shall pay to Andrew in advance any transfer or other taxes required by reason thereof, or shall establish to the satisfaction of Andrew that such tax has been paid or is not payable. <PAGE> (c) In the event any Common Certificate shall have been lost, stolen or destroyed, the person so claiming shall make an affidavit of that fact and, if required by Andrew, post a bond in such amount as Andrew may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Common Certificate. Thereafter, Andrew shall issue in exchange for such lost, stolen or destroyed Common Certificate the shares of Andrew Common Stock and any cash in lieu of fractional shares deliverable in respect thereof pursuant to this Agreement. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ANTENNA Except as disclosed by Antenna in the disclosure schedule delivered pursuant to this Agreement (the "Disclosure Schedule"), Antenna represents and warrants to Andrew as follows: 3.1. Corporate Organization. (a) Antenna is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois. Antenna has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary. Correct and complete copies of the Articles of Incorporation and By-Laws of Antenna, as in effect on the date of this Agreement, have been made available to Andrew by Antenna. (b) Section 3.1(b) of the Disclosure Schedule sets forth the name, jurisdiction where organized and capitalization of each entity included in the consolidated financial statements of Antenna (the "Antenna Subsidiaries") and each other corporation, partnership, limited liability company, joint venture or other entity in which Antenna holds an interest. Each Antenna Subsidiary (i) is duly organized or formed, validly existing and in good standing under the laws of its jurisdiction of organization, (ii) is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary and (iii) has the requisite power and authority to own or lease all of its properties and assets and to carry on its business as now being conducted. (c) The minute books of Antenna and the Antenna Subsidiaries accurately reflect in all material respects all actions taken by the boards of directors, including committees thereof, and the stockholders of Antenna and the Antenna Subsidiaries. <PAGE> 3.2. Capitalization. (a) The authorized capital stock of Antenna consists of 100,000 shares of Antenna Common Stock, of which 9,000 shares are issued and outstanding. Each record holder of Antenna Common Stock, and the number of shares owned by each, is set forth in Section 3.2 of the Disclosure Schedule. No shares of Antenna Common Stock are held in Antenna's treasury and no shares of Antenna Common Stock are reserved for issuance. All of the issued and outstanding shares of Antenna Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. Antenna does not have and is not bound by any outstanding subscriptions, options, convertible securities, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of its capital stock. (b) Antenna owns, directly or indirectly, all of the issued and outstanding shares of capital stock of the Antenna Subsidiaries, free and clear of any liens, pledges, charges, encumbrances and security interests of any kind (collectively, "Liens"), and all of such shares have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Antenna Subsidiary has or is bound by any outstanding subscriptions, options, convertible securities, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of its capital stock or any other equity interest in such Subsidiary. 3.3. Authority; No Violation. (a) Antenna has the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Antenna. Except for the adoption of this Agreement by the affirmative vote of holders owning 66-2/3% or more of the issued and outstanding shares of Antenna Common Stock, no other corporate proceedings on the part of Antenna are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Antenna and constitutes a valid and binding obligation of Antenna, enforceable against Antenna in accordance with its terms. (b) The execution and delivery of this Agreement by Antenna, the consummation by Antenna of the transactions contemplated hereby, and the compliance by Antenna with the terms or provisions hereof, will not (i) violate any provision of the Articles of Incorporation or By-Laws of Antenna, (ii) violate any law, statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Antenna or any of the Antenna Subsidiaries or any of their respective properties or assets, or (iii) violate, conflict with, breach any provision of or result in the loss of any benefit or the increase in the amount of any liability or obligation under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of Antenna or any of the Antenna Subsidiaries under any note, bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which Antenna or any of the Antenna Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected. <PAGE> 3.4. Consents and Approvals. Except for (i) the filing of the Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Filing") and the expiration of the waiting period thereunder, (ii) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL, (iii) the filing of Articles of Merger with the Illinois Secretary of State pursuant to the Illinois Business Corporation Act of 1983, as amended, (iv) the approval of this Agreement by the requisite vote of the holders of Antenna Common Stock, and (v) the filing with the Securities and Exchange Commission (the "SEC") and declaration of effectiveness of a Registration Statement on Form S-4 (the "S-4"), no consent, approval or authorization of, or withholding of objection on the part of, or filing, registration or qualification with, or notice to (collectively, the "Consents") any court, administrative agency, commission or other governmental authority or instrumentality, whether Federal, state, local or foreign (each a "Governmental Authority"), or with any third party are necessary in connection with the execution and delivery by Antenna of this Agreement and the consummation by Antenna of the Merger and the other transactions contemplated by this Agreement. 3.5. Reports. Antenna and each of the Antenna Subsidiaries have timely filed all reports, registrations and statements required to be filed since January 1, 1991 with any Governmental Authority, and have paid all fees and assessments due and payable in connection therewith. No Governmental Authority has initiated any proceeding or, to the best knowledge of Antenna, investigation into the business or operations of Antenna or any of the Antenna Subsidiaries. 3.6. Compliance with Applicable Law. Antenna and each of the Antenna Subsidiaries hold all licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses and have complied with and are not in default under any law, statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction of any Governmental Authority applicable to Antenna or any of the Antenna Subsidiaries. 3.7. Financial Statements. Antenna has previously provided Andrew with correct and complete copies of the following (collectively, the "Antenna Financial Statements"): (a) the consolidated balance sheets of Antenna and the Antenna Subsidiaries as of December 31, 1994, 1993, 1992 and 1991, and the related consolidated statements of income and retained earnings and cash flows for the fiscal years ended December 31, 1994, 1993, 1992 and 1991, in each case accompanied by the audit report of William J. Barnes & Co., Ltd., independent public accountants with respect to Antenna, and (b) the unaudited consolidated balance sheets of Antenna and the Antenna Subsidiaries as of March 31, June 30 and September 30, 1995 and the related unaudited consolidated statements of income for the periods then ended (the "Interim Financial Statements"). The Antenna Financial Statements fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments customary in nature and amount), the consolidated financial position of Antenna and the Antenna Subsidiaries as of the dates thereof, and the consolidated results of operations and cash flows of Antenna and the Antenna Subsidiaries for the respective fiscal periods or as of the respective dates thereof. Each of the Antenna Financial Statements, including the notes thereto, has been, or will be, prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied during the periods involved. The books and records of Antenna and the Antenna Subsidiaries have been, and are being, maintained in accordance with all applicable legal and accounting requirements. <PAGE> 3.8. Absence of Certain Changes or Events. (a) Since December 31, 1994, (i) Antenna and the Antenna Subsidiaries, taken as a whole, have not incurred any material liability that is not disclosed in the Interim Financial Statements, (ii) no event has occurred which, individually or in the aggregate, could have a material adverse effect on the business, properties, profits, operations or financial condition (a "Material Adverse Effect") of Antenna and the Antenna Subsidiaries, taken as a whole, and (iii) Antenna and the Antenna Subsidiaries have carried on their respective businesses in the ordinary and usual course. (b) Since December 31, 1994, neither Antenna nor any of the Antenna Subsidiaries has (i) increased the salaries, wages, or other compensation, or pensions, fringe benefits or other perquisites payable to any director, executive officer or employee, or (ii) granted any severance or termination pay, or (iii) paid or accrued any bonuses or commissions, or (iv) suffered any strike, work stoppage, slowdown, or other labor disturbance which could, either individually or in the aggregate, result in a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole, or the Surviving Corporation. 3.9. Legal Proceedings and Restrictions. (a)There are no actions, suits, proceedings, claims or investigations pending, or to the knowledge of Antenna, threatened against or affecting Antenna or any of the Antenna Subsidiaries at law or in equity or before any Governmental Authority. (b) There is no judgment, order, writ, decree, injunction or regulatory restriction imposed upon Antenna, any of the Antenna Subsidiaries or their assets which has had, or could reasonably be expected to have, a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole. 3.10. Taxes and Tax Returns. (a) (i) Antenna and the Antenna Subsidiaries (which term for purposes of this Section 3.10 shall include former subsidiaries of Antenna for periods during which they were owned) have timely filed (when due or prior to the expiration of any extension of the time to file) correct and complete Returns in respect of Taxes required to be filed; all Taxes shown on such Returns or otherwise known by Antenna to be due or payable have been timely paid; no adjustment relating to any such Return has been proposed in writing by any Governmental Authority, except proposed adjustments that have been resolved prior to the date hereof; and there are no outstanding summons, subpoenas or written requests for information with respect to any such Returns or the Taxes reflected thereon. To Antenna's knowledge there is no basis for imposing any additional Taxes on it or any of the Antenna Subsidiaries other than the Taxes shown on such Returns. There are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which Antenna or any of the Antenna Subsidiaries may be subject and neither Antenna nor any of the Antenna Subsidiaries is under audit by any Governmental Authority for any Tax. There are no Tax liens on any assets of Antenna or any of the Antenna Subsidiaries other than liens for Taxes not yet due or payable; <PAGE> (ii) Antenna and the Antenna Subsidiaries have paid, on the basis of Antenna's good faith estimate of the required installments, all estimated Taxes required to be paid under Section 6655 of the Code or any comparable provision of state, local or foreign law; and all Taxes which will be due and payable for any period or portion thereof ending on or prior to the Closing Date will have been paid or will be reflected on Antenna's books as an accrued Tax liability, either current or deferred. The amount of such Tax liabilities as of September 30, 1995 will be set forth in Section 3.10 of the Disclosure Schedule. All Taxes required to be withheld, collected or deposited by Antenna or any of the Antenna Subsidiaries during any taxable period for which the applicable statute of limitations on assessment remains open have been timely withheld, collected or deposited and, to the extent required, have been paid to the relevant Governmental Authority; (iii) For each taxable period for which the statute of limitations on assessment remains open, Antenna has not (A) been either a common parent corporation or a member corporation of an affiliated group of corporations filing a consolidated Federal income tax return, or (B) acquired any corporation that filed a consolidated Federal income tax return with any other corporation that was not also acquired by Antenna; and none of the Antenna Subsidiaries or any other entity that was included in the filing of a Return with Antenna on a consolidated, combined, or unitary basis has left Antenna's consolidated, combined or unitary group in a taxable year for which the statute of limitations on assessment remains open. Neither Antenna nor any of the Antenna Subsidiaries has been at any time a member of any partnership or joint venture or the holder of a beneficial interest in any trust for any period for which the statute of limitations for any Tax potentially applicable as a result of such membership or holding has not expired; (iv) No consent under Section 341(f) of the Code has been filed with respect to Antenna or any of the Antenna Subsidiaries; and (v) There is no significant difference on the books of Antenna or any of the Antenna Subsidiaries between the amounts of the book basis and the tax basis of assets (net of liabilities) that is not accounted for by an accrual on the books for Federal income tax purposes. (b) Neither Antenna nor any of the Antenna Subsidiaries: (i) Has any property that is or will be required to be treated as being owned by another person under the provisions of Section 168(f)(8) of the Code (as in effect prior to amendment by the Tax Reform Act of 1986) or is "tax-exempt use property" within the meaning of Section 168 of the Code; (ii) Has any Tax sharing or allocation agreement or arrangement (written or oral), owes any amount pursuant to any Tax sharing or allocation agreement or arrangement, or will have any liability in respect to any Tax sharing or allocation agreement or arrangement with respect to any entity that has been sold or disposed of; <PAGE> (iii) Was acquired in a qualified stock purchase under Section 338(d)(3) of the Code and no elections under Section 338(g) of the Code, protective carryover basis elections, offset prohibition elections or other deemed or actual elections under Section 338 are applicable to any of them; (iv) Is or has been subject to the provisions of Section 1503(d) of the Code related to "dual consolidated loss" rules; (v) Is a party to any agreement, contract or arrangement that would result, individually or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code by reason of the Merger; (vi) Has any income reportable for a period ending after the Closing Date but attributable to an installment sale occurring in or a change in accounting method made for a period ending on or prior to the Closing Date which resulted in a deferred reporting of income from such transaction or from such change in accounting method (other than a deferred intercompany transaction), or deferred gain or loss arising out of any deferred intercompany transaction; or (vii) Has any unused net operating loss, unused net capital loss, unused tax credit, or excess charitable contribution for Federal income tax purposes. (viii) Is a United States real property holding corporation as defined in Section 897 of the Code. (c) For purposes of this Agreement: (i) "Returns" means any and all returns, reports, information returns and information statements with respect to Taxes required to be filed with any Governmental Authority, including consolidated, combined and unitary tax returns. (ii) "Tax" or "Taxes" means any and all taxes, charges, fees, levies, and other governmental assessments and impositions of any kind, payable to any Governmental Authority, including income, franchise, net worth, profits, gross receipts, minimum alternative, estimated, ad valorem, value added, sales, use, service, real or personal property, capital stock, license, payroll, withholding, disability, employment, social security, Medicare, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premiums, windfall profits, transfer and gains taxes, customs duties, imposts, charges, levies or other similar assessments of any kind, and interest, penalties and additions to tax imposed with respect thereto. <PAGE> 3.11. Employee Benefits. (a) Antenna (which for purposes of this Section 3.11 shall include the Antenna Subsidiaries and any other ERISA Affiliate (as hereinafter defined)) has not at any time within the past three years, maintained, administered or contributed to any pension, profit-sharing, thrift or 401(k), disability, medical, dental, health, life (including any individual life insurance policy), death benefit, group insurance or any other welfare plan, bonus, incentive, deferred compensation, stock purchase, stock option, severance plan, salary continuation, vacation, holiday, sick leave, fringe benefit, personnel policy, or similar plan, trust, program, policy, commitment or arrangement whether or not covered by Employee Retirement and Income Security Act of 1974, as amended ("ERISA") and whether or not funded or insured and whether written or oral (hereinafter referred to as the "Antenna Plans"), which could result in Andrew or Antenna having any liabilities, whether direct or indirect. (b) Antenna has made available to Andrew correct and complete copies of (i) each Antenna Plan document, amendments thereto and board resolutions adopting such plans and amendments, (ii) each current summary plan description, (iii) any and all agreements, insurance policies and other documents related to any Antenna Plan, including written descriptions of any unwritten Antenna Plans, (iv) the most recent determination letter from the Internal Revenue Service (the "IRS") for each Antenna Plan (as applicable), and (v) the three most recent Annual Reports - Form 5500 (including accompanying schedules) and summary annual reports for each Antenna Plan. (c) (i) Each Antenna Plan (and any related agreements and documents) and Antenna have at all times complied in all material respects with the applicable requirements of ERISA, the Code and any other applicable law (including regulations and rulings thereunder), and the Antenna Plans have at all times been properly administered in all material respects in accordance with all such laws and with the terms of each applicable plan document, (ii) each of the Antenna Plans intended to be "qualified" within the meaning of Code Section 401(a) is so qualified and no facts exist that could reasonably be expected to affect adversely such "qualified" status, (iii) no Antenna Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), for current or former employees following their retirement or other termination of service, other than coverage mandated by applicable statutes or death benefits or retirement benefits under any "employee pension plan" (as such term is defined in ERISA Section 3(2)), (iv) there has not occurred nor, to the knowledge of Antenna, is any person contractually bound to enter into any non-exempt "prohibited transaction" within the meaning of Code Section 4975 or ERISA Section 406, (v) Antenna has not engaged in a transaction which could subject it to either a civil penalty under ERISA Section 409 or a tax under Code Section 4976, (vi) there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against Antenna, any of the Antenna Plans or any trusts related thereto, (vii) Antenna has made or caused to be made on a timely basis any and all contributions, premiums and other amounts due and owing under the terms of any Antenna Plan or as otherwise required by applicable law, (viii) Antenna has in all respects complied with Code Section 4980B and other applicable laws concerning the continuation of employer-provided health benefits following a termination of employment or any other event that would otherwise terminate such coverage, (ix) Antenna has not at any time maintained, administered or contributed to any plan subject to ERISA Title IV, and (x) Antenna has not at any time participated in, made contributions to or had any other liability with respect to a "multiemployer plan" under ERISA Section 4001, a "multiple employer plan" under Code Section 413(c), or a "multiple employer welfare arrangement" under ERISA Section 3(40). <PAGE> (d) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any director, officer or employee of Antenna, (ii) increase any benefits otherwise payable under any Antenna Plan, (iii) result in any acceleration of the time of payment or vesting of any such benefits, or (iv) impair the rights of Antenna under any Antenna Plan. (e) There are no actions, claims, investigations or audits pending or, to Antenna's knowledge, threatened with respect to any Antenna Plan (other than claims for benefits in the ordinary course) that will create any liability or obligation for the Surviving Corporation with respect to any Antenna Plan participant, beneficiary, alternate payee or other claimant, or with respect to any Governmental Authority, including, but not limited to, the IRS, the Department of Labor and the Pension Benefit Guaranty Corporation. (f) For purposes of this Agreement, "ERISA Affiliate" means Antenna and (i) any corporation that is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which Antenna is a member, (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which Antenna is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Code of which Antenna, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. 3.12. Employment and Labor Relations. To the knowledge of Antenna and the Antenna Subsidiaries, no executive, key employee or group of employees has any plans to terminate its or their employment with Antenna or any of the Antenna Subsidiaries. There are no charges, complaints, investigations or litigation currently pending, or to the knowledge of Antenna threatened (and to the knowledge of Antenna there is no basis therefor), against Antenna or any of the Antenna Subsidiaries, relating to alleged employment discrimination, unfair labor practices, equal pay discrimination, affirmative action noncompliance, occupational safety and health, breach of employment contract, employee benefit matters, wrongful discharge or other employment-related matters. There are no outstanding orders or charges against Antenna or any of the Antenna Subsidiaries under any applicable occupational safety and health laws in any jurisdiction in which Antenna or any of the Antenna Subsidiaries conduct business. All levies, assessments and penalties made against Antenna or any of the Antenna Subsidiaries pursuant to any applicable workers' compensation legislation in any jurisdiction in which Antenna or any of the Antenna Subsidiaries conduct business have been paid by Antenna or the Antenna Subsidiaries. Neither Antenna nor any of the Antenna Subsidiaries is a party to any contracts with any labor union or employee association nor has Antenna or any of the Antenna Subsidiaries made commitments to or conducted negotiations with any labor union or employee association with respect to any future contracts. Neither Antenna nor any of the Antenna Subsidiaries is aware of any current attempts to organize or establish any labor union or employee association with respect to any employees of Antenna or any of the Antenna Subsidiaries, and there is no existing or pending certification of any such union with regard to a bargaining unit. <PAGE> 3.13. Contracts. Section 3.13 of the Disclosure Schedule lists or describes the following contracts, agreements, licenses, permits, arrangements, commitments or understandings (whether written or oral) which are currently in effect or which will, without any further action on the part of Antenna or any of the Antenna Subsidiaries become effective in the future, to which Antenna or any of the Antenna Subsidiaries is a party (collectively, the "Antenna Contracts"): (a) any agreement for the lease of personal property or real property to or from any person or entity that individually involves an expenditure by the lessee of in excess of $10,000 in any one year; (b) any agreement for the purchase, sale or distribution of products, materials, commodities, supplies or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year or involve consideration payable by any party in excess of $10,000 in any one year; (c) any agreement creating, governing or providing for an investment or participation in a partnership or joint venture; (d) any agreement under which Antenna or any of the Antenna Subsidiaries has created, incurred, assumed or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, or under which Antenna or any of the Antenna Subsidiaries has imposed a Lien on any of its assets; (e) any agreement concerning confidentiality or noncompetition; (f) any agreement with any director, officer, employee or stockholder of Antenna or any of their affiliates; (g) any pension, profit sharing, thrift or 401(k), bonus, incentive, deferred compensation, stock purchase, stock option, severance, salary continuation or other plan or arrangement for the benefit of current or former directors, officers or employees; (h) any agreement for the employment of any individual on a full-time, part-time, consulting or other basis; (i) any agreement relating to any Intellectual Property (as that term is defined in Section 3.18) used by Antenna or any of the Antenna Subsidiaries in the conduct of their businesses, or that is licensed by Antenna or any of the Antenna Subsidiaries for use by others; (j) any agreement under which the consequences of a default, termination, non-renewal or acceleration could have a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole; or (k) any other agreement the performance of which involves consideration payable by any party in excess of $10,000 in any one year. <PAGE> Antenna has made available to Andrew a correct and complete copy of each Antenna Contract. Except as set forth in Section 3.13 of the Disclosure Schedule, (i) each Antenna Contract is legal, valid, binding, enforceable and in full force and effect, (ii) the consummation of the Merger will not cause a breach or termination of any Antenna Contract nor effect a change in any of the terms of any Antenna Contract, (iii) neither Antenna nor any of the Antenna Subsidiaries, and, to Antenna's knowledge, no other party, is in breach or default of any Antenna Contract and no event has occurred which with notice or lapse of time, or both, would constitute a breach or default that would result in or permit termination, modification or acceleration under any Antenna Contract, and (iv) neither Antenna nor any of the Antenna Subsidiaries, and, to Antenna's knowledge, no other party, has repudiated any provision of any Antenna Contract. 3.14. Undisclosed Liabilities. Except for liabilities (i) that are fully reflected or reserved against on the December 31, 1994 consolidated balance sheet of Antenna and the Antenna Subsidiaries (the "1994 Balance Sheet") or (ii) that were incurred in the ordinary course of business consistent with past practice since December 31, 1994, or (iii) that are fully reflected or reserved against in the Interim Financial Statements, neither Antenna nor any of the Antenna Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due). 3.15. Environmental Liability. (a) Neither Antenna nor any of the Antenna Subsidiaries has received any notice, or otherwise has knowledge, of any claim, and no proceeding has been instituted raising any claim against Antenna or any of the Antenna Subsidiaries or any of the respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws; (b) Neither Antenna nor any of the Antenna Subsidiaries has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use; (c) Neither Antenna nor any of the Antenna Subsidiaries has stored or released any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them or disposed of any Hazardous Materials, in each case in a manner contrary to any Environmental Laws; and (d) All buildings on all real properties now owned, leased or operated by Antenna or any of the Antenna Subsidiaries are in compliance with applicable Environmental Laws, except where the failure to comply could not reasonably be expected to result in a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole. <PAGE> (e) For purposes of this Agreement, (i) "Environmental Laws" means any and all Federal, state, county, local and foreign laws, statutes, codes, ordinances, rules, regulations, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems; and (ii) "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including asbestos, urea formaldehyde foam insulation and polycholorinated biphenyls). 3.16. Tangible Assets. Antenna and the Antenna Subsidiaries have good and marketable title to, or a valid leasehold interest in, the properties and assets used by them, located on their premises, shown on the 1994 Balance Sheet or acquired after the date thereof, except for properties and assets disposed of in the ordinary course of business, free and clear of all Liens. Antenna and the Antenna Subsidiaries own or lease pursuant to an Antenna Contract all buildings, machinery, equipment and other tangible assets material to the conduct of their businesses as presently conducted. Each such tangible asset is free from defects (patent and latent) other than defects that do not individually or in the aggregate materially impair its value or intended use, has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it presently is used. Section 3.16 of the Disclosure Schedule contains a schedule of such tangible assets owned or leased by Antenna and the Antenna Subsidiaries that have a value in excess of $10,000. 3.17. Real Property. Neither Antenna nor any of the Antenna Subsidiaries owns any real property. Section 3.17 of the Disclosure Schedule lists and describes briefly all real property leased or subleased to Antenna and any of the Antenna Subsidiaries. Antenna has made available to Andrew correct and complete copies of each such lease and sublease. Except as set forth in Section 3.17 of the Disclosure Schedule: (a) each such lease or sublease is legal, valid, binding, enforceable and in full force and effect; (b) the consummation of the transactions contemplated hereby will neither cause the termination of each such lease or sublease nor effect a change in any of its terms; <PAGE> (c) neither Antenna nor any of the Antenna Subsidiaries nor, to the knowledge of Antenna, any other party to such lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, or both, would constitute a breach or default that would permit termination, modification or acceleration thereunder; (d) neither Antenna nor any of the Antenna Subsidiaries nor, to the knowledge of Antenna, any other party to each such lease or sublease has repudiated or disputed any provision thereof; (e) there are no oral agreements in effect as to each such lease or sublease; (f) to the knowledge of Antenna, the representations and warranties set forth in clauses (a) through (e) above are true and correct with respect to the lease underlying each such sublease; and (g) neither Antenna nor any of the Antenna Subsidiaries has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in any leasehold or subleasehold. 3.18. Intellectual Property. (a) Section 3.18 of the Disclosure Schedule identifies each patent, trademark, service mark, trade name, assumed name, copyright, trade secret, license to or from third parties with respect to any of the foregoing, applications to register or registrations of any of the foregoing or other intellectual property rights which are owned or used by or have been issued to Antenna or any of the Antenna Subsidiaries (collectively the "Intellectual Property"). Antenna has made available correct and complete copies of all patents, trademarks, copyrights, registrations, licenses, permits, agreements and applications related to the Intellectual Property to Andrew and correct and complete copies of all other written documentation evidencing ownership of or the right to use each such item. Except as set forth in Section 3.18 of the Disclosure Schedule: (i) Antenna and the Antenna Subsidiaries possess all right, title and interest in and to the Intellectual Property, free and clear of any Lien or other restriction; (ii) the legality, validity, enforceability, ownership or use of the Intellectual Property is not currently being challenged, nor to the knowledge of Antenna is it subject to any such challenge; (iii) Antenna and the Antenna Subsidiaries have taken all necessary or advisable action to maintain and protect the Intellectual Property and will continue to maintain those rights prior to the Closing so as not to affect materially the validity or enforcement of the rights set forth in Section 3.18 of the Disclosure Schedule; and <PAGE> (iv) the Intellectual Property will be owned or available for use by Andrew on identical terms and conditions immediately subsequent to the Closing and the transactions contemplated by this Agreement will have no Material Adverse Effect on Antenna's and the Antenna Subsidiaries rights, title and interest in and to any of the rights set forth in Section 3.18 of the Disclosure Schedule. (b) To the knowledge of Antenna, (i) neither Antenna nor any of the Antenna Subsidiaries has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of third parties, nor is Antenna or any of the Antenna Subsidiaries currently interfering with, infringing upon, misappropriating or otherwise coming into conflict with any intellectual property rights of third parties, and (ii) no third party has, in the past three years, interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of Antenna or any of the Antenna Subsidiaries that could result in a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole, nor is any third party currently interfering with, infringing upon, misappropriating or otherwise coming into conflict with any Intellectual Property rights of Antenna or any of the Antenna Subsidiaries. 3.19. Inventory. No material portion of the inventory of Antenna or any of the Antenna Subsidiaries is unfit for the purpose for which it was procured, or is obsolete, expired, damaged or defective. Substantially all of the inventory of Antenna and the Antenna Subsidiaries consists of items of a quantity and quality which are usable and saleable in the ordinary course of business. 3.20. Notes and Accounts Receivable. All notes and accounts receivable of Antenna and the Antenna Subsidiaries are reflected properly on Antenna's books and records, are not subject to any setoff or counterclaim, are current and collectible, subject only to the reserve for bad debts established in accordance with the past practice of Antenna and the Antenna Subsidiaries. 3.21. Bank Accounts and Powers of Attorney. Section 3.21 of the Disclosure Schedule sets forth a list of all accounts, borrowing resolutions and deposit boxes maintained by each of Antenna and the Antenna Subsidiaries at any bank or other financial institution and the names of the persons authorized to effect transactions in such accounts and pursuant to such resolutions and with access to such boxes. There are no outstanding powers of attorney executed on behalf of Antenna or any of the Antenna Subsidiaries. 3.22. Guaranties. Neither Antenna nor any of the Antenna Subsidiaries is a guarantor or otherwise is liable for any indebtedness, liability or other obligation of any other person or entity. <PAGE> 3.23. Insurance. Section 3.23 of the Disclosure Schedule lists each insurance policy and self-insurance arrangement to which Antenna or any of the Antenna Subsidiaries is a party, a named insured or otherwise the beneficiary of, specifying the insurer, type of insurance, policy number and pending claims thereunder with respect to Antenna and any of the Antenna Subsidiaries. The coverage provided by each of such policies is in an amount, and of a type sufficient for the business presently conducted and proposed to be conducted by Antenna and the Antenna Subsidiaries. Antenna and the Antenna Subsidiaries are in substantial compliance with all conditions contained in such policies. 3.24. Service Contracts and Warranties. Neither Antenna nor any of the Antenna Subsidiaries is a party to any service contract pursuant to which services are provided by Antenna or the Antenna Subsidiaries to a third party. Section 3.24 of the Disclosure Schedule includes copies of the standard terms and conditions of all product warranties for each of Antenna and the Antenna Subsidiaries. 3.25. Certain Relationships. No stockholder, director, officer or, to Antenna's knowledge, employee of Antenna or any of the Antenna Subsidiaries (i) is, or controls, or is an employee of any competitor, supplier, customer or lessor or lessee of Antenna or any of the Antenna Subsidiaries, or (ii) is indebted to Antenna or any of the Antenna Subsidiaries in an amount in excess of $1,000 in any individual case, or (iii) owns any asset, tangible or intangible, which is used in the business of Antenna or any of the Antenna Subsidiaries, other than assets that are immaterial in value; and neither Antenna nor any of the Antenna Subsidiaries has entered into any transaction (including the furnishing of goods or services) with any stockholder, director, officer, employer or other affiliate, except on terms and conditions no less favorable to Antenna or any of the Antenna Subsidiaries than would be obtained in a comparable arm's-length transaction with a third party. 3.26. S-4 Information. None of the written information to be supplied by Antenna for inclusion in the S-4 will, at the time the S-4 is filed with the SEC, at any time it is amended or supplemented, at the time it becomes effective under the Securities Act of 1933, as amended (the "Securities Act"), or at the Closing Date contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. 3.27. Broker's Fees. Except for the amounts set forth in the letter agreement dated May 11, 1995 between Antenna and The Chicago Corporation, neither Antenna nor any of the Antenna Subsidiaries nor any of their respective directors, officers or employees has employed any person or entity as a broker, finder or agent or incurred any liability for any broker's fees, finder's fees or other commission in connection with the Merger or the related transactions contemplated by this Agreement. 3.28. Pooling of Interests. Antenna has no reason to believe that the Merger will not qualify as a "pooling of interests" for accounting purposes. <PAGE> 3.29. Certain Customer Relationships. Section 3.29 of the Disclosure Schedule contains an accurate list of Antenna's 15 largest customers for the year ending December 31, 1995 (the "Primary Customers"), together with the total dollar amount of all products purchased by such Primary Customers from Antenna and the Antenna Subsidiaries during 1995. Antenna and the Antenna Subsidiaries generally have good relationships with each of the Primary Customers and neither Antenna nor any of the Antenna Subsidiaries has received any notice or otherwise has knowledge that any Primary Customer intends to reduce the volume or dollar amount of the products it purchases from Antenna or the Antenna Subsidiaries. 3.30. Disclosure. No representation or warranty by Antenna contained in this Agreement (including the Disclosure Schedule and the Exhibits referred to herein), or in any certificate furnished or to be furnished by Antenna to Andrew in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact required to make the statements herein or therein not misleading, or necessary in order to provide a prospective purchaser of Antenna with adequate information as to Antenna and the Antenna Subsidiaries and their business, properties, profits, operations, liabilities or condition (financial and otherwise). ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ANDREW Andrew represents and warrants to Antenna as follows: 4.1. Corporate Organization. Andrew is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Andrew has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary. Correct and complete copies of the Certificate of Incorporation and By-Laws of Andrew, as in effect as of the date of this Agreement, have been made available to Antenna by Andrew. 4.2. Capitalization. The authorized capital stock of Andrew consists of 100,000,000 shares of Andrew Common Stock, of which as of December 13, 1995, 39,035,020 shares were issued and outstanding. All of the issued and outstanding shares of Andrew Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. The shares of Andrew Common Stock to be issued pursuant to the Merger will be duly authorized and validly issued and, at the Effective Time, all such shares will be fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. <PAGE> 4.3. Authority; No Violation. (a) Andrew has the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Andrew. No other corporate proceedings on the part of Andrew are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Andrew and constitutes a valid and binding obligation of Andrew, enforceable against Andrew in accordance with its terms. (b) The execution and delivery of this Agreement by Andrew, the consummation by Andrew of the transactions contemplated hereby, and the compliance by Andrew with the terms or provisions hereof, will not (i) violate any provision of the Certificate of Incorporation or By-Laws of Andrew, (ii) violate any law, statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Andrew or any of its subsidiaries or any of their respective properties or assets, or (iii) violate, conflict with, breach any provision of or result in the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of Andrew or any of its subsidiaries under any note, bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which Andrew or any of its subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected. 4.4. Consents and Approvals. Except for (i) the HSR Filing and the expiration of the waiting period thereunder, (ii) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL, (iii) the filing of Articles of Merger with the Illinois Secretary of State pursuant to the Illinois Business Corporation Act of 1983, as amended, (iv) the filing with the SEC and declaration of effectiveness of the S-4, (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of the shares of Andrew Common Stock pursuant to this Agreement, and (vi) the filings and authorizations necessary to list the shares of Andrew Common Stock issued pursuant to this Agreement on the NNM, no Consents from any Governmental Authority or any third party are necessary in connection with the execution and delivery by Andrew of this Agreement and the consummation by Andrew of the Merger and the other transactions contemplated by this Agreement. <PAGE> 4.5. Financial Statements. Andrew has previously provided Antenna with correct and complete copies of (a) the consolidated balance sheet of Andrew and its subsidiaries as of September 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year ended September 30, 1995, accompanied by the audit report of Ernst & Young LLP, independent public auditors with respect to Andrew, (b) the consolidated balance sheets of Andrew and its subsidiaries as of September 30, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal years ended September 30, 1994, 1993 and 1992 as reported in Andrew's 1994 Annual Report to Stockholders filed with the SEC under the Securities and Exchange Act (the "Exchange Act"), accompanied by the audit report of Ernst & Young LLP, and (c) the unaudited consolidated condensed balance sheets of Andrew and its subsidiaries as of December 31, 1994 and 1993, March 31, 1995 and 1994 and June 30, 1995 and 1994 and the related unaudited condensed consolidated statements of income and cash flows for the periods then ended as reported in Andrew's Quarterly Reports on Form 10-Q for the periods ended December 31, 1994, March 31, 1995 and June 30, 1995 filed with the SEC under the Exchange Act (the "Andrew Forms 10-Q") (collectively, the "Andrew Financial Statements"). The Andrew Financial Statements fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments customary in nature and amount), the consolidated financial position of Andrew and its subsidiaries as of the dates thereof, and the consolidated results of the operations and cash flows of Andrew and its subsidiaries for the respective fiscal periods or as of the respective dates thereof; and each of such statements , including the notes thereto, comply in all material respects with the applicable accounting requirements and published rules and regulations of the SEC. Each of such financial statements, including the notes thereto, has been prepared in accordance with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto or, in the case of unaudited statements, as permitted by the applicable accounting requirements and published rules and regulations of the SEC for Quarterly Reports on Form 10-Q. The books and records of Andrew and its subsidiaries have been, and are being, maintained in all material respects in accordance with all other applicable legal and accounting requirements and reflect only actual transactions. 4.6. Legal Proceedings. (a) There are no actions, suits, proceedings, claims or investigations pending, or to the knowledge of Andrew, threatened against or affecting Andrew or any of its subsidiaries at law or in equity or before any Governmental Authority or challenging the validity or propriety of the transactions contemplated by this Agreement. (b) There is no judgment, order, writ, decree, injunction or regulatory restriction imposed upon Andrew, any of its subsidiaries or their assets which has had, or could reasonably be expected to have, a Material Adverse Effect on Andrew and its subsidiaries, taken as a whole, or the Surviving Corporation. <PAGE> 4.7. SEC Reports. The annual reports on Form 10-K of Andrew for the past two years as filed under the Exchange Act, and all other reports and proxy statements filed or required to be filed by Andrew during such period, have been duly and timely filed by Andrew, complied as to form with all requirements under the Exchange Act, were true and correct in all material respects as of the dates at which the information was furnished, and contained no untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 4.8. S-4 Information. None of the information that Andrew will include or incorporate by reference in the S-4 will, at the time the S-4 is filed with the SEC, at any time it is amended or supplemented, at the time it becomes effective under the Securities Act, or at the Closing Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The S-4 will comply as to form in all material respects with the requirements of the Securities Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, Andrew makes no representation or warranty with respect to statements made in the S-4 based on written information supplied by Antenna or the Antenna Subsidiaries specifically for inclusion therein. 4.9. Broker's Fees. Neither Andrew nor any of its subsidiaries nor any of their respective directors, officers or employees has employed any person or entity as a broker, finder or agent or incurred any liability for any broker's fees, finder's fees or other commission in connection with the Merger or the related transactions contemplated by this Agreement. 4.10. Reorganization. Andrew has no reason to believe that the Merger will not qualify as a reorganization within the meaning of Section 368 of the Code. 4.11. Disclosure. No representation or warranty by Andrew contained in this Agreement, or in any financial statement, certificate or other document furnished or to be furnished by Andrew to Antenna or its representatives in connection herewith contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact required to make the statements herein or therein not misleading. <PAGE> ARTICLE V. COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1. Conduct of Businesses Prior to the Effective Time. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement, each of Antenna and Andrew shall, and shall cause each of their respective subsidiaries to, (i) conduct its business in the usual, regular and ordinary course consistent with past practice, (ii) use its reasonable efforts to maintain and preserve intact its business organization and advantageous business relationships and retain the services of its key officers and employees and (iii) take no action which would adversely affect or delay the ability of either Antenna or Andrew to obtain any necessary approvals of any Governmental Authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement. 5.2. Antenna Forbearances. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement, Antenna shall not, and shall not permit any of the Antenna Subsidiaries to, without the prior written consent of Andrew: (a) incur any indebtedness for borrowed money (except pursuant to existing funded debt agreements described in Section 3.13 of the Disclosure Schedule), assume, guarantee, endorse or otherwise as an accommodation, become responsible for the obligations of any other individual, partnership, limited liability company, corporation or other entity (collectively, "Person"), or make any loan or advance; (b) (i) adjust, split, combine or reclassify any capital stock; (ii) make, declare or pay any dividend, or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, (iii) grant any Person any right to acquire any shares of its capital stock, or (iv) issue any additional shares of capital stock; (c) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets to any Person, or cancel or release any indebtedness or claims owed to or held by Antenna or any of the Antenna Subsidiaries by any Person, except in the ordinary course of business consistent with past practice; (d) make any investment in any Person by purchase of securities, contributions to capital, property transfers, or purchase of any property or assets of any other Person; <PAGE> (e) except for transactions in the ordinary course of business consistent with past practice, enter into or terminate any Antenna Contract, or change any terms in any Antenna Contract, other than renewals or changes in immaterial terms thereof or changes effective January 1, 1996 in certain terms of the Antenna Company Employee's 401(k) Plan which changes have been made available to Andrew; (f) increase in any manner the compensation or fringe benefits of any of its directors, officers or employees other than in the ordinary course of business consistent with past practice, pay any pension or retirement allowance not required by any existing plan or agreement to any of the foregoing, or become a party to, amend or commit itself to, any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any of the foregoing, except for changes effective January 1, 1996 in certain terms of the Antenna Company Employee's 401(k) Plan which changes have been made available to Andrew; (g) settle any claim, action or proceeding involving money damages, except in the ordinary course of business consistent with past practice; (h) take any action that would prevent or impede the Merger from qualifying (i) for "pooling of interests" accounting treatment, or (ii) as a reorganization within the meaning of Section 368 of the Code; (i) amend its Articles of Incorporation or By-Laws; or (j) take any action that is intended or may reasonably be expected to result in (i) any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or (ii) any of the conditions to the Merger set forth in Article VII not being satisfied or (iii) any violation of any provision of this Agreement, except, in each case, as may be required by applicable law. 5.3. Andrew Forbearances. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement, Andrew shall not, and shall not permit any of its subsidiaries to, without the prior written consent of Antenna: (a) take any action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code; or (b) take any action that is intended or may reasonably be expected to result in (i) any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or (ii) any of the conditions to the Merger set forth in Article VII not being satisfied or (iii) any violation of any provision of this Agreement, except, in each case, as may be required by applicable law. <PAGE> ARTICLE VI. ADDITIONAL AGREEMENTS 6.1. Regulatory and Other Matters. (a) Andrew, with the cooperation of Antenna, shall promptly prepare and file the S-4 with the SEC and shall use reasonable efforts to have the S-4 declared effective under the Securities Act as promptly as practicable after such filing. Antenna shall, upon request, furnish Andrew with all information or documents concerning Antenna and the Antenna Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the S-4. Andrew shall also use its reasonable efforts to obtain all necessary state securities law or "Blue Sky" qualifications, permits and approvals required to carry out the transactions contemplated by this Agreement, and Antenna shall furnish all information concerning Antenna and the holders of Antenna Common Stock as may be reasonably requested by Andrew in connection with such qualifications, permits and approvals. (b) The parties shall cooperate with each other and use their best efforts to prepare and file promptly all necessary documentation to effect all applications, notices, petitions and filings, including the HSR Filing, and to obtain as promptly as practicable all Consents of Governmental Authorities and third parties which are necessary or advisable to consummate the Merger and the other transactions contemplated by this Agreement, and the parties shall keep each other apprised of the status of matters relating to completion of the transactions contemplated herein. 6.2. Access to Information. Upon reasonable notice, Antenna shall, and shall cause the Antenna Subsidiaries to, afford to the officers, employees, accountants, counsel and other representatives of Andrew access during normal business hours during the period prior to the Effective Time to all of Antenna's and the Antenna Subsidiaries' books and records, properties and contracts, and, during such period, Antenna shall, and shall cause the Antenna Subsidiaries to, make available to Andrew all information concerning their businesses, assets and personnel as Andrew may reasonably request. Andrew shall hold all information furnished by or on behalf of Antenna or the Antenna Subsidiaries pursuant to this Section 6.2 in confidence to the extent required by, and in accordance with, the provisions of the confidentiality agreement, dated August 11, 1995, between Antenna and Andrew (as amended, the "Confidentiality Agreement"). 6.3. Stockholders' Approval. Antenna shall call a meeting of its stockholders for the purpose of voting upon this Agreement and the Merger, which meeting shall be held as soon as reasonably practicable after the S-4 is declared effective by the SEC . 6.4. NNM Listing. Andrew shall cause the shares of Andrew Common Stock to be issued in the Merger to be approved for listing on the NNM, subject to official notice of issuance, prior to the Effective Time. <PAGE> 6.5. Affiliates. Prior to the Effective Time, Antenna shall obtain from each of its stockholders a written agreement substantially in the form attached as Exhibit B, provided, however, that Antenna is not required to obtain any such agreement from any stockholder or group of stockholders who, in the opinion of McDermott, Will & Emery, are not "affiliates" of Antenna pursuant to Rule 145 of the Securities Act or otherwise pursuant to SEC accounting releases with respect to "pooling of interests" accounting treatment. 6.6. Additional Agreements. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to the Merger, the proper officers and directors of each party to this Agreement and their respective subsidiaries shall take all such necessary or advisable action. 6.7. Advice of Changes. Antenna and Andrew shall promptly advise the other party of any change or event which is likely to have a Material Adverse Effect on it or which it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein. 6.8. Takeover Proposals. (a) Antenna agrees that from and after its execution of this Agreement through the Effective Time, it shall not, nor shall it permit any of the Antenna Subsidiaries to, and it shall use its best efforts to cause the directors, officers, employees and stockholders, and all investment bankers, attorneys or other advisors or representatives retained by Antenna or any of the Antenna Subsidiaries not to, (i) solicit or encourage the submission of any Takeover Proposal (as hereinafter defined), (ii) participate in any discussions or negotiations regarding, or furnish to any third party any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, a Takeover Proposal, (iii) make or authorize any statement or recommendation in support of any Takeover Proposal or (iv) enter into any agreement with respect to any Takeover Proposal. <PAGE> (b) Notwithstanding the foregoing paragraph (a), nothing contained in this Section 6.8 shall prohibit the Board of Directors, executive officers or stockholders of Antenna, or the investment bankers, attorneys, or other advisors or representatives retained by Antenna from participating in any discussions or negotiations with, or furnishing any information to, any third party that makes a Takeover Proposal if all of the following events shall have occurred: (i) Andrew has been notified in writing of such Takeover Proposal within 24 hours of Antenna's receipt thereof, including the identity of the party making the Takeover Proposal and the specific terms and conditions thereof, and has been given copies of such Takeover Proposal; (ii) such third party has made a written Takeover Proposal to the Board of Directors of Antenna, which Takeover Proposal identifies a price or range of values to be paid and based on the advice of Antenna's investment bankers, the Board of Directors of Antenna has determined that such Takeover Proposal is financially more favorable to the stockholders of Antenna than the terms of the Merger; (iii) Antenna's Board of Directors has determined, based on the advice of Antenna's investment bankers, that such third party is financially capable of consummating the transactions specified in the Takeover Proposal; and (iv) the Board of Directors of Antenna has determined, after consultation with its outside legal counsel, that its fiduciary duties require it to furnish information to and negotiate with such third party. Notwithstanding the foregoing, Antenna shall not provide any non-public information to such third party unless (x) prior to the date thereof Antenna has provided such information to Andrew; (y) Antenna has notified Andrew in advance of any such proposed disclosure of non-public information and has provided Andrew with a description of the information Antenna intends to disclose; and (z) Antenna provides such non-public information pursuant to a nondisclosure agreement with terms which are at least as restrictive as the Confidentiality Agreement. (c) In addition to the foregoing requirements, Antenna shall not accept or enter into any agreement concerning a Takeover Proposal until at least 48 hours after Andrew's receipt of a copy of such Takeover Proposal. Upon compliance with the requirements in the foregoing paragraph (b) and this paragraph (c), Antenna shall be entitled to terminate this Agreement in accordance with the provisions of Section 8.1(d). (d) For purposes of this Agreement, "Takeover Proposal" means any proposal or offer for a merger, consolidation or other business combination involving Antenna or any proposal or offer to acquire a material equity interest in, or a substantial portion of the assets of, Antenna or the Antenna Subsidiaries, other than by Andrew as contemplated by this Agreement. (e) The Company shall be entitled to furnish a copy of this Section 6.8 to any third party who expresses an interest in making a Takeover Proposal after the execution of this Agreement. 6.9. Tax Matters. Antenna and Andrew agree as follows: <PAGE> (a) Consistency. Antenna and Andrew will not, and Antenna will use its best efforts to cause its stockholders not to, file any tax return, make any disclosure or otherwise take any position or any action that is inconsistent with the Merger qualifying as a reorganization under Section 368(a)(1)(A) of the Code or would alone or in conjunction with any other action cause the Merger to not qualify as a reorganization under Section 368(a)(1)(A) of the Code. Antenna and Andrew will, and Antenna will use its best efforts to cause its stockholders to, file all Returns and take such other actions as may be required for the Merger to qualify as a reorganization under Section 368(a)(1)(A) of the Code and to comply with the regulations under Section 368 of the Code as they apply to the Merger. (b) Continuity of Business Enterprise. Andrew will cause the historic business of Antenna to be continued or will cause a significant portion of the historic business assets of Antenna to be used in a trade or business in a manner sufficient to comply with the continuity of business enterprise requirements set forth in Treasury Regulation 1.368-1(d) under Section 368 of the Code. (c) Reacquisition of Shares. Neither Andrew nor any of its affiliates have any plan or present intention to reacquire any of the shares of Andrew Common Stock issued in the Merger. 6.10. Exchange Act Reports. Andrew will make timely filings of all documents and reports required to be filed by it pursuant to the Exchange Act. 6.11. Combined Operations Financial Statements. If the Closing occurs after February 29, 1996, Andrew will file, not later than the fifteenth day following the last day of the first complete calendar month following the Closing, provided such month is the first month of the quarter, a report on Form 8-K which includes financial results of Andrew covering a period of at least 30 days of post-Merger combined operations of Andrew and Antenna sufficient to allow "affiliates" of Antenna to sell shares of Andrew received in connection with the Merger pursuant to the provisions of Accounting Series Release No. 135, as amended by Staff Accounting Bulletin Nos. 65 and 76. ARTICLE VII. CONDITIONS PRECEDENT 7.1. Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: <PAGE> (a) Approvals and Consents. All regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all such waiting periods being referred to herein as the "Requisite Regulatory Approvals"), and all consents necessary to transfer all of Antenna's rights, title and interest to its facilities located on Maplewood Drive in Itasca, Illinois shall have been obtained in accordance with the lease thereof, and shall remain in full force and effect. (b) S-4. The S-4 shall have become effective under the Securities Act and no stop order suspending the effectiveness of the S-4 shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. (c) NNM Listing. The shares of Andrew Common Stock which shall be issued to the stockholders of Antenna upon consummation of the Merger shall have been authorized for listing on the NNM, subject to official notice of issuance. (d) Blue Sky. Andrew shall have received all state securities or "blue sky" permits and other authorizations necessary to issue the shares of Andrew Common Stock pursuant to this Agreement and the Merger. (e) No Injunctions or Restraints; Illegality. No order, injunction or decree issued by any Governmental Authority or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect. No law, statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Authority which prohibits, materially restricts or makes illegal the consummation of the Merger or the other transactions contemplated by this Agreement. (f) Antenna Stockholder Approval. This Agreement and the transactions contemplated hereby shall have been approved by holders owning 66-2/3% or more of the issued and outstanding shares of Antenna Common Stock. 7.2. Conditions to Obligations of Andrew. The obligation of Andrew to effect the Merger is also subject to the satisfaction or waiver by Andrew at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Antenna set forth in this Agreement that are qualified with reference to a Material Adverse Effect or materiality shall be true and correct, and the representations and warranties of Antenna that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date. Andrew shall have received a certificate signed on behalf of Antenna by the President and the Vice President-Operations, to the foregoing effect. <PAGE> (b) Performance of Obligations of Antenna. Antenna shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Andrew shall have received a certificate signed on behalf of Antenna by the President, and the Vice President-Operations to such effect. (c) Dissenters Rights. No holder of Antenna Common Stock shall have validly exercised its "dissenters rights" pursuant to Sections 11.65 and 11.70 of the Illinois Business Corporation Act of 1983, as amended (the "IBCA"). (d) Antenna Technologies Inc. Antenna Technologies Inc., an Illinois corporation ("ATI"), shall have been dissolved in accordance with the provisions of the IBCA and the Secretary of State of Illinois shall have issued a certificate of dissolution applicable to ATI. No actions shall have been taken by ATI, its directors or its shareholders to revoke such dissolution. (e) Stockholder Agreements. Andrew shall have received either (i) executed letter agreements substantially in the form attached as Exhibit B from each stockholder of Antenna, or (ii) a legal opinion from McDermott, Will & Emery, counsel to Antenna, in form and substance satisfactory to Andrew and its counsel, opining that any stockholder or any group of stockholders of Antenna that has failed to execute and deliver such an agreement is not deemed to be an "affiliate" of Antenna for purposes of Rule 145 under the Securities Act or otherwise pursuant to SEC accounting releases with respect to "pooling of interests" accounting treatment. (f) Non-Competition and Confidentiality Agreements. Roger K. Fisher and William A. Hamilton shall have each executed and delivered to Andrew a non-competition and confidentiality agreement substantially in the form attached as Exhibit C. (g) Pooling of Interests Letter. Andrew shall have received from Ernst & Young, LLP a letter dated on or about the date that is two business days prior to the date the Proxy Statement/Prospectus that forms a part of the S-4 is first mailed to stockholders of Antenna, in form and substance acceptable to Andrew, to the effect that the business combination to be effected by the Merger will qualify for accounting as a "pooling of interests" by Andrew for purposes of its consolidated financial statements under GAAP and applicable SEC rules and regulations, and such letter shall not have been withdrawn or modified in any material respect on the Closing Date. No action shall have been taken or proposed by any Governmental Authority, and no statute, rule, regulation or order shall have been enacted, promulgated, issued or proposed by any Governmental Authority that would prevent Andrew from accounting for the business combination to be effected by the Merger as a pooling of interests. <PAGE> (h) Legal Opinion; Closing Certificates. Andrew shall have received from McDermott, Will & Emery, counsel to Antenna, an opinion substantially in the form attached as Exhibit D, together with such customary closing documents and certificates as Andrew or its counsel shall reasonably request. (i) Federal Tax Opinion. Andrew shall have received an opinion of Gardner, Carton & Douglas, in form and substance reasonably satisfactory to Andrew, on or about the date that is two business days prior to the date the S-4 is first mailed to stockholders of Antenna, substantially to the effect that the Merger will constitute a tax free reorganization under Section 368(a)(1)(A) of the Code and Antenna and Andrew will each be a party to the reorganization and such opinion shall not have been withdrawn or modified in any material respect on the Closing Date. In rendering such opinion, counsel may require and rely upon representations contained in certificates of officers of Andrew, Antenna, stockholders of Antenna and others. (j) Certifications. Andrew and Gardner, Carton & Douglas, counsel to Andrew, shall have received (i) a certificate from Antenna substantially in the form attached as Exhibit E, and (ii) certificates from each stockholder of Antenna substantially in the form attached as Exhibit F. (k) Material Adverse Change. There shall not have occurred any change which would constitute a Material Adverse Effect on Antenna and the Antenna Subsidiaries, taken as a whole. 7.3. Conditions to Obligations of Antenna. The obligation of Antenna to effect the Merger is also subject to the satisfaction or waiver by Antenna at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Andrew set forth in this Agreement that are qualified with a reference to materiality shall be true and correct, and the representations and warranties of Andrew that are not so qualified shall be true and correct in all material respects, in each case, as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date. Antenna shall have received a certificate signed on behalf of Andrew by the Chief Executive Officer or the Chief Financial Officer of Andrew to the foregoing effect. (b) Performance of Obligations of Andrew. Andrew shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Antenna shall have received a certificate signed on behalf of Andrew by the Chief Executive Officer or the Chief Financial Officer of Andrew to such effect. <PAGE> (c) Legal Opinion; Closing Certificates. Antenna shall have received from Gardner, Carton & Douglas, counsel to Andrew, an opinion substantially in the form attached as Exhibit G together with such customary closing documents and certificates as Antenna or its counsel shall reasonably request. (d) Federal Tax Opinion. The stockholders of Antenna shall have received an opinion of McDermott, Will & Emery, in form and substance reasonably satisfactory to them on or about the date that is two business days prior to the date the Proxy Statement/Prospectus that forms a part of the S-4 is first mailed to stockholders of Antenna, substantially to the effect that: (i) The Merger will constitute a tax free reorganization under Section 368(a)(1)(A) of the Code and Antenna and Andrew will each be a party to the reorganization; (ii) No gain or loss will be recognized by the stockholders of Antenna who exchange their Antenna Common Stock for Andrew Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Andrew Common Stock); (iii) The tax basis of the Andrew Common Stock received by stockholders who exchange all of their Antenna Common Stock for Andrew Common Stock in the Merger will be the same as the tax basis of the Antenna Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); (iv) The holding period for capital gains purposes of Andrew Common Stock received by stockholders of Antenna in the Merger will include the period during which the shares of Antenna Common Stock surrendered in exchange therefor were held, provided such Antenna Common Stock was held as a capital asset by the holder of such Antenna Common Stock at the Effective Time; and (v) The discussion in the S-4 under the caption "The Merger -- Certain Federal Income Tax Consequences" insofar as it relates to matters of federal income tax law is a fair and accurate summary of such matters. and such opinion shall not have been withdrawn or modified in any material respect on the Closing Date. In rendering such opinion, counsel may require and rely upon representations contained in certificates of officers of Antenna, stockholders of Antenna, Andrew and others. (e) Material Adverse Change. There shall not have occurred any change which would constitute a Material Adverse Effect on Andrew and its subsidiaries, taken as a whole. <PAGE> ARTICLE VIII. TERMINATION AND AMENDMENT 8.1. Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of Antenna: (a) by mutual consent of Antenna and Andrew in a written instrument, if the Board of Directors of each so determines by a vote of a majority of the members of its entire Board; (b) by either the Board of Directors of Antenna or the Board of Directors of Andrew if any Governmental Authority which must grant a Requisite Regulatory Approval has denied approval of the Merger, or any Governmental Authority of competent jurisdiction shall have issued an order permanently enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; (c) by either the Board of Directors of Antenna or the Board of Directors of Andrew (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if (x) there shall have been a material breach of any of the representations or warranties or any of the covenants or agreements set forth in this Agreement on the part of the other party, which breach is not cured within 30 days following written notice to the party committing such breach, or which breach, by its nature or timing, cannot be cured prior to the Closing Date, (y) the Closing shall not have occurred on or before March 1, 1996; provided, however, that neither Board of Directors shall be entitled to terminate the Agreement pursuant to this clause (y) if the reason the Closing has not occurred by such date is because any Governmental Authority which must grant a Requisite Regulatory Approval has failed to act, the S-4 shall have been filed but shall not yet have been declared effective, the Antenna stockholder meeting shall not have occurred in accordance with the requirements of the IBCA or some similar event beyond the control of both parties shall not have occurred by such date, or (z) the Closing shall not have occurred on or before May 31, 1996; (d) by the Board of Directors of Antenna (after consulting with its legal counsel), if such action is required for the Board of Directors to comply with its fiduciary duties to Antenna and its stockholders; provided, however, if such action is taken by Antenna, then (i) within 2 days of such termination Antenna shall pay to Andrew $400,000 as reimbursement for Andrew's out-of-pocket expenses incurred in connection with the transactions contemplated by this Agreement (for which Andrew shall not be required to account); and (ii) if Antenna shall consummate any transaction pursuant to a Takeover Proposal (x) within 15 months following the date of this Agreement, or (y) pursuant to a definitive agreement executed by Antenna during such 15-month period, Antenna shall also promptly pay to Andrew $1,500,000 upon the occurrence of such transaction; or <PAGE> (e) by Antenna if the Andrew Stock Value is less than $38.00. 8.2. Effect of Termination. In the event of termination of this Agreement by either Antenna or Andrew as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Antenna, Andrew, any of their respective subsidiaries or any of their directors or officers shall have any liability of any nature whatsoever hereunder, or in connection with the transactions contemplated hereby, except that (i) Sections 8.1(d) and 9.1, this Section 8.2 and the last sentence of Section 6.2, shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, neither Antenna nor Andrew shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. 8.3. Amendment; Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Board of Directors, may, to the extent legally allowed, (i) amend any term or provision of this Agreement, (ii) extend the time for the performance of any of the obligations or other acts of the parties hereto, (iii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iv) waive compliance with any of the agreements or conditions contained herein; provided, however, that after any approval of the transactions contemplated by this Agreement by the stockholders of Antenna, there may not be, without further approval of such stockholders, any amendment, extension or waiver of this Agreement which reduces the amount or changes the form of the consideration to be delivered to the holders of Antenna Common Stock hereunder other than as contemplated by this Agreement. Any agreement on the part of a party hereto to any such amendment, extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such amendment, extension or waiver or failure to insist on strict compliance with any obligation, covenant, agreement or condition in this Agreement shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE IX. GENERAL PROVISIONS 9.1. Expenses. Except as set forth in Section 8.1(d), all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, provided, however, that all filing and other fees paid to the SEC and state securities agencies in connection with the S-4 shall be borne by Andrew. <PAGE> 9.2. Notices. All notices and other required communications hereunder shall be in writing and shall be deemed given: if delivered personally, when so delivered; if telecopied, on the date telecopied, provided there is written confirmation of receipt and a confirming notice or communication is delivered in the manner set forth herein); if mailed by registered or certified mail (postage prepaid and return receipt requested), on the date five days after deposit in the mail; or if delivered by overnight courier (with written confirmation of delivery to such courier), on the next business after such delivery, in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Andrew, to: Andrew Corporation 10500 West 153rd Street Orland Park, Illinois 60462 Attention: Charles R. Nicholas Executive Vice President; Chief Financial Officer Fax: (708) 873-2571 with a copy to: Gardner, Carton & Douglas 321 North Clark Street, Suite 3400 Chicago, Illinois 60610 Attention: Dewey B. Crawford Fax: (312) 644-3381 and (b) if to Antenna, to: The Antenna Company 1100 Maplewood Drive Itasca, Illinois 60143 Attention: Mr. Roger K. Fisher, President Fax: (708) 250-8269 with a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attention: Thomas J. Murphy Fax: (312) 984-3669 <PAGE> 9.3. Interpretation. When a reference is made in this Agreement to Sections, Schedules or Exhibits, such reference shall be to a Section of or Schedule or Exhibit to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." No provision of this Agreement shall be construed to require Andrew, Antenna or any of their respective subsidiaries or affiliates to take any action which would violate any applicable law, rule or regulation. 9.4. Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement. 9.5. Entire Agreement. This Agreement (including the Disclosure Schedule, Exhibits, documents and instruments referred to herein) constitutes the entire agreement of the parties and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof other than the Confidentiality Agreement. 9.6. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law which would result in the application of any other law. 9.7. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 9.8. Publicity. Except as otherwise required by applicable law or the rules of the NNM, neither Antenna nor Andrew shall, or shall permit any of their respective subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to, or otherwise make any public statement concerning, the transactions contemplated by this Agreement without the prior consent of the other party, which consent shall not be unreasonably withheld. <PAGE> 9.9. Assignment; Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations set forth herein shall be assigned by either of the parties (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. This Agreement (including the Disclosure Schedule, Exhibits, documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 9.10. Knowledge and Awareness. As used in this Agreement, "knowledge" or "awareness" of any entity means the actual knowledge or awareness of such entity's officers and other persons exercising supervisory authority, and such knowledge or awareness as such entity's officers and other persons exercising supervisory authority should have had after reasonable investigation. Whenever the term "knowledge" or "awareness" is used to refer to the "knowledge" or "awareness" of Antenna, such term shall include the "knowledge" or "awareness" of the officers and other persons exercising supervisory authority over Antenna and the Antenna Subsidiaries and the stockholders of Antenna who are active in the business of Antenna and the Antenna Subsidiaries. 9.11. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumptions or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any Federal, state, county, local or foreign law or statute shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. 9.12. Pooling of Interests Accounting; Tax Free Reorganization. In the event that either Andrew or Antenna becomes aware of any provisions of this Agreement which would prevent the Merger from being accounted for as a pooling of interests or qualifying as a reorganization within the meaning of Section 368 of the Code, such parties shall negotiate in good faith with a view toward amending this Agreement in a manner which would permit the Merger to be accounted for as a pooling of interests or qualified as such a reorganization, as applicable. IN WITNESS WHEREOF, Antenna and Andrew have caused this AGREEMENT AND PLAN OF MERGER to be executed by their respective officers thereunto duly authorized as of the date first above written. ANDREW CORPORATION THE ANTENNA COMPANY By: /s/ F. L. English By: /s/ Roger K. Fisher --------------------------------- -------------------- Floyd L. English Roger K. Fisher Chairman, President and Chief President Executive Officer <PAGE> EXHIBIT A CERTIFICATE OF MERGER OF THE ANTENNA COMPANY INTO ANDREW CORPORATION Andrew Corporation, a Delaware Corporation, hereby certifies that: FIRST: The name and state of incorporation of each of the constituent corporations is as follows: State of Name Incorporation Andrew Corporation Delaware The Antenna Company Illinois SECOND: An Agreement and Plan of Merger dated January ___, 1996 has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 252(c) of the General Corporation Law of the State of Delaware. THIRD: The name of the surviving corporation is Andrew Corporation. FOURTH: The Certificate of Incorporation of Andrew Corporation as in effect on the date of filing of this certificate shall be the Certificate of Incorporation of the surviving corporation. FIFTH: The executed Agreement and Plan of Merger is on file at the principal place of business of Andrew Corporation, the surviving corporation, the address of which is 10500 West 153rd Street, Orland Park, Illinois 60462. SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the surviving corporation, on request and without cost, to any stockholder of either constituent corporation. SEVENTH: The authorized capital stock of The Antenna Company is 100,000 shares of Common Stock, $.10 par value. <PAGE> IN WITNESS WHEREOF, Andrew Corporation has caused this certificate to be duly executed by its officers thereunto duly authorized this ____ day of _____________ 1996. ANDREW CORPORATION By: Charles R. Nicholas Executive Vice President; Chief Financial Officer ATTEST: James F. Petelle Secretary <PAGE> EXHIBIT B FORM OF AFFILIATE LETTER _____________, 1996 Andrew Corporation 10500 West 153rd Street Orland Park, Illinois 60464 Ladies and Gentlemen: I have been advised that as of the date of this letter I may be deemed to be an "affiliate" of The Antenna Company, an Illinois corporation ("Antenna"), as the term "affiliate" is defined within the meaning of Rule 145 of the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger dated January ___, 1996 (as amended from time to time, the "Agreement"), between Andrew Corporation, a Delaware corporation ("Andrew") and Antenna, Antenna shall merge with and into Andrew (the "Merger"). In connection with the Merger, I may be entitled to receive shares of common stock, par value $0.01 per share, of Andrew (the "Andrew Common Stock") in exchange for shares of Antenna common stock, par value $0.10 per share (the "Antenna Common Stock"). I represent and warrant to, and covenant with, Andrew that in the event I receive any Andrew Common Stock as a result of the Merger: (a) I shall not make any sale, transfer or other disposition of the Andrew Common Stock in violation of the Act or the Rules and Regulations. (b) I have carefully read this letter and the Agreement and, to the extent I felt necessary, I have discussed the requirements of such documents and other applicable limitations upon my ability to sell, transfer or otherwise dispose of Andrew Common Stock with my counsel or counsel for Antenna. (c) I have been advised that any shares of Andrew Common Stock issued to me pursuant to the Merger have been registered with the Commission under the Act on a Registration Statement on Form S-4. However, I have been advised that at the time the Merger is submitted for a vote of the stockholders of Antenna, I may be deemed to be an affiliate of Antenna, and other than as set forth in the Agreement, the distribution by me of the Andrew Common Stock has not been registered under the Act. Therefore, I will not sell, transfer or otherwise dispose of any Andrew Common Stock issued to me in the Merger unless such sale, transfer or other disposition is made in conformity with the volume and other limitations of Rule 145 promulgated by the Commission under the Act, and either such sale, transfer or other disposition has been made (i) pursuant to an effective registration statement under the Act, or (ii) in a transaction that in the opinion of counsel is exempt from registration under the Act. <PAGE> (d) I understand that Andrew is under no obligation to register the sale, transfer or other disposition of the Andrew Common Stock by me or on my behalf under the Act, or to take any other action necessary in order to make compliance with an exemption from such registration available. (e) I further represent to, and covenant with, Andrew that I will not, during the 30 days prior to the Effective Time (as defined in the Agreement), sell, transfer or otherwise dispose of Antenna Common Stock or shares of the capital stock of Andrew that I may hold and, furthermore, that I will not sell, transfer or otherwise dispose of Andrew Common Stock received by me in the Merger or any other shares of the capital stock of Andrew until after such time as results covering at least 30 days of the combined operations of Antenna and Andrew have been published by Andrew, in the form of a quarterly earnings report, an effective registration statement filed with the Commission, a report filed with the Commission on Form 10-K, 10-Q, or 8-K, or any other public filing or announcement which includes such combined results of operations, and I understand that Andrew may place on the certificates of Common Stock issued to me a legend to the foregoing effect. Execution of this letter is not an admission on my part that I am an "affiliate" of Antenna as described in the first paragraph of this letter, or as a waiver of any rights I may have to object to any claim that I am such an affiliate on or after the date of this letter. Sincerely yours, Name: Accepted this ___ day of _______________, 1996 ANDREW CORPORATION By: Name: Title: <PAGE> EXHIBIT C FORM OF CONFIDENTIALITY AND NON-COMPETITION AGREEMENT THIS CONFIDENTIALITY AND NON-COMPETITION AGREEMENT (the "Agreement") is entered into as of ___________, 1996, by and between [Roger K. Fisher/William A. Hamilton] (the "Stockholder") and ANDREW CORPORATION, a Delaware corporation ("Andrew"). R E C I T A L S: WHEREAS, Andrew and the Antenna Company, an Illinois corporation ("Antenna"), have entered into an Agreement and Plan of Merger dated as of ________, 1996 (the "Merger Agreement"), pursuant to which Antenna will be merged with and into Andrew. WHEREAS, Antenna is engaged in the design, assembly, testing, packaging, marketing, sale and distribution of antenna products and cellular phone accessories (the "Acquired Business"). WHEREAS, the Stockholder owns certain shares of the Antenna capital stock, and also serves as an officer and director of Antenna; WHEREAS, in his role as a significant stockholder and an officer and director of Antenna, the Stockholder has acquired confidential and proprietary business information and trade secrets relating to Antenna and the Acquired Business, which information and trade secrets form a substantial and valuable asset to Andrew. WHEREAS, as a condition to Andrew's obligations under the terms of the Merger Agreement, and as an incentive for Andrew to undertake such obligations, Andrew desires to bind the Stockholder to certain restrictive covenants and Stockholder agrees to be so bound, on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Andrew and the Stockholder agree as follows: <PAGE> 1. Non-Competition. The Stockholder acknowledges and agrees that he has learned valuable trade secrets and other proprietary information regarding Antenna and the Acquired Business, and that Andrew would be irreparably damaged if the Stockholder were to provide services to any person or entity in violation of the restrictions contained in this Agreement. Accordingly, as an inducement for Andrew to enter into and consummate the transactions contemplated by the Merger Agreement, the Stockholder agrees that for a period of two years from the later of the date hereof or the date on which Stockholder ceases to be an employee of Andrew (the "Restricted Period"), neither the Stockholder nor any Affiliate (as defined below) of the Stockholder shall, directly or indirectly, either for himself or itself or for any other person or entity: (a) engage or participate in, or assist or advise (whether as a stockholder, owner, partner, employee, officer, director, advisor, consultant or agent), or permit his or its name to be used by, or render services for, any person or entity that is engaged in a Competing Business (as defined below) in the Market Area (as defined below); provided, however, that nothing in this Agreement shall prevent the Stockholder from acquiring or owning, as a passive investment, up to two percent (2%) of the outstanding voting securities of an entity engaged in a Competing Business which are publicly traded on any recognized national securities market; (b) take any action in the Market Area in connection with a Competing Business which might divert from Andrew or any of its Affiliates any opportunity which would be within the scope of Andrew's or such Affiliate's business as then conducted or, to the Stockholder's knowledge, proposed to be conducted; (c) solicit or attempt to solicit any customer of Andrew or any of its Affiliates to purchase Competing Products or Services (as defined below) from any person or entity (other than Andrew or such Affiliate); (d) solicit or attempt to solicit any supplier, licensor, licensee or other business relation of Andrew or any Affiliate thereof to cease doing business with Andrew or any of its Affiliates; or (e) directly or indirectly solicit or hire, or attempt to solicit or hire, any person or entity who is a director, officer, employee or agent of Andrew or any of its Affiliates to perform services for any entity other than Andrew or such Affiliate. <PAGE> As used herein, a "Competing Business" shall mean a business which engages or is making plans to engage in the manufacture, marketing or distribution of products, or the performance, marketing or sale of services, which are competitive with, similar to, or may be used as substitutes for, any products or services of Andrew or any of its Affiliates, including, but not limited to those products and services of Antenna and the Acquired Business, whether (i) in the case of products, such products are or were manufactured by or for Andrew or an Affiliate thereof for sale, or purchased as finished goods for resale, or (ii) in the case of services, such services were performed by Andrew or an Affiliate thereof, or by another company or person on behalf of Andrew or such Affiliate; the products and services subject to these restrictive covenants being referred to herein as "Competing Products and Services." As used herein, "Market Area" shall mean the State of Illinois, any other State in the United States wherein Andrew or any of its Affiliates conducts operations, or any other country wherein Andrew or any of its Affiliates conducts operations. As used herein, an "Affiliate" shall mean any person or entity which controls a party, which such party controls or which is under common control with such party. "Control" means the power, direct or indirect, to influence or cause the direction of the management and policies of a person or entity through voting securities, contract or otherwise. 2. Disclosure of Confidential Information. Andrew and the Stockholder recognize that it is fundamental to the business and operations of Andrew and its Affiliates to preserve the specialized knowledge, trade secrets, and Confidential Information (as defined below) of Antenna concerning the communications industry, including the research, development, production, assembly, marketing, distribution and sale of communications equipment. As a result of his prior role in Antenna's operations, the Stockholder has obtained specialized knowledge, trade secrets and confidential information such as that described herein about the Acquired Business, Antenna and its Affiliates. Therefore, the Stockholder agrees that: (a) The Stockholder shall keep secret and retain in strict confidence, and shall not use, disclose to others, or publish any secret or confidential information relating to the Acquired Business, the operations or other affairs of Antenna, Andrew or their Affiliates, including confidential information concerning the marketing practices, pricing practices, costs, profit margins, customer lists, products, methods, guidelines, procedures, engineering designs and standards, design specifications, analytical techniques, technical information, customer, client, vendor or supplier information, employee information, and any and all other information protectible as a trade secret under applicable law (collectively, the "Confidential Information"). The obligations of the Stockholder hereunder shall not apply to any information that has become public information without fault on the part of the Stockholder, and shall not apply where the Stockholder's disclosure of any such secret or confidential information is required by law. <PAGE> (b) At the request of Andrew, the Stockholder shall, and shall cause each of his Affiliates to make, execute and deliver all applications, papers, assignments, conveyances, instruments or other documents and shall perform or cause to be performed such other lawful acts as Andrew may reasonably deem necessary or desirable to implement any of the provisions of this Agreement, and shall give testimony and cooperate with Andrew, its Affiliates or their representatives in any controversy or legal proceedings involving Andrew, its Affiliates or their representatives with respect to any Confidential Information. 3. Specific Performance. The Stockholder agrees that any violation by him of Sections 1 or 2 of this Agreement would be highly injurious to Andrew and its Affiliates and would cause irreparable harm. Therefore, if the Stockholder breaches the provisions of Sections 1 or 2 of this Agreement, Andrew shall be entitled to seek injunctive relief and a decree of specific performance against the Stockholder. Andrew's right to seek such specific performance is non-exclusive and shall be in addition to any other rights and remedies to which it may be entitled. In the event the Stockholder breaches a covenant contained in this Agreement, the Restricted Period applicable to the Stockholder with respect to such breached covenant shall be extended for the period of such breach. 4. Reformation. The Stockholder acknowledges that the territorial, time and scope limitations set for in Section 1 and 2, as applicable, are reasonable and are properly required for the protection of Andrew. In the event any territorial, time or scope limitation contained in this Agreement is deemed to be unreasonable by a court of competent jurisdiction, Andrew and the Stockholder agree that such term shall be reduced to an area, period or scope as such court shall deem reasonable under the circumstances. 5. Notice. All notices and other required communications hereunder shall be in writing and shall be deemed given: if delivered personally, when so delivered; if telecopied, on the date telecopied, provided there is written confirmation of receipt and a confirming notice or communication is delivered in the manner set forth herein; if mailed by registered or certified mail (postage prepaid and return receipt requested), on the date five days after deposit in the mail; or if delivered by overnight courier (with written confirmation of delivery to such courier), on the next business after such delivery, in each case to the parties at the following addresses: (a) if to Andrew, to: Andrew Corporation 10500 West 153rd Street Orland Park, Illinois 60462 Attention: Charles R. Nicholas Executive Vice President; Chief Financial Officer Fax: (708) 873-2571 <PAGE> with a copy to: Gardner, Carton & Douglas 321 North Clark Street, Suite 3400 Chicago, Illinois 60610 Attention: Dewey B. Crawford Fax: (312) 644-3381 and (b) if to the Stockholder to: with a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attention: Thomas J. Murphy Fax: (312) 984-3669 or at such other addresses or to such other addressees as may be designated by notice given in accordance with the provisions hereof. 6. Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement. 7. Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 8. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Illinois, without regard to any applicable conflicts of law rules which would result in the application of any other law. 9. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 10. Assignment. Neither this Agreement nor any of the rights, interests or obligations set forth herein shall be assigned by either of the parties (whether by operation of law or otherwise); provided, however that Andrew shall be allowed to assign its rights hereunder in connection with the transfer of all or substantially all of Andrew's assets or capital stock to another party (whether by sale, merger, consolidation or otherwise). Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. <PAGE> 11. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumptions or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any Federal, state, county, local or foreign law or statute shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. 12. Interpretation. When a reference is made in this Agreement to sections, such reference shall be to a section of this Agreement unless otherwise indicated. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth above. ANDREW CORPORATION STOCKHOLDER By: Name: Name: [Roger K. Fisher/ Title: William A. Hamilton] <PAGE> EXHIBIT D FORM OF LEGAL OPINION TO BE DELIVERED BY SPECIAL COUNSEL TO ANTENNA The legal opinion of McDermott, Will & Emery, special counsel to The Antenna Company ("Antenna"), shall be to the effect that: 1. Antenna has been duly incorporated and is validly existing and in good standing under the laws of the State of Illinois. Antenna has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted. Antenna is duly qualified to do business and is in good standing as a foreign corporation under the laws of the State of Texas. 2. Each Antenna Subsidiary has been duly incorporated and is validly existing and in good standing under the laws of its jurisdiction of organization, and has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as now being conducted. 3. The authorized capital stock of Antenna consists of 100,000 shares of Antenna Common Stock, of which 9,000 shares are issued and outstanding. All of the issued and outstanding shares of Antenna Common Stock have been duly authorized and validly issued and are fully paid, nonassessable, free of statutory preemptive rights, and, to such counsel's knowledge, free of any other preemptive rights. To the knowledge of such counsel, Antenna does not have and is not bound by any outstanding subscriptions, options, convertible securities, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of its capital stock. 4. Antenna owns, directly or indirectly, all of the issued and outstanding shares of capital stock of the Antenna Subsidiaries, free and clear of any Liens, and all of such shares have been duly authorized and validly issued and are fully paid and nonassessable. To the knowledge of such counsel no Antenna Subsidiary has or is bound by any outstanding subscriptions, options, convertible securities, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of its capital stock or any other equity interest in such subsidiary. 5. Antenna has the corporate power and authority to execute and deliver the Merger Agreement and to consummate the transactions contemplated thereby. The execution and delivery of the Merger Agreement and the consummation of the transactions contemplated thereby have been duly and validly approved by the Board of Directors and stockholders of Antenna. No other corporate proceedings on the part of Antenna are necessary to approve the Merger Agreement or to consummate the transactions contemplated thereby. The Merger Agreement has been duly and validly executed and delivered by Antenna and constitutes a valid and binding obligation of Antenna, enforceable against Antenna in accordance with its terms, subject to the following qualifications: <PAGE> (i) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or in law); and (ii) such counsel need express no opinion with respect to the enforceability of (a) Section 8.3 of the Merger Agreement to the extent that it provides that provisions of the Merger Agreement may only be waived in writing, or (b) Section 9.7 of the Merger Agreement to the extent it states that the provisions of the Merger Agreement are severable. 6. The execution and delivery of the Merger Agreement by Antenna, the consummation by Antenna of the transactions contemplated thereby, and the compliance by Antenna with the terms or provisions thereof, will not (i) violate any provision of the Articles of Incorporation or By-Laws of Antenna, (ii) constitute a violation of any Applicable Contracts, (iii) cause the creation of any security interest or lien upon any of the property of Antenna pursuant to any Applicable Contract, (iv) contravene any provision of any Applicable Law, or (v) contravene any Applicable Order of any Governmental Authority against the Company. Reference to (i) "Applicable Laws" shall mean those laws, rules, and regulations of the States of Illinois and Delaware and of the United States of America which, in such counsel's experience, are normally applicable to transactions of the type contemplated by the Merger Agreement; (ii) "Governmental Authorities" shall mean any Illinois, Delaware, or federal executive, legislative, judicial, administrative, or regulatory body; (iii) "Applicable Orders" shall mean those orders or decrees of Governmental Authorities identified on a schedule attached to such opinion which are the only orders or decrees known to such counsel to be binding on Antenna; and (iv) "Applicable Contracts" shall mean those agreements or instruments set forth on Schedule 3.13 to the Merger Agreement. 7. Except for (i) the HSR Filing and the expiration of the waiting period thereunder, (ii) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL, (iii) the filing of Articles of Merger with the Illinois Secretary of State pursuant to the Illinois Business Corporation Act of 1983, as amended, (iv) the approval of the Merger Agreement by the requisite vote of the holders of Antenna Common Stock, and (v) the filing with the SEC and declaration of effectiveness of the S-4, all of which filings, expirations, approvals and declarations have been made, occurred or obtained, no Consent of any Governmental Authority, is necessary in connection with the execution and delivery by Antenna of the Merger Agreement and the consummation by Antenna of the Merger and the other transactions contemplated thereby. <PAGE> 8. To the knowledge of such counsel, there are no actions, suits, proceedings, claims or investigations pending, or to the knowledge of counsel after due inquiry, threatened against or affecting Antenna or any of the Antenna Subsidiaries at law or in equity or before any Governmental Authority or challenging the validity or propriety of the transactions contemplated by the Merger Agreement. 9. ATI has been dissolved in accordance with the requirements of the IBCA. <PAGE> EXHIBIT E THE ANTENNA COMPANY OFFICER'S CERTIFICATE TO ANDREW CORPORATION AND ITS COUNSEL The Antenna Company ("Antenna") makes the representations and warranties set forth below to Andrew Corporation ("Andrew") and its counsel, Gardner, Carton & Douglas, in connection with the merger of Antenna into Andrew (the "Merger") pursuant to the Agreement and Plan of Merger dated January __, 1996, between Andrew and Antenna (the "Agreement"). Antenna represents and warrants that: 1. The fair market value of the Andrew Common Stock and any other consideration to be received by each Antenna shareholder ("Shareholder") will be approximately equal to the fair market value of the Antenna stock surrendered in the exchange. 2. There is no plan or intention by the Shareholders of Antenna to sell, exchange, or otherwise dispose of a number of shares of Andrew Common Stock to be received in the Merger that would reduce the Shareholders' ownership of Andrew Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50% of the value of all of the stock of Antenna as of the same date, or to enter into any transaction or agreement that would eliminate substantially all of the economic benefits and burdens of the beneficial ownership of any such shares. For purposes of this representation, shares of Antenna stock to be exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of Andrew Common Stock have been treated as outstanding Antenna stock on the date of the Merger. In addition, shares of Antenna stock and shares of Andrew Common Stock held by the Shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger have been considered in making this representation. 3. The liabilities of Antenna to be assumed by Andrew and the liabilities to which the transferred assets of Antenna are subject were incurred by Antenna in the ordinary course of its business. 4. The fair market value of the assets of Antenna to be transferred to Andrew will equal or exceed the sum of the liabilities assumed by Andrew, plus the amount of liabilities, if any, to which the transferred assets are subject. <PAGE> 5. Immediately prior to the Merger, Antenna is not an investment company within the meaning of Section 368(a)(2)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). A corporation is an "investment company" under that provision of the Code if 50% or more of its assets (by value) consist of stock or securities and 80% or more of its assets (by value) are held for investment. For purposes of these 50% and 80% tests, however, stock of a subsidiary corporation is ignored and the parent corporation is deemed to own a ratable portion of its subsidiary's assets directly. (A corporation is a subsidiary for this purpose if the parent owns 50% or more of its stock by vote or value). 6. There is no intercorporate indebtedness existing between Antenna and Andrew that was issued, acquired, or will be settled at a discount. 7. Antenna has not filed for protection from creditors under the U.S. bankruptcy laws or otherwise made a general assignment of its assets for the benefit of creditors. 8. Andrew, Antenna and the Shareholders will pay their respective expenses, if any, incurred in connection with the Merger. 9. Antenna is entering into the Merger for business reasons and not for the principal purpose of avoiding federal income tax. 10. Antenna has not declared dividends with respect to its stock which are or will be unpaid at the time of the Merger. 11. The Merger will be consummated in compliance with the material terms of the Agreement, and none of the material terms and conditions therein has been waived or modified, and Antenna has no plan or intention to waive or modify any such material condition. No side agreements exist between Antenna and any of the Shareholders or Andrew related to the Merger which set forth terms or conditions or call for payment of consideration by any party not set forth in the Agreement. Antenna acknowledges that Andrew is relying upon the truth and accuracy of each of the foregoing representations and warranties in consummating the Merger and that if any representation and warranty is untrue Andrew could suffer significant financial harm. Antenna further acknowledges that Gardner, Carton & Douglas is relying upon the truth and accuracy of each of the foregoing representations and warranties as the basis, in part, for the delivery of its opinion on the federal tax consequences of the Merger pursuant to Section 7.2(i) of the Agreement. IN WITNESS WHEREOF, Antenna, acting by an authorized officer and with full corporate authority, has executed and delivered this Officer's Certificate as of the _____ day of __________, 1996. THE ANTENNA COMPANY By: __________________________________ Its: __________________________________ <PAGE> EXHIBIT F THE ANTENNA COMPANY SHAREHOLDER'S CERTIFICATE TO ANDREW CORPORATION AND ITS COUNSEL I, _________________, a shareholder of The Antenna Company ("Antenna") make the representations and warranties set forth below to Andrew Corporation ("Andrew") and its counsel, Gardner, Carton & Douglas, in connection with the merger of Antenna into Andrew (the "Merger") pursuant to the Agreement and Plan of Merger dated January __, 1996, between Andrew and Antenna (the "Agreement"). I represent and warrant that: 1. I have no plan or intention to sell, exchange, or otherwise dispose of a number of shares of Andrew Common Stock to be received by me in the Merger that would reduce my ownership of Andrew Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50% of the value of all Antenna stock owned by me as of the same date, and I have not entered into and have no plan or intention to enter into any transaction or agreement that would eliminate substantially all of the economic benefits and burdens of the beneficial ownership of any such shares of Andrew Common Stock. For purposes of this representation, shares of Antenna stock to be exchanged for cash or other property have been treated as outstanding Antenna stock on the date of the Merger and Antenna stock otherwise sold, redeemed or disposed of prior to the Merger, or intended to be subsequent to the Merger, have been considered. 2. I will pay the expenses, if any, incurred by me in my capacity as a shareholder of Antenna in connection with the Merger. 3. To the best of my knowledge, no part of any consideration paid or to be paid to me for services performed or to be performed by me for Antenna or Andrew or pursuant to any contractual relationship between Antenna or Andrew and me constitutes separate or additional consideration for the shares of Antenna stock to be exchanged by me in the Merger, and no part of the Andrew Common Stock to be issued to me pursuant to the Merger constitutes separate or additional consideration attributable to such services or contractual relationship. <PAGE> I understand that Andrew is relying upon the truth and accuracy of each of the foregoing representations and warranties in consummating the Merger and that if any representation and warranty is untrue, Andrew could suffer significant financial harm. I further understand that Gardner, Carton & Douglas is relying upon the truth and accuracy of each of the foregoing representations and warranties as the basis, in part, for the delivery of its opinion pursuant to Section 7.2(i) of the Agreement. Dated: __________, 1996 ------------------------------------ [Name of Antenna Shareholder] <PAGE> EXHIBIT G FORM OF LEGAL OPINION TO BE DELIVERED BY COUNSEL TO ANDREW The legal opinion of Gardner, Carton & Douglas, counsel to Andrew Corporation ("Andrew"), shall be to the effect that: 1. Andrew is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Andrew has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted. 2. The authorized capital stock of Andrew consists of 100,000,000 shares of Andrew Common Stock. All of the issued and outstanding shares of Andrew Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of statutory preemptive rights. The shares of Andrew Common Stock to be issued pursuant to the Merger have been duly authorized and, at the Effective Time upon issuance pursuant to the Merger Agreement, all such shares will be validly issued, fully paid, nonassessable and free of statutory preemptive rights. 3. Andrew has the corporate power and authority to execute and deliver the Merger Agreement and to consummate the transactions contemplated thereby. The execution and delivery of the Merger Agreement and the consummation of the transactions contemplated thereby have been duly and validly approved by the Board of Directors of Andrew. No other corporate proceedings on the part of Andrew are necessary to approve the Merger Agreement or to consummate the transactions contemplated thereby. The Merger Agreement has been duly and validly executed and delivered by Andrew and constitutes a valid and binding obligation of Andrew, enforceable against Andrew in accordance with its terms, except to the extent that enforcement may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors or by equitable principles regardless of whether enforcement is sought in a proceeding in equity or at law. We express no opinion as to the validity or enforceability of any provision regarding choice of Delaware law to govern the Merger Agreement. <PAGE> 4. The execution and delivery of the Merger Agreement by Andrew, the consummation by Andrew of the transactions contemplated thereby, and the compliance by Andrew with the terms or provisions thereof, will not (i) violate any provision of the Certificate of Incorporation or By-Laws of Andrew, (ii) violate the Delaware General Corporation Law or any Federal or Illinois law, rule or regulation that to the knowledge of such counsel is applicable to transactions of the type contemplated by the Merger Agreement, (iii) contravene any order or decree of any federal, Illinois or Delaware governmental authority known by such counsel to be applicable to Andrew, or (iv) constitute a violation of, or cause the creation of any lien pursuant to, any material license, lease, contract, agreement or other instrument or obligation to which Andrew or any of its subsidiaries is a party and which is filed as an exhibit to any filings or reports with the SEC. Notwithstanding the preceding sentence, we express no opinion as to whether the execution and delivery of the Merger Agreement by Andrew, the consummation by Andrew of the transactions contemplated thereby or the compliance by Andrew with the terms and provisions thereof will constitute a breach of, or constitute a default under, any covenant or provision with respect to financial ratios or tests or any aspect of the financial condition or results of operations of Andrew contained in any agreement to which Andrew is a party. 5. Except for (i) the HSR Filing and the expiration of the waiting period thereunder, (ii) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL, (iii) the filing of Articles of Merger with the Illinois Secretary of State pursuant to the Illinois Business Corporation Act of 1983 as amended, (iv) the filing with the SEC and declaration of effectiveness of the S-4, (v) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of the shares of Andrew Common Stock pursuant to this Agreement, and (vi) the filings and authorizations necessary to list the shares of Andrew Common Stock issued pursuant to the Merger Agreement on the NNM, all of which filings, expirations, approvals and declarations have been made, occurred or obtained, no Consents from any federal, Illinois or Delaware governmental authority are necessary in connection with the execution and delivery by Andrew of the Merger Agreement and the consummation by Andrew of the Merger and the other transactions contemplated by the Merger Agreement. 6. To our knowledge, based upon discussions with officers of Andrew, there are no actions, suits, proceedings, claims or investigations pending or threatened against or affecting Andrew or any of its subsidiaries at law or in equity or before any federal, Illinois or Delaware governmental authority or challenging the validity or propriety of the transactions contemplated by the Merger Agreement which individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect to Andrew and its subsidiaries, taken as a whole. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 11 <TEXT> EXHIBIT 11 <TABLE> ANDREW CORPORATION COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts) <CAPTION> Three Months Ended December 31 ---------------------- 1995 1994 --------- -------- <S> <C> <C> PRIMARY EARNINGS PER SHARE Average shares outstanding 39,019 38,348 Net effect of dilutive stock options-- based on the treasury stock method using average market price 597 1,071 -------- -------- TOTAL 39,616 39,419 ======== ======== Net income $ 15,727 $ 11,234 ======== ======== Per share amount $ .40 $ .28 ======== ======== FULLY DILUTED EARNINGS PER SHARE (NOTE) Average shares outstanding 39,019 38,348 Net effect of dilutive stock options-- based on the treasury method using average market price 597 1,087 -------- -------- TOTAL 39,616 39,435 ======== ======== Net income $ 15,727 $ 11,234 ======== ======== Per share amount $ .40 $ .28 ======== ======== <FN> NOTE: This calculation is submitted in accordance with the Securities Exchange Act of 1934 Release No. 9038 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR 12-31-95 10Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> DEC-31-1995 <PERIOD-END> DEC-31-1995 <CASH> 22,291 <SECURITIES> 0 <RECEIVABLES> 153,694 <ALLOWANCES> 3,466 <INVENTORY> 131,737 <CURRENT-ASSETS> 309,087 <PP&E> 294,688 <DEPRECIATION> 177,965 <TOTAL-ASSETS> 518,614 <CURRENT-LIABILITIES> 94,311 <BONDS> 45,240 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 457 <OTHER-SE> 366,170 <TOTAL-LIABILITY-AND-EQUITY> 518,614 <SALES> 164,031 <TOTAL-REVENUES> 164,031 <CGS> 96,784 <TOTAL-COSTS> 96,784 <OTHER-EXPENSES> 41,653 <LOSS-PROVISION> 266 <INTEREST-EXPENSE> 1,208 <INCOME-PRETAX> 24,574 <INCOME-TAX> 8,847 <INCOME-CONTINUING> 15,727 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 15,727 <EPS-PRIMARY> 0.40 <EPS-DILUTED> 0.40 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

APD

https://www.sec.gov/Archives/edgar/data/2969/0000950123-96-000593.txt

-----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, T7Z6iZ8x1EOcUnroZ8B+DdL4Ltgf9dp6LiiIWmLBuA3wQUputYXFSA0rIN1GS1iF Xkh1w55vPj9fkghrjSy5aA== <SEC-DOCUMENT>0000950123-96-000593.txt : 19960216 <SEC-HEADER>0000950123-96-000593.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950123-96-000593 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR PRODUCTS & CHEMICALS INC /DE/ CENTRAL INDEX KEY: 0000002969 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 231274455 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04534 FILM NUMBER: 96518142 BUSINESS ADDRESS: STREET 1: 7201 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18195-1501 BUSINESS PHONE: 2154814911 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>AIR PRODUCTS AND CHEMICALS, INC. <TEXT> <PAGE> 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 31 December 1995 ---------------- 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 1-4534 ------ AIR PRODUCTS AND CHEMICALS, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 23-1274455 - -------------------------------------------------------------------------------- (State of Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 610-481-4911 ------------------ Indicate by checkmark 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 /checkmark/ No / / --------- -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at 7 February 1996 -------------------------- ---------------------------------- Common Stock, $1 par value 121,832,100 <PAGE> 2 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES INDEX Page No. -------- Part I. Financial Information Consolidated Balance Sheets - 31 December 1995 and 30 September 1995 ........ 3 Consolidated Income - Three Months Ended 31 December 1995 and 1994 .. 4 Consolidated Cash Flows - Three Months Ended 31 December 1995 and 1994 .. 5 Notes to Consolidated Financial Statements ..... 6 Management's Discussion and Analysis ........... 7 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ...... 10 Signatures ..................................... 11 REMARKS: The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (the "Company" or "Registrant") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying statements reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Such adjustments are of a normal, recurring nature unless otherwise disclosed in the notes to consolidated financial statements. However, the results for the periods indicated herein reflect certain adjustments, such as the valuation of inventories on the LIFO cost basis, which can only be finally determined on an annual basis. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. Results of operations for any three month period are not necessarily indicative of the results of operations for a full year. 2 <PAGE> 3 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except per share) <TABLE> <CAPTION> ASSETS 31 December 30 September ------ 1995 1995 ----------- ------------ <S> <C> <C> CURRENT ASSETS Cash and cash items $ 95 $ 87 Trade receivables, less allowances for doubtful accounts 628 625 Inventories 371 335 Contracts in progress, less progress billings 111 123 Other current assets 151 162 ------ ------ TOTAL CURRENT ASSETS 1,356 1,332 ------ ------ INVESTMENTS 783 657 ------ ------ PLANT AND EQUIPMENT, at cost 7,501 7,350 Less - Accumulated depreciation 3,926 3,848 ------ ------ PLANT AND EQUIPMENT, net 3,575 3,502 ------ ------ GOODWILL 80 81 ------ ------ OTHER NONCURRENT ASSETS 240 244 ------ ------ TOTAL ASSETS $6,034 $5,816 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Payables, trade and other $ 487 $ 519 Accrued liabilities 223 249 Accrued income taxes 68 56 Short-term borrowings 387 314 Current portion of long-term debt 168 173 ------ ------ TOTAL CURRENT LIABILITIES 1,333 1,311 ------ ------ LONG-TERM DEBT 1,314 1,194 ------ ------ DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 436 435 ------ ------ DEFERRED INCOME TAXES 506 478 ------ ------ TOTAL LIABILITIES 3,589 3,418 ------ ------ SHAREHOLDERS' EQUITY Common stock, par value $1 per share 125 125 Capital in excess of par value 465 465 Retained earnings 2,450 2,388 Unrealized gain on investments 46 41 Cumulative translation adjustments (50) (24) Treasury stock, at cost (133) (139) Shares in trust (458) (458) ------ ------ TOTAL SHAREHOLDERS' EQUITY 2,445 2,398 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,034 $5,816 ====== ====== </TABLE> 3 <PAGE> 4 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED INCOME (In millions, except per share) <TABLE> <CAPTION> Three Months Ended 31 December --------------------- 1995 1994 ---- ---- <S> <C> <C> SALES AND OTHER INCOME Sales $947 $921 Other income (expense), net 4 (1) ---- ---- 951 920 ---- ---- COSTS AND EXPENSES Cost of sales 560 544 Selling, distribution and administrative 220 206 Research and development 27 24 ---- ---- OPERATING INCOME 144 146 Income from equity affiliates, net of related expenses 16 9 Interest expense 29 24 ---- ---- INCOME BEFORE TAXES 131 131 Income taxes 42 44 ---- ---- NET INCOME $ 89 $ 87 ==== ==== MONTHLY AVERAGE OF COMMON SHARES OUTSTANDING 112 113 ---- ---- EARNINGS PER COMMON SHARE $.80 $.77 ==== ==== DIVIDENDS DECLARED PER COMMON SHARE -- Cash $.26 $.24 ---- ---- </TABLE> 4 <PAGE> 5 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED CASH FLOWS (In millions) <TABLE> <CAPTION> Three Months Ended 31 December ------------------ 1995 1994 ------ ------ <S> <C> <C> OPERATING ACTIVITIES Net Income $ 89 $ 87 Adjustments to reconcile income to cash provided by operating activities: Depreciation 99 90 Deferred income taxes 22 18 Other -- 9 Working capital changes that provided (used) cash: Trade receivables (6) (20) Inventories and contracts in progress (25) (8) Payables, trade and other (33) (29) Accrued liabilities (25) (12) Other 4 16 Other 1 (15) ----- ----- CASH PROVIDED BY OPERATING ACTIVITIES 126 136 ----- ----- INVESTING ACTIVITIES Additions to plant and equipment* (184) (178) Investment in and advances to unconsolidated affiliates (127) (20) Proceeds from sale of assets and investments 24 -- Other -- 2 ----- ----- CASH USED FOR INVESTING ACTIVITIES (287) (196) ----- ----- FINANCING ACTIVITIES Long-term debt proceeds* 125 81 Payments on long-term debt (8) (3) Net increase in commercial paper 64 83 Net increase in other short-term borrowings 9 9 Dividends paid to shareholders (29) (28) Purchase of Treasury Stock -- (89) Other 8 11 ----- ----- CASH PROVIDED BY FINANCING ACTIVITIES 169 64 ----- ----- Effect of Exchange Rate Changes on Cash -- -- ----- ----- Increase in Cash and Cash Items 8 4 Cash Items - Beginning of Year 87 100 ----- ----- Cash and Cash Items - End of Period $ 95 $ 104 ===== ===== </TABLE> *Excludes capital leases of $1 million for the three months ended 31 December 1995 and 1994. 5 <PAGE> 6 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the second quarter of 1996, the Company reached a $67 million settlement with Bankers Trust Company over $107 million in losses the Company reported in fiscal 1994 associated with leveraged interest rate swap contracts. The settlement included the termination of two previously closed contracts with Bankers Trust. Prior to the settlement there was an outstanding liability of $62 million associated with these closed contracts. The after-tax gain related to this settlement was $41 million. 6 <PAGE> 7 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS FIRST QUARTER FISCAL 1996 VS. FIRST QUARTER FISCAL 1995 ----------------------------------------------------------- RESULTS OF OPERATIONS CONSOLIDATED Sales in the first quarter of fiscal 1996 of $947 million were 3% higher than in the same quarter of last year while operating income was down $2 million, or 1%, to $144 million. Profits of equity affiliates increased $7 million to $16 million for the three months ended 31 December 1995. Net income was $89 million, or $.80 per share, compared to net income of $87 million, or $.77 per share, in the year-ago quarter. Industrial gases' operating income declined due primarily to lower margins. This was offset by the strong performance of European and Asian equity affiliates. Chemicals' operating income remained constant as broad-based margin improvement was offset by lower ammonia and methanol results. The equipment and services segment profits improved significantly. SEGMENT ANALYSIS INDUSTRIAL GASES - Sales of $551 million in the first quarter of fiscal 1996 were up 5% due primarily to higher worldwide shipments of merchant and tonnage gases. Favorable European currency effects contributed 2% to the 5% sales increase. Worldwide volumes rose despite unexpected U.S. tonnage customer outages. However, the rate of volume growth has slowed from previous quarters. Merchant selling prices were up in the United States but declined in Europe from a year-ago quarter. Operating income of $103 million declined 5%. Favorable European currency effects resulted in a 2% improvement in operating income versus a year ago. The decline in operating income was due to lower margins resulting from higher costs, including distribution costs, combined with lower U.S. liquid oxygen and nitrogen volumes, contract changes and expirations, and a number of key tonnage customer outages. Equity affiliates' income for the first quarter of fiscal 1996 was $9 million compared to $2 million in the prior year. Strong performances from joint ventures in Spain, Italy and Asia contributed to these higher results. The prior year results included a loss related to the peso devaluation in the Mexican investment. 7 <PAGE> 8 CHEMICALS- Sales in the first quarter of 1996 of $310 million decreased $14 million while operating income was comparable to the prior year at $49 million. A portion of the ammonia capacity was shut down in the second quarter of fiscal 1995 and converted to hydrogen production. This portion of ammonia capacity contributed $15 million to trade sales and $8 million to operating income in the first quarter of fiscal 1995. Excluding the prior year contribution from this ammonia capacity, sales were comparable and operating income was up $8 million. This increase in operating income is due principally to broad-based margin improvement, especially in polymer chemicals. Margins improved due to higher selling prices combined with lower raw material costs. Partially offsetting these gains were lower volumes and lower methanol selling prices. The decline in volumes was due to reduced export demand coupled with an extended customer outage. ENVIRONMENTAL AND ENERGY - Sales in the first quarter of 1996 of $14 million were comparable to the prior year while operating income has declined slightly to a loss of $1 million. Equity affiliates' income for the first quarter of fiscal 1996 of $7 million was comparable to the prior year. EQUIPMENT AND SERVICES - Sales of $72 million increased $14 million from the year-ago quarter while operating income was $4 million compared to a loss of $1 million. This year's results reflect a more profitable project mix and a higher level of activity. Sales backlog for the equipment product line improved to $266 million at 31 December 1995 compared to $198 million at 30 September 1995, due principally to new orders for natural gas liquefaction equipment. CORPORATE AND OTHER - The net expense of $11 million is comparable to the prior year. INTEREST Interest expense was $29 million compared to $24 million in the first quarter of fiscal 1995. The increase in expense was due primarily to a higher level of average debt outstanding. INCOME TAXES The effective tax rate on income was 32.3% for the quarter ended 31 December 1995 compared with 34.0% for the same quarter in fiscal 1995. The decrease in the effective tax rate was due principally to higher gas equity affiliate profits. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures during the first three months of fiscal 1996 totaled $312 million compared to $199 million in the corresponding period of the prior year. Additions to plant and equipment were $184 million during the first three months of fiscal 1996 versus $178 million last year. Investments in unconsolidated affiliates were $127 million during the first three months of fiscal 1996 versus $20 million last year. During the first quarter of fiscal 1996, the Company acquired an additional 21.5% of the outstanding shares of a Spanish affiliate at a cost of $120 million. Capital expenditures for new plant and equipment and investment in unconsolidated affiliates are expected to be approximately $1.2 billion in fiscal 1996. Cash provided by operating activities during the first three months of fiscal 1996 ($126 million) combined with cash provided by long-term debt ($125 million), additional commercial paper ($64 million), and proceeds from the sale of assets and investments ($24 8 <PAGE> 9 million) were used largely for capital expenditures ($312 million) and cash dividends ($29 million). Cash and cash items increased $8 million from $87 million at the beginning of the fiscal year to $95 million at 31 December 1995. Total debt at 31 December 1995 and 30 September 1995, expressed as a percentage of the sum of total debt and shareholders' equity, was 43% and 41%, respectively. Total debt increased from $1,681 million at 30 September 1995 to $1,869 million at 31 December 1995. During the first quarter of fiscal 1996, the Company issued $125 million of 6.6% medium-term notes due in fiscal 2008 to finance the acquisition of additional shares in a Spanish affiliate. There was $392 million of commercial paper outstanding at 31 December 1995. Domestic lines of credit totaled $400 million. Additional commitments totaling $50 million are maintained by the Company's foreign subsidiaries, of which $3 million was utilized at 31 December 1995. In January 1996, the Company entered into a $600 million committed, multi-currency, syndicated credit facility to replace the $400 million domestic lines of credit and $34 million of the $50 million of commitments maintained by the foreign subsidiaries. At 31 December 1995, the Company had an unutilized shelf registration for $245 million of medium-term notes. Subsequent to 31 December 1995, the Company issued $31 million of 6.25% medium-term notes due 2011 under this shelf registration. Interest rate swap agreements are used to reduce interest rate risks and costs inherent in the Company's debt portfolio. The Company enters into these agreements to change the fixed/variable interest rate mix of the debt portfolio to reduce the Company's aggregate risk to movements in interest rates. Most of these agreements change long-term fixed-rate debt to variable-rate debt. The notional principal of interest rate swap agreements outstanding at 31 December 1995 is $385 million. The fair value of the agreements is a gain of $15 million. As of 30 September 1995 interest rate swap agreements were outstanding with a notional principal amount and fair value of $488 million and a gain of $1 million, respectively. The Company is also party to interest rate and currency swap contracts. These contracts effectively convert the currency denomination of a debt instrument into another currency in which the Company has a net equity position while changing the interest rate characteristics of the instrument. The notional principal of interest rate and currency swap agreements outstanding at 31 December 1995 is $206 million. The fair value of the agreements is a loss of $19 million, of which $10 million has not been recognized in the financial statements. As of 30 September 1995 interest rate and currency swap agreements were outstanding with a notional principal amount and fair value of $86 million and a loss of $11 million, respectively. During the first quarter of fiscal 1996, the Company entered into interest rate and currency swap agreements to effectively convert $120 million of the $125 million of 6.6% medium-term notes into Spanish peseta liabilities with maturities of three to ten years. The estimated fair value of the Company's long-term debt, including current portion, as of 31 December 1995 is $1,617 million compared to a book value of $1,482 million. 9 <PAGE> 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. (b) Current Report on Form 8-K dated 24 October 1995 was filed by the registrant during the quarter ended 31 December 1995 in which Item 5 of such form was reported. <PAGE> 11 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. Air Products and Chemicals, Inc. -------------------------------- (Registrant) Date: February 14, 1996 By: /s/ A. H. Kaplan ---------------------------- A. H. Kaplan Vice President - Finance (Chief Financial Officer) <PAGE> 12 INDEX TO EXHIBITS (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12.A <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS <TEXT> <PAGE> 1 Exhibit (a)(12) AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Unaudited) <TABLE> <CAPTION> Three Months Ended Year Ended 30 September 31 December -------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> EARNINGS: (Millions of dollars) Income before extraordinary item and the cumulative effect of accounting changes: $249 $277 $201 $234 $368 $ 89 Add (deduct): Provision for income taxes 114 131 103 95 186 43 Fixed charges, excluding capitalized interest 122 133 127 127 148 41 Capitalized interest amortized during the period 7 8 8 8 9 2 Undistributed earnings of less-than- fifty-percent-owned affiliates (9) (13) (8) (3) (25) (10) ---- ---- ---- ---- ---- ---- Earnings, as adjusted $483 $536 $431 $461 $686 $165 ==== ==== ==== ==== ==== ==== FIXED CHARGES: Interest on indebtedness, including capital lease obligations $113 $125 $118 $118 $139 $ 38 Capitalized interest 29 4 6 10 18 6 Amortization of debt discount premium and expense 2 1 1 1 -- -- Portion of rents under operating leases representative of the interest factor 7 7 8 8 9 3 ---- ---- ---- ---- ---- ---- Fixed charges $151 $137 $133 $137 $166 $ 47 ==== ==== ==== ==== ==== ==== RATIO OF EARNINGS TO FIXED CHARGES: 3.2 3.9 3.2 3.4 4.1 3.5 ==== ==== ==== ==== ==== ==== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. </LEGEND> <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-START> OCT-01-1995 <PERIOD-END> DEC-31-1995 <EXCHANGE-RATE> 1 <CASH> 95 <SECURITIES> 0 <RECEIVABLES> 642 <ALLOWANCES> 14 <INVENTORY> 371 <CURRENT-ASSETS> 1,356 <PP&E> 7,501 <DEPRECIATION> 3,926 <TOTAL-ASSETS> 6,034 <CURRENT-LIABILITIES> 1,333 <BONDS> 1,314 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 125 <OTHER-SE> 2,320 <TOTAL-LIABILITY-AND-EQUITY> 6,034 <SALES> 947 <TOTAL-REVENUES> 947 <CGS> 560 <TOTAL-COSTS> 560 <OTHER-EXPENSES> 27 <LOSS-PROVISION> 1 <INTEREST-EXPENSE> 29 <INCOME-PRETAX> 131 <INCOME-TAX> 42 <INCOME-CONTINUING> 89 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 89 <EPS-PRIMARY> .80 <EPS-DILUTED> .80 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

BDX

https://www.sec.gov/Archives/edgar/data/10795/0000950130-96-000479.txt

-----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, KqvZiYgSoOeD08di4IVhFU7Qm/tUtuWu4Z+Cyiqwn4XnzDmaPOSVL7yv7AJEXpmi /oMehBve8uapWUfiLAB9Ug== <SEC-DOCUMENT>0000950130-96-000479.txt : 19960213 <SEC-HEADER>0000950130-96-000479.hdr.sgml : 19960213 ACCESSION NUMBER: 0000950130-96-000479 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BECTON DICKINSON & CO CENTRAL INDEX KEY: 0000010795 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 220760120 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04802 FILM NUMBER: 96515990 BUSINESS ADDRESS: STREET 1: ONE BECTON DR CITY: FRANKLIN LAKES STATE: NJ ZIP: 07417-1880 BUSINESS PHONE: 2018476800 MAIL ADDRESS: STREET 1: ONE BECTON DR CITY: FRANKLIN LAKE STATE: NJ ZIP: 07417 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 ------------------------------------------------ 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 1-4802 ------ Becton, Dickinson and Company ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-0760120 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (201) 847-6800 ------------------------------------------------ (Registrant's telephone number, including area code) N/A ------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___. --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Shares Outstanding as of January 31, 1996 --------------------- ----------------------------------------- Common stock, par value $1.00 64,004,929 <PAGE> PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements. --------------------- Condensed Consolidated Balance Sheets at December 31, 1995 and September 30, 1995 Condensed Consolidated Statements of Income for the three months ended December 31, 1995 and 1994 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 1995 and 1994 Notes to Condensed Consolidated Financial Statements -2- <PAGE> ITEM 1. FINANCIAL STATEMENTS BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS Thousands of Dollars <TABLE> <CAPTION> December 31, September 30, Assets 1995 1995 - ------ ------------ ------------- (Unaudited) <S> <C> <C> Current Assets: Cash and equivalents $ 199,205 $ 198,506 Short-term investments 33,587 41,495 Trade receivables, net 527,378 573,093 Inventories (Note 2): Materials 90,510 87,116 Work in process 65,365 71,316 Finished products 254,536 250,203 ---------- ---------- 410,411 408,635 Prepaid expenses, deferred taxes and other 113,764 105,789 ---------- ---------- Total Current Assets 1,284,345 1,327,518 Investments in Marketable Securities 44,400 44,400 Property, plant and equipment 2,436,746 2,423,080 Less allowances for depreciation and amortization 1,169,165 1,142,049 ---------- ---------- 1,267,581 1,281,031 Intangibles, Net Patents and other 85,002 84,403 Goodwill 102,982 97,098 Other 156,349 165,055 ---------- ---------- Total Assets $2,940,659 $2,999,505 ========== ========== Liabilities and Shareholders' Equity - ------------------------------------ Current Liabilities: Short-term debt $ 222,155 $ 205,799 Payables and accrued expenses 485,110 514,236 ---------- ---------- Total Current Liabilities 707,265 720,035 Long-Term Debt 556,310 557,594 Long-Term Employee Benefit Obligations 297,616 289,711 Deferred Income Taxes and Other 35,195 33,780 Commitments and Contingencies - - Shareholders' Equity: Preferred stock 54,269 54,713 Common stock 85,349 85,349 Capital in excess of par value 120,739 118,201 Cumulative currency translation adjustments (2,254) 6,767 Retained earnings 1,976,254 1,946,636 Unearned ESOP compensation (36,818) (36,941) Shares in treasury - at cost (853,266) (776,340) ---------- ---------- Total Shareholders' Equity 1,344,273 1,398,385 ---------- ---------- Total Liabilities and Shareholders' Equity $2,940,659 $2,999,505 ========== ========== </TABLE> See notes to condensed consolidated financial statements -3- <PAGE> BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Thousands of Dollars, Except Per Share Data (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31, ------------------ 1995 1994 ---- ---- <S> <C> <C> REVENUES $ 639,935 $ 593,476 Cost of products sold 348,746 327,065 Selling and administrative 181,909 171,606 Research and development 37,334 35,223 ---------- ---------- TOTAL OPERATING COSTS AND EXPENSES 567,989 533,894 ---------- ---------- OPERATING INCOME 71,946 59,582 Interest expense, net (9,287) (10,554) Other expense, net (823) (1,382) ---------- ---------- INCOME BEFORE INCOME TAXES 61,836 47,646 Income tax provision 17,314 14,102 ---------- ---------- NET INCOME $ 44,522 $ 33,544 ========== ========== EARNINGS PER SHARE $ .65 $ .46 ========== ========== DIVIDENDS PER SHARE $ .23 $ .205 ========== ========== Average common and common equivalent shares outstanding 67,343 70,411 ========== ========== </TABLE> See notes to condensed consolidated financial statements -4- <PAGE> BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Thousands of Dollars (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31, ------------------ 1995 1994 ---- ---- <S> <C> <C> Operating Activities: Net income $ 44,522 $ 33,544 Adjustments to net income to derive net cash provided by operating activities: Depreciation and amortization 51,035 50,270 Change in working capital (14,695) 20,470 Other, net 7,981 1,231 ---------- ---------- Net cash provided by operating activities 88,843 105,515 ---------- ---------- Investing Activities: Capital expenditures (30,643) (22,938) Acquisitions of businesses (10,418) - Change in investments, net 7,891 21,174 Other, net 5,379 4,926 ---------- ---------- Net cash (used for) provided by investing activities (27,791) 3,162 ---------- ---------- Financing Activities: Change in short-term debt 17,717 66,199 Payments of long-term debt (1,604) (1,626) Issuance of common stock 5,020 2,623 Repurchase of common stock (79,852) (150,147) Dividends paid (881) (915) ---------- ---------- Net cash used for financing activities (59,600) (83,866) ---------- ---------- Effect of exchange rate changes on cash and equivalents (753) (687) ---------- ---------- Net increase in cash and equivalents 699 24,124 Opening Cash and Equivalents 198,506 94,913 ---------- ---------- Closing Cash and Equivalents $ 199,205 $ 119,037 ========== ========== </TABLE> See notes to condensed consolidated financial statements -5- <PAGE> BECTON, DICKINSON AND COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 1 - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in the Company's 1995 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. Note 2 - Inventory Valuation - ---------------------------- An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. -6- <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------------------------------------------- Results of Operations - --------------------- First quarter reported revenues of $640 million exceeded the prior year's revenues by 8%. The favorable effect of a weaker dollar versus the prior year added an estimated $9 million to revenues, or 1.5 percentage points. Reported revenue growth was unfavorably impacted by the decrease in revenues as a result of the divestiture of the glove business last year. This reduction was offset by the estimated increase in sales in the first quarter due to the reduction in promotional activity at the end of the prior fiscal year. Medical Supplies and Devices segment revenues of $347 million increased 8%, or 7% after excluding the estimated favorable effect of foreign currency translation. Diagnostic Systems segment revenues of $293 million increased 7%, or 6% after excluding the estimated impact of foreign currency translation. Domestic Medical segment revenues of $174 million increased 5%. Domestic Medical segment revenues were unfavorably impacted by the absence of sales due to the divestiture of the gloves business. This impact was offset by the increase in sales in the quarter which resulted from the reduction in promotional activity in the fourth quarter of last year. International Medical segment revenues of $173 million increased 12%, or 8% after excluding the estimated favorable impact of foreign currency translation. Good growth rates were experienced worldwide by both the injection systems and infusion therapy businesses which continue to benefit from the conversion to safety products. Domestic Diagnostic segment revenues of $153 million increased 2%. Diagnostic segment revenue growth continues to be unfavorably impacted by cost containment initiatives in the marketplace. The Company is responding to these trends by continuing the effort to develop innovative and cost effective products. International Diagnostic segment revenues of $140 million increased 14%, or 11% after excluding the estimated favorable effect of foreign currency translation. Strong sales growth continued in the sample collection and flow cytometry products lines in Europe, Japan and the Asia-Pacific region. This strength was partially offset by unfavorable trends related to cost containment initiatives in the infectious disease diagnostics business. The gross profit margin of 45.5% was over one-half of a percentage point higher than last year's first quarter rate of 44.9%. The improvement reflects productivity improvements and a more profitable mix of products sold as well as favorable foreign currency translation. Selling and administrative expense of $182 million was 28.4% of revenues. This ratio is an improvement of one-half of a percentage point over last year's ratio of 28.9%, despite the increase in some targeted investments in sales and marketing for critical strategic initiatives and international expansion. Investment of $37 million in research and development increased 6% over last year's first quarter expenditures, reflecting the funding of strategic choices made last year. Operating income of $72 million increased 21% from last year's first quarter amount of $60 million. The improvement in the operating margin from 10.0% to 11.2% primarily reflects the improved gross profit margin and improved expense ratios. -7- <PAGE> Net interest expense of $9 million was $1 million lower than last year's first quarter amount, reflecting the Company's strong cash flow and reduced working capital requirements. Other expense, net was $1 million which was approximately the same as last year's first quarter amount. The first quarter income tax rate was 28.0%, compared with last year's first quarter rate of 29.6%, reflecting the forecasted mix in income among tax jurisdictions. Net income was $45 million compared with $34 million last year, an increase of 33%. Earnings per share of $.65 increased 41% over last year's $.46, or approximately 33% after excluding the estimated $.04 favorable effect of foreign currency translation. Strong growth in operating income as well as the Company's continuation of the share repurchase program contributed to this favorable earnings per share growth. Financial Condition - ------------------- During the first quarter of 1996, cash provided by operations was $89 million, compared with $106 million during the first quarter of last year. In the first quarter of 1996, net working capital decreased $30 million reflecting the emphasis on asset management. Total debt increased $15 million during the first quarter of 1996. The percentage of debt to capitalization (wherein capitalization is defined as the sum of shareholders' equity, net non-current deferred income tax liabilities, and debt) was 36.5%, significantly lower than 40.4% a year ago. Capital expenditures for the quarter were $31 million compared with $23 million during the first quarter of last year. For the full year, capital expenditures are expected to be approximately $150 million. In the first quarter, the Company also expended $10 million to complete acquisitions in the infectious disease and sample collection businesses. Because of its strong credit ratings, the Company believes it has the capacity to arrange significant additional borrowings should the need arise. During the first quarter of 1996, the Company repurchased 1.2 million shares of its common stock for a total expenditure of $80 million. At December 31, 1995, authorization from the Board of Directors remained outstanding to acquire an additional 2.9 million shares. For the full year, the Company expects to spend less than $300 million for share repurchases. At its November 1995 meeting, the Board of Directors increased the Company's quarterly dividend from $.205 to $.23 per common share. -8- <PAGE> PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K. --------------------------------- a) Exhibits 11 - Computation of Earnings Per Share. 27 - Financial Data Schedule b) Reports on Form 8-K A report on Form 8-K dated November 28, 1995 was filed with the Securities and Exchange Commission by the registrant on December 14, 1995. Item 5 ("Other Events") was reported and disclosed the registrant's adoption of a new shareholder rights plan. Pursuant to the new plan, one Right will be issued for each outstanding share of common stock, par value $1.00 per share, of the registrant on the expiration of the existing rights (April 25, 1996). A description of the terms of the Rights was included and referred to in the report. -9- <PAGE> SIGNATURE 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. Becton, Dickinson and Company ----------------------------- (Registrant) Date February 12, 1996 ------------------------ /s/ Edward J. Ludwig -------------------- Edward J. Ludwig Senior Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -10- <PAGE> EXHIBIT INDEX ------------- Exhibit Method of Number Description Filing - ------- ----------- -------------- 11 Computation of Earnings Filed with Per Share this report 27 Financial Data Schedule Filed with this report -11- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> Exhibit 11 BECTON, DICKINSON AND COMPANY COMPUTATION OF EARNINGS PER SHARE (All amounts in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended December 31, PRIMARY EARNINGS PER SHARE 1995 1994 -------------------------- ---- ---- <S> <C> <C> Net income $ 44,522 $ 33,544 Less preferred stock dividends (882) (909) ---------- ---------- Net income applicable to common stock $ 43,640 $ 32,635 ========== ========== Shares: Average shares outstanding 64,503 68,689 Add dilutive stock equivalents from stock plans 2,840 1,722 ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the year 67,343 70,411 ========== ========== Earnings per share $ .65 $ .46 ========== ========== FULLY DILUTED EARNINGS PER SHARE -------------------------------- Net income applicable to common stock $ 43,640 $ 32,635 Add preferred stock dividends using the "if converted" method 882 909 Less additional ESOP contribution, using the "if converted" method (326) (359) ---------- ---------- Net income for fully diluted earnings per share $ 44,196 $ 33,185 ========== ========== Shares: Average shares outstanding 64,503 68,689 Add: Dilutive stock equivalents from stock plans 3,131 1,763 Shares issuable upon conversion of preferred stock 1,472 1,517 ---------- ---------- Weighted average number of common shares used in calculating fully diluted earnings per share 69,106 71,969 ========== ========== Fully diluted earnings per share $ .64 $ .46 ========== ========== </TABLE> -12- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>ARTICLE 5 FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> This Schedule contains summary financial information extracted from the Company's Consolidated Financial Statements for the three months ended December 31, 1995, and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 199,205 <SECURITIES> 33,587 <RECEIVABLES> 527,378 <ALLOWANCES> 0<F1> <INVENTORY> 410,411 <CURRENT-ASSETS> 1,284,345 <PP&E> 2,436,746 <DEPRECIATION> 1,169,165 <TOTAL-ASSETS> 2,940,659 <CURRENT-LIABILITIES> 707,265 <BONDS> 556,310 <COMMON> 85,349 <PREFERRED-MANDATORY> 0 <PREFERRED> 54,269 <OTHER-SE> 1,204,655 <TOTAL-LIABILITY-AND-EQUITY> 2,940,659 <SALES> 639,935 <TOTAL-REVENUES> 639,935 <CGS> 348,746 <TOTAL-COSTS> 348,746 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0<F1> <INTEREST-EXPENSE> 13,784 <INCOME-PRETAX> 61,836 <INCOME-TAX> 17,314 <INCOME-CONTINUING> 44,522 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 44,522 <EPS-PRIMARY> 0.65 <EPS-DILUTED> 0.64 <FN> <F1>These items are consolidated only at year-end. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

BGG

https://www.sec.gov/Archives/edgar/data/14195/0000950124-96-000622.txt

-----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, LoB8VcnT0M08yGWzPYtuzBW4eKyROPEL4lDStxWpi4SsQTLp3zPhg+2JOHJvf8yq taJGBhMNaQThTjRH4O60LA== <SEC-DOCUMENT>0000950124-96-000622.txt : 19960216 <SEC-HEADER>0000950124-96-000622.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950124-96-000622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGGS & STRATTON CORP CENTRAL INDEX KEY: 0000014195 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 390182330 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01370 FILM NUMBER: 96516481 BUSINESS ADDRESS: STREET 1: 12301 W WIRTH ST CITY: WAUWATOSA STATE: WI ZIP: 53222 BUSINESS PHONE: 4142595333 MAIL ADDRESS: STREET 1: P O BOX 702 CITY: MILWAUKEE STATE: WI ZIP: 53201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> <PAGE> 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 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 1-1370 BRIGGS & STRATTON CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) A Wisconsin Corporation 39-0182330 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12301 West Wirth Street, Wauwatosa, Wisconsin 53222 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 414/259-5333 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class February 8, 1996 - -------------------------------------------------------------------------------- COMMON STOCK, par value $0.01 per share 28,927,000 Shares -1- <PAGE> 2 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets - December 31, 1995, July 2, 1995 and January 1, 1995 3 Consolidated Condensed Statements of Income - Three Months and Six Months Ended December 31, 1995 and January 1, 1995 4 Consolidated Condensed Statements of Cash Flows - Six Months Ended December 31, 1995 and January 1, 1995 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 -2- <PAGE> 3 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands of dollars) ASSETS <TABLE> <CAPTION> Dec.31 July 2 Jan. 1 1995 1995 1995 --------- ------- -------- CURRENT ASSETS: (Unaudited) (Unaudited) <S> <C> <C> <C> Cash and cash equivalents $ 6,323 $170,648 $ 10,956 Receivables, net 270,142 94,116 288,973 Inventories - Finished products and parts 156,117 96,540 109,970 Work in process 44,087 40,107 35,004 Raw materials 4,560 4,027 5,469 ---------------------------------- Total inventories $204,764 $140,674 $150,443 Future income tax benefits 31,744 31,376 32,349 Prepaid expenses 14,796 16,516 20,001 ---------------------------------- Total current assets $527,769 $453,330 $502,722 ---------------------------------- PREPAID PENSION COST $ 727 $ - $ 7,873 ---------------------------------- DEFERRED INCOME TAX ASSET $ 4,157 $ 1,866 - ---------------------------------- PLANT AND EQUIPMENT, at cost: $759,178 $726,331 $692,563 Less - Accumulated depreciation and unamortized investment tax credit 387,056 383,034 390,223 ---------------------------------- Total plant and equipment, net $372,122 $343,297 $302,340 ---------------------------------- $904,775 $798,493 $812,935 ================================== <CAPTION> LIABILITIES & SHAREHOLDERS' INVESTMENT <S> <C> <C> <C> CURRENT LIABILITIES: Accounts payable $ 62,251 $ 63,913 $ 58,798 Domestic notes payable 101,558 6,750 1,750 Foreign loans 20,066 19,653 21,595 Accrued liabilities 94,602 108,817 109,506 Dividends payable 7,521 - 7,232 Federal and state income taxes 12,815 (1,878) 13,571 ---------------------------------- Total current liabilities $298,813 $197,255 $212,452 ---------------------------------- DEFERRED INCOME TAX LIABILITY $ - $ - $ 9,660 ---------------------------------- ACCRUED EMPLOYEE BENEFITS $ 17,260 $ 16,447 $ 15,918 ---------------------------------- ACCRUED PENSION COST $ - $ 1,606 - ---------------------------------- ACCRUED POSTRETIREMENT HEALTH CARE OBLIGATION $ 69,143 $ 68,707 $ 65,341 ---------------------------------- LONG-TERM DEBT $ 75,000 $ 75,000 $ 75,000 ---------------------------------- SHAREHOLDERS' INVESTMENT: Common stock- Authorized 60,000,000 shares, $.01 par value Issued and outstanding 28,927,000 shares $ 289 $ 289 $ 289 Additional paid-in capital 41,327 41,698 42,059 Retained earnings 403,209 397,627 393,388 Cumulative translation adjustments (266) (136) (1,172) ---------------------------------- Total shareholders' investment $444,559 $439,478 $434,564 ---------------------------------- $904,775 $798,493 $812,935 ================================== </TABLE> The accompanying notes are an integral part of these statements. -3- <PAGE> 4 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands of dollars except amounts per share) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ----------------- Dec. 31 Jan. 1 Dec. 31 Jan. 1 1995 1995 1995 1995 ------- -------- ------- --------- <S> <C> <C> <C> <C> NET SALES $329,357 $366,717 $518,834 $594,562 COST OF GOODS SOLD 263,594 283,193 433,930 471,239 -------- -------- -------- -------- Gross profit on sales $ 65,763 $ 83,524 $ 84,904 $123,323 ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,801 26,697 49,284 48,973 --------- ------- -------- -------- Income from operations $ 40,962 $ 56,827 $ 35,620 $ 74,350 INTEREST EXPENSE (2,919) (2,121) (4,976) (4,212) OTHER INCOME, net 541 557 2,620 3,859 -------- -------- -------- -------- Income before provision for income taxes $ 38,584 $ 55,263 $ 33,264 $ 73,997 PROVISION FOR INCOME TAXES 14,660 21,550 12,640 28,860 -------- -------- -------- -------- Net income $ 23,924 $ 33,713 $ 20,624 $ 45,137 ======== ======== ======== ======== PER SHARE DATA* - Net income $ .82 $ 1.17 $ .71 $ 1.56 ====== ====== ====== ====== Cash dividends $ .26 $ .25 $ .52 $ .48 ====== ====== ====== ====== </TABLE> * Based on 28,927,000 shares outstanding. The accompanying notes are an integral part of these statements. -4- <PAGE> 5 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Increase(Decrease) in Cash and Cash Equivalents (In thousands of dollars) (Unaudited) <TABLE> <CAPTION> Six Months Ended ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dec. 31, 1995 Jan. 1, 1995 ------------- ------------ <S> <C> <C> Net income $ 20,624 $ 45,137 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 20,938 22,662 (Gain)Loss on disposition of plant and equipment 680 (7) (Increase)decrease in operating assets - Accounts receivable (176,026) (166,376) Inventories (64,090) (64,773) Other current assets 1,352 1,066 Other assets (3,018) 808 Increase(decrease) in liabilities - Accounts payable and accrued liabilities 6,337 3,686 Other liabilities (357) (900) --------- -------- Net cash used by operating activities $(193,560) $(158,697) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment $ (51,423) $ (41,416) Proceeds received on sale of plant and equipment 928 2,032 --------- --------- Net cash used in investing activities $ (50,495) $ (39,384) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on domestic and foreign loans $ 95,221 $ 2,022 Dividends (15,042) (13,885) Purchase of common stock for treasury (547) (295) Proceeds from exercise of stock options 176 140 --------- --------- Net cash provided(used) by financing activities $ 79,808 $ (12,018) --------- --------- EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS $ (78) $ (46) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS $(164,325) $(210,145) CASH AND CASH EQUIVALENTS, beginning 170,648 221,101 --------- --------- CASH AND CASH EQUIVALENTS, ending $ 6,323 $ 10,956 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 4,596 $ 4,180 ========= ========= Income taxes paid $ 2,576 $ 26,748 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. -5- <PAGE> 6 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, in the opinion of the Company, adequate disclosures have been presented to make the information not misleading, and all adjustments necessary to present fair statements of the results of operations and financial position have been included. All of these adjustments are of a normal recurring nature. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. During the current quarter, the Company recorded a change in an accounting estimate originally made in the last quarter of fiscal 1995. During that period, a charge totaling $19,059,000 was added to pension and postretirement health care expenses to reflect the costs of early retirement windows that were offered and accepted at the end of fiscal 1995. In October 1995, when the retirements were to occur, a number of those employees who had accepted the offer canceled their acceptance, and thus a credit totaling $3,477,000 was recorded as a change in the original accounting estimate during the second quarter of fiscal 1996. The Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995, which establishes financial accounting and reporting standards for stock-based employee compensation. The Company plans to adopt only the pro forma disclosure requirements of this statement, and will continue to apply the accounting provisions of APB Opinion No. 25 to stock-based employee compensation arrangements, as is allowed by the statement. This disclosure will be effective for the financial statements ending in June 1997. -6- <PAGE> 7 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is Management's discussion and analysis of certain significant factors which have affected the Company's results of operations and financial condition during the periods included in the accompanying consolidated condensed financial statements. RESULTS OF OPERATIONS SALES Net sales for the second fiscal quarter of 1996 decreased 10% or $37,360,000 compared to the same period in the preceding year. Approximately two-thirds of this decrease is attributable to the absence of lock sales. This business was spun off to the shareholders at the end of February 1995. The remaining portion of the change is due to a 7% decrease in engine units sold between years. This occurred because domestic manufacturers of lawn and garden equipment continued their reduced production rates from the first fiscal quarter. As was the case in the first quarter, the decrease in unit sales was larger than the decrease in sales dollars because it occurred primarily in the Company's lower selling price small engine line. There were small improvements in export sales for the quarter which were offset by reductions in service sales. Net sales for the six months ended December 1995 decreased 13% to $518,834,000. Over half of this decrease was attributable to the spun-off lock business. Engine unit shipments were down 13%. All other comments made above are applicable to this period. GROSS PROFIT Gross profit decreased 21%, reflecting a decrease in rate from 23% last year to 20% in the current year. This decrease was the result of the absence of gross profit from the spun-off lock business, lower unit sales, the spreading of fixed costs over fewer engine units and the expected lower manufacturing efficiency associated with the four new plants. Partially offsetting this was lower profit sharing accruals, the credit resulting from a change in an accounting estimate (described in the notes on page 6), and a small reduction in aluminum costs, the major raw material used in the manufacture of engines. The same factors caused the decrease in gross profits of $38,419,000 or 31% when comparing the first six months of fiscal 1996 to the same period in fiscal 1995. Added to these factors was the first quarter start-up cost of the new plants which totaled $9,800,000. -7- <PAGE> 8 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES This category of expenses decreased $1,896,000 or 7% between the second quarter of fiscal 1996 and 1995. This decrease resulted primarily from the lack of engineering and selling expenses that were part of the spun-off lock business and lower profit sharing accruals. Six-month comparison in this category reflects a 1% increase between years. Larger advertising and marketing expenses in the first quarter were almost offset by the reductions described in the preceding paragraph. INTEREST EXPENSE Interest expense for the second fiscal quarter of 1996 increased 38% over the same period in the preceding year. This increase reflects the use of domestic short-term borrowing to finance increases in accounts receivable and inventories and capital expenditures associated with plant projects described later. There was no domestic short-term borrowing in the second quarter of the preceding year. The same factors effected the six-month interest experience comparisons. OTHER INCOME Other income was comparable between quarters. However, the six-month comparison reflects a 32% reduction due to lower investment income because of the lack of investable funds. PROVISION FOR INCOME TAXES The effective tax rate used for the first six months of operations was 38%. This rate reflects management's estimate of what the rate will be for the entire fiscal year. OUTLOOK The outlook for retail sales of outdoor power equipment this spring seems to be good. The econometric forecasting services the Company uses predicts retail sales will be somewhat stronger than last spring, assuming normal weather. Retailers are optimistic, and their indications to their equipment suppliers reflect their optimism. Equipment manufacturers are optimistic, too, and their indications reflect their optimism. However, the rate at which they are taking engines does not validate their optimism. Unless this rate changes soon, prudence will dictate that the Company should reduce assembly rates so as to keep the end of season inventory within a reasonable range. It now appears that earnings for the third quarter are unlikely to reach last year's record level and that a return to favorable comparisons will be postponed to the fourth quarter. It is now certain that earnings for the full year will be lower than for last year. -8- <PAGE> 9 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) FINANCIAL CONDITION Cash and cash equivalents decreased $164,325,000 since the end of the previous fiscal year. Cash was used to finance the $176,026,000 increase in accounts receivable, the $64,090,000 increase in inventories, capital expenditures totaling $51,423,000, and payment of dividends totaling $15,042,000. Additional funds were obtained from net profits and depreciation and new short-term debt. The increase in accounts receivable is a normal seasonal increase at this time of the year. Inventory increases are mostly in the finished goods category which reflects the Company's continued maintenance of a stable rate of production. The continuance of this production rate was discussed previously in the Outlook section. Additions to plant and equipment during the first six months of fiscal 1996 totaled $51,423,000. Capital projects involving three new engine plants, a foundry and plant expansions were substantially completed during the December quarter. These new plants are now in operation. The Company plans to spend approximately $30,000,000 of additional capital expenditures on other projects during the remainder of the fiscal year. CALIFORNIA EMISSION STANDARDS Recently the California Air Resources Board has granted the Company's request that the California standard for carbon monoxide be relaxed to harmonize it with that adopted by the U.S. Environmental Protection Agency (EPA). As a result of this change, a wider range of the Company's engines will meet California's current emission standards. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.3(c) Amendment to Economic Value Added Incentive Compensation Plan. (Filed herewith.) 10.11 Officer Employment Agreement. (Filed herewith.) 10.12 Deferred Compensation Plan for Directors. (Filed herewith.) 27 Financial Data Schedule. (Filed herewith.) </TABLE> -9- <PAGE> 10 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION (Continued) (b) Reports on Form 8-K. There were no reports on Form 8-K for the second quarter ended December 31, 1995. 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. BRIGGS & STRATTON CORPORATION ----------------------------- (Registrant) Date: February 8, 1996 /s/ R. H. Eldridge ------------------------------------------ R. H. Eldridge Executive Vice President & Chief Financial Officer, Secretary-Treasurer Date: February 8, 1996 /s/ J. E. Brenn ------------------------------------------ J. E. Brenn Vice President and Controller -10- <PAGE> 11 BRIGGS & STRATTON CORPORATION EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.3(c) Amendment to Economic Value Added Incentive Compensation Plan (Filed herewith) 10.11 Officer Employment Agreement (Filed herewith) 10.12 Deferred Compensation Plan for Directors (Filed herewith) 27 Financial Data Schedule (Filed herewith) </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3(C) <SEQUENCE>2 <DESCRIPTION>AMENDMENT TO COMPENSATION PLAN <TEXT> <PAGE> 1 BRIGGS & STRATTON CORPORATION Form 10-Q for Quarterly Period Ended December 31, 1995 Exhibit No. 10.3(c) AMENDMENT TO BRIGGS & STRATTON CORPORATION ECONOMIC VALUE ADDED INCENTIVE COMPENSATION PLAN RESOLVED, that Section V.B. Target Incentive Awards., of the Briggs & Stratton Corporation Economic Value Added Incentive Compensation Plan be amended by deleting "Secretary-Treasurer" from the list of Executive Positions. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.11 <SEQUENCE>3 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> <PAGE> 1 BRIGGS & STRATTON CORPORATION Form 10-Q for Quarterly Period Ended December 31, 1995 Exhibit No. 10.11 OFFICER EMPLOYMENT AGREEMENT <PAGE> 2 AGREEMENT This Agreement is made this 26th day of October, 1995, by and between Briggs & Stratton Corporation, a Wisconsin corporation (the "Employer") and James A. Wier (the "Employee"). In consideration of the promises set forth herein, the parties hereto agree as follows: 1. Employment. Employer shall employ Employee from the date hereof until June 30, 2000, unless such employment shall be terminated earlier as specified herein. During the term specified in the preceding sentence, Employee's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned immediately preceding the date hereof and the Employee's service shall be performed at the location where he was employed immediately preceding the date hereof or any office or location less than 35 miles from such location. Employer may terminate Employee's employment at any time for any of the following causes: (a) the continuing inability of the Employee, for a period of at least 90 days, to perform and carry out his duties and responsibilities under this Agreement for any reason, including mental or physical disability. The determination of such inability shall be made in the sole discretion of the Board of Directors of the Employer; (b) gross negligence or repeated neglect by Employee in the performance of duties for Employer; (c) material breach by Employee of the terms of this Agreement; or (d) death. 2. Salary. During the term specified in Section 1 hereof, Employer shall pay Employee a monthly salary of no less than $18,708.33, payable in semi-monthly installments, or at such other intervals as salary is paid to other senior executives of the Employer generally. 3. Other Compensation and Benefits. Except as specified in this Section 3 and Sections 4 and 5 hereof, Employee shall participate in such executive compensation structures and employee benefit plans as shall cover senior executives of the Employer generally and his participation and benefits (and the participation and benefits of any person claiming through his status as a <PAGE> 3 participant) shall be governed by the terms and conditions of such structures and plans. Effective with respect to stock option grants made during and after 1996, the number of stock options which shall be granted Employee shall be one-half of the number of options which would have been granted to him by application of the formula or other method of determination used by the Employer for the grant of options to other senior executives of the Employer at the time in question. For purposes of determining any cash bonus to which Employee may be entitled and the computation of which is a function of base salary, Employee's monthly base salary during the term covered hereby shall be deemed to be actual base salary, plus $4,166.67. 4. Supplemental Pension Benefits. If Employee's employment shall continue until June 30, 2000, he shall be entitled to a monthly pension benefit commencing July 1, 2000 equal to $20,833.33, which shall be payable in the form of a joint and 50% survivor annuity -- i.e., the monthly pension shall be $20,833.33 during Employee's lifetime, and should the spouse to whom he was legally married on July 1, 2000 survive him, she will be paid a monthly annuity for her life of $10,416.67. Such amounts shall include any amounts to which the Employee and such surviving spouse may be entitled under any qualified defined benefit pension plan maintained by the Employer and any unfunded supplemental defined benefit pension plan maintained by the Employer. To the extent that Employee is covered by a plan or plans described in the preceding sentence, he shall make all such elections and file all such papers as the Employer shall require so that benefits under such plans shall be payable in the form and at the time specified in the first sentence of this Section 4. To the extent that the benefits specified under this Section 4 exceed the benefits payable under such plans, any and all such benefits shall be an unfunded obligation of the Employer as to which the Employee and any person claiming through the Employee shall be merely a general unsecured creditor of the Employer; provided that the Company shall cause this benefit to be covered by the "rabbi" trust which it maintains with respect to other executive benefits. If Employee's employment is terminated prior to June 30, 2000, under the rules of Section l.a. hereof, he shall be entitled to the benefits described in the first paragraph of this Section 4, commencing on the first day of the first calendar month commencing after the date that his employment is so terminated except that the number set forth in the schedule below, which corresponds to the date that his employment is so terminated, shall be substituted for $20,833.33 (and one-half of such number shall be substituted for $10,416.67). <PAGE> 4 <TABLE> <CAPTION> Date of Termination of Employment Monthly Benefit Amount --------------------------------- ---------------------- <S> <C> On or after July 1, 1999, but prior to June 30, 2000 $20,000.00 On or after July 1, 1998, but prior to June 30, 1999 $19,166.67 On or after July 1, 1997, but prior to June 30, 1998 $18,333.33 On or after July 1, 1996, but prior to June 30, 1997 $17,500.00 Prior to June 30, 1996 $16,666.67 </TABLE> 5. Medical Coverage. If Employee's employment shall continue until June 30, 2000, he shall be entitled to purchase medical coverage for the period commencing on his separation from service and continuing until he reaches age 65 as though he were covered by the medical coverage continuation rules of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") for that entire period. 6. Competition. As a condition to the receipt of the benefits described in Section 4 hereof which are in excess of the benefits which would otherwise be payable to Employee under any qualified defined benefit pension plan or unfunded supplemental defined benefit pension plan maintained by Employer and covering other senior executives of the Employer, Employee agrees to abide by the terms of this Section 6. For a period of 3 years after the Employee's separation from service with the Employer, Employee will not, directly or indirectly, own, manage, operate, control, be connected with the ownership, management, operation or control of any entity in the United States of America which competes with the Employer, or be employed by, perform service for, consult with or solicit business for any such entity. Employee agrees that the restrictions set forth in this Section 6 are fair and reasonable and are reasonably required for the protection of the Employer. Employer's sole remedy for Employee's breach of this Section 6 shall be to forever withhold from Employee, and any person claiming through Employee, any further payments described in the first clause of the first sentence of this Section 6. 7. Release. As a condition to the receipt of the benefits described in the first clause of the first sentence of Section 6 hereof, the Employee shall execute such release as the Employer shall specify. <PAGE> 5 8. Integration. This Agreement sets forth the entire agreement of the parties hereto, and it supersedes any and all prior agreements, contracts and understandings between the parties hereto, whether written or oral, with regard to the subject matter hereof, including without limitation, the two documents each entitled "Employment Agreement, one of which is dated November 20, 1987, and the other of which is dated February 19, 1990. This Agreement may be amended only in writing executed by the parties hereto. 9. Governing Law. This Agreement shall be governed by the internal laws of the State of Wisconsin. 10. Binding Effect. The rights and obligations of the Employer hereunder shall inure to the benefit of and shall be binding upon the respective successors and assigns of Employer. 11. Non-waiver. The waiver by Employer of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach by the Employee. 12. Board Approval. This Agreement shall be subject to the approval of the Nominating and Salaried Personnel Committee of the Board of Directors of the Employer. 13. Headings. Headings are for convenience of reference only. BRIGGS & STRATTON CORPORATION By: /s/ F. P. Stratton, Jr. /s/ James A. Wier ------------------------------------ ------------------------- Its: Chairman & Chief Executive Officer James A. Wier ------------------------------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.12 <SEQUENCE>4 <DESCRIPTION>COMPENSATION PLAN FOR DIRECTORS <TEXT> <PAGE> 1 BRIGGS & STRATTON CORPORATION Form 10-Q for Quarterly Period Ended December 31, 1995 Exhibit No. 10.12 DEFERRED COMPENSATION PLAN FOR DIRECTORS <PAGE> 2 BRIGGS & STRATTON CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS AS AMENDED AND RESTATED TO January 16, 1996 SECTION I PURPOSE The purpose of the Briggs & Stratton Corporation Deferred Compensation Plan for Directors is to offer Non-Employee Directors the opportunity to defer all or a portion of their Compensation for future services as a member of the Board of Directors. SECTION II DEFINITIONS a. "Beneficiary" shall mean the person or persons designated from time to time in writing by a Participant to receive payments under the Plan after the death of such Participant, or, in the absence of any such designation or in the event that such designated person or persons shall predecease such Participant, his estate. b. "Common Share Unit" shall mean a Deferred Amount which is converted into a unit or fraction of a unit for purposes of the Plan by dividing a dollar amount by the Fair Market Value of one of the Corporation's common shares. c. "Corporation" shall be Briggs & Stratton Corporation. d. "Compensation" shall mean payments which the Participant receives from the Corporation for services, including retainer fees, meeting fees, and consent resolution fees. e. "Deferred Amount" shall mean an amount of Compensation deferred under the Plan and carried during the deferral period in any Account provided for in the Plan. f. "Distribution Date" shall mean the date designated by a Participant in the Notice of Election form for distribution of the Participant's Accounts. g. "Dividend Equivalent" shall mean an amount equal to the cash dividend paid on one of the Corporation's common shares credited to an Account for each Common Share Unit credited to such Account. <PAGE> 3 h. "Fair Market Value" shall mean the closing price of the Corporation's common shares as reported by the New York Stock Exchange or such other exchange or national market system on which the Corporation's common shares may then be listed or quoted. i. "Non-Employee Director" shall mean any duly elected or appointed member of the Board of Directors of the Corporation who is not an employee of the Corporation or of any subsidiary of the Corporation. j. "Participant" shall mean any Non-Employee Director who elects to defer any amount of Compensation under the Plan. k. "Plan" shall mean this Briggs & Stratton Corporation Deferred Compensation Plan for Directors, as amended and restated. l. "Secretary" shall mean the duly elected Secretary of the Corporation. SECTION III ELECTION, MODIFICATION AND TERMINATION PROCEDURES Any Non-Employee Director wishing to participate in the Plan must file with the Secretary of the Corporation at P. O. Box 702, Milwaukee, Wisconsin 53201, a written Notice of Election on the form attached as Exhibit "A" to defer payment of all or a portion of the Non-Employee Director's Compensation payable in the future. An effective election with respect to Compensation, payment of which has been deferred under the terms of this Plan, may not be modified or revoked. An effective election with regard to future Compensation, payment of which has not yet been deferred, may be modified by filing a new Notice of Election or may be terminated by filing a Notice of Termination on the form attached as Exhibit "B". SECTION IV ESTABLISHMENT AND ADMINISTRATION OF DEFERRED DIRECTORS' COMPENSATION ACCOUNTS The amount of any Participant's Compensation deferred in accordance with an election shall be credited to an Account maintained by the Corporation. Such Account shall remain a part of the general funds of the Corporation, and nothing contained in this Plan shall be deemed to create a trust or fund of any kind or create any fiduciary relationship. The Director shall elect to have any deferrals hereunder credited with earnings in accordance with (a) or (b) below: 2 <PAGE> 4 (a) Fixed Rate Account As of the last day of each calendar quarter, the portion of the Participant's Deferred Amount for which the Participant has selected earnings to be credited pursuant to this subsection (a) shall be adjusted as follows: (1) The Participant's Account shall first be charged with any distributions made during the quarter. (2) The Participant's Account balance shall then be credited with a supplemental amount for that quarter. Such supplemental amount shall be computed by multiplying the Account balance after the adjustment provided for in Subsection (1) by a fraction, the numerator of which is 80% of the prevailing prime interest rate at the Firstar Bank of Milwaukee on the last business day of the quarter, and the denominator of which is four (4). (3) Finally, the Account shall be credited with the amount, if any, of Compensation deferred during that quarter. (b) Briggs & Stratton Common Share Unit Account Compensation deferred into a Common Share Unit Account shall be credited to the Account on the same date when it would otherwise by payable to the Participant. Such Deferred Amounts shall be converted into a number of Common Share Units on the date credited to the Account by dividing the Deferred Amount by the Fair Market Value on such date. If Common Share Units exist in a Participant's Account on a dividend record date for the Corporation's common shares, Dividend Equivalents shall be credited to the Participant's Account on the related dividend payment date, and shall be converted into the number of Common Share Units which could be purchased with the amount of Dividend Equivalents so credited. In the event of any change in the Corporation's common shares outstanding, by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of stock or similar corporate change, the Secretary shall make such equitable adjustments, if any, by reason of any such change, deemed appropriate in the number of Common Share Units credited to each Participant's Account. A separate record of each deferred Participant's Account shall be maintained by the Corporation for each Participant in the Plan. 3 <PAGE> 5 SECTION V PAYMENT OF DEFERRED DIRECTORS' COMPENSATION Deferred Amounts shall be paid to a Participant or, in the event of death, to his designated Beneficiary in accordance with the Notice of Election and Beneficiary Designation forms that have been filed with the Secretary of the Corporation. If a Participant elects to receive payment of his Deferred Amount in annual installments rather than in a lump sum, the payment period shall not exceed ten years following the payment commencement date. The amount of any installment payment shall be determined by multiplying the balance of the Participant's unpaid Account on the date of such installment by a fraction, the numerator of which is one and the denominator of which is the number of remaining unpaid installments. Such account balance shall be appropriately reduced to reflect the installment payment made hereunder. In no event will an installment payment be less than $1,000.00 and all installments will be paid annually as soon as it practicable after commencement of the calendar year selected by the Participant. If a Participant shall die prior to the receipt of all installment payments, any unpaid balance of deferred fees and supplemental amounts shall be paid in one lump sum to his designated Beneficiary(s) as soon as practicable following the month of death. SECTION VI WHEN PAYMENT OF DEFERRED AMOUNTS COMMENCES Compensation may be deferred until any date but no later than the year in which the Participant attains the age of seventy-one years. The payment in a lump sum or installments of amounts deferred pursuant to an election under the Plan shall commence as soon as practicable during the first year to which payment has been deferred, and shall be paid in accordance with the terms of such election. If a Participant shall die prior to the first year to which payment has been deferred, such payment shall be made as soon as practicable immediately following the month of death. SECTION VII DESIGNATION OF BENEFICIARY Each Non-Employee Director, on becoming a Participant, shall file with the Secretary of the Corporation a Beneficiary designation on the form attached as Exhibit "C" designating one or more Beneficiaries to whom payments otherwise due the Participant shall be made in the event of his or her death. A Beneficiary designation will be effective only if the signed Beneficiary designation form is filed with the Secretary of the Corporation while the Participant is alive, and will cancel all Beneficiary designations signed and filed previously. If the primary Beneficiary shall survive the Participant but dies before receiving all the amounts due hereunder, the Deferred Amounts remaining unpaid at the time of death shall be paid in one lump sum to the legal representative of the primary Beneficiary's estate. If the primary Beneficiary shall predecease the Participant, amounts remaining unpaid at the time of the Participant's death shall be paid in the order specified by the Participant to the contingent 4 <PAGE> 6 Beneficiary(s) surviving the Participant. If the contingent Beneficiary(s) dies before receiving all the amounts due hereunder, the unpaid amount shall be paid in one lump sum to the legal representative of such contingent Beneficiary(s) estate. If the Participant shall fail to designate a Beneficiary(s) as provided in this Section, or if all designated Beneficiaries shall predecease the Participant, the Deferred Amounts remaining unpaid at the time of such Participant's death shall be paid in one lump sum to the legal representative of the Participant's estate. SECTION VIII NONALIENATION OF BENEFITS Neither the Participant nor any Beneficiary designated by him shall have any right to, directly or indirectly, alienate, assign, or encumber any amount that is or may be payable hereunder. SECTION IX ADMINISTRATION OF PLAN Full power and authority to construe, interpret and administer the Plan shall be vested in the Corporation's Board of Directors. Decision of the Board shall be final, conclusive and binding upon all parties. SECTION X AMENDMENT OR TERMINATION OF PLAN The Board of Directors may amend or terminate this Plan at any time. Any amendment or termination of the Plan shall not affect the rights of Participants or Beneficiaries to the Deferred Amounts in existence at the time of such amendment or termination. SECTION XI APPLICABLE LAW The provisions of this Plan shall be interpreted and construed in accordance with the laws of the State of Wisconsin. SECTION XII EFFECTIVE DATE OF PLAN This Plan shall become operative and in effect on such date as shall be fixed by the Board of Directors of the Corporation. 5 <PAGE> 7 SECTION XIII DISCRETION OF BOARD Anything to the contrary herein notwithstanding, the Board of Directors shall have the right, in its sole discretion, at any time and from time to time, to accelerate payments and make distributions to or on behalf of a Participant or a Beneficiary of a Participant then entitled to distributions from the Account of such Participant, where the Board of Directors deems such accelerated payment in the best interest of the Corporation and such distributees. 6 <PAGE> 8 EXHIBIT "A" NOTICE OF ELECTION TO DEFER THE PAYMENT OF DIRECTORS' COMPENSATION Secretary Briggs & Stratton Corporation P.O. Box 702 Milwaukee, WI 53201 Re: Briggs & Stratton Corporation Deferred Compensation Plan For Directors Pursuant to provisions of the above-referenced Plan, I hereby elect to have Compensation payable to me for services as a Director of Briggs & Stratton Corporation deferred in the manner specified below. It is understood and agreed that this election shall become effective upon receipt of this Notice of Election by the Secretary of the Corporation. I understand that this election shall be irrevocable with respect to Compensation that has been deferred while this election is in effect. This election shall continue in effect for subsequent terms of office unless I shall modify or revoke it. Percentage of Compensation Deferred: Retainer _____% Board Meeting Fees _____% Committee Meeting Fees _____% Consent Resolution Fees _____% Account(s) to be Credited with Deferred Amounts: (a) Fixed Rate Account _____% (b) Briggs & Stratton Common Share Unit Account _____% Payment of deferred Compensation shall commence as soon as practicable in the year designated below; provided, however, that in no event shall such payments commence until at least six (6) months have elapsed since my last Compensation deferral unless payment is being made incident to my death, in which case payment shall be made as soon as practicable following the month of death. Year to Which Payment is Deferred: 19___ (no later than the year in which you attain age 71) Method of Payment: Cash deferred to be paid in: ______ Lump Sum, OR ______ Annual Installments - Number of Years, not to exceed 10. However, if an unpaid balance of deferred fees and supplemental amounts exists at the time of my death, such balance shall be paid in one lump sum to my designated Beneficiary(s) as soon as practicable immediately following my death. _____________________________________ Date____________________ Director <PAGE> 9 EXHIBIT "B" NOTICE OF TERMINATION Secretary Briggs & Stratton Corporation P.O. Box 702 Milwaukee, WI 53201 Re: Briggs & Stratton Corporation Deferred Compensation Plan For Directors Pursuant to provisions of the above-referenced Plan, I hereby terminate my participation in the Plan effective upon receipt of this Notice of Termination by the Secretary of the Corporation. ______________________________________ Date____________________ Director <PAGE> 10 EXHIBIT "C" BENEFICIARY DESIGNATION Secretary Briggs & Stratton Corporation P.O. Box 702 Milwaukee, WI 53201 Re: Briggs & Stratton Corporation Deferred Compensation Plan For Directors Any Compensation for my services as a Director of Briggs & Stratton Corporation was deferred under the above-referenced Plan and remain unpaid at my death shall be paid to the following primary Beneficiary: _____________________________________________________________ Name _____________________________________________________________ Address If the above-named primary Beneficiary shall predecease me, I designate the following persons as contingent Beneficiaries, in the order shown, to receive any such unpaid deferred fees: 1. _____________________________________________________________ Name _____________________________________________________________ Address 2. _____________________________________________________________ Name _____________________________________________________________ Address 3. _____________________________________________________________ Name _____________________________________________________________ Address This supersedes any previous Beneficiary designation made by me with respect to deferred Compensation under the Plan. I reserve the right to change the Beneficiary in accordance with the terms of the Plan. ______________________________________ Date____________________ Director Witnesses: ________________________________ ________________________________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FDS <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-START> JUL-3-1995 <PERIOD-END> DEC-31-1995 <CASH> 6,323,000 <SECURITIES> 0 <RECEIVABLES> 270,142,000 <ALLOWANCES> 0 <INVENTORY> 204,764,000 <CURRENT-ASSETS> 527,769,000 <PP&E> 759,178,000 <DEPRECIATION> 387,056,000 <TOTAL-ASSETS> 904,775,000 <CURRENT-LIABILITIES> 298,813,000 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 289,000 <OTHER-SE> 444,270,000 <TOTAL-LIABILITY-AND-EQUITY> 904,775,000 <SALES> 518,834,000 <TOTAL-REVENUES> 518,834,000 <CGS> 433,930,000 <TOTAL-COSTS> 433,930,000 <OTHER-EXPENSES> 46,664,000 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 4,976,000 <INCOME-PRETAX> 33,264,000 <INCOME-TAX> 12,640,000 <INCOME-CONTINUING> 20,624,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 20,624,000 <EPS-PRIMARY> .71 <EPS-DILUTED> .71 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

BMET

https://www.sec.gov/Archives/edgar/data/351346/0000351346-96-000001.txt

-----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, JSpPvdFeQjErIpZLe3ywWmliqvATqrpNU4oJq+XaDyptKBp6q/VLdkMfMqwMD48O 1WPlTxCQx6xOiJ3m3GQg2g== <SEC-DOCUMENT>0000351346-96-000001.txt : 19960117 <SEC-HEADER>0000351346-96-000001.hdr.sgml : 19960117 ACCESSION NUMBER: 0000351346-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMET INC CENTRAL INDEX KEY: 0000351346 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 351418342 STATE OF INCORPORATION: IN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12515 FILM NUMBER: 96503818 BUSINESS ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 BUSINESS PHONE: 2192676639 MAIL ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> 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 November 30, 1995. 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 0-12515. BIOMET, INC. (Exact name of registrant as specified in its charter) Indiana 35-1418342 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587 (Address of principal executive offices) (219) 267-6639 (Registrant's telephone number, including area code) 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 The number of shares outstanding of each of the issuer's classes of common stock, as of November 30, 1995: Common Shares - No Par Value 115,425,459 Shares (Class) (Number of Shares) Rights to Purchase Common Shares 115,425,459 Rights (Class) (Number of Shares) BIOMET, INC. CONTENTS Pages Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets 1-2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II. Other Information 10 Signatures 11 Index to Exhibits 12 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1995 and May 31, 1995 (in thousands) ASSETS November 30, May 31, 1995 1995 ------------ ------- Current assets: Cash and cash investments $ 74,103 $ 34,091 Marketable securities 19,436 56,354 Accounts and notes receivable, net 147,553 140,283 Inventories 149,641 140,885 Prepaid expenses and other 21,918 20,289 ------- ------- Total current assets 412,651 391,902 ------- ------- Property, plant and equipment, at cost 126,338 121,018 Less, Accumulated depreciation 46,362 40,710 ------- ------- Property, plant and equipment, net 79,976 80,308 ------- ------- Marketable securities 33,629 34,030 Intangible assets, net 8,477 8,170 Excess acquisition cost over fair value of acquired net assets, net 21,126 22,828 Investments in and advances to affiliates 209 185 Other assets 1,561 1,661 ------- ------- Total assets $ 557,629 $ 539,084 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1995 and May 31, 1995 (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1995 1995 ------------ ------- Current liabilities: Short-term borrowings $ 3,005 $ 3,518 Accounts payable 17,331 27,194 Accrued income taxes 14,970 12,366 Accrued wages and commissions 10,749 13,050 Liability for purchased common shares -- 10,406 Other accrued expenses 22,137 22,616 ------- ------- Total current liabilities 68,192 89,150 Long-term liabilities: Deferred federal income taxes 2,242 2,240 Other liabilities 2,025 3,077 ------- ------- Total liabilities 72,459 94,467 ------- ------- Contingencies (Note 5) Shareholders' equity: Common shares 65,033 64,526 Additional paid-in capital 13,050 12,624 Retained earnings 407,571 364,087 Unrealized gain on certain equity securities 760 2,800 Cumulative translation adjustment (1,244) 580 ------- ------- Total shareholders' equity 485,170 444,617 ------- ------- Total liabilities and shareholders' equity $ 557,629 $ 539,084 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the six and three month periods ended November 30, 1995 and 1994 (in thousands, except earnings per share) Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1995 1994 1995 1994 ---- ---- ---- ---- Net sales $260,273 $203,086 $133,046 $106,860 Cost of sales 84,829 62,682 43,550 32,877 ------- ------- ------- ------- Gross profit 175,444 140,404 89,496 73,983 Selling, general and administrative expenses 99,498 74,266 48,901 39,100 Research and development expense 12,049 10,846 5,852 5,631 ------- ------- ------- ------- Operating income 63,897 55,292 34,743 29,252 Other income, net 5,599 3,055 1,803 1,664 ------- ------- ------- ------- Income before income taxes 69,496 58,347 36,546 30,916 Provision for income taxes 26,012 21,825 13,811 11,507 ------- ------- ------- ------- Net income $ 43,484 $ 36,522 $ 22,735 $ 19,409 ======= ======= ======= ======= Earnings per share, based on the weighted average number of shares outstanding during the periods presented $ .38 $ .32 $ .20 $ .17 ==== ==== ==== ==== Weighted average number of shares 115,303 114,733 115,353 114,986 ======= ======= ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended November 30, 1995 and 1994 (in thousands) 1995 1994 ---- ---- Cash flows from (used in) operating activities: Net income $ 43,484 $ 36,522 Adjustments to reconcile net income to net cash from operating activities: Depreciation 5,997 4,256 Amortization 4,115 2,097 Gain on sale of marketable securities, net (2,824) (53) Equity in losses of affiliates -- 1,200 Deferred income taxes -- 96 Changes in current assets and current liabilities: Accounts and notes receivable, net (7,630) (4,599) Inventories (9,240) (10,599) Prepaid expenses and other (1,662) (1,467) Accounts payable (9,648) (940) Accrued income taxes 2,659 1,536 Accrued wages and commissions (2,294) (78) Other accrued expenses (372) 2,977 ------ ------ Net cash from operating activities 22,585 30,948 ------ ------ Cash flows from (used in) investing activities: Cash proceeds from sale of marketable securities 47,087 3,254 Purchase of marketable securities (8,984) (13,911) Capital expenditures (5,877) (5,711) Cash invested in and advanced to affiliates (24) (107) Purchase of Kirschner, net of cash acquired -- (27,315) Increase in other assets (2,399) 148 Other (928) 666 ------ ------ Net cash from (used in) investing activities 28,875 (42,976) ------ ------ Cash flows from (used in) financing activities: Decrease in short-term borrowings (581) (7,771) Issuance of common shares 507 772 Repurchase of shares (10,406) -- ------ ------ Net cash used in financing activities (10,480) (6,999) ------ ------ Effect of exchange rate changes on cash (968) (395) ------ ------ Increase (decrease) in cash and cash investments 40,012 (19,422) Cash and cash investments, beginning of year 34,091 70,391 ------ ------ Cash and cash investments, end of period $ 74,103 $ 50,969 ====== ====== The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: OPINION OF MANAGEMENT. In the opinion of management, the information furnished herein includes all adjustments necessary to reflect a fair statement of the interim periods reported. The May 31, 1995 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. NOTE 2 INVENTORIES. Inventories at November 30, 1995 and May 31, 1995 are as follows: November 30, May 31, 1995 1995 ------------ ------- (in thousands) Raw materials $ 21,878 $ 19,146 Work in process 15,033 15,163 Finished goods 64,940 62,884 Consigned inventory 47,790 43,692 ------- ------- $149,641 $140,885 ======= ======= NOTE 3: INCOME TAXES. The difference between the reported provision for income taxes and a provision computed by applying the federal statutory rate to pre-tax accounting income is primarily attributable to state income taxes, tax exempt income and tax credits. NOTE 4: COMMON SHARES. During the six months ended November 30, 1995, the Company issued 237,794 common shares upon the exercise of outstanding stock options for proceeds aggregating $506,867. NOTE 5: CONTINGENCIES. On February 9, 1990, Pedro A. Ramos, M.D. filed a complaint in the United States District Court for the Southern District of Florida naming the Company as a defendant. The plaintiff alleged the Company infringed his patent. In April 1993, the matter was tried before Judge Aronovitz of the Southern District of Florida. Judge Aronovitz issued a memorandum opinion in August 1993, finding that U.S. Patent No. 4,383,090 was willfully infringed. On September 10, 1993 the trial court entered a final judgment and permanent injunction in favor of Dr. Ramos. An amended final judgment was entered on November 30, 1993 awarding Dr. Ramos a permanent injunction and $6,008,000. The Company filed Notices of Appeal of the final judgment and amended final judgment on September 20, 1993 and December 13, 1993, respectively, with the Court of Appeals for the Federal Circuit. On September 2, 1995 the U.S. Court of Appeals for the Federal Circuit reversed in part and affirmed in part the judgment previously entered against the Company. The Court of Appeals held that, although the bipolar design did infringe the Ramos patent under the doctrine of equivalents, that infringement was neither literal nor willful on the part of the Company and reduced the judgment to approximately $2,000,000. The Company's petition for rehearing to the Court of Appeals was denied and the case is now closed. The Company recorded a $2,000,000 charge against pre-tax earnings for the quarter ended August 31, 1995, to reflect the effect of this decision. The Company has discontinued sales of its old bipolar design in question and introduced a new bipolar product. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AS OF NOVEMBER 30, 1995 As of November 30, 1995, the Company's working capital position remains strong, increasing by $41,707,000 during the first six months of fiscal year 1996 to $344,459,000 and resulting in a working capital ratio of 6.1 to 1. This increase in working capital is principally attributable to the operating results experienced by the Company during the first six months of fiscal year 1996. Cash and marketable securities increased during the first six months by $2,693,000 to $127,168,000 . The Company's cash and marketable securities, together with anticipated cash flow from operations, are expected to be adequate to fund all anticipated capital requirements. Accounts and notes receivable and inventories increased by $7,270,000 and $8,756,000, respectively. Accounts receivable increased due to the increased sales volume. Inventories have been increased to support the Kirschner reconstructive implant product line and the recent increase in international sales. Property, plant and equipment increased $5,320,000 during the first six months of fiscal 1996. Included in the aforementioned changes were decreases in accounts receivable, inventories and property, plant and equipment of approximately $381,000, $421,000 and $353,000, respectively, attributable to the increase from May 31, 1995 to November 30, 1995 in the exchange rates used to convert the financial statements of the Company's foreign subsidiaries from their functional currency to the U.S. Dollar. These increases did not affect the Company's earnings during the past six month period because foreign currency translation adjustments to balance sheet items are recognized directly in shareholders' equity on the Company's consolidated balance sheet. The Company will continue to be exposed to the effects of foreign currency translation adjustments. The payment for common shares purchased prior to May 31, 1995 and a decrease in accounts payable are the primary causes of the decrease of $22,008,000 in total liabilities. Shareholders' equity increased $40,553,000 principally due to the Company's first six months earnings. Offsetting this increase is a decrease in the unrealized gain on certain equity securities and cumulative translation adjustment of $2,040,000 and $1,824,000, respectively, between periods presented. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 Net sales increased 28% to $260,273,000 for the six month period ended November 30, 1995, from $203,086,000 for the same period last year. The Company's U.S.-based revenue increased 24% to $196,067,000 during the first six months, while foreign sales increased 43% to $64,206,000. Foreign currency exchange rates did not have a material impact on sales or earnings during the first six months. Biomet's worldwide reconstructive device sales during the first six months of fiscal 1996 were $157,074,000, representing a 31% increase compared to the first six months of fiscal year 1995. This increase was primarily a result of Biomet's continued penetration of the reconstructive device market led by the recently introduced Maxim Total Knee System and the inclusion of Kirschner sales for the first six months. Sales of EBI's products were $53,488,000 for the first six months of fiscal 1996, representing a 15% increase as compared to the same period in 1995. This increase was largely attributable to increased demand for bone healing units and the continued increase in the external fixation market. The Company's "other products" revenues totaled $49,711,000, representing a 36% increase over the first six months of fiscal year 1995, primarily as a result of increased sales of Lorenz products, fixation products and the inclusion of Kirschner sales. Cost of sales increased as a percentage of net sales from 30.9% for the first six months of fiscal 1995 to 32.6% for the first six months of fiscal 1996 due to the inclusion of Kirschner sales for the period which have a lower gross profit margin and the start-up expenses associated with the EBI manufacturing facility purchased late last fiscal year. Selling, general and administrative expenses increased as a percentage of net sales to 38.2%, compared to 36.6% for the first six months of last year. This includes a $1,600,000 accrual for the Ramos litigation as described in Note 5 of the Notes to Consolidated Financial Statements, and a $1,000,000 accrual for expenses in connection with the restructuring and consolidation of the operations of Kirschner's reconstructive implant division. The increase in research and development expenditures during the first six months reflects Biomet's commitment to remain competitive through technological advancements and to capitalize on future opportunities available within the orthopedic market. Operating income rose 16% from $55,292,000 for the first six months of fiscal 1995, to $63,897,000 for the first six months of fiscal 1996, corresponding to the increase in net sales. Other income increased $2,544,000 for the first six months of fiscal year 1996 compared to the prior year's first six months due to realized gains on the sale of marketable securities and higher investment rates during the first quarter offset by accrued interest of $400,000 incurred for the Ramos litigation as described in Note 5 of the Notes to Consolidated Financial Statements. A gain of $2,500,000 was realized on the sale of the Company's holdings in American Medical Electronics, Inc. in connection with the closing of the Orthofix International NV and American Medical Electronics, Inc. merger. The effective income tax rate remained constant at 37.4% for each of the six month periods presented. These factors resulted in a 19% increase in net income and earnings per share for the first six months of fiscal 1996 as compared to the same period in fiscal 1995, increasing from $36,522,000 to $43,484,000, and from $.32 to $.38, respectively. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1995 AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1994 Net sales increased 25% to $133,046,000 for the second quarter of fiscal year 1996, as compared to $106,860,000 for the same period last year. Operating income rose 19% from $29,252,000 for the second quarter of fiscal 1995, to $34,743,000 for the second quarter of fiscal 1996. During the second quarter, net income increased 17% to $22,735,000 as compared to $19,409,000 for the same period last year. Earnings per share increased 18% from $.17 per share for the second quarter of fiscal 1995, to $.20 per share for the same period of fiscal 1996. The business factors resulting in these changes and relevant trends affecting the Company's business during the periods in question are comparable to those described in the preceding discussion for the six-month period except for the three nonrecurring events which were recorded in the first quarter. PART II. OTHER INFORMATION Item 1. Legal Proceedings. On February 9, 1990, Pedro A. Ramos, M.D. filed a complaint in the United States District Court for the Southern District of Florida naming the Company as a defendant. The plaintiff alleged the Company infringed his patent. In April 1993, the matter was tried before Judge Aronovitz of the Southern District of Florida. Judge Aronovitz issued a memorandum opinion in August 1993, finding that U.S. Patent No. 4,383,090 was willfully infringed. On September 10, 1993 the trial court entered a final judgment and permanent injunction in favor of Dr. Ramos. An amended final judgment was entered on November 30, 1993 awarding Dr. Ramos a permanent injunction and $6,008,000. The Company filed Notices of Appeal of the final judgment and amended final judgment on September 20, 1993 and December 13, 1993, respectively, with the Court of Appeals for the Federal Circuit. On September 2, 1995 the U.S. Court of Appeals for the Federal Circuit reversed in part and affirmed in part the judgment previously entered against the Company. The Court of Appeals held that, although the bipolar design did infringe the Ramos patent under the doctrine of equivalents, that infringement was neither literal nor willful on the part of the Company and reduced the judgment to approximately $2,000,000. The Company's petition for rehearing to the Court of Appeals was denied and the case is now closed. The Company recorded a $2,000,000 charge against pre-tax earnings for the quarter ended August 31, 1995, to reflect the effect of this decision. The Company has discontinued sales of its old bipolar design in question and introduced a new bipolar product. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Index to Exhibits. (b) Reports on Form 8-K. None. 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. BIOMET, INC. - ------------ (Registrant) DATE: 1/12/96 BY: /s/ GREGORY D. HARTMAN -------- ------------------------- Gregory D. Hartman Vice President - Finance (Principal Financial Officer) (Signing on behalf of the Registrant and as Principal Financial Officer) BIOMET, INC. FORM 10-Q INDEX TO EXHIBITS Sequential Number Assigned Numbering System in Regulation S-K Page Number Item 601 Description of Exhibit of Exhibit - ----------------- -------------------------------- ---------------- (2) No exhibit. (4) 4.1 Specimen certificate for Common Shares. (Incorporated by reference to Exhibit 4.1 to the registrant's Report on Form 10-K for the fiscal year ended May 31, 1985). 4.2 Rights Agreement between Biomet, Inc. and Lake City Bank, as Rights Agent, dated as of December 2, 1989. (Incorporated by reference to Exhibit 4 to Biomet, Inc. Form 8-K Current Report dated December 22, 1989, Commission File No. 0-12515). (10) No exhibit. (11) No exhibit. (15) No exhibit. (18) No exhibit. (19) No exhibit. (22) No exhibit. (23) No exhibit. (24) No exhibit. (27) Financial data schedules. (99) No exhibit. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1996 <PERIOD-END> NOV-30-1995 <CASH> 74103000 <SECURITIES> 19436000 <RECEIVABLES> 153997000 <ALLOWANCES> 6444000 <INVENTORY> 149641000 <CURRENT-ASSETS> 412651000 <PP&E> 126338000 <DEPRECIATION> 46362000 <TOTAL-ASSETS> 557629000 <CURRENT-LIABILITIES> 68192000 <BONDS> 0 <COMMON> 65033000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 420137000 <TOTAL-LIABILITY-AND-EQUITY> 557629000 <SALES> 260273000 <TOTAL-REVENUES> 260273000 <CGS> 84829000 <TOTAL-COSTS> 111547000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 788000 <INCOME-PRETAX> 69496000 <INCOME-TAX> 26012000 <INCOME-CONTINUING> 43484000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 43484000 <EPS-PRIMARY> .38 <EPS-DILUTED> .38 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CA

https://www.sec.gov/Archives/edgar/data/356028/0000356028-96-000001.txt

-----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, ORlu9LTU5iG6meZ89XaE1mDKDKdTX0cjxDpque7FsLFbpIpMY8AAnvHMYep5CSku jWY0HZBj5pRj4XQiZLgpBQ== <SEC-DOCUMENT>0000356028-96-000001.txt : 19960205 <SEC-HEADER>0000356028-96-000001.hdr.sgml : 19960205 ACCESSION NUMBER: 0000356028-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960202 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER ASSOCIATES INTERNATIONAL INC CENTRAL INDEX KEY: 0000356028 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 132857434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09247 FILM NUMBER: 96510419 BUSINESS ADDRESS: STREET 1: ONE COMPUTER ASSOCIATES PLAZA CITY: ISLANDIA STATE: NY ZIP: 11788 BUSINESS PHONE: 5163425224 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1995 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period ended from _____ to _____ Commission File Number 0-10180 Computer Associates International, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2857434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Computer Associates Plaza Islandia, New York 11788-7000 (Address of principal executive offices) (Zip Code) (516) 342-5224 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Title of Class Shares Outstanding Common Stock as of January 30, 1996 par value $.10 per share 241,930,704 <PAGE> <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES <CAPTION> INDEX PART I. Financial Information: Page No. <S> <C> Item 1. Consolidated Condensed Balance Sheets - December 31, 1995 and March 31, 1995 . . . . 1 Consolidated Statements of Income - Three Months Ended December 31, 1995 and 1994 2 Nine Months Ended December 31, 1995 and 1994 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended December 31, 1995 and 1994 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . 9 PART II. Other Information: Item 6. Exhibits and Reports on Form 8-K. . . . . . . 12 </TABLE> <PAGE> <TABLE> Item 1: Part I. FINANCIAL INFORMATION COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) <CAPTION> December 31, March 31, 1995 1995 ------------- --------- (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents . . . . . . . $ 55,322 $ 116,579 Marketable securities . . . . . . . . . 107,277 184,643 Trade and installment accounts receivable - net. . . . . . . . . . . . 1,147,561 787,684 Other current assets . . . . . . . . . . 67,800 58,660 --------- --------- TOTAL CURRENT ASSETS 1,377,960 1,147,566 Installment accounts receivable, due after one year - net . . . . . . . 1,524,689 1,045,798 Property and equipment - net . . . . . . 425,839 343,953 Purchased software products - net . . . 658,494 342,999 Excess of cost over net assets acquired - net . . . . . . . . . . . . 797,460 300,268 Other noncurrent assets . . . . . . . . 97,239 88,844 --------- --------- TOTAL ASSETS $4,881,681 $3,269,428 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Loans payable - banks . . . . . . . . . $ 495,000 $ 240,000 Other current liabilities . . . . . . . 1,036,829 607,893 Long-term debt and other . . . . . . . 1,146,467 50,489 Deferred income taxes . . . . . . . . . 636,922 460,838 Deferred maintenance revenue . . . . . 344,478 332,083 Stockholders' equity . . . . . . . . . . 1,221,985 1,578,125 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $4,881,681 $3,269,428 ========== ========== <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) <CAPTION> For the Three Months Ended December 31, -------------------- 1995 1994 ---- ---- <S> <C> <C> Product revenue and other related income . . . $ 822,051 $ 535,831 Maintenance fees . . . . . . . . . . . . . . . 182,388 185,201 ------- ------- TOTAL REVENUE 1,004,439 721,032 Costs and expenses: Selling, marketing and administrative . . . 371,006 268,294 Product development and enhancements . . . . 76,148 60,380 Commissions and royalties . . . . . . . . . 51,514 37,294 Depreciation and amortization . . . . . . . 113,946 71,532 Interest expense - net . . . . . . . . . . . 27,236 2,554 ------- ------- TOTAL COSTS AND EXPENSES 639,850 440,054 ------- ------- Income before income taxes . . . . . . . . . . 364,589 280,978 Provision for income taxes . . . . . . . . . . 137,411 106,772 ------- ------- NET INCOME $ 227,178 $ 174,206 ======= ======= NET INCOME PER COMMON SHARE . . . . . . . . . $ .90 $ .69 ======= ======= Weighted average shares used in computation. . 253,714 251,667* <FN> *Adjusted for three-for-two stock split declared August 9, 1995. See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) <CAPTION> For the Nine Months Ended December 31, -------------------- 1995 1994 ---- ---- <S> <C> <C> Product revenue and other related income . . . $ 1,848,959 $1,286,317 Maintenance fees . . . . . . . . . . . . . . . 545,248 534,686 --------- --------- TOTAL REVENUE 2,394,207 1,821,003 Costs and expenses: Selling, marketing and administrative . . . . 960,928 775,979 Product development and enhancements . . . . 204,532 164,764 Commissions and royalties . . . . . . . . . . 118,109 87,705 Depreciation and amortization . . . . . . . . 286,042 185,274 Interest expense - net . . . . . . . . . . . 46,086 4,752 Purchased research and development . . . . . 1,303,280 249,300 --------- --------- TOTAL COSTS AND EXPENSES 2,918,977 1,467,774 --------- --------- (Loss) income before income taxes . . . . . . . ( 524,770) 353,229 Provision for income tax (benefit) expense . . ( 203,317) 134,227 --------- --------- NET (LOSS) INCOME $( 321,453) $ 219,002 ========= ========= NET (LOSS) INCOME PER COMMON SHARE . . . . . . $( 1.33) $ .87 ========= ========= Weighted average shares used in computation . . 241,317 251,982* <FN> *Adjusted for three-for-two stock split declared August 9, 1995 See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> (In thousands) For the Nine Months Ended December 31, ------------------- 1995 1994 <S> <C> <C> OPERATING ACTIVITIES: Net (loss) income. . . . . . . . . . . . . . . . . $( 321,453) $ 219,002 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . 286,042 185,274 Provision for deferred income taxes . . . . . . ( 384,606) (29,897) Charge for purchased research and development. . 1,303,280 249,300 Increase in noncurrent installment accounts receivable - net . . . . . . . . . . . . . . . ( 399,111) (206,439) Increase (decrease) in deferred maintenance revenue . . . . . . . . . . . . . . 13,514 ( 20,217) Changes in other operating assets and liabilities, excludes effects of acquisitions . ( 163,187) ( 91,086) ----------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 334,479 305,937 INVESTING ACTIVITIES: Acquisitions, primarily purchased software, marketing rights and intangibles . . . . . . . . (1,772,282) (371,991) Purchases of property and equipment . . . . . . . ( 17,500) (30,589) Decrease in current marketable securities . . . . 79,815 62,498 Capitalized development costs . . . . . . . . . . ( 9,872) (12,203) ----------- -------- NET CASH USED IN INVESTING ACTIVITIES (1,719,839) (352,285) FINANCING ACTIVITIES: Increase (decrease) in long-term debt - net . . . 1,098,498 (84,076) Increase in loans payable-banks - net . . . . . . 255,000 235,000 Dividends paid . . . . . . . . . . . . . . . . . . ( 16,086) (16,172) Exercise of common stock options/other . . . . . . 16,440 12,933 Purchases of treasury stock . . . . . . . . . . . ( 27,106) (161,666) ----------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,326,746 (13,981) DECREASE IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH ( 58,614) (60,329) Effect of exchange rate changes on cash . . . . . . ( 2,643) 6,861 ---------- --------- DECREASE IN CASH AND CASH EQUIVALENTS ( 61,257) (53,468) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 116,579 133,127 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,322 $ 79,659 ========= ======== </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending March 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in Computer Associates International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form 10-K for the fiscal year ended March 31, 1995. Dividends: In December 1995, the Company's Board of Directors declared its semi-annual cash dividend of $.07 per share. The dividend was paid on January 12, 1996 to stockholders of record on December 22, 1995. Net Income per Share: Net income per common share is computed by dividing net income by the weighted average number of common shares and any dilutive common share equivalents outstanding. Common share equivalents for the nine month period ended December 31, 1995 were excluded because of their anti-dilutive effect. Fully diluted net income per share is the same or not materially different from net income per share. Stock Split: On August 9, 1995 the Company declared a three-for-two stock split in the form of a stock dividend distributed September 5, 1995 to stockholders of record as of August 21, 1995. All per share data and number of common shares, where appropriate, have been adjusted to reflect the stock split. Statements of Cash Flows: For the nine months ended December 31, 1995 and 1994, interest paid was $48 and $16 million, respectively, and income taxes paid were $101 and $158 million, respectively. <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE B -- ACQUISITIONS On August 1, 1995, the Company acquired 98% of the issued and outstanding shares of common stock of Legent Corporation ("Legent"), and on November 6, 1995, merged Legent into one of its wholly owned subsidiaries. The aggregate purchase price of approximately $1.8 billion was funded from drawings under the Company's $2 billion credit agreement dated as of July 24, 1995. Legent was engaged in the design, development, marketing, and support of a broad range of computer software products for the management of information systems used to manage mainframe, midrange, server, workstation and PC systems deployed throughout a business enterprise. The acquisition was accounted for as a purchase. The results of Legent's operations have been combined with those of the Company since the date of acquisition. The Company recorded an $808 million after-tax charge against earnings for the write-off of purchased Legent research and development technology that had not reached the working model stage and has no alternative future use. Had this charge not been taken during the quarter ended September 30, 1995, net income and net income per share for the nine month period ended December 31, 1995 would have been $487 million, or $1.92 per share. On June 22, 1994, the Company acquired 98% of the issued and outstanding common stock of The ASK Group, Inc. ("ASK"), and on September 20, 1994, merged ASK into one of its wholly owned subsidiaries. The aggregate cost of acquiring the common stock of ASK was approximately $314 million. The purchase price was provided from existing cash balances and from a revolving credit agreement with a group of banks. ASK was primarily in the business of developing, marketing and selling relational database management systems, data access and connectivity products, manufacturing and financial software application tools and provided related consulting and support services. The acquisition was accounted for as a purchase. The results of ASK's operations have been combined with those of the Company since the date of acquisition. In conjunction with the purchase of ASK, the Company recorded an after-tax charge against earnings of $154 million relating to the write-off of purchased research and development technology that had not reached the working model stage and has no alternative future use. Had this charge not been taken during the quarter ended June 30, 1994, net income for the nine month period ended December 31, 1994 would have been $374 million, or $1.48 per share. <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE B -- ACQUISITIONS (continued) The following table reflects pro forma combined results of operations (unaudited) of the Company, ASK and Legent on the basis that the acquisition of ASK had taken place at the beginning of fiscal year 1995 and the acquisition of Legent had taken place at the beginning of the fiscal years for all periods presented. The after-tax charges in fiscal years 1995 and 1996 of $154 million and $808 million were recorded at the beginning of the fiscal year for each of the periods presented: <TABLE> (In thousands, except per share amounts) <CAPTION> For the Nine Months For the Three Months Ended December 31, Ended December 31, ------------------- -------------------- 1995 1994 1995 1994 <S> <C> <C> <C> <C> Revenue . . . . . . . $ 2,494,726 $ 2,147,696 $1,018,439 $ 821,715 Net (loss) income . . ( 535,906) ( 759,259) 235,858 142,878 Net (loss) income per common share . . $( 2.22)$( 3.14) $ .93 $ .57 Shares used in computation . 241,317 241,848 253,864 251,667 </TABLE> The following table reflects pro forma combined results of operations (unaudited) of the Company, ASK and Legent on the basis that the acquisition of ASK had taken place at the beginning of fiscal year 1995 and the acquisition of Legent had taken place at the beginning of the fiscal years for all periods presented. It excludes the effect of the after-tax charges in fiscal years 1995 and 1996 of $154 million and $808 million: <TABLE> (In thousands, except per share amounts) <CAPTION> For the Nine Months For the Three Months Ended December 31, Ended December31, ------------------ ------------------- 1995 1994 1995 1994 <S> <C> <C> <C> <C> Revenue . . . . . . $2,494,726 $2,147,696 $1,018,439 $ 821,715 Net income . . . . $ 426,694 $ 203,341 $ 235,858 $ 142,878 Net income per common share . $ 1.68 $ .81 $ .93 $ .57 Shares used in computation 253,805 251,982 253,864 251,667 </TABLE> In management's opinion, the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of fiscal year 1995 or of future operations of the combined companies under the ownership and operation of the Company. <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE C- THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN Under the 1995 Key Employee Stock Ownership Plan (the "1995 Plan") the Stock Option and Compensation Committee of the Board of Directors (the "Committee") is authorized to grant, subject to the attainment of certain common stock price objectives, up to 9,000,000 shares of the Company's common stock to three key executives. The Committee has initially granted 3,000,000 shares of common stock (the "Initial Grant") and may grant up to an additional 6,000,000 shares (the "Additional Grants") based on the price per share of the common stock achieving target levels. The Initial Grant and Additional Grants are non- transferable and subject to substantial risk of forfeiture during the five year period ending March 31, 2000, and further subject to significant limitations on transfer during the seven years following fiscal year 2000. In January 1996, 600,000 shares of common stock under the Initial Grant vested, subject to the continued employment of the key executives and, accordingly, the Company began accruing compensation expense over the employment period ending March 31, 2000. <PAGE> Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue: Total revenue for the quarter ended December 31, 1995 increased by 39%, or $283 million, over the prior year's comparable quarter. This increase reflects the continued demand for enterprise licensing alternatives with less restrictive pricing options, as well as the continued growth of licensing fees for client/server product offerings on the midrange platform. In addition, the inclusion of Legent products for a full fiscal quarter contributed approximately 10% to total revenue. The increase in midrange platform revenue reflects strong growth in our database, manufacturing and UNIX-based systems management products. Maintenance revenues decreased by $3 million, primarily due to the continued trend in site consolidations. Price changes did not have a material impact in either quarter. Costs and Expenses: Selling, marketing and administrative expenses as a percentage of total revenue for the December 1995 quarter was unchanged from the December 1994 quarter, at 37%. Net research and development expenditures increased $16 millon, or 26%, over the December 1994 quarter. The increase was a direct result of the addition of the Legent products and associated development personnel, the focus on expanding the client/server product offerings, in particular the CA-Unicenter products, and continued support and development for the ASK products. Commissions and royalties remained at 5% of revenue for both the December 1995 and 1994 quarters. Depreciation and amortization expense increased $42 million in the December 1995 quarter over the December 1994 quarter, primarily due to the $56 million increase in depreciation and amortization associated with the Legent acquisition offset by the expected decrease of $12 million in ASK purchased software amoritzation. In the December 1995 quarter, net interest expense increased by $25 million over the December 1994 quarter, a direct result of higher debt levels associated with borrowings used to finance the Legent acquisition. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Margins: Pre-tax income for the quarter ended December 1995 exceeded the prior year's comparable quarter by $84 million. However, as a percentage of total revenue pre-tax income decreased to 36% from 39% in the comparable prior year period. This decrease is due to an increase in interest and depreciation expense attributable to the Legent acquisition. The Company's consolidated effective tax rate for the December 1995 quarter decreased to 37.7% from 38% for the December 1994 quarter, primarily as a result of anticipated increases in foreign tax credits. Operations: The Company has traditionally reported lower profit margins in the first two quarters of each fiscal year than those experienced in the third and fourth quarters. As part of the annual budget process, management establishes higher discretionary expense levels in relation to projected revenue for the first half of the year. Historically, the Company's combined third and fourth quarter revenues have been greater than those for the first half of the year, as these two quarters coincide with the clients' calendar year budget periods and the culmination of the Company's annual sales plan. These historically higher second half revenues have resulted in significantly higher profit margins since total expenses have not increased in proportion to revenue. However, past financial performance may not be indicative of future performance, particularly in view of the uncertainties associated with integration of the Legent acquisition, the higher depreciation, amortization and interest expenses noted above and the personnel and infrastructure investments necessary to capitalize on the industry's on going migration to client server technology. The Company's near term operating results may be affected by a number of other factors, including, but not limited to: uncertainties relative to global economic conditions; market acceptance of competing technologies; the availability and cost of new solutions; the Company's ability to successfully maintain or increase market share in its core business while expanding its product base into other markets; the strength of its distribution channels; the Company's ability to manage fixed and variable expense growth relative to revenue growth; and the Company's ability to effectively integrate acquired products and operations. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents and short-term marketable securities decreased by approximately $45 million during the quarter ended December 31, 1995. This decrease was primarily attributable to the repayment of bank debt and payments related to the Legent acquisition, offset by cash generated from operations. Cash from operations, although approximately $30 million higher than that of the prior year, was reduced by approximately $32 million of additional interest payments for the nine months ended December 31, 1995. Additionally, the Company continues to allow clients to finance their purchases of the Company's software over several years. The Company believes that this ability to offer clients attractive financing alternatives provides the Company with a distinct competitive advantage over other software vendors. During the quarter ended September 30, 1995, the Company entered into a new $2 billion credit facility with a group of banks. An initial draw down of $1.8 billion was used to finance the acquisition of 98% of the issued and outstanding of Common Stock of Legent Corporation. This $2 billion facility is a five year reducing revolving credit agreement having a current all-in borrowing cost at the London Interbank Rate ("LIBOR") plus 47.5 basis points. The margin is adjusted upon the Company's achievement of certain financial conditions and ratios. At December 31, 1995, $1.6 billion was drawn under this credit agreement. On December 31, 1995, total purchases under the Company's open market common stock repurchase programs were 47.2 million shares. Approximately 12.8 million shares remain available for repurchase under this program. These figures have been adjusted for the Company's three-for-two stock split. The Company's capital resource requirements as of the end of December 1995 consisted of lease obligations for office space, computer equipment, mortgage or loan obligations and amounts due as a result of product and company acquisitions. It is expected that existing cash, cash equivalents, short-term marketable securities, the availability of borrowings under committed and uncommitted credit lines, as well as cash provided from operations, will be sufficient to meet anticipated cash requirements. <PAGE> PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K. None. 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. COMPUTER ASSOCIATES INTERNATIONAL, INC. Dated: February 2, 1996 By:/s/ Sanjay Kumar ---------------------- Sanjay Kumar,President and Chief Operating Officer Dated: February 2, 1996 By:/s/ Peter Schwartz ---------------------- Peter Schwartz Sr. Vice President - Finance (Chief Financial and Accounting Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>ART. 5 FDS FOR COMPUTER ASSOCIATES 3RD QTR 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1996 <PERIOD-START> APR-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 55322 <SECURITIES> 107277 <RECEIVABLES> 1147561 <ALLOWANCES> 0 <INVENTORY> 67800 <CURRENT-ASSETS> 1377960 <PP&E> 425839 <DEPRECIATION> 0 <TOTAL-ASSETS> 4881681 <CURRENT-LIABILITIES> 1531829 <BONDS> 1146467 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 1221985 <TOTAL-LIABILITY-AND-EQUITY> 4881681 <SALES> 1848959 <TOTAL-REVENUES> 2394207 <CGS> 0 <TOTAL-COSTS> 2918977 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 46086 <INCOME-PRETAX> (524770) <INCOME-TAX> (203317) <INCOME-CONTINUING> (321453) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (321453) <EPS-PRIMARY> (1.33) <EPS-DILUTED> (1.33) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CAG

https://www.sec.gov/Archives/edgar/data/23217/0000023217-96-000002.txt

-----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, F/7q7Y1czrqrJo4JjAIGgHBlbTaGgMiBEhQSAEKN/gxjLe9vb8FnR/4sNBpCiwgz g+fwwArY0LRHtP5ytkhKNQ== <SEC-DOCUMENT>0000023217-96-000002.txt : 19960112 <SEC-HEADER>0000023217-96-000002.hdr.sgml : 19960111 ACCESSION NUMBER: 0000023217-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951126 FILED AS OF DATE: 19960110 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONAGRA INC /DE/ CENTRAL INDEX KEY: 0000023217 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 470248710 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20597 FILM NUMBER: 96502506 BUSINESS ADDRESS: STREET 1: ONE CONAGRA DR CITY: OMAHA STATE: NE ZIP: 68102 BUSINESS PHONE: 4025954000 FORMER COMPANY: FORMER CONFORMED NAME: NEBRASKA CONSOLIDATED MILLS CO DATE OF NAME CHANGE: 19721201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> 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 November 26, 1995 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 1-7275 ___________________________________________ CONAGRA, INC. __________________________________________________________________ (Exact name of registrant, as specified in charter) Delaware 47-0248710 __________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One ConAgra Drive, Omaha, Nebraska 68102-5001 __________________________________________________________________ (Address of Principal Executive Offices) (Zip Code) (402) 595-4000 __________________________________________________________________ (Registrant's telephone number, including area code) NA __________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ _______ Number of shares outstanding of issuer's common stock, as of December 24, 1995 was 246,563,011. PART I - FINANCIAL INFORMATION CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions) NOV 26, MAY 28, NOV 27, 1995 1995 1994 _________ _________ _________ ASSETS Current assets: Cash and cash equivalents $ 46.4 $ 60.0 $ 59.4 Receivables, less allowance for doubtful accounts of $68.0, $63.9 and $69.5 2,530.7 1,540.0 2,410.8 Margin deposits and segregated funds - - 293.6 Inventory: Hedged commodities 1,350.2 925.4 1,035.2 Other 2,610.8 2,241.9 2,579.6 _________ _________ _________ Total inventory 3,961.0 3,167.3 3,614.8 Prepaid expenses 384.5 372.9 238.4 _________ _________ _________ Total current assets 6,922.6 5,140.2 6,617.0 _________ _________ _________ Property, plant and equipment at cost, less accumulated depreciation of $1935.9, $1741.8 and $1687.9 3,239.4 2,796.0 2,719.0 Brands, trademarks and goodwill, at cost less accumulated amortization 2,564.9 2,420.1 2,750.4 Other assets 449.3 444.7 429.2 _________ _________ _________ $13,176.2 $10,801.0 $12,515.6 _________ _________ _________ _________ _________ _________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions) NOV 26, MAY 28, NOV 27, 1995 1995 1994 _________ _________ _________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 3,112.6 $ - $ 2,681.9 Current installments of long-term debt 129.0 47.9 61.0 Accounts payable 1,706.9 1,574.8 1,516.4 Advances on sales 209.1 856.6 177.2 Payable to customers, clearing associations, etc. - - 330.6 Other accrued liabilities 1,452.7 1,485.6 1,479.9 _________ _________ _________ Total current liabilities 6,610.3 3,964.9 6,247.0 _________ _________ _________ Senior long-term debt, excluding current installments 1,727.0 1,770.0 1,417.5 Other noncurrent liabilities 904.4 940.8 1,057.6 Subordinated debt 750.0 750.0 766.0 Preferred securities of subsidiary company 525.0 525.0 275.0 Preferred shares subject to mandatory redemption 27.9 354.9 355.6 Common stockholders' equity: Common stock of $5 par value, authorized 1,200,000,000 shares, issued 252,957,072, 252,869,958 and 252,828,935 1,264.8 1,264.3 1,264.1 Additional paid-in capital 410.8 409.9 402.1 Retained earnings 1,858.9 1,712.5 1,549.8 Foreign currency translation adjustment (29.3) (44.9) (16.9) Less treasury stock, at cost, common shares 4,846,730, 7,172,312 and 4,727,587 (166.7) (206.9) (122.3) _________ _________ _________ 3,338.5 3,134.9 3,076.8 Less unearned restricted stock and value of 17,541,528 19,423,916 and 21,029,155 common shares held in EEF (706.9) (639.5) (679.9) _________ _________ _________ Total common stockholders' equity 2,631.6 2,495.4 2,396.9 _________ _________ _________ $13,176.2 $10,801.0 $12,515.6 _________ _________ _________ _________ _________ _________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and shares in millions except per share amounts) THIRTEEN WEEKS ENDED NOV 26, NOV 27, 1995 1994 _________ _________ Net sales $ 6,626.3 $ 6,288.6 _________ _________ Costs and expenses: Cost of goods sold 5,677.4 5,392.3 Selling, administrative and general expenses 591.6 575.2 Interest expense, net 77.6 74.1 _________ _________ 6,346.6 6,041.6 _________ _________ Income before equity in earnings of affiliates and income taxes 279.7 247.0 Equity in earnings of affiliates 3.6 2.8 _________ _________ Income before income taxes 283.3 249.8 Income taxes 116.2 99.9 _________ _________ Net income 167.1 149.9 Less preferred dividends 3.5 6.0 _________ _________ Net income available for common stock $ 163.6 $ 143.9 _________ _________ _________ _________ Earnings per common and common equivalent share $ 0.72 $ 0.63 _________ _________ _________ _________ Weighted average number of common and common equivalent shares outstanding 226.9 229.3 _________ _________ _________ _________ Cash dividends declared per common share $ 0.237 $ 0.208 _________ _________ _________ _________ CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and shares in millions except per share amounts) TWENTY-SIX WEEKS ENDED NOV 26, NOV 27, 1995 1994 _________ _________ Net sales $13,062.7 $12,534.5 _________ _________ Costs and expenses: Cost of goods sold 11,311.8 10,899.1 Selling, administrative and general expenses 1,169.9 1,120.3 Interest expense, net 153.5 142.8 _________ _________ 12,635.2 12,162.2 _________ _________ Income before equity in earnings of affiliates and income taxes 427.5 372.3 Equity in earnings of affiliates 3.4 5.5 _________ _________ Income before income taxes 430.9 377.8 Income taxes 176.7 151.1 _________ _________ Net income 254.2 226.7 Less preferred dividends 8.6 12.0 _________ _________ Net income available for common stock $ 245.6 $ 214.7 _________ _________ _________ _________ Earnings per common and common equivalent share $ 1.08 $ 0.94 _________ _________ _________ _________ Weighted average number of common and common equivalent shares outstanding 227.2 228.9 _________ _________ _________ _________ Cash dividends declared per common share $ 0.445 $ 0.388 _________ _________ _________ _________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) TWENTY-SIX WEEKS ENDED NOV 26, NOV 27, Decrease in Cash and Cash Equivalents 1995 1994 _________ _________ Cash flows from operating activities: Net income $ 254.2 $ 226.7 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and other amortization 163.8 153.0 Goodwill amortization 36.0 34.6 Other noncash items (includes nonpension postretirement benefits) 27.7 21.5 Change in assets and liabilities before effects from business acquisitions (2,374.7) (2,212.7) _________ _________ Net cash flows from operating activities (1,893.0) (1,776.9) _________ _________ Cash flows from investing activities: Sale of property, plant and equipment 31.9 5.6 Additions to property, plant and equipment (285.7) (175.1) Payment for business acquisitions (454.0) (322.3) Decrease in notes receivable-Monfort Finance Company 30.1 54.9 Other items 26.1 (42.0) _________ _________ Net cash flows from investing activities (651.6) (478.9) _________ _________ Cash flows from financing activities: Net short term borrowings 3,084.2 2,262.9 Decrease in accounts receivable sold - (100.0) Proceeds from exercise of employee stock options 31.5 10.0 Cash dividends paid (105.9) (97.2) Repayment of long-term debt (54.3) (84.2) Treasury stock purchases (399.1) - Issuance of preferred securities of a subsidiary company - 175.0 Employee Equity Fund stock transactions 7.5 9.0 Other items (32.9) (26.7) _________ _________ Net cash flows from financing activities 2,531.0 2,148.8 _________ _________ Net decrease in cash & cash equivalents (13.6) (107.0) Cash and cash equivalents at beginning of year 60.0 166.4 _________ _________ Cash and cash equivalents at end of period $ 46.4 $ 59.4 _________ _________ _________ _________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOVEMBER 26, 1995 (1) The information furnished herein relating to interim periods has not been examined by independent Certified Public Accountants. In the opinion of management, all adjustments necessary for a fair statement of the results for the periods covered have been included. All such adjustments are of a normal recurring nature. The accounting policies followed by the Company, and additional footnotes, are set forth in the financial statements included in the Company's 1995 annual report, which report was incorporated by reference in Form 10-K for the fiscal year ended May 28, 1995. (2) The composition of inventories is as follows (in millions): NOV 26, MAY 28, NOV 27, 1995 1995 1994 _________ _________ _________ Hedged commodities $ 1,350.2 $ 925.4 $ 1,035.2 Food products and livestock 1,341.3 1,232.2 1,333.9 Agricultural chemicals, fertilizer and feed 465.8 323.1 422.8 Retail merchandise 173.7 196.4 188.7 Other, principally ingredients and supplies 630.0 490.2 634.2 _________ _________ _________ $ 3,961.0 $ 3,167.3 $ 3,614.8 _________ _________ _________ _________ _________ _________ (3) ConAgra acquired all outstanding common stock of Canada Malting Co. Limited, one of the world's largest producers of malted barley for approximately US$ 300 million, pursuant to a tender offer commenced in September 1995 and a statutory amalgamation completed in December 1995. In addition to being Canada's leading malt producer and exporter, Canada Malting Co. Limited has interests in malt producers in the United States, the United Kingdom, Argentina and Uruguay. Canada Malting is also the leading producer of mushrooms in Canada. Canada Malting's sales for the year ended December 31, 1994 were Canadian $367 million. (4) Following is a condensed statement of common stockholders' equity (in millions): <TABLE> <captions> Unearned Add'l Foreign Restricted Common Paid-In Retained Curr Treasury & EEF Stock Capital Earnings Trns Adj Stock Stock Total __________ __________ __________ __________ __________ __________ __________ <S> <C> <C> <C> <C> <C> <C> <C> Balance 5/28/95 $ $1,264.3 $ $409.9 $ $1,712.5 $ ($44.9)$ ($206.9)$ ($639.5) $ $2,495.4 Shares issued Employee stock option and incentive 0.3 1.1 0.1 (0.1) 1.4 EEF* stock option, incentive and other employee benefit plans (1.9) 51.4 49.5 Fair market valuation of EEF shares 119.1 (119.1) - Acquisitions 0.1 0.3 0.4 Conversion of preferred stock 0.1 (117.7) 444.6 327.0 Shares acquired Incentive plans (5.4) 0.4 (5.0) Treasury shares purchased (399.1) (399.1) Foreign currency translation adjustment 15.6 15.6 Cash dividends declared (107.8) (107.8) Net income 254.2 254.2 __________ __________ __________ __________ __________ __________ __________ Balance 11/26/95 $ $1,264.8 $ $410.8 $ $1,858.9 $ ($29.3)$ ($166.7)$ ($706.9) $ $2,631.6 __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ *Employee Equity Fund </TABLE> (5) On August 14, 1990, ConAgra acquired Beatrice Company (Beatrice). As a result of the acquisition and the significant pre-acquisition tax and other contingencies of the Beatrice businesses and its former subsidiaries, the consolidated post-acquisition financial statements of ConAgra have reflected significant liabilities and valuation allowances associated with the estimated resolution of these contingencies. Subsequent to the acquisition of Beatrice by ConAgra, the Internal Revenue Service completed its audit of the federal income tax returns of Beatrice and its predecessors for the fiscal years ended in 1985 through 1987 and issued an examining agent's report. The findings contained in the report were protested by Beatrice. Agreement was reached with the Internal Revenue Service regarding these matters in August 1995. This settlement resolves all deficiencies proposed by the Internal Revenue Service for 1987 and prior years, including deficiencies relating to previously-filed carry-back claims. The settlement allowed ConAgra to better estimate the amounts of Beatrice state tax liabilities that will ultimately be paid to various state tax authorities, and the amounts of state tax and interest that will be deductible for federal income tax purposes. Prior to the settlement, ConAgra had recorded a valuation allowance against deferred tax assets of approximately $230.0 million due to uncertainties as to the ultimate realization of these assets. As a result of the settlement, ConAgra has released the $230.0 million valuation allowance and has reduced noncurrent liabilities by $135.0 million, with a resulting reduction of goodwill associated with the Beatrice acquisition of $365.0 million. Federal income tax returns of Beatrice for fiscal years ended 1988, 1989 and 1990 and various state tax returns remain open. However, after taking into account the foregoing adjustments, management believes that the ultimate resolution of all remaining pre-acquisition Beatrice tax contingencies should not exceed the reserves established for such matters. Beatrice is also engaged in various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by ConAgra. The environmental proceedings include litigation and administrative proceedings involving Beatrice's status as a potentially responsible party at 48 Superfund, proposed Superfund or state-equivalent sites. Beatrice has paid or is in the process of paying its liability share at 35 of these sites. Beatrice's known volumetric contribution exceeds 4% at seven of the sites. Beatrice has established substantial reserves for these matters. The environmental reserves are based on Beatrice's best estimate of its undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required cleanup, the known volumetric contribution of Beatrice and other potentially liable responsible parties and Beatrice's prior experience in remediating sites. Management believes the ultimate resolution of such Beatrice legal and environmental contingenices should not exceed the reserves established for such matters. ConAgra is party to a number of other lawsuits and claims arising out of the operation of its businesses. After taking into account liabilities recorded for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on ConAgra's financial condition, results of operation or liquidity. (6) On October 16, 1995 the company called for redemption on November 30, 1995 all of its Class E $25.00 cumulative convertible preferred stock. The redemption price is $25.76819 per share, representing $25.48225 per share of preferred stock plus accrued and unpaid dividends to and including November 30, 1995. Holders of the preferred stock, as an alternative to redemption prior to the redemption date, could convert each preferred share held into 1.017728 shares of the company's common stock. As of November 26, 1995, 13,077,319 shares of Class E preferred stock, at a par value of $327.0 million, had been converted into shares of common stock. Since February 1995, the Company has purchased, in the open market, 14,436,587 shares of common stock at an aggregate cost of $516.8 million to cover the conversion of the Class E preferred stock. (7) Earnings per common and common equivalent share are calculated on the basis of the weighted average outstanding common shares and, when applicable, those outstanding options that are dilutive and after giving effect to the preferred stock dividend requirements. Fully diluted earnings per share did not differ significantly from primary earnings per share in any period presented. CONAGRA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and operating results for the periods included in the accompanying consolidated condensed financial statements. Results for the fiscal 1996 second quarter and first half are not necessarily indicative of results which may be attained in the future. FINANCIAL CONDITION During the first half of fiscal 1996, the Company's capital investment (working capital plus noncurrent assets) decreased $270.2 million. Working capital decreased $863.0 million and noncurrent assets increased $592.8 million. The decrease in working capital resulted from an increase in notes payable due to business acquisitions and normal property, plant and equipment additions, and from treasury stock purchases. The increase in notes payable was also due to the normal seasonal increase in accounts receivable and inventory. The decrease in payables to customers and margin deposits and segregated funds from the prior year first half is the result of the sale of Geldermann, Inc. during the third quarter of fiscal 1995. The increase in property, plant and equipment over second quarter of fiscal 1995 of $520.4 million is primarily due to business acquisitions and normal additions. The Company's objective is that senior long-term debt normally will not exceed 30 percent of total long-term debt plus equity. At November 26,1995, senior long-term debt was 31 percent of total long-term debt plus equity compared to 30 percent at May 28,1995 and 27 percent at November 27,1994. OPERATING RESULTS A summary of the period to period increases (decreases) in the principal components of operations is shown below (dollars in millions, except per share amounts). COMPARISON OF THE PERIODS ENDED NOV. 26, 1995 & NOV. 27, 1994 THIRTEEN WEEKS TWENTY-SIX WEEKS DOLLARS % DOLLARS % ________________________________ Net sales 337.7 5.4 528.2 4.2 Cost of goods sold 285.1 5.3 412.7 3.8 Gross profit 52.6 5.9 115.5 7.1 Selling, administrative and general expenses 16.4 2.9 49.6 4.4 Interest expense, net 3.5 4.7 10.7 7.5 Income before equity in earnings of affiliates and income taxes 32.7 13.2 55.2 14.8 Equity in earnings of affiliates 0.8 28.6 (2.1) (38.2) Income before income taxes 33.5 13.4 53.1 14.1 Income taxes 16.3 16.3 25.6 16.9 Net income 17.2 11.5 27.5 12.1 Earnings per common and common equivalent share 0.09 14.3 0.14 14.9 All three of ConAgra's industry segments, Food Inputs & Ingredients, Refrigerated Foods and Grocery/Diversified Products increased operating profit in fiscal 1996's second quarter and first half versus the same periods in fiscal 1995. Sources of increased sales and expenses during the second quarter and first half included the international trading businesses, the crop protection chemical business, the grain processing businesses, the pork business and the grocery products businesses. Those increases were partially offset by sales and expense declines in the red meat business and the Australian meat business. Acquisitions, as well as unit volume increases, contributed to ConAgra's second quarter and first half sales growth, partially offset by the divestiture of non-core businesses. In the Grocery/Diversified segment, Hunt-Wesson and the Lamb-Weston potato products business achieved earnings growth in the second quarter and first half. Consumer Frozen Foods' operating profit declined in the second quarter but was up for the first half. Acquisitions contributed to the Grocery/Diversified segment's earnings growth in both periods. In the Refrigerated Foods segment, second quarter and first half operating profit growth was driven by the U.S. beef business, turkey products and cheese products. Chicken products results improved in the second quarter and first half. Operating profit declined in both periods in packaged meats, pork products and Australia beef. In the Food Inputs & Ingredients industry segment, the principal sources of second quarter and first half operating profit growth were grain merchandising and management actions last year to eliminate unhealthy businesses. Crop input operating profit was up in both periods. Grain Processing operating profit was up in the second quarter but down in the first half. Specialty Retailing earnings declined in both periods. Operating profit is based on net sales less all identifiable operating expenses and includes the related equity in earnings of companies included on the basis of the equity method of accounting. General corporate expense, interest expense (except financial businesses) income taxes and goodwill amortization are excluded from segment operating profit. For financial businesses, operating profit includes the effect of interest, which is a large element of their operating costs. Weighted average shares outstanding decreased in fiscal 1996's second quarter and first half over the sames periods in fiscal 1995 primarily as a result of common stock repurchases. Preferred dividends decreased because of the conversion of Class E preferred stock. ConAgra is in the process of divesting certain non-core businesses and is planning a joint venture arrangement for a recently acquired business. During fiscal 1995, ConAgra divested Consumer Direct (direct mail marketing), Dyno Merchandise, Inc. (home sewing accessories), Geldermann, Inc. (financial services), and Berliner & Marx, Inc. (meat products). In July 1995, ConAgra also completed the sale of Petrosul International (sulfur processing and marketing) and Alum Rock Foodservice (cheese distribution). In October 1995 ConAgra completed the sale of Omaha Vaccine (animal care products). In November 1995 ConAgra completed the sale of Mott's-Blue Coach Foods (poultry products). Sales and earnings of the businesses divested and identified for divestiture are not material to ConAgra's results of operations. ConAgra continues to reevaluate the businesses identified for divestiture and changes may be made. In addition, ConAgra presently plans to joint venture its malting operations by selling up to 50% to a third party. ConAgra presently expects the combined results of these activities will not be significant to ConAgra's results of operations. ConAgra is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no later than fiscal 1997. ConAgra has not yet quantified the effect, if any, of implementation on the financial statements. CONAGRA, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. ConAgra gave notice on October 16, 1995 that it would redeem on November 30, 1995 all of the outstanding shares of its $25 Class E Cumulative Convertible Voting Preferred Stock ("Class E Preferred Stock") at a redemption price of $25.48225 per share plus accrued and unpaid dividends thereon to the redemption date. The notice stated that holders of the Class E Preferred Stock could elect to convert any or all of the shares to be redeemed into shares of ConAgra common stock at the rate of 1.017728 shares of common stock per share of preferred stock. The redemption transaction was completed on November 30, 1995. An aggregate of 14,177,159 shares of Class E Preferred Stock were converted into shares of Common Stock. An aggregate of 18,336 shares of Class E Preferred Stock were redeemed for cash. ConAgra gave notice on December 26, 1995 that it would redeem on January 30, 1996 all of the outstanding shares of its $2.50 Class D Cumulative Convertible Preferred Stock ("Class D Preferred Stock") at a redemption price of $25 per share plus accrued and unpaid dividends thereon to the redemption date. The notice stated that holders of the Class D Preferred Stock could elect to convert any or all of the shares to be redeemed into shares of ConAgra common stock at the rate of 6.9323 shares of common stock per share of preferred stock. At December 26, 1995, ConAgra had outstanding 24,450 shares of Class D Preferred Stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS. 3.1 - Certificate of Elimination relating to Class B, Class C and Class E Preferred Stock. 12 - Statement regarding computation of ratio of earnings to fixed charges, and ratio of earnings to combined fixed charges and preferred dividends. 27 - Financial Data Schedule. (B) REPORTS ON FORM 8-K. ConAgra filed a Form 8-K report dated October 16, 1995 reporting that ConAgra had given notice that it would redeem on November 30, 1995 all of the outstanding shares of its $25 Class E Cumulative Convertible Voting Preferred Stock. See Item 5 above. CONAGRA, INC. By: /s/ James P. O'Donnell _______________________ James P. O'Donnell Senior Vice President and Chief Financial Officer By: /s/ Kenneth W. DiFonzo ________________________ Kenneth W. DiFonzo Vice President and Controller Dated this 10 day of January, 1996. EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE 3.1 - Certificate of Elimination relating to Class B, Class C and Class E Preferred Stock............................. 18 12 - Statement regarding computation of ratio of earnings to fixed charges, and ratio of earnings to combined fixed charges and preferred dividends..................... 20 27 - Financial Data Schedule..................... </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <TEXT> EXHIBIT 3.1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "CONAGRA, INC.", FILED IN THIS OFFICE ON THE FIFTEENTH DAY OF DECEMBER, A.D. 1995, AT 9 O'CLOCK A.M. [GREAT SEAL OF THE STATE OF DELAWARE] A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEWCASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ Edward J. Freel ______________________________ Edward J. Freel, Secretary of State [SEAL] AUTHENTICATION: 7753142 0818944 8100 DATE: 12-15-95 950295608 <PAGE> CERTIFICATE OF ELIMINATION OF STATEMENTS OF RESOLUTIONS AND CERTIFICATES OF DESIGNATION FOR CERTAIN SERIES OF CLASS B, CLASS C and CLASS E PREFERRED STOCK OF CONAGRA, INC. UNDER SECTION 151(g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE ConAgra, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), does hereby certify that the following resolutions were duly adopted by the Corporation's Board of Directors: "WHEREAS, by reason of conversion or redemption, no shares of the Corporation's Series 1, 2, 3, 4, 5, 6 or 7 Class B Preferred Stock (the "Prior Series Class B Preferred Stock"), Series 1, 2 or 3 Class C Preferred Stock (the "Prior Series Class C Preferred Stock") or the $2,500 Class E Cumulative Convertible Voting Preferred Stock or $25 Class E Cumulative Convertible Voting Preferred Stock (the "Prior Series Class E Preferred Stock") remain outstanding, it is hereby: "RESOLVED, that no additional shares of the Prior Series Class B Preferred Stock, Prior Series Class C Preferred Stock or Prior Series Class E Preferred Stock will be issued pursuant to the terms of the Certificates of Designation or Statements of Resolution of each such series of Preferred Stock; "FURTHER RESOLVED, that the officers of the Corporation are duly authorized to file a certificate with the Secretary of State of Delaware eliminating from the Certificate of Incorporation all matters set forth in each Certificate of Designation or Statement of Resolution for the Prior Series Class B Preferred Stock, Prior Series Class C Preferred Stock and Prior Series Class E Preferred Stock in respect of each such series of such Preferred Stock." Upon the effective date of the filing of this Certificate, there shall be eliminated from the Certificate of Incorporation all matters set forth in the Certificates of Designation or Statements of Resolution, with respect to the Prior Series Class B Preferred Stock, Prior Series Class C Preferred Stock and Prior Series Class E Preferred Stock, in respect of each such series of such Preferred Stock. IN WITNESS WHEREOF, ConAgra, Inc. has caused its corporate seal to be hereunto affixed and this Certificate to be signed by J. P. O'Donnell, its Senior Vice President and Chief Financial Officer, and attested by L. B. Thomas, its Senior Vice President and Secretary, this 8th day of December, 1995. ConAgra, Inc. By: /s/ J. P. O'Donnell _________________________ Senior Vice President and Chief Financial Officer Attest: By: /s/ L. B. Thomas ___________________________________ Senior Vice President and Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT 12 CONAGRA, INC. AND SUBSIDIARIES COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES AND OF EARNINGS TO COMBINED FIXED CHARGES & PREFERRED STOCK DIVIDENDS ($ IN MILLIONS) Six Months Ended November 26, 1995 ____________ Fixed charges: Interest expense $ 178.5 Capitalized interest 2.3 Interest in cost of goods sold 10.1 One third of non-cancellable lease rent 20.4 ------------ Total fixed charges (A) 211.3 Add preferred stock dividends of the company 14.6 ------------ Total fixed charges and preferred stock dividends (B) 225.9 ============ Earnings: Pretax income 430.9 Adjustment for unconsolidated subidiaries 1.0 ------------ Pretax income of the Company as a whole 431.9 Add fixed charges 211.3 Less capitalized interest (2.3) ------------ Earnings and fixed charges (C) 640.9 ============ Ratio of earnings to fixed charges (C/A) 3.0 Ratio of earnings to combined fixed charges and preferred stock dividends (C/B) 2.8 EXHIBIT 12 (Continued) For the purpose of computing the above ratio of earnings to fixed charges, earnings consist of income before taxes and fixed charges. Fixed charges, for the purpose of computing earnings are adjusted to exclude interest capitalized. Fixed charges include interest on both long and short-term debt (whether said interest is expensed or capitalized and including interest charged to cost of goods sold), and a portion of noncancellable rental expense representative of the interest factor. The ratio is computed using the amounts for ConAgra as a whole, including its majority-owned subsidiaries, whether or not consolidated, and its proportionate share of any 50% owned subsidiaries, whether or not ConAgra guarantees obligations of these subsidiaries. For purposes of calculating the above ratio of earnings to combined fixed charges and preferred dividends, preferred stock dividend requirements (computed by increasing preferred stock dividends to an amount representing the pre-tax earnings which would be required to cover such dividend requirements) are combined with fixed charges as described above, and the total is divided into earnings as described above. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-26-1996 <PERIOD-END> NOV-26-1995 <CASH> 46400 <SECURITIES> 0 <RECEIVABLES> 2598700 <ALLOWANCES> 68000 <INVENTORY> 3961000 <CURRENT-ASSETS> 6922600 <PP&E> 5175300 <DEPRECIATION> 1935900 <TOTAL-ASSETS> 13176200 <CURRENT-LIABILITIES> 6610300 <BONDS> 2477000 <COMMON> 1264800 <PREFERRED-MANDATORY> 27900 <PREFERRED> 525000 <OTHER-SE> 1366800 <TOTAL-LIABILITY-AND-EQUITY> 13176200 <SALES> 13062700 <TOTAL-REVENUES> 13062700 <CGS> 11311800 <TOTAL-COSTS> 11311800 <OTHER-EXPENSES> 1169900 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 153500 <INCOME-PRETAX> 430900 <INCOME-TAX> 176700 <INCOME-CONTINUING> 254200 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 254200 <EPS-PRIMARY> 1.08 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CLX

https://www.sec.gov/Archives/edgar/data/21076/0000021076-96-000001.txt

-----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, G/JSyNBtETGaMK03Ny5n75hlOT3P5AMAEPT5Rw2OVj0lfSMbb+8h8oeTwy+tp1BZ TMNUIpTSn45vh+tskRlywQ== <SEC-DOCUMENT>0000021076-96-000001.txt : 19960216 <SEC-HEADER>0000021076-96-000001.hdr.sgml : 19960216 ACCESSION NUMBER: 0000021076-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLOROX CO /DE/ CENTRAL INDEX KEY: 0000021076 STANDARD INDUSTRIAL CLASSIFICATION: SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS [2842] IRS NUMBER: 310595760 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07151 FILM NUMBER: 96519152 BUSINESS ADDRESS: STREET 1: 1221 BROADWAY CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5102717000 MAIL ADDRESS: STREET 1: P.O. BOX 24305 CITY: OAKLAND STATE: CA ZIP: 94612-1305 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q TEXT <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) X OF THE SECURITIES EXCHANGE ACT OF 1934 - - For the quarterly period ended December 31, 1995 ----------------- 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 1-07151 ------- THE CLOROX COMPANY - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 31-0595760 - ----------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 Broadway - Oakland, California 94612 - 1888 - ----------------------------------------------------------------- (Address of principal executive offices Registrant's telephone number (including area code) (510) 271-7000 -------------- - ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all report 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 ----- ----- As of December 31, 1995 there were 51,910,594 shares outstanding of the registrant's common stock (par value - $1.00), the registrant's only outstanding class of stock. - ------------------------------------------------------------------ Total pages 10 1 - <PAGE> THE CLOROX COMPANY PART 1. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Condensed Statements of Consolidated Earnings Three and Six Months Ended December 31, 1995 and 1994 3 Condensed Consolidated Balance Sheets December 31, 1995 and June 30, 1995 4 Condensed Statements of Consolidated Cash Flows Six Months Ended December 31, 1995 and 1994 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7-9 2 - <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Earnings --------------------------------------------- (In thousands, except per share amounts) Three Months Ended Six Months Ended -------------------------------- -------------------------------- 12/31/95 12/31/94 12/31/95 12/31/94 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales $ 466,789 $ 414,454 $ 985,275 $ 890,821 Costs and Expenses Cost of products sold 213,171 183,963 444,504 394,097 Selling, delivery and administration 102,378 91,885 201,034 181,356 Advertising 66,628 68,007 139,110 138,974 Research and development 11,205 10,817 21,407 20,917 Interest expense 7,588 5,163 15,360 10,089 Other expense (income), net 2,196 (2,164) 1,629 (1,802) ------- ------- ------- ------- Total costs and expenses 403,166 357,671 823,044 743,631 ------- ------- ------- ------- Earnings before income taxes 63,623 56,783 162,231 147,190 Income Taxes 25,712 22,688 65,541 59,914 ------- ------- ------- ------- Net Earnings $ 37,911 $ 34,095 $ 96,690 $ 87,276 ========== ========== ========== ========== Earnings per Common Share $ 0.73 $ 0.64 $ 1.85 $ 1.64 Dividends per Share $ 0.53 $ 0.48 $ 1.06 $ 0.96 Weighted Average Shares Outstanding 52,089 53,274 52,222 53,341 See Notes to Condensed Consolidated Financial Statements. 3 - </TABLE> <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Consolidated Balance Sheets ------------------------------------- (In thousands) 12/31/95 6/30/95 ---------------- --------------- <S> <C> <C> ASSETS - ------ Current Assets Cash and short-term investments $ 105,866 $ 137,330 Accounts receivable, less allowance 220,371 311,868 Inventories 157,524 121,095 Deferred income taxes 11,575 11,495 Prepaid expenses 16,219 18,543 ---------------- --------------- Total current assets 511,555 600,331 Property, Plant and Equipment - Net 533,208 524,972 Brands, Trademarks, Patents and Other Intangibles 599,880 592,792 Investments in Affiliates 94,225 96,385 Other Assets 120,355 92,192 ---------------- --------------- Total $ 1,859,223 $ 1,906,672 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 89,462 $ 122,763 Accrued liabilities 187,754 234,595 Income taxes payable 11,991 6,283 Commercial paper and notes payable 168,526 115,303 Current maturities of long-term debt 395 379 ---------------- --------------- Total current liabilities 458,128 479,323 Long-term Debt 249,487 253,079 Other Obligations 80,987 85,129 Deferred Income Taxes 136,957 145,228 Put Option Obligations 17,259 - Stockholders' Equity Common Stock 55,422 55,422 Additional paid-in capital 109,068 108,347 Retained earnings 1,011,177 971,380 Treasury shares, at cost (228,813) (168,217) Cumulative translation adjustments and other (30,449) (23,019) ---------------- --------------- Stockholders' Equity 916,405 943,913 ---------------- --------------- Total $ 1,859,223 $ 1,906,672 ================ =============== See Notes to Condensed Consolidated Financial Statements. 4 - </TABLE> <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Cash Flows ----------------------------------------------- (In thousands) Six Months Ended -------------------------------------- 12/31/95 12/31/94 ------------- -------------- <S> <C> <C> Operations: Earnings from continuing operations $ 96,690 $ 87,276 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 55,669 51,445 Deferred income taxes 3,300 5,400 Other 12,532 10,230 Effects of changes in: Accounts receivable 91,497 71,938 Inventories (33,505) (50,089) Prepaid expenses 2,243 2,460 Accounts payable (33,385) (19,886) Accrued liabilities (44,049) (42,100) Income taxes payable (5,863) (4,078) ------------- -------------- Net cash provided by operations 145,129 112,596 Investing Activities: Property, plant and equipment (30,658) (28,803) Disposal of property, plant and equipment 770 550 Businesses purchased (61,665) (24,165) Other (22,168) (18,083) ------------- -------------- Net cash used for investment (113,721) (70,501) Financing Activities: Short-term borrowings 6,031 Long-term debt and other obligations repayments (12,696) (207) Commercial paper, net 53,223 44,038 Cash dividends (55,537) (51,298) Treasury stock purchased (50,150) (26,682) Employee stock plans 2,288 4,458 ------------- -------------- Net cash used for financing (62,872) (23,660) ------------- -------------- (Decrease) Increase in Cash and Short-Term Investments (31,464) 18,435 Cash and Short-Term Investments: Beginning of period 137,330 115,922 ------------- -------------- End of period $ 105,866 $ 134,357 ============= ============== See Notes to Condensed Consolidated Financial Statements. 5 - </TABLE> <PAGE> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements ---------------------------------------------------- (1) The summarized financial information for the three and six months ended December 31, 1995 and 1994 has not been audited but, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations, financial position, and cash flows of The Clorox Company and subsidiaries (the Company) have been made. The results of the three and six months ended December 31, 1995 and 1994 should not be considered as necessarily indicative of the results for the entire year. (2) Inventories at December 31, 1995 and at June 30, 1995 consisted of (in thousands): 12/31/95 6/30/95 -------- ------- Finished goods and work in process $ 99,147 $ 71,102 Raw materials and supplies 58,377 49,993 -------- -------- Total $157,524 $121,095 ======== ======== (3) Stock Repurchases The Company's Board of Directors in July 1995, authorized a $100,000,000 share repurchase program which is planned for completion during fiscal year 1996. The shares will be purchased on the open market. Shares reacquired will be held as treasury shares and are available for reissuance for corporate uses. Through December 31, 1995, 697,000 shares had been repurchased at a cost of $50,150,000. (4) Acquisitions for the six months ended December 31, 1995 of $61,665,000 were funded from cash provided from operations and included the Black Flag line of insecticides, the acquisition of the remaining minority interest of our business in Argentina, and other business interests in Mexico. These acquisitions were accounted for as purchases. (5) Put Option Obligations The Company sold 240,000 put options and purchased 240,000 call options during the second quarter of fiscal 1996 with various strike prices (average of $71.91 per share) that expire at various times through September 30, 2005. Upon exercise, each put option obligates the Company to purchase one share of its common stock at the strike price and each call option allows the Company to purchase one share of its common stock at the strike price. The aggregate exercise price of $17,259,000 has been classified as put option obligations with a corresponding increase in treasury stock at December 31, 1995. 6 - <PAGE> PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Results of Operations --------------------- Comparison of the Three Months Ended December 31, 1995 ------------------------------------------------------ with the Three Months Ended December 31, 1994 --------------------------------------------- Earnings per share increased 14 percent to $.73 from $.64, and net earnings increased 11 percent to $37,911,000 from $34,095,000 a year ago principally due to a 13 percent increase in net sales driven by a 13 percent increase in volume. Record shipments were recorded for our home cleaning business unit which includes Formula 409, Soft Scrub, Pine-Sol and Clorox toilet bowl cleaners. This business unit achieved its twelfth consecutive quarterly increase in shipments. Combat insecticides and Kingsford charcoal shipments were also up strongly. Brita water filtration systems shipped record quarterly volumes reflecting strong growth in all trade channels and the acquisition in January 1995 of the Brita business in Canada. Our international business growth during the quarter was principally due to volume from businesses acquired in fiscal 1995. Cost of products sold as a percentage of net sales was 45.7 and 44.4 percent in the current and year ago quarters, respectively. Gross margins are anticipated to remain at approximately 55 percent for the remainder of the fiscal year. Selling, delivery, and administration expense increased 11 percent over the year ago period principally due to continued investment in international infrastructure, and costs implementing our customer interface project. Advertising expense decreased 2 percent over the year ago period principally due to reductions in sales promotion activities (e.g. couponing). However, media spending has increased versus a year ago and we expect it to increase for the full year in line with sales. Interest expense increased $2,425,000 over the year ago period due to higher levels and rates on commercial paper, and additional indebtedness related to the Brita Canada acquisition of January 1995. 7 - <PAGE> PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Results of Operations --------------------- Comparison of the Six Months Ended December 31, 1995 ---------------------------------------------------- with the Six Months Ended December 31, 1994 ------------------------------------------- Earnings per share increased 13 percent to $1.85 from $1.64, and net earnings increased 11 percent to $96,690,000 from $87,276,000 a year ago principally due to a 11 percent increased in net sales driven by a 10 percent increase in volume. Record shipments were recorded in both the first and second quarters for our home cleaning business unit which includes Formula 409, Soft Scrub, Pine-Sol and Clorox toilet bowl cleaners. Combat insecticides and Kingsford charcoal shipments were both up in volume versus the year ago period. Brita water filtration systems shipped record volumes that reflect continued strong growth in all trade channels and the acquisition in January 1995 of the Brita business in Canada. International volume growth was principally due to volume from businesses acquired in fiscal 1995. Cost of products sold was 45.1 and 44.2 percent in the current and year ago periods respectively. Gross margins are expected to remain at approximately 55 percent for the remiander of the fiscal year. Selling, delivery and administration expense increased 11 percent over the year ago period principally due to continued investment in international infrastructure, and costs implementing our customer interface project. Advertising expense was about even with a year ago. Included in advertising expense is a shift from sales promotion to media spending which improves the overall efficiency of the advertising effort. Interest expense increased $5,271,000 over a year ago due to higher levels and rates on commercial paper, and additional indebtedness related to the Brita Canada acquisition of January 1995. 8 - <PAGE> PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Liquidity and Capital Resources ------------------------------- The Company's financial position and liquidity remain strong due to cash provided by operations which increased $32,533,000 over the year ago period, principally due to the liquidation of June 30, 1995 receivables including those with seasonal dating terms for payment this period. Decreases in accounts receivable and accounts payable, and increases in inventory balances from June 30, 1995 reflect normal seasonal variation, principally due to the charcoal and insecticides businesses. We expect inventories to increase during the next fiscal quarter to support the seasonal charcoal and insecticides businesses. In July 1995, the Board of Directors approved a $100,000,000 share repurchase program which is planned for completion during this fiscal year, subject to market conditions and business opportunities which may arise. Through the six month period ended December 31, 1995, 697,000 shares at a cost of $50,150,000 were reacquired, of which 418,400 shares at a cost of $31,331,000 were reacquired during the second quarter. The Company also sold 240,000 put options on the Company's stock during the second quarter as a hedge of certain future stock option exercises. The options sold were unexpired and unexercised at December 31, 1995. The Company has approved the use of interest rate derivative instruments such as interest rate swaps in order to manage the impact of interest rate movements on interest expense. These instruments have the effect of converting fixed rate interest to floating, or floating to fixed. The conditions under which derivatives can be used are set forth in a Company Policy Statement and include a restriction on the amount of such activity to a designated portion of existing debt, a limit on the term of any derivative transaction, and a specific prohibition on the use of any leveraged derivatives. Management believes the Company has access to additional capital through existing lines of credit and from public and private sources should the need arise. 9 - <PAGE> S I G N A T U R E 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. THE CLOROX COMPANY (Registrant) DATE BY /S/ HENRY J. SALVO, JR. ----------------- ----------------------- Henry J. Salvo, Jr. Vice-President - Controller 10 -- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1995, AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 31862 <SECURITIES> 74004 <RECEIVABLES> 221892 <ALLOWANCES> 1521 <INVENTORY> 157524 <CURRENT-ASSETS> 511555 <PP&E> 928248 <DEPRECIATION> 395040 <TOTAL-ASSETS> 1859223 <CURRENT-LIABILITIES> 458128 <BONDS> 249487 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 55422 <OTHER-SE> 860983 <TOTAL-LIABILITY-AND-EQUITY> 1859223 <SALES> 985275 <TOTAL-REVENUES> 985275 <CGS> 444504 <TOTAL-COSTS> 806055 <OTHER-EXPENSES> 1629 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 15360 <INCOME-PRETAX> 162231 <INCOME-TAX> 65541 <INCOME-CONTINUING> 96690 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 96690 <EPS-PRIMARY> 1.85 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

COMS

https://www.sec.gov/Archives/edgar/data/738076/0000738076-96-000001.txt

-----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, E9R03n1P3InRePzUWb83dVRL0FkKZ08mslY4cV75Nee5E+/gJh72nfPA5tVIORpE 6C7id0Hi6nsbH+9efuT9PQ== <SEC-DOCUMENT>0000738076-96-000001.txt : 19960117 <SEC-HEADER>0000738076-96-000001.hdr.sgml : 19960117 ACCESSION NUMBER: 0000738076-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3COM CORP CENTRAL INDEX KEY: 0000738076 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 942605794 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12867 FILM NUMBER: 96503718 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052 BUSINESS PHONE: 4087645000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> __________________________________________________________________ united states securities and exchange commission Washington, D. C. 20549 FORM 10-Q quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the Quarterly Period Ended November 30, 1995 Commission File No. 0-12867 or transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from to ____________ 3Com Corporation (Exact name of registrant as specified in its charter) California 94-2605794 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Bayfront Plaza 95052 Santa Clara, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (408) 764-5000 Former name, former address and former fiscal year, if changed since last report: N/A 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 ....XX.... No ................ As of November 30, 1995, 164,433,661 shares of the Registrant's Common Stock were outstanding. __________________________________________________________________ 3Com Corporation Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets November 30, 1995 and May 31, 1995 Consolidated Statements of Income Quarters and Six Months Ended November 30, 1995 and 1994 Consolidated Statements of Cash Flows Six Months Ended November 30, 1995 and 1994 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3Com Corporation Consolidated Balance Sheets (dollars in thousands) (unaudited) November 30, May 31, 1995 1995 ------------ ------- ASSETS Current Assets: Cash and cash equivalents $ 199,409 $ 159,908 Temporary cash investments 181,176 225,660 Trade receivables 331,423 245,258 Inventories 194,373 182,759 Deferred income taxes 57,761 55,273 Other 34,124 26,698 --------- --------- Total current assets 998,266 895,556 Property and equipment-net 195,501 144,944 Deposits and other assets 60,413 34,310 --------- --------- Total $1,254,180 $1,074,810 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 119,955 $ 118,377 Accrued and other liabilities 171,824 149,079 Income taxes payable 38,046 56,412 Current portion of long-term obligations 586 997 --------- --------- Total current liabilities 330,411 324,865 Long-term debt 110,000 110,000 Other long-term obligations 5,317 6,221 Deferred income taxes 19,587 - Shareholders' Equity: Preferred stock, no par value, 3,000,000 shares authorized; none outstanding - - Common stock, no par value, 400,000,000 shares authorized; shares outstanding: November 30, 1995: 164,433,661; May 31, 1995: 160,911,572 492,424 435,922 Unamortized restricted stock grants (3,641) (2,037) Retained earnings 276,193 200,030 Unrealized gain (loss) on available-for-sale securities 24,366 (22) Accumulated translation adjustments (477) (169) --------- --------- Total shareholders' equity 788,865 633,724 --------- --------- Total $1,254,180 $1,074,810 ========= ========= See notes to consolidated financial statements. 3Com Corporation Consolidated Statements of Income (in thousands, except per share data) (unaudited) Quarter Ended Six Months Ended November 30, November 30, 1995 1994 1995 1994 ---- ---- ---- ---- Sales $563,544 $376,771 $1,060,833 $691,454 Costs and expenses: Cost of sales 266,719 175,046 502,269 321,766 Sales and marketing 118,920 74,356 221,131 139,923 Research and development 56,082 39,091 107,630 73,240 General and administrative 22,902 16,484 43,843 30,108 Purchased in-process technology - 60,796 - 60,796 Acquisition related charges and other 69,000 (1,100) 69,000 4,025 ------- ------- --------- ------- Total 533,623 364,673 943,873 629,858 ------- ------- --------- ------- Operating income 29,921 12,098 116,960 61,596 Other income-net 1,930 2,210 3,183 3,368 ------- ------- --------- ------- Income before income taxes 31,851 14,308 120,143 64,964 Income tax provision 15,506 5,051 46,377 23,062 ------- ------- --------- ------- Net income $ 16,345 $ 9,257 $ 73,766 $ 41,902 ======= ======= ========= ======= Net income per common and equivalent share: Primary $ .09 $ .06 $ .42 $ .25 Fully diluted $ .09 $ .05 $ .42 $ .25 Common and equivalent shares used in computing per share amounts: Primary 176,319 168,133 175,077 166,794 Fully diluted 176,396 168,713 175,459 168,236 See notes to consolidated financial statements. 3Com Corporation Consolidated Statements of Cash Flows (dollars in thousands) (unaudited) Six Months Ended November 30, ------------------ 1995 1994 ---- ---- Cash flows from operating activities: Net income $ 73,766 $ 41,902 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 39,602 28,137 Deferred income taxes 9,074 (23,949) Purchased in-process technology - 60,796 Adjustment to conform fiscal year of pooled entity (3,048) 3,013 Non-cash acquisition-related costs 44,320 - Non-cash restructuring costs - (1,100) Changes in assets and liabilities, net of effects of acquisitions: Trade receivables (98,674) (47,829) Inventories (22,741) (13,802) Other current assets (7,485) (5,854) Accounts payable 12,238 33,943 Accrued and other liabilities 6,088 (11,823) Income taxes payable 9,482 32,142 Accrued acquisition-related costs 15,784 - ------- ------- Net cash provided by operating activities 78,406 95,576 ------- ------- Cash flows from investing activities: Purchase of property and equipment (87,073) (37,345) Purchase of temporary cash investments (113,804) (103,604) Proceeds from temporary cash investments 147,701 29,442 Businesses acquired in purchase transactions - (48,692) Other-net (3,391) 2,702 ------- ------- Net cash used for investing activities (56,567) (157,497) ------- ------- Cash flows from financing activities: Sale of stock 20,719 12,619 Repurchases of common stock - (16,893) Net proceeds from issuance of debt - 106,945 Repayments of notes payable and capital lease obligations (2,749) (1,068) Other-net (308) 24 ------- ------- Net cash provided by financing activities 17,662 101,627 ------- ------- Increase in cash and cash equivalents 39,501 39,706 Cash and cash equivalents at beginning of period 159,908 80,625 ------- ------- Cash and cash equivalents at end of period $199,409 $120,331 ======= ======= Non-cash operating, investing and financing activities: Tax benefit on stock option transactions $ 30,181 $ 11,941 Fair market value adjustment on available-for-sale securities $ 24,237 $ (163) See notes to consolidated financial statements. 3Com Corporation Notes to Consolidated Financial Statements 1. Basis of Presentation On October 13, 1995, 3Com Corporation (the Company) acquired Chipcom Corporation (Chipcom) which was accounted for as a pooling-of-interests. All financial date of the Company, including the Company's previously issued financial statements for the periods presented in this Form 10-Q, have been restated to include the historical financial information of Chipcom in accordance with generally accepted accounting principles and pursuant to Regulation S-X. The unaudited consolidated financial statements have been prepared by the Company and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In the opinion of management, these unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the Company's financial position as of November 30, 1995, and the results of operations and cash flows for the quarters and six months ended November 30, 1995 and 1994. The results of operations for the quarter and six months ended November 30, 1995 may not necessarily be indicative of the results to be expected for the fiscal year ending May 31, 1996. These financial statements should be read in conjunction with the consolidated financial statements and related notes thereto for the fiscal year ended May 31, 1995 included in the Company's fiscal 1995 Form 10-K and the Company's Joint Proxy Statement/Prospectus dated September 11, 1995. 2. Inventories consisted of (in thousands): November 30, May 31, 1995 1995 ---- ---- Finished goods $111,241 $83,221 Work-in-process 19,908 31,102 Raw materials 63,224 68,436 ------- ------ Total $194,373 $182,759 ======= ======= 3. Net Income Per Share Net income per common and equivalent share is computed based on the weighted average number of common shares and the dilutive effects of stock options outstanding during the period using the treasury stock method. The effect of the assumed conversion of the 10.25% convertible subordinated notes was antidilutive for the periods presented. Weighted average shares outstanding and per share amounts have been restated to reflect the two-for-one stock split on August 25, 1995 for shareholders of record on August 4, 1995. 4. Business Combinations On October 13, 1995, the Company acquired Chipcom by issuing approximately 18.3 million shares of its common stock in exchange for all the outstanding stock of Chipcom. The Company also assumed and exchanged all options to purchase Chipcom stock for options to purchase approximately 2.4 million shares of the Company's common stock. Chipcom designs, manufactures and distributes computer networking multi-function platforms. The acquisition was accounted for as a pooling-of-interests. All financial data of the Company has been restated to include the historical financial information of Chipcom. Chipcom maintained its financial records on a 52-53 week fiscal year ending nearest to December 31. The May 31, 1995 restated consolidated balance sheet includes the balance sheet of Chipcom as of December 31, 1994. The restated consolidated statements of income and cash flows for the quarter and six months ended November 30, 1994 include Chipcom's statements of income and cash flows for the quarter and six months ended June 26, 1994. The results of operations of Chipcom for the five month period ended May 31, 1995, which reflected revenues of $118.1 million and net income of $2.4 million, has been reported as an increase in the Company's fiscal 1996 retained earnings. No significant adjustments were required to conform the accounting policies of the Company and Chipcom. Financial information as of November 30, 1995 and for the quarter and six months ended reflects the Company's and Chipcom's operations for those periods. The following table shows the effect on the results of operations as restated for the quarters ended August 31, 1995 and August 31, 1994 and for the six months ended November 30, 1994. The Company's quarter ended August 31, 1994 and six months ended November 30, 1994 has been combined with Chipcom's quarter ended March 26, 1994 and six months ended June 25, 1994, respectively. Quarter ended August 31, Six Months Ended 1995 1994 November 30, 1994 ---- ---- ----------------- (in thousands) Sales: 3Com $430,354 $262,801 $578,266 Chipcom 66,935 51,882 113,188 ------- ------- ------- Combined $497,289 $314,683 $691,454 ======= ======= ======= Net Income (loss): 3Com $ 59,421 $ 30,772 $ 33,897 Chipcom (2,000) 1,873 8,005 ------- ------- ------- Combined $ 57,421 $ 32,645 $ 41,902 ======= ======= ======= As a result of the acquisition, the Company recorded acquisition-related charges totaling $69.0 million in the second quarter of fiscal 1996. These charges include $60.8 million of integration expenses and $8.2 million of direct transaction costs (consisting primarily of investment banking and other professional fees). Integration expenses include approximately $37.8 million of costs of eliminating duplicate and discontinued products, $5.1 million of severance and related costs for approximately 80 employees primarily associated with duplicate or discontinued product lines, field sales and administrative functions, $4.3 million of costs of eliminating duplicate facilities and $13.6 million of other acquisition-related costs. Total expected cash expenditures relating to the acquisition-related charges are $24.7 million, of which $8.9 million was disbursed prior to November 30, 1995 and the remaining $15.8 million is expected to be paid within the next twelve months. On June 9, 1995, the Company acquired Primary Access Corporation (Primary Access) by issuing approximately 4.6 million shares of its common stock for all of the outstanding stock of Primary Access. The Company also assumed and exchanged all options and warrants to purchase Primary Access stock for options and warrants to purchase approximately 1.0 million shares of the Company's common stock. Primary Access develops, manufactures and markets network access systems. The acquisition was accounted for as a pooling-of-interests. All financial data of the Company has been restated to include the operating results of Primary Access. No significant adjustments were required to conform the accounting policies of the Company and Primary Access. 5. Litigation On October 13, 1995, the Company acquired Chipcom, which had already been named as a defendant in the following litigation described below. On May 30, 1995, a complaint was filed in the United States District Court for the District of Massachusetts entitled Lucille Nappo, Marc Linsky, Constandine Machakos, and Mary Machakos v. Chipcom Corp., John Robert Held, Robert Peter Badavas, Bruce L. Cohen, Menachem E. Abraham, and Jerald G. Fishman. The named plaintiffs purport to represent the class of persons who purchased Chipcom's common stock during the period from and including February 8, 1995 through and including May 26, 1995. The complaint alleges violations by the defendants of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and seeks unspecified damages. On June 7, 1995, a complaint alleging very similar claims was filed against the same defendants in the same Court by Anthony Mallozzi. A third similar complaint was filed against the same defendants in the same Court on June 8, 1995, by Daniel List. A fourth similar complaint was filed in the same Court on June 16, 1995, entitled Sean J. Carney and Nicholas Giannantonio v. Chipcom Corp., John Held, and Robert Badavas. A fifth similar complaint was filed in the same Court on June 16, 1995, entitled Manuel C. DeSousa and Barbara J. DeSousa v. Chipcom Corp., John Held, and Robert Badavas. The cases have been consolidated for pretrial purposes pursuant to an order entered by the Court on June 15, 1995. The consolidated action is entitled In re: Chipcom Securities Litigation, Civil Action No. 95-111114-DPW. A Consolidated Complaint was filed on September 13, 1995, and an Amended Consolidated Complaint was filed on November 30, 1995. The defendants have moved to dismiss the Amended Consolidated Complaint, dispute the merits of the allegations in the consolidated complaint, and intend to defend the actions vigorously. Although the ultimate outcome of this litigation is difficult to predict, based on the facts currently known, management does not believe this matter will have a material adverse effect on the financial position of the Company. 3Com Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Acquisitions - ------------ During the quarter ended November 30, 1995, 3Com (the Company) enhanced its High Performance Scalable Networking (HPSN) enterprise-wide solutions with the acquisition of Chipcom Corporation (Chipcom), a provider of computer networking multi- function platforms, including hubs, switching and network management products. The acquisition was completed on October 13, 1995. The Company issued approximately 18.3 million shares of its common stock in exchange for all the outstanding stock of Chipcom. The Company also assumed and exchanged all options to purchase Chipcom stock for options to purchase approximately 2.4 million shares of the Company's common stock. The acquisition was accounted for as a pooling-of-interests and all financial data of the Company prior to the acquisition has been restated to include the historical financial information of Chipcom. See Note 4 of Notes to Consolidated Financial Statements for additional information on the Company's business combinations. Results of Operations - --------------------- Quarter Ended November 30, 1995 The Company achieved record sales in the second quarter of fiscal 1996 totaling $563.5 million, an increase of $186.8 million or 50 percent from the corresponding quarter a year ago. Compared with the first quarter of fiscal 1996, sales for the second quarter of fiscal 1996 increased $66.3 million or 13 percent. The Company believes that the year-over-year increase in second quarter sales is due to several factors, including rapid growth in sales outside the U.S., continued strength in the data networking market as customers embrace new technologies such as switching and Fast Ethernet, increases in personal computer sales, the breadth of 3Com's product offerings and its ability to deliver complete data networking solutions for different connectivity environments. Sales of network systems products (i.e., internetworking platforms, remote access servers, hubs and switching products) in the second quarter of fiscal 1996 represented 56 percent of total sales and increased 60 percent from the same quarter one year ago. In the second quarter of fiscal 1995, sales of network systems products represented 52 percent of total sales. The increase in network systems product sales was led primarily by the LANplex(registered TM) family of switching products, the LinkBuilder(registered TM) FMS(TM) II stackable hub, Aperture(TM) integrated network access systems and the ONcore(TM) intelligent switching hub system. Also contributing to the sales increase was the introduction of the LinkSwitch(TM) stackable switches during fiscal 1996. The increase in network systems products was partially offset by declines in sales of the ONline(TM) system concentrator, in part due to customer migration to the ONcore system. Sales of network adapters in the second quarter of fiscal 1996 represented 40 percent of total sales and increased 37 percent from the year-ago period. In the second quarter of fiscal 1995, sales of network adapters represented 44 percent of total sales. The increase in network adapter sales represented a significant increase in unit volume combined with a marginal increase in average selling prices. The increase in unit volume primarily resulted from sales of the EtherLink(registered TM) III network adapters, but was also favorably impacted by sales of the EtherLink PC Card adapter and the Fast EtherLink PCI adapter. The increase in average selling prices was due to the higher mix of Fast Ethernet products, partially offset by the industry-wide trend toward decreasing average selling prices in the desktop Ethernet and Token Ring markets. Sales of other products (i.e., terminal servers, customer service and other products) represented four percent of total sales in the second quarter of fiscal 1996 and fiscal 1995. Sales of other products increased 52 percent from the year-ago period, although they continued to represent a small percentage of the Company's total sales, as expected. Sales outside of the United States comprised 54 percent of total sales in the second quarter of fiscal 1996, compared to 51 percent for the same period last year. International sales rose 61% from the prior year and increased in all geographic regions, especially in the Asia Pacific region. The Company believes that this increase reflected its continued global expansion through recent openings of new sales offices in Latin America and Asia and the expansion of its worldwide service and support programs. The Company's operations were not significantly impacted by fluctuations in foreign currency exchange rates in the second quarters of fiscal 1996 and 1995. Cost of sales as a percentage of sales was 47.3 percent in the second quarter of fiscal 1996, compared to 46.5 percent for the second quarter of fiscal 1995. The resulting decline in gross margin in the second quarter of fiscal 1996 primarily reflected higher period costs for freight and duties, warranty, and obsolete and excess expenses which reduced gross margin by 2.1 percentage points. In addition, an unfavorable mix of certain lower margin Chipcom products reduced gross margin by 0.8 percentage points. However, a favorable shipment mix toward the Company's switching products and reductions in adapter product material costs improved gross margin by 2.3 percentage points. Total operating expenses in the second quarter of fiscal 1996 were $266.9 million, compared to $189.6 million in the second quarter of fiscal 1995. Excluding the acquisition-related charge of $69.0 million for Chipcom (see Note 4 of Notes to Consolidated Financial Statements), total operating expenses in the second quarter of fiscal 1996 were $197.9 million, or 35.1% of sales. Excluding the one-time charge of $60.8 million for purchased in- process technology primarily associated with the acquisition of NiceCom, Ltd., and a non-recurring credit of $1.1 million for the reduction in accrued costs relating to the fiscal 1991 restructuring, total operating expenses in the second quarter of fiscal 1995 were $129.9 million, or 34.5% of sales. Sales and marketing expenses in the second quarter of fiscal 1996 increased $44.6 million or 60 percent from fiscal 1995. As a percentage of sales, sales and marketing expenses increased to 21.1 percent in the second quarter of fiscal 1996, from 19.7 percent in the corresponding fiscal 1995 period. The increase in such expenses reflected increased selling costs related to the increase in sales volume, the cost of promoting the Company's new and existing products, and a 39 percent year-over-year increase in sales and marketing personnel. The Company believes the Chipcom acquisition caused some loss of productivity due to disruptions associated with integration of sales forces during the second quarter of fiscal 1996. During the quarter, the Company undertook a major new marketing initiative to heighten the public awareness of the Company by sponsoring 3Com Park, formerly Candlestick Park, in San Francisco. Research and development expenses in the second quarter of fiscal 1996 increased $17.0 million or 43 percent from the year- ago period. As a percentage of sales, such expenses decreased to 10.0 percent in the second quarter of fiscal 1996, compared to 10.4 percent in the second quarter of fiscal 1995. The increase in research and development expenses was primarily attributable to the cost of developing 3Com's new products including the Company's expansion into new technologies and markets. The Company believes the timely introduction of new technologies and products is crucial to its success, and will continue to make strategic acquisitions to accelerate time to market where appropriate. Most of the in-process technology acquired in connection with businesses purchased by the Company since December 1993 have been completed. The nature of costs for the projects that are still in process are primarily labor costs for design, prototype development and testing. The Company estimates that the remaining costs in connection with the completion of all acquired research and development projects are not significant. General and administrative expenses in the second quarter of fiscal 1996 increased $6.4 million or 39 percent from the same period a year-ago. The increase in general and administrative expenses reflected expansion of the Company's infrastructure through internal growth and acquisitions. General and administrative personnel increased 36 percent from the prior year. However, as a percentage of sales, such expenses decreased to 4.1 percent in the second quarter of fiscal 1996, from 4.4 percent in the corresponding fiscal 1995 period. Other income (net) was $1.9 million in the second quarter of fiscal 1996, compared to $2.2 million in the second quarter of fiscal 1995. The decline in other income was due primarily to higher interest expense associated with the $110.0 million of convertible subordinated notes issued during the second quarter of fiscal 1995. The Company's effective income tax rate was approximately 49 percent in the second quarter of fiscal 1996 and approximately 35 percent in the second quarter of fiscal 1995. Excluding the merger costs associated with the Chipcom acquisition, which were not fully tax deductible, the effective tax rate was 35 percent in the second quarter of fiscal 1996. Net income for the second quarter of fiscal 1996 was $16.3 million, or $.09 per share, compared to net income of $9.3 million, or $.05 per share, for the second quarter of fiscal 1995. If the aforementioned $69.0 million charge associated with the acquisition of Chipcom was excluded, the Company would have realized net income of $65.6 million, or $.37 per share, for the second quarter of fiscal 1996. Excluding the $60.8 million charge associated with purchased in-process technology and the $1.1 million credit for the reduction in the restructuring reserve, net income was $45.9 million, or $.27 per share, for the second quarter of fiscal 1995. Net income per share for fiscal 1995 has been restated to reflect the two-for-one stock split on August 25, 1995. Six Months Ended November 30, 1995 The Company achieved record sales for the first six months of fiscal 1996 totaling $1,060.8 million, an increase of $369.4 million or 53 percent from the corresponding period a year ago. Sales of network systems products in the first six months of fiscal 1996 represented 57 percent of total sales and increased 68 percent from the same period one year ago. Sales of network adapters in the first six months of fiscal 1996 represented 39 percent of total sales and increased 36 percent from the same period last year. International sales comprised 53 percent of total sales and increased 64 percent from the first six months of fiscal 1995. Cost of sales as a percentage of sales was 47.3 percent for the first six months of fiscal 1996, compared to 46.5 percent for the corresponding fiscal 1995 period. The resulting decline in gross margin in the first six months of fiscal 1996 primarily reflected higher period costs for freight and duties, warranty, and obsolete and excess expenses which reduced gross margin by 2.0 percentage points. In addition, an unfavorable mix of certain lower margin Chipcom products reduced gross margin by 1.0 percentage point. However, a favorable shipment mix toward the Company's switching products and reductions in adapter product material costs improved gross margin by 2.6 percentage points. Total operating expenses in the first six months of fiscal 1996 were $441.6 million compared to $308.1 million in the first six months of fiscal 1995. Excluding the $69.0 million charge associated with the Chipcom acquisition, total operating expenses in the first six months of fiscal 1996 were $372.6 million, or 35.1 percent of sales. Excluding the one-time charge of $60.8 million for purchased in-process technology, the non-recurring credit of $1.1 million for the reduction in accrued restructuring costs and a charge of $5.1 million for merger costs associated with Chipcom's acquisition of Artel Communications Corporation, total operating expenses in the first six months of fiscal 1995 were $243.3 million, or 35.2 percent of sales. The increase in recurring operating expenses of $129.3 million, or 53 percent, reflected increased selling costs related to higher sales volume, the cost of developing and promoting the Company's products and an average headcount increase of 35 percent over the first six months of fiscal 1995. In the first six months of fiscal 1996, sales and marketing expenses increased $81.2 million or 58 percent from the prior year and increased to 20.8 percent of sales, compared to 20.2 percent of sales in fiscal 1995. Research and development expenses increased $34.4 million in the first six months of fiscal 1996, but decreased as a percentage of sales to 10.1 percent compared to 10.6 percent in fiscal 1995. General and administrative expenses increased $13.7 million in the first six months of fiscal 1996, but decreased as a percentage of sales to 4.1 percent compared to 4.4 percent in fiscal 1995. Other income (net) was $3.2 million for the first six months of fiscal 1996, compared to $3.4 million in the corresponding period one year ago. The decline in other income was due primarily to higher interest expense associated with the issuance of the $110.0 million convertible notes during the second quarter of fiscal 1995. The Company's effective income tax rate was approximately 39 percent in the first six months of fiscal 1996 and approximately 35 percent in the first six months of fiscal 1995. Excluding the merger costs associated with the Chipcom acquisition, which were not fully tax deductible, the effective tax rate was 35 percent for the first six months of fiscal 1996. Net income for the first six months of fiscal 1996 was $73.8 million, or $.42 per share, compared to net income of $41.9 million, or $.25 per share, for the first six months of fiscal 1995. Excluding the aforementioned $69.0 million charge associated with the acquisition of Chipcom, net income was $123.0 million, or $.70 per share, for the first six months of fiscal 1996. Excluding the $60.8 million charge associated with purchased in-process technology, the $5.1 million charge for merger costs and the $1.1 million credit for the reduction in the restructuring reserve, net income was $81.8 million, or $.49 per share, for the first six months of fiscal 1995. Net income per share for fiscal 1995 has been restated to reflect the two-for-one stock split on August 25, 1995. Business Environment and Risk Factors The Company's future operating results may be affected by various trends and factors which the Company must successfully manage in order to achieve favorable operating results. In addition, there are trends and factors beyond the Company's control which affect its operations. Such trends and factors include adverse changes in general economic conditions or conditions in the specific markets for the Company's products, governmental regulation or intervention affecting communications or data networking, fluctuations in foreign exchange rates, and other factors, including those listed below. The data networking industry has become increasingly competitive, and the Company's results may be adversely affected by the actions of existing or future competitors. Such actions may include the development or acquisition of new technologies, the introduction of new products, the assertion by third parties of patent or similar intellectual property rights, and the reduction of prices by competitors to gain or retain market share. Industry consolidation or alliances may also affect the competitive environment. The market for the Company's products is characterized by rapidly changing technology. The Company's success depends in substantial part on the timely and successful introduction of new products. An unexpected change in one or more of the technologies affecting data networking or in market demand for products based on a particular technology could have a material adverse effect on the Company's operating results if the Company does not respond timely and effectively to such changes. The Company is engaged in research and development activities in certain emerging LAN and WAN high-speed technologies, such as ATM, ISDN and Fast Ethernet. As the industry standardizes on high- speed technologies, there can be no assurance that the Company will be able to respond timely and cost effectively to compete in the marketplace. Some key components of the Company's products are currently available only from single sources. There can be no assurance that in the future the Company's suppliers will be able to meet the Company's demand for components in a timely and cost effective manner. The Company's operating results and customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components. Acquisitions of complementary businesses and technologies, including technologies and products under development, are an active part of the Company's overall business strategy. The Company has recently consummated acquisitions of several companies, including Chipcom and Primary Access. There can be no assurance that products, technologies, distribution channels, key personnel and businesses of acquired companies will be effectively assimilated into the Company's business or product offerings, or that the effects of such integration will not adversely affect the Company's business, financial condition or results of operations. The difficulties of such integration may be increased by the size and number of such acquisitions and the necessity of coordinating geographically separated organizations. There can be no assurance that any acquired products, technologies or businesses will contribute to the Company's revenues or earnings, that the sales and earnings from acquired businesses will not be adversely affected by the integration process or other general factors. The acquisition of Chipcom is the largest acquisition the Company has undertaken, and the factors identified above are therefore more significant to the Company's business than for prior transactions. There can be no assurance that the Company will continue to be able to identify and consummate merger transactions in the future. The market price of the Company's common stock has been, and may continue to be, extremely volatile. Factors such as new product announcements by the Company or its competitors, quarterly fluctuations in the Company's operating results, challenges associated with integration of acquired businesses and general conditions in the data networking market may have a significant impact on the market price of the Company's common stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. During the third quarter of fiscal 1996, the Company is transitioning its core order processing, logistics and financial systems to a new client server based platform. While the Company has extensively planned for and tested the new system, the successful implementation of this project is not without risk. Notwithstanding the Company's increased geographical diversification, the Company's corporate headquarters and a large portion of its research and development activities and other critical business operations are located near major earthquake faults. The Company's business, financial condition and operating results could be materially adversely affected in the event of a major earthquake. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past trends and performance should not be presumed by investors to be an accurate indicator of future results or trends. Liquidity and Capital Resources Cash, cash equivalents and temporary cash investments at November 30, 1995 were $380.6 million, decreasing $5.0 million from May 31, 1995. During the quarter ended November 30, 1995, the Company completed the acquisition of Chipcom. As a result of the acquisition, the Company recorded acquisition-related charges totaling $69.0 million. Total expected cash expenditures relating to the acquisition-related charges are $24.7 million, of which $8.9 million was disbursed prior to November 30, 1995 and the remaining $15.8 million is expected to be paid within the next twelve months. (See Note 4 of Notes to Consolidated Financial Statements). For the six months ended November 30, 1995, net cash generated from operating activities was $78.4 million. Trade receivables at November 30, 1995 increased $86.2 million from May 31, 1995. Days sales outstanding in receivables was 53 days at November 30, 1995, compared to 46 days at May 31, 1995, due primarily to an increase in international and carrier sales. Inventory levels at November 30, 1995 increased $11.6 million from the prior fiscal year-end, net of a $27.1 million provision included in the acquisition charge for duplicate and discontinued Chipcom products. Inventory turnover was 5.2 turns at November 30, 1995, compared to 5.4 turns at May 31, 1995. Deposits and other assets of $60.4 million at November 30, 1995 increased $34.0 million from May 31, 1995. This increase resulted primarily from recording an unrealized long term investment gain of $40.1 million due to the initial public offering of Sync Research, Inc. (Sync). In accordance with the fair value accounting requirements of SFAS 115, the unrealized gain on the Company's investment in Sync resulted in corresponding increases of $24.1 million to the unrealized gain on available-for-sale securities equity account and $16.0 million to deferred income tax liabilities. The unrealized balance sheet gain or loss on this investment will fluctuate quarterly with a change in that company's stock price. During the six months ended November 30, 1995, the Company made $87.1 million in capital expenditures. Major capital expenditures included upgrades and additions to product manufacturing lines and facilities in Santa Clara and Ireland, purchase of a facility in the Boston area, furnishings and improvements to new facilities in Santa Clara and the Boston area, and upgrades of desktop systems. During the first six months of fiscal 1996, the Company received cash of $20.7 million from the sale of its common stock to employees through its employee stock purchase and option plans. During the first quarter of fiscal 1995, the Company signed a five-year lease for 225,000 square feet of office and manufacturing space to be built on land adjacent to its existing headquarters in Santa Clara. This arrangement provides the Company with an option to purchase the related property during the lease term, and at the end of the lease term the Company is obligated to either purchase the property or arrange for the sale of the property to a third party with a guaranteed residual value of up to $33.5 million to the seller of the property. The Company commenced occupancy of the facility in the first quarter of fiscal 1996, and payments on the lease started in the second quarter of fiscal 1996. The Company has a $40 million revolving bank credit agreement which expires December 31, 1996. No amount is outstanding under the credit agreement and the Company is in compliance with all financial ratio and minimum net worth requirements. Based on current plans and business conditions, the Company believes that its existing cash and equivalents, temporary cash investments, cash generated from operations and the available revolving credit agreement will be sufficient to satisfy anticipated operating cash requirements for at least the next twelve months. PART II. OTHER INFORMATION Item 1. Legal Proceedings On October 13, 1995, the Company acquired Chipcom, which had already been named as a defendant in the following litigation described below. On May 30, 1995, a complaint was filed in the United States District Court for the District of Massachusetts entitled Lucille Nappo, Marc Linsky, Constandine Machakos, and Mary Machakos v. Chipcom Corp., John Robert Held, Robert Peter Badavas, Bruce L. Cohen, Menachem E. Abraham, and Jerald G. Fishman. The named plaintiffs purport to represent the class of persons who purchased Chipcom's common stock during the period from and including February 8, 1995 through and including May 26, 1995. The complaint alleges violations by the defendants of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and seeks unspecified damages. On June 7, 1995, a complaint alleging very similar claims was filed against the same defendants in the same Court by Anthony Mallozzi. A third similar complaint was filed against the same defendants in the same Court on June 8, 1995, by Daniel List. A fourth similar complaint was filed in the same Court on June 16, 1995, entitled Sean J. Carney and Nicholas Giannantonio v. Chipcom Corp., John Held, and Robert Badavas. A fifth similar complaint was filed in the same Court on June 16, 1995, entitled Manuel C. DeSousa and Barbara J. DeSousa v. Chipcom Corp., John Held, and Robert Badavas. The cases have been consolidated for pretrial purposes pursuant to an order entered by the Court on June 15, 1995. The consolidated action is entitled In re: Chipcom Securities Litigation, Civil Action No. 95-111114- DPW. A Consolidated Complaint was filed on September 13, 1995, and an Amended Consolidated Complaint was filed on November 30, 1995. The defendants have moved to dismiss the Amended Consolidated Complaint, dispute the merits of the allegations in the consolidated complaint, and intend to defend the actions vigorously. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on September 28, 1995. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected and the proposals listed below were approved. The following are the voting results on each of the proposals (voting results and share reserve increases reflect the two-for-one stock split on August 25, 1995): Proposal I ---------- Election of Directors In Favor Withheld --------------------- -------- -------- David W. Dorman 111,692,402 14,630,450 Jean-Louis Gassee 111,693,010 14,629,842 Stephen C. Johnson 111,720,610 14,602,242 William F. Zuendt 111,719,190 14,603,662 Proposal II In Favor Opposed Abstain No Vote ----------- -------- ------- ------- ------- Increase in share reserve by 6,000,000 shares under the 1984 Employee Stock Purchase Plan 109,156,642 15,926,758 401,558 837,894 Proposal III ------------ Increase in share reserve by 500,000 shares under the Restricted Stock Plan 91,680,285 33,229,217 575,456 837,894 Proposal IV ----------- To ratify and approve administrative amendments under the Director Stock Option Plan 107,782,158 16,986,178 716,622 837,894 Proposal V ---------- Selection of Deloitte & Touche LLP as the Company's independent auditors for 1996 126,066,690 77,422 178,740 -- Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 3.1 Amended and Restated Articles of Incorporation (Exhibit 19.1 to Form 10-Q) (6) 3.2 Certificate of Amendment of the Amended and Restated Articles of Incorporation (Exhibit 3.2 to Form 10-K) (15) 3.3 Bylaws, as amended and restated (Exhibit 4.2 to Form S-8) (10) 3.4 Certificate of Amendment of the Amended and Restated Articles of Incorporation (Exhibit 4.1 to Form S-8) (23) 4.1 Reference is made to Exhibit 3.1 (Exhibit 4.1 to Form 10-K) (15) 4.2 Indenture Agreement between 3Com Corporation and The First National Bank of Boston for the private placement of convertible subordinated notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (18) 4.3 Placement Agreement for the private placement of convertible subordinated notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (18) 4.4 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (19) 10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K) (7)* 10.2 Amended and Restated Incentive Stock Option Plan (4)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 First Amended and Restated 1984 Employee Stock Purchase Plan, as amended (Exhibit 19.1 to Form 10-Q) (8)* 10.5 Second Amended and Restated 1984 Employee Stock Purchase Plan* 10.6 License Agreement dated as of June 1, 1986 (Exhibit 10.16 to Form 10-K) (3) 10.7 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (8)* 10.8 Amended 3Com Corporation Director Stock Option Plan* 10.9 Bridge Communications, Inc. 1983 Stock Option Plan, as amended (Exhibit 4.7 to Form S-8) (2)* 10.10 3Com Headquarters Lease dated December 1, 1988, as amended (Exhibit 10.14 to Form 10-K) (7) 10.11 Ground Lease dated July 5, 1989 (Exhibit 10.19 to Form 10-K) (5) 10.12 Sublease Agreement dated February 9, 1989 (Exhibit 10.20 to Form 10-K) (5) 10.13 Credit Agreement dated April 21, 1993 (Exhibit 10.11 to Form 10-K) (9) 10.14 Amendment to Credit Agreement (Exhibit 10.20 to Form 10-Q) (14) 10.15 Second Amendment to Credit Agreement (Exhibit 10.21 to Form 10-Q) (14) 10.16 3Com Corporation Restricted Stock Plan dated July 9, 1991 (Exhibit 19.2 to Form 10-Q) (8)* 10.17 Amended 3Com Corporation Restricted Stock Plan* 10.18 Form of Escrow and Indemnification Agreement for Directors and Officers (Exhibit 10.15 to Form 10-Q) (11) 10.19 Agreement and Plan of Reorganization dated December 16, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.1 to Form 8-K) (12) 10.20 Side Agreement Regarding Agreement and Plan of Reorganization dated January 14, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.2 to Form 8-K) (12) 10.21 Agreement and Plan of Reorganization dated January 18, 1994 (Exhibit 7.2 to Form 8-K) (13) 10.22 Indemnification and Escrow Agreement dated February 2, 1994 (Exhibit 7.3 to Form 8-K) (13) 10.23 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (15)* 10.24 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 14, 1994 (Exhibit 10.23 to Form 10-Q) (16) 10.25 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, dated July 14, 1994 (Exhibit 10.24 to Form 10-Q) (16) 10.26 Asset Purchase Agreement dated September 18, 1994 among 3Com Corporation, NiceCom, Ltd., and Nice Systems, Ltd. (Exhibit 7.1 to Form 8-K) (17) 10.27 First Amendment to Asset Purchase Agreement dated October 17, 1994 among 3Com Corporation, NiceCom, Ltd., and Nice Systems, Ltd. (Exhibit 7.2 to Form 8-K) (17) 10.28 Acquisition and Exchange Agreement dated March 22, 1995 among 3Com Corporation and Shareholders of Sonix Communications Limited (Exhibit 7.1 to Form 8-K) (20) 10.29 Agreement and Plan of Reorganization, dated March 21, 1995, by and among 3Com Corporation, Anuinui Acquisition Corporation and Primary Access Corporation (Appendix A to prospectus included in Form S-4) (21) 10.30 Amendment to Agreement and Plan of Reorganization, dated May 30, 1995 by and among 3Com Corporation, Anuinui Acquisition Corporation and Primary Access Corporation (Appendix A-1 to prospectus included in Form S-4) (21) 10.31 Escrow Agreement, dated June 9, 1995 by and among 3Com Corporation, The First National Bank of Boston and Tench Coxe, Kathryn C. Gould and William R. Stensrud as Shareholders' Agents (Exhibit 10.27 to Form S-4) (21) 10.32 Agreement and Plan of Merger dated as of July 26, 1995 among 3Com Corporation, Chipcom Acquisition Corporation and Chipcom Corporation (Exhibit 2.1 to Form S-4) (22) *Indicated a management contract or compensatory plan. - ----------------------------------------------------------------------------- (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed January 25, 1984 (File No. 2-89045) (2) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8 filed October 13, 1987 (File No. 33-17848) (3) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed August 29, 1987 (File No. 0-12867) (4) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850) (5) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 28, 1989 (File No. 0-12867) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 2, 1991 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1991 (File No. 0-12867) (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed January 10, 1992 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1993 (File No. 0-12867) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8, filed on November 24, 1993 (File No. 33-72158) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 14, 1994 (File No. 0-12867) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on January 31, 1994 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on February 11, 1994 (File No. 0-12867) (14) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 13, 1994 (File No. 0-12867) (15) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 31, 1994 (File No. 0-12867) (16) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 16, 1994 (File No. 0-12867) (17) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on November 1, 1994 (File No. 0-12867) (18) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on November 16, 1994 (File No. 0-12867) (19) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1995 (File No. 0-12867) (20) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on May 16, 1995 (File No. 0-12867) (21) Incorporated by reference to the Exhibit or other item identified in parentheses previously filed as an Exhibit to or included in Registrant's Registration Statement on Form S-4, originally filed on March 23, 1995 (File No. 33-58203) (22) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4, originally filed on August 31, 1995 (File No. 33-62297) (23) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8, filed on October 19, 1995 (File No. 33-63547) (b) Reports on Form 8-K The Company filed one report on Form 8-K during the fiscal quarter covered by this report as follows: (i) Report on Form 8-K filed on October 27, 1995, reporting under Item 2 the completion of the acquisition of Chipcom Corporation effective October 13, 1995. 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. 3Com Corporation (Registrant) Dated: January 15, 1996 By: /s/ Christopher B. Paisley ------------------------------ Christopher B. Paisley Vice President Finance and Chief Financial Officer (Principal Financial Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>2 <TEXT> EXHIBIT 10.5 AMENDED AND RESTATED 3COM CORPORATION 1984 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The 3Com Corporation 1984 Employee Stock Purchase Plan (the "Prior Plan") was established to provide eligible employees of 3Com Corporation ("3Com") and any current or future subsidiary corporation(s) of 3Com (collectively referred to as the "Company") with an opportunity through payroll deductions to acquire common stock of 3Com. The Prior Plan has been amended from time to time. On September 28, 1995, the Board of Directors of 3Com (the "Board") amended and restated the Prior Plan as amended in order to make various changes to the Prior Plan considered beneficial for continuing to carry out the purposes of such plan, all in the form set forth herein (the "Plan"). For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends that the Plan shall qualify as an "employee stock purchase plan" under section 423 of the Code (including any future amendments or replacements of such section), and the Plan shall be so construed. Any term not expressly defined in the Plan but defined for purposes of section 423 of the Code shall have the same definition herein. Because an eligible employee who participates in the Plan (a "Participant") may withdraw the Participant's accumulated payroll deductions and terminate participation in the Plan or any Offering (as defined below) therein at any time during an Offering Period (as defined below), the Participant is, in effect, given an option which may or may not be exercised during any Offering Period. 2. Share Reserve. The maximum number of shares which may be issued under the Plan shall be 20,000,000 shares of 3Com's authorized but unissued common stock (the "Shares"). In the event that any option granted under the Plan (an "Option") for any reason expires or is terminated, the Shares allocable to the unexercised portion of such Option may again be subjected to an Option. 3. Administration. The Plan shall be administered by the Board and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references to the Board shall also mean the committee if it has been appointed. All questions of interpretation of the Plan or of any Options shall be determined by the Board and shall be final and binding upon all persons having an interest in the Plan and/or any Option. Subject to the provisions of the Plan, the Board shall determine all of the relevant terms and conditions of Options granted pursuant to the Plan; provided, however, that all Participants granted Options pursuant to the Plan shall have the same rights and privileges within the meaning of section 423(b)(5) of the Code. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 4. Eligibility. Any regular employee of the Company is eligible to participate in the Plan and any Offering (as hereinafter defined) under the Plan except the following: (a) employees who are customarily employed by the Company for less than twenty (20) hours a week; (b) employees who own or hold options to purchase or who, as a result of participation in the Plan, would own or hold options to purchase stock of the Company possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company within the meaning of section 423(b)(3) of the Code; and (c) with respect to participation in the Additional Offering described in paragraph 5(a) below, employees who were not employed by the Company or Chipcom Corporation ("Chipcom") as of October 2, 1995. 5. Offerings. (a) Offering Periods Beginning On or After October 1, 1995. Effective for offerings commencing on or after October 1, 1995, the Plan shall be implemented by sequential offerings (individually, an "Offering") of approximately six (6) months duration (an "Offering Period"). Effective October 1, 1995, Offerings shall commence on April 1 and October 1 of each year and end on the first September 30 and March 31, respectively, occurring thereafter. An additional Offering shall commence upon the date immediately following the Effective Time (as defined in the Agreement and Plan of Merger dated as of July 26, 1995 by and among 3Com, Chipcom Acquisition Corporation, a wholly-owned subsidiary of 3Com and Chipcom) and shall end on March 31, 1996 (the "Additional Offering"). Notwithstanding the foregoing, the Board may establish a different term for one or more Offerings and/or different commencing and/or ending dates for such Offerings; provided, however, that no Offering may exceed a term of twenty-seven (27) months. An employee who becomes eligible to participate in the Plan after an Offering Period has commenced shall not be eligible to participate in such Offering but may participate in any subsequent Offering provided such employee is still eligible to participate in the Plan as of the commencement of any such subsequent Offering. The first day of an Offering Period shall be the "Offering Date" for such Offering Period. The last day of each Offering Period shall be the "Purchase Date" for such Offering Period. In the event the first and/or last day of an Offering Period is not a business day, the Company shall specify the business day that will be deemed the first or last day, as the case may be, of the Offering Period. (b) Offering Periods Beginning Prior to October 1, 1995. Offering Periods which began prior to October 1, 1995 and were in effect on the date of this amendment shall continue in effect, subject to the terms and conditions of the Plan as in effect immediately prior to this amendment. (c) Governmental Approval; Shareholder Approval. Notwithstanding any other provision of the Plan to the contrary, any Option granted pursuant to the Plan shall be subject to (i) obtaining all necessary governmental approvals and/or qualifications of the sale and/or issuance of the Options and/or the Shares, and (ii) in the case of Options with an Offering Date after an amendment to the Plan, obtaining any necessary approval of the shareholders of the Company required in paragraph 17. 6. Participation in the Plan. (a) Initial Participation. An eligible employee may elect to become a Participant effective as of the first Offering Date after satisfying the eligibility requirements set forth in paragraph 4 above by delivering a subscription agreement authorizing payroll deductions (a "Subscription Agreement") to the Company's payroll office not later than fifteen (15) calendar days, or such other period as the Company may determine in its sole discretion, prior to such Offering Date. Such Subscription Agreement shall state the eligible employee's election to participate in the Plan and the rate at which payroll deductions shall be accumulated. An eligible employee who does not deliver a Subscription Agreement to the Company's payroll office at least fifteen (15) calendar days, or such period as the Company may determine in its sole discretion, prior to the first Offering Date after becoming eligible to participate in the Plan, shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless such employee subsequently enrolls in the Plan by filing a Subscription Agreement with the Company in accordance with this paragraph 6(a). (b) Automatic Participation in Subsequent Offerings. A Participant shall automatically participate in each subsequent Offering Period until such time as such Participant ceases to be eligible as provided in paragraph 4, the Participant withdraws from the Plan pursuant to paragraph 10 below, or the Participant terminates employment as provided in paragraph 11 below. A Participant is not required to file an additional Subscription Agreement for such Offering Periods in order to automatically participate therein. Unless otherwise indicated in a subsequently filed Subscription Agreement, the rate at which payroll deductions shall be accumulated with respect to any such subsequent Offering Period shall equal the rate applicable to the immediately preceding Offering Period. 7. Purchase Price. The purchase price at which Shares may be acquired in any Offering Period under the Plan shall be eighty-five percent (85%) of the lesser of (a) the fair market value of the Shares on the Offering Date of such Offering Period or (b) the fair market value of the Shares on the Purchase Date of such Offering Period. For purposes of the Plan, the fair market value of the Shares at any point in time shall be determined by the Board based on such factors as the Board deems relevant; including, without limitation, the mean of the bid and asked price of the Shares on the date in question as reported by the National Association of Securities Dealers Automated Quotation System. 8. Payment of Purchase Price; Payroll Deductions. (a) Accumulation of Payroll Deductions. The purchase price of Shares to be acquired in an Offering Period shall be accumulated only by payroll deductions over the Offering Period. Payroll deductions from a Participant's compensation on each payday during the Offering Period (i) shall not exceed ten percent (10%) of such Participant's base pay per month reduced by any payroll deductions from such Participant's compensation to purchase stock under any other plan of the Company intended to qualify as an "employee stock purchase plan" under section 423 of the Code, and (ii) shall not be less than one percent (1%) of the Participant's base pay per month. For purposes hereof, a Participant's "base pay" from the Company is an aggregate that (i) shall include all salaries and commissions, and (ii) shall not include annual awards or incentive bonuses and any other payments not specifically referenced in (i) above, except to the extent that the inclusion of any such item with respect to all Participants on a non-discriminatory basis is specifically approved by the Board. Payroll deductions shall commence on the first payday following the first day of an Offering Period or as soon as administratively feasible thereafter and shall continue to the end of such Offering Period unless sooner altered or terminated as provided in the Plan. (b) Election to Change Payroll Deduction Rate. A Participant may decrease (but not increase) the rate of payroll deductions with respect to an Offering Period only on or before and effective as of the date three (3) months after the beginning of such Offering Period by filing an amended Subscription Agreement with the Company. A Participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing a new Subscription Agreement with the Company not later than fifteen (15) calendar days, or such other period as the Company may determine in its sole discretion, prior to the beginning of such subsequent Offering Period. (c) Participant Accounts. Individual accounts shall be maintained for each Participant. All payroll deductions from a Participant's compensation shall be credited to the Participant's account under the Plan and shall be deposited with the general funds of the Company. No interest shall accrue on such payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose. 9. Purchase of Shares. (a) Purchase. On the Purchase Date of each Offering Period, each remaining Participant shall automatically purchase, subject to the limitations set forth in paragraphs 9(b) and 9(c) below, that number of whole Shares arrived at by dividing the total amount theretofore credited to the Participant's account pursuant to paragraph 8(c) by the purchase price established for such Offering Period pursuant to paragraph 7. Any cash balance remaining in the Participant's account shall be refunded to the Participant as soon as practicable after the Purchase Date. In the event the cash to be returned to a Participant pursuant to the preceding sentence is an amount less than the amount necessary to purchase a whole Share, such amount shall continue to be credited to the Participant's account and shall be applied toward the purchase of Shares in the immediately subsequent Offering Period. No Shares shall be purchased in a given Offering Period on behalf of a Participant whose participation in the Plan has terminated prior to the Purchase Date for such Offering Period. (b) Share Limitation. Subject to the adjustments set forth in paragraph 13 below, no Participant shall be entitled to purchase more than 4,000 Shares in a single Offering. (c) Fair Market Value Limitation. Notwithstanding any other provision of the Plan, no Participant shall be entitled to purchase Shares under the Plan (or any other employee stock purchase plan which is intended to meet the requirements of section 423 of the Code sponsored by 3Com or a parent corporation or subsidiary corporation of 3Com) at a rate which exceeds $25,000 in fair market value (or such other limit as may be imposed by section 423 of the Code) for each calendar year in which the Participant participates in the Plan or any other employee stock purchase plan described in this sentence, as determined in accordance with section 423(b)(8) of the Code. (d) Pro Rata Allocation. In the event the number of Shares which might be purchased by all Participants in the Plan exceeds the number of Shares available in the Plan, the Company shall make a pro rata allocation of the remaining Shares in as uniform a manner as shall be practicable and as the Company shall determine to be equitable. (e) Rights as a Shareholder and Employee. A Participant shall have no rights as a shareholder by virtue of the Participant's participation in the Plan until the date of issuance of a stock certificate(s) for the Shares being purchased pursuant to the exercise of the Participant's Option. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate(s) are issued. Nothing herein shall confer upon a Participant any right to continue in the employ of the Company or interfere in any way with any right of the Company to terminate the Participant's employment at any time. (f) The Company may, from time to time, establish or change (i) limitations on the frequency and/or number of changes in the amount withheld during an Offering, (ii) an exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, (iii) procedures for permitting unequal percentages of payroll withholding from a Participant's compensation in order to accommodate the Company's established payroll procedures or mistakes or delays in following those procedures when processing Participants' withholding elections, and (iv) such other limitations or procedures as deemed advisable by the Company in the Company's sole discretion which are consistent with the Plan and section 423 of the Code. (g) Any portion of a Participant's Option remaining unexercised after the end of the Offering Period to which such right relates shall expire immediately upon the end of such period. 10. Withdrawal. (a) Withdrawal From the Plan. A Participant may withdraw from the Plan by signing and delivering to the Company's payroll office, a written notice of withdrawal on a form provided by the Company for such purpose. Such withdrawal may be elected at any time, and if prior to the end of an Offering Period shall be effective for that Offering Period. A Participant is prohibited from again participating in an Offering upon withdrawal from the Plan during such Offering. A Participant who elects to withdraw from the Plan may again participate in the Plan by filing a new Subscription Agreement in the same manner as set forth in paragraph 6(a) above for initial participation in the Plan. The Company may impose, from time to time, a requirement that the notice of withdrawal be on file with the Company for a reasonable period of time prior to the effectiveness of the Participant's withdrawal from the Plan. (b) Return of Payroll Deductions. Upon withdrawal from the Plan, the accumulated payroll deductions credited to a withdrawing Participant's account shall be returned to the Participant and the Participant's interest in the Plan shall terminate. No interest shall accrue on the payroll deductions of a Participant. 11. Termination of Employment. Termination of a Participant's employment with the Company for any reason, including retirement or death, or the failure of a Participant to remain an eligible employee, shall terminate the Participant's participation in the Plan immediately. Upon such termination, the payroll deductions credited to the Participant's account shall be returned to the Participant (or in the case of the Participant's death, to the Participant's legal representative) and all of the Participant's rights under the Plan shall terminate. A Participant whose participation has been so terminated may again become eligible to participate in the Plan by again satisfying the requirements of paragraphs 4 and 6. 12. Repayment of Payroll Deductions Without Interest. In the event a Participant's interest in the Plan is terminated, the Company shall deliver to the Participant (or in the case of the Participant's death or incapacity, to the Participant's legal representative) the payroll deductions credited to the Participant's account. No interest shall accrue on the payroll deductions of a Participant. 13. Capital Changes. In the event of changes in the common stock of the Company due to a stock split, reverse stock split, stock dividend, combination, reclassification or like change in the Company's capitalization, or in the event of any merger, sale or reorganization, appropriate adjustments shall be made by the Company in (a) the number and class of Shares of stock subject to the Plan and to any outstanding Option, (b) the purchase price per Share of any outstanding Option and (c) the Share limitation set forth in paragraph 9(b) above. 14. Nonassignability. Only the Participant may elect to exercise the Participant's Option during the Participant's lifetime, and no rights or accumulated payroll deductions of any Participant under the Plan may be pledged, assigned or transferred for any reason, except by will or the laws of descent and distribution, and any such attempt may be treated by the Company as an election by the Participant to withdraw from the Plan. 15. Reports. Each Participant shall receive after the last day of each Offering Period a report of the Participant's account setting forth the total payroll deductions accumulated, the number of Shares purchased and the remaining cash balance to be carried over and/or refunded pursuant to paragraph 9(a) above, if any. 16. Plan Term. This Plan shall continue until terminated by the Board or until all of the Shares reserved for issuance under the Plan have been issued. 17. Amendment or Termination of the Plan. The Board may at any time amend or terminate the Plan, except that such termination cannot affect Options previously granted under the Plan except as otherwise permitted by the Plan, nor may any amendment make any change in an Option previously granted under the Plan which would adversely affect the right of any Participant except as otherwise permitted by the Plan, nor may any amendment be made without approval of the shareholders of the Company within twelve (12) months of the adoption of such amendment if such amendment would authorize the sale of more shares than are authorized for issuance under the Plan or would change the designation of corporations whose employees may be offered Options under the Plan. Notwithstanding any other provision of the Plan to the contrary, in the event of an amendment to the Plan which affects the rights or privileges of Options to be offered under the Plan, each Participant with an outstanding Option shall have the right to exercise such outstanding Option on the effective date of the amendment and to participate in the Plan for the remaining term of such outstanding Option pursuant to the terms and conditions of the Plan as amended. If in accordance with the preceding sentence a Participant elects to exercise such outstanding Option and to commence participation in the Plan as amended on the effective date of such amendment, the Participant shall be deemed to have received a new Option on such effective date, and such effective date shall be deemed the Offering Date for such Option. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <TEXT> EXHIBIT 10.8 3Com CORPORATION DIRECTOR STOCK OPTION PLAN (As Amended September 28, 1995) 1. Purpose. It is the purpose of this Director Stock Option Plan (the "Plan") to enable 3Com CORPORATION (the "Company") and its subsidiaries to retain and provide incentives to outside directors by offering them an opportunity to acquire a proprietary interest in the Company. 2. Eligibility and Administration. Eligible participants shall be limited to outside directors of the Company and its subsidiaries. The Plan shall be administered by a committee of the Company's Board of Directors (the "Board") consisting of its directors who are also employees of the Company. The Board and such committee are both referred to as the Board and the committee shall have all the powers of the Board hereunder, including, without limitation, the authority to, from time to time, establish guidelines (the "Guidelines") that determine the number of shares to be subject to the options granted under the Plan, subject to the per option limits set forth in Sections 4(b) and 4(c) and the restriction on amendment of the Guidelines set forth in Section 9. The Guidelines must (i) provide that on each grant date, the number of shares of Common Stock subject to each option automatically granted pursuant to Section 4(b) or 4(c), as the case may be, shall be equal for each eligible participant, subject to distinctions based on the outside director's position as Chairman of the Board, designation as the "lead" outside director, and service on Board committees, and (ii) not cause an outside director who receives an option under the Plan to cease to be a "disinterested person" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. All questions of interpretation of the Plan or of any option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such option. 3. Shares Subject to Plan. (a) Subject to adjustment as provided in Section 3(b), the maximum number of shares of the Company's common stock ("Common Stock") and rights to acquire Common Stock that may be issued pursuant to this Plan shall be 2,000,000 shares. Options or shares that are issued to participants under the Plan and terminate without being exercised shall revert to the status of authorized but unissued options or shares under the Plan. (b) In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan, the Guidelines and the per option limits set forth in Section 4, and to any outstanding options granted under the Plan, and in the exercise price of such outstanding options. 4. Rights Issuable Under the Plan. (a) During the term of the Plan, eligible participants shall be granted options to acquire shares of the Common Stock of the Company ("Options") as provided in this Section 4. Each Option shall be exercisable immediately as to all shares of Common Stock subject to the Option and shall vest in 24 monthly increments. All Options shall be subject to the terms and conditions set forth in the form of Nonqualified Stock Option Agreement attached hereto as Exhibit 1; provided, however, that the Board may at the time of grant of any Option make such modifications to such terms and conditions as are otherwise in compliance with the restrictions contained in the Plan. (b) The Board shall grant an Option to purchase that number of shares as may be specified in the Guidelines then currently in effect (the "Guideline Amount") for service on the Board, not to exceed 60,000 shares of Common Stock (or 80,000 shares if the participant is the Chairman of the Board on the date of grant), to each eligible participant at the first Board meeting following the date upon which he or she first becomes eligible. Thereafter, the Board shall grant an additional Option to purchase that number of shares equal to the Guideline Amount for service on the Board, not to exceed 60,000 shares of Common Stock (or 80,000 shares if the participant is the Chairman of the Board on the date of grant), to an eligible participant following the vesting in full of the Option of that eligible participant most recently granted under this Section 4(b) for service on the Board. Such additional grant shall be made at the first Board meeting following the vesting in full of such most recently granted Option. (c) In addition to the Options granted by the Board pursuant to Section 4(b), the Board shall grant an Option to purchase that number of shares equal to the Guideline Amount for service on a Standing Committee, not to exceed 24,000 shares of Common Stock, to each eligible participant serving on a Standing Committee of the Board at the first meeting of the Board occurring on or after the date on which he or she begins to serve on a Standing Committee. A Standing Committee shall mean either the Audit Committee or the Compensation Committee of the Board. Thereafter, the Board shall grant an additional Option to purchase that number of shares equal to the Guideline Amount for service on a Standing Committee, not to exceed 24,000 shares of Common Stock, to each eligible participant who continues to serve on a Standing Committee following the vesting in full of the Option of that eligible participant most recently granted under this Section 4(c). Such additional grant shall be made at the first Board meeting following the vesting in full of such most recently granted Option. 5. Consideration. The exercise price for Options shall be payable by (i) delivery of cash or check, (ii) tender of shares of Common Stock having a fair market value equivalent to the purchase or exercise price, or (iii) delivery of a promissory note payable to the Company; provided, however, that the Board may impose at the time of any grant of rights hereunder such restrictions on the exchange of Common Stock or delivery of a promissory note as the Board may deem appropriate or necessary and that any promissory note shall be secured by such collateral as is required by the attached form of Nonqualified Stock Option Agreement, or as the Board shall otherwise determine at the time of grant. 6. Exercise Price. The exercise price payable upon exercise of any Option shall be equal to the fair market value of a share of Common Stock as determined by the Board on the date of grant. 7. Limitation on Exercisability. No right granted hereunder shall be exercisable for a period of more than five years after the date of grant. 8. Restriction on Transfer of Options. No Option may be transferred in any manner whatsoever, other than by the laws of descent and distribution. Options may be exercised during the lifetime of the optionee only by the optionee. 9. Termination or Amendment. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan at any time; provided, however, that without the approval of the shareholders of the Company, there shall be (a) no increase in the total number of shares of stock covered by the Plan (except by operation of the provision of Section 3, above), and (b) no expansion in the class of persons eligible to receive Options; and provided, further, that the provisions of the Plan addressing eligibility to participate in the Plan and the amount, price and timing of grants of Options (including changes to the Guidelines) shall not be amended more than once every six (6) months, other than to comport to changes in the Internal Revenue Code of 1986, as amended, or the rules thereunder. In any event, no amendment may adversely affect any then outstanding Option, or any unexercised portion thereof, without the consent of the optionee. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> EXHIBIT 10.17 3COM CORPORATION RESTRICTED STOCK PLAN (As Amended September 28, 1995) 1. Purpose. The 3Com Corporation Restricted Stock Plan (the "Plan") was adopted by the Board of Directors of 3Com Corporation (the "Board") on July 9, 1991, and was established to create additional incentive for key employees of 3Com Corporation and any successor corporation thereto (collectively referred to as the "Company"), and any present or future parent and/or subsidiary corporations of such corporation (all of whom along with the Company being individually referred to as a "Participating Company" and collectively referred to as the "Participating Company Group") to promote the financial success and progress of the Participating Company Group. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Administration. The Plan shall be administered by the Board and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any such committee shall satisfy the requirements of Rule 16b-3, as promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and amended from time to time, for being a committee of "disinterested persons" as defined in Rule 16b-3. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All questions of interpretation of the Plan or of the provisions of the grant of shares of the common stock of the Company under the Plan shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 3. Eligibility. Key employees of the Company (including officers and directors who are also employees) are eligible to participate in the Plan. The Board shall, in the Board's sole discretion, determine which individuals shall have the right to acquire shares of the common stock of the Company under the Plan (the "Participants"). 4. Share Reserve. The Plan shall have a share reserve of nine hundred thousand (900,000) shares of the authorized but unissued common stock of the Company (the "Stock"). Such share reserve shall be reduced by the number of shares of Stock granted pursuant to the Plan. In the event that any shares of Stock granted pursuant to the Plan are reacquired under the terms of the Plan by the Company, the shares so reacquired shall be returned to the share reserve. Appropriate adjustments shall be made in the number and class of shares of Stock in such share reserve in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. 5. Compliance with Securities Laws. Inability of the Company to obtain from any regulatory body having jurisdiction authority deemed by the Company's legal counsel to be necessary to the lawful issuance of any shares of Stock under the Plan shall relieve the Company of any liability in respect of the non-issuance of such shares of Stock as to which such requisite authority shall not have been obtained. 6. Stock Grant. The Board shall have the authority to grant shares of Stock from time to time to Participants. After the Board has granted a Participant shares of Stock pursuant to the Plan, the Company shall advise such Participant in writing of the terms, conditions and restrictions of the grant, including the number of shares of Stock which the Participant has been granted. The number of shares of Stock which a Participant may receive under the Plan shall be determined by the Board in the Board's sole discretion. Subject to the provisions of paragraph 7 below, the grant shall be made in the form attached hereto as Exhibit A (the "Stock Grant Agreement"). The grant of shares of Stock pursuant to the Plan shall be made in consideration of the past services of a Participant. Notwithstanding any other provision of the Plan to the contrary, the Board may not require a Participant to make any monetary payment as a condition of receiving a grant of shares of Stock pursuant to the Plan. Therefore, for purposes of Rule 16b-3(d)(1)(i) promulgated under the Exchange Act, the "price at which securities may be offered" shall be zero (0) dollars. 7. Authority to Vary Terms. The Board shall have the authority from time to time to vary the terms of the standard form of Stock Grant Agreement attached hereto as Exhibit A either in connection with an individual grant or in connection with the authorization of a new standard form; provided, however, that the terms and conditions of such revised or amended standard form of stock grant agreement shall be in accordance with the terms of the Plan. 8. Provision of Information. Each Participant who receives a grant of shares of Stock pursuant to the Plan shall be given access to information concerning the Company equivalent to that information generally made available to the common shareholders of the Company so long as the Participant retains ownership of such shares. 9. Term. Unless otherwise terminated, the Plan shall continue until July 9, 2001. 10. Termination or Amendment of Plan. The Board may terminate or amend the Plan at any time. In any event, no amendment may adversely affect any outstanding grant of shares of Stock without the consent of the Participant. A grant shall be considered as outstanding as of the effective date of such grant as determined by the Board. EXHIBIT A 3COM CORPORATION RESTRICTED STOCK PLAN STOCK GRANT AGREEMENT THIS AGREEMENT is made and entered into as of the ___ day of ___________, 19__, by and between 3Com Corporation, a California corporation (the "Company"), and _________________ (the "Participant"). The Company desires to issue and the Participant desires to acquire shares of the common stock of the Company as herein described, pursuant to the 3Com Corporation Restricted Stock Plan (the "Plan"), on the terms and conditions set forth in this Agreement. Unless otherwise provided in this Agreement, defined terms shall have the meaning given to such terms in the Plan. IT IS AGREED between the parties as follows: 1. Issuance of Shares. On the effective date of this Agreement as set forth above (the "Grant Date"), the Participant shall acquire and the Company shall issue, subject to the provisions hereof, _________ shares of the common stock of the Company (the "Stock") in consideration for the Participant's past service with the Company. No shares of Stock shall be issued pursuant to this Agreement if the issuance and delivery of such shares of Stock would constitute a violation of any applicable federal or state securities law or other law or regulation, or would fail to satisfy the requirements of any stock exchange upon which the common stock of the Company may then be listed. As a condition to the issuance and delivery of any shares of Stock pursuant to this Agreement, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. Notwithstanding the foregoing, any shares of Stock which are granted prior to approval of the Plan, or any amendment thereto, by the shareholders of the Company as provided by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, shall be contingent upon such stockholder approval and the Participant shall have no right to sell or transfer the shares of Stock prior to such approval. In the event such shareholder approval is not obtained within one (1) year of the Grant Date, the issuance of the shares of Stock shall be null and void and the certificates representing the shares shall be returned to the Company for cancellation. 2. Administration. All questions of interpretation concerning this Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in this Agreement. 3. Vesting and Unvested Share Reacquisition Right. (a) Vesting. (i) Provided the Participant is continuously employed by a Participating Company, the shares of Stock shall vest in the Participant and become "Vested Shares" for purposes of this Agreement in four (4) equal annual installments, commencing one (1) year after the Grant Date. (ii) Notwithstanding the foregoing, in the event of a Transfer of Control (as defined in paragraph 3(d) below), the Board, in its sole discretion, shall either (A) provide that any Unvested Shares (as defined in paragraph 3(b) below) shall become "Vested Shares" for purposes of this Agreement as of the date of the Transfer of Control, or (B) arrange with the surviving, continuing, successor, or purchasing corporation, as the case may be, that such corporation substitute shares of such corporation's stock for the outstanding shares of Stock held by the Participant. (iii) In the event that the acceleration of the vesting of any Unvested Shares pursuant to paragraph 3(a)(ii) above will result in a "parachute payment" as defined in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding such paragraph 3(a)(ii), the extent to which vesting will be accelerated in connection with a Transfer of Control shall not exceed the amount of vesting which produces the greatest after-tax benefit to the Participant as determined by the Company in a fair and equitable manner. (b) Unvested Share Reacquisition Right. In the event the Participant's employment with the Participating Company Group is terminated for any reason, with or without cause, or if the Participant or the Participant's legal representative attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change) any shares of Stock which are not Vested Shares (the "Unvested Shares"), including, without limitation, any transfer to the nominee or agent of the Participant, the Company shall automatically reacquire the Unvested Shares and the Participant shall not be entitled to any payment therefor (the "Unvested Share Reacquisition Right"). (c) Ownership Change. In the event of an Ownership Change (as defined in paragraph 3(d) below), the Unvested Share Reacquisition Right shall continue in full force and effect; provided, however, that "employment with the Participating Company Group" for purposes of this paragraph 3 shall include all service with any corporation which was a Participating Company at the time the services were rendered whether or not the corporation was included within such term both before and after the event constituting the Ownership Change. (d) Ownership Change and Transfer of Control. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange by the shareholders of the Company of all or substantially all of the stock of the Company; (ii) a merger in which the Company is a party; or (iii) the sale, exchange or transfer of all or substantially all of the Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the shareholders of the Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the shareholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred. 4. Legends. The Company may at any time place legends referencing the Unvested Share Reacquisition Right set forth in paragraph 3 above and any applicable federal and/or state securities law restrictions on all certificates representing shares of Stock subject to the provisions of this Agreement. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares of Stock acquired under this Agreement in the possession of the participant in order to carry out the provisions of this paragraph 4. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN THIS AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." 5. Escrow. (a) Establishment of Escrow. To insure that shares of Stock subject to the Unvested Share Reacquisition Right will be available for reacquisition, the Company may require the Participant to deposit the certificate or certificates evidencing the shares with an escrow agent designated by the Company under the terms and conditions of an escrow agreement approved by the Company. If the Company does not require such deposit as a condition of the issuance of shares of Stock to the Participant, the Company reserves the right at any time to require the Participant to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. (b) Delivery of Shares to Participant. As soon as practicable after the expiration of the Unvested Share Reacquisition Right, the escrow agent shall deliver to the Participant the shares of Stock no longer subject to such restriction. 6. Transfers in Violation of Agreement. The Company shall not be required (a) to transfer on its books any shares of Stock which are sold or transferred in violation of any of the provisions set forth in this Agreement, or (b) to treat as the owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom any such shares shall have been so transferred. 7. Effect of Change in Company's Capital Structure. Appropriate adjustments shall be made in the number and class of shares of Stock in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. If, from time to time, there is any stock dividend, stock split, or other change in the character or amount of any of the outstanding stock of the Company, then in such event any and all new substituted or additional securities to which the Participant is entitled by reason of the Participant's ownership of the shares of Stock shall be immediately subject to the Unvested Share Reacquisition Right with the same force and effect as the shares of Stock subject to the Unvested Share Reacqusition Right immediately before such event. 8. Rights as a Shareholder or Employee. The Participant shall have no rights as a shareholder with respect to the shares of Stock until the date of issuance of a certificate or certificates for the shares. Except as provided in paragraph 7 above, no adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued. Nothing in the Plan or in this Agreement shall confer upon the Participant any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Participant's employment at any time. 9. Further Instruments. The parties hereto agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 10. Notice. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon telegraphic delivery, or upon delivery by certified mail, addressed to the other party hereto at the address shown below such party's signature or at such other address as such party may designate by ten days advance written notice to all other parties hereto. 11. Binding Effect. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Participant and the Participant's heirs, executors, administrators, successors and assigns. 12. Withholding. At the time that this Agreement is executed, or at any time thereafter as requested by the Company, the Participant shall make adequate provision for foreign, federal and state tax withholding obligations of the Participating Company Group, if any, which arise in connection with the acquisition of shares of Stock pursuant to the Plan, including, without limitation, obligations arising upon (i) the transfer, in whole or in part, of any shares of Stock, (ii) the lapse of any restriction with respect to any shares of Stock acquired pursuant to the Plan, or (iii) the filing of an election to recognize a tax liability. The Participant authorizes the Participating Company Group to withhold from the Participant's compensation such amounts as may be necessary to satisfy the Participating Company Group's tax withholding obligations arising in connection with the issuance of the shares of Stock pursuant to the Plan. The Company shall have no obligation to issue a certificate as to such share of Stock and/or to release such shares of Stock from escrow until the Participating Company Group's tax withholding obligations have been satisfied. 13. Certificate Registration. The certificate or certificates for the shares of Stock acquired pursuant to this Agreement shall be registered in the name of the Participant. 14. Integrated Agreement. This Agreement and the Plan constitute the entire understanding and agreement of the Participant and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Participant and the Participating Company Group other than those set forth or provided for herein or therein. 15. Applicable Law. This Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: PARTICIPANT: 3COM CORPORATION By:_________________________________ _________________________________ (Signature) Title: _____________________________ _________________________________ (Print Name) Address: Address: 5400 Bayfront Plaza _________________________________ P.O. Box 58145 _________________________________ Santa Clara, CA 95052-8145 _________________________________ Attention: Legal Department _________________________________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <RESTATED> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1996 <PERIOD-END> NOV-30-1995 <CASH> 199,409 <SECURITIES> 181,176 <RECEIVABLES> 355,749 <ALLOWANCES> (24,326) <INVENTORY> 194,373 <CURRENT-ASSETS> 998,266 <PP&E> 383,071 <DEPRECIATION> (187,570) <TOTAL-ASSETS> 1,254,180 <CURRENT-LIABILITIES> 330,411 <BONDS> 0 <COMMON> 492,424 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 296,441 <TOTAL-LIABILITY-AND-EQUITY> 1,254,180 <SALES> 1,060,833 <TOTAL-REVENUES> 1,060,833 <CGS> 502,269 <TOTAL-COSTS> 723,400 <OTHER-EXPENSES> 211,930 <LOSS-PROVISION> 1,885 <INTEREST-EXPENSE> 3,475 <INCOME-PRETAX> 120,143 <INCOME-TAX> 46,377 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 73,766 <EPS-PRIMARY> 0.42 <EPS-DILUTED> 0.42 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

COST

https://www.sec.gov/Archives/edgar/data/909832/0000912057-96-000281.txt

-----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, B+R3jDhAWW0bLSJDrM8HD/6NplukLrQ7Y/WwGRHqJ1U1OcuDMJXuR4gqLwCVTJO7 NW36EafQapYImQ2ixdUVpQ== <SEC-DOCUMENT>0000912057-96-000281.txt : 19960111 <SEC-HEADER>0000912057-96-000281.hdr.sgml : 19960111 ACCESSION NUMBER: 0000912057-96-000281 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951126 FILED AS OF DATE: 19960109 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE/COSTCO INC CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330572969 STATE OF INCORPORATION: CA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20355 FILM NUMBER: 96502139 BUSINESS ADDRESS: STREET 1: 4649 MORENA BOULEVARD CITY: SAN DIEGO STATE: CA ZIP: 92117 BUSINESS PHONE: 6195815350 MAIL ADDRESS: STREET 1: 4241 JUTLAND DRIVE #300 CITY: SAN DIEGO STATE: CA ZIP: 92117 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED NOVEMBER 26, 1995 / / 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 0-20355 PRICE/COSTCO, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 33-0572969 (State or other jurisdiction (I.R.S. Employer of Identification incorporation or No.) organization) </TABLE> 999 LAKE DRIVE ISSAQUAH, WASHINGTON 98027 (Address of principal executive office) (206) 313-8100 (Registrant's telephone number, including area code) 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 ___ The registrant had 195,302,985 common shares, par value $.01, outstanding at December 31, 1995. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> PRICE/COSTCO, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PART I -- FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE ----- <S> <C> ITEM 1 -- FINANCIAL STATEMENTS............................................................................. 3 Condensed Consolidated Balance Sheets.................................................................... 8 Condensed Consolidated Statements of Operations.......................................................... 9 Condensed Consolidated Statements of Cash Flows.......................................................... 10 Notes to Condensed Consolidated Financial Statements..................................................... 11 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 3 PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS................................................................................ 5 ITEM 2 -- CHANGES IN SECURITIES............................................................................ 6 ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES.................................................................. 6 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 6 ITEM 5 -- OTHER INFORMATION................................................................................ 6 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K................................................................. 6 Exhibit (27) Financial Data Schedule Exhibit (28) Report of Independent Public Accountants.................................................... 13 </TABLE> 2 <PAGE> PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Price/Costco, Inc.'s (the "Company" or "PriceCostco") unaudited condensed consolidated balance sheet as of November 26, 1995, and the condensed consolidated balance sheet as of September 3, 1995, unaudited condensed consolidated statements of operations and cash flows for the 12-week periods ended November 26, 1995, and November 20, 1994 are included elsewhere herein. Also included elsewhere herein are notes to the unaudited condensed consolidated financial statements and the results of the limited review performed by Arthur Andersen LLP, independent public accountants. The Company reports on a 52/53-week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. Fiscal 1996 is a 52-week year with period 13 ending on September 1, 1996. The first, second, and third quarters consist of 12 weeks each and the fourth quarter consists of 16 weeks. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS It is suggested that this management discussion be read in conjunction with the management discussion included in the Company's fiscal 1995 annual report on Form 10-K previously filed with the Securities and Exchange Commission. COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 26, 1995 AND NOVEMBER 20, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income for the first quarter of fiscal 1996 increased 2% to $49,553 or $.25 per share (fully diluted) from $48,527 or $0.22 per share (fully diluted) during the first quarter of fiscal 1995. The 14% earnings per share increase reflects the increase in net income as well as the reduction of 23.2 million outstanding shares of PriceCostco Common Stock beginning on December 20, 1994, following the completion of the spin-off of Price Enterprises. Net sales increased 9% to $4,295,862 during the first quarter of fiscal 1996 from $3,943,718 during the first quarter of fiscal 1995. This increase was primarily due to opening a net of 15 new warehouses (17 opened, 2 closed) since the end of the first quarter of fiscal 1995 and an increase in comparable warehouse sales. Comparable sales, that is sales in warehouses open for at least a year, increased 3 percent during the first quarter of fiscal 1996, reflecting new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Changes in prices of merchandise did not materially contribute to sales increases. Membership fees and other revenue increased to $87,702 or 2.04% of net sales in the first quarter of fiscal 1996 from $86,205 or 2.19% of net sales in the first quarter of fiscal 1995. Membership fees include new membership sign-ups at the 15 warehouses opened since the end of the first quarter of fiscal 1995. Gross margin (defined as net sales minus merchandise costs) increased 12% to $408,746 or 9.51% of net sales in the first quarter of fiscal 1996 from $366,274, or 9.29% of net sales in the first quarter of fiscal 1995. Gross margin as a percentage of net sales increased due to greater purchasing power, expanded use of the Company's depot facilities, and increased sales penetration of certain higher gross margin ancillary businesses. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The first quarters of fiscal 1996 and 1995 each include a $2,500 LIFO charge to income due to the use of the LIFO method. Selling, general and administrative expenses as a percent of net sales increased to 8.98% during the first quarter of fiscal 1996 from 8.88% during the first quarter of fiscal 1995, reflecting higher expenses associated with international expansion and certain ancillary operations. 3 <PAGE> Preopening expenses totaled $9,450 or 0.22% of net sales during the first quarter of fiscal 1996 compared to $6,991 or 0.18% of net sales during the first quarter of fiscal 1995. The increase in preopening expenses is primarily due to remodels and expanded fresh foods and ancillary operations at existing warehouses. Interest expense totaled $17,771 in the first quarter of fiscal 1996 compared to $14,139 in the first quarter of fiscal 1995. The increase in interest expense is primarily related to higher average borrowings and interest rates, which include the issuance in June 1995 of $300,000 of 7 1/8% Senior Notes. Interest income and other totaled $1,091 in the first quarter of fiscal 1996 compared to $1,079 in the first quarter of fiscal 1995. The effective income tax rate on earnings in the first quarter of fiscal 1996 was 41.25% compared to 41.0% effective tax rate in the first quarter of fiscal 1995. The increase in the effective tax rate is related primarily to an increase in the proportion of Canadian earnings which have a higher tax rate. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) EXPANSION PLANS PriceCostco's primary capital requirements are for financing the expansion of its United States and Canadian operations and its international ventures (presently Mexico, United Kingdom and Asia). While there can be no assurance that current expectations will be realized and plans are subject to change upon further review, during fiscal 1996 management's intention is to spend approximately $450,000 to $500,000 for its United States and Canadian operations and approximately $50,000 to $100,000 for its international ventures. Capital expenditures are primarily for real estate, construction, remodeling and equipment for warehouses and related operations. Expansion plans for the United States and Canada during fiscal 1996 are to open a net of 23 to 25 warehouse clubs, including the relocation of two to three warehouses to larger and better-located facilities and the closing of two to three unprofitable locations. The Company is continuing its remodeling and expansion of fresh foods and ancillary operations and expects to dedicate approximately $110,000 to $115,000 to these efforts. The Company expects that annual spending on remodeling activities will be reduced by one-half for the next several years, as much of the major remodel work will have been completed. International expansion plans during fiscal 1996 include opening two to three additional warehouse clubs in the United Kingdom through a 60%-owned subsidiary, and to develop additional warehouse club ventures, primarily in Asia. Expansion will be financed with a combination of cash and cash equivalents, which totaled $45,688 at September 3, 1995; net cash provided by operating activities; short-term borrowings under revolving credit facilities and/or commercial paper facilities; and other financing sources as required. BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS The Company has a domestic multiple option loan facility with a group of 13 banks which provides for borrowings up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At November 26, 1995, $158,000 was outstanding under the commercial paper program and no amount was outstanding under the loan facility. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 30, 1996 at substantially the same terms. In addition, the Company's wholly-owned Eastern Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is 4 <PAGE> based on the prime rate or the "Bankers' Acceptance" rate. At November 26, 1995, $89,000 was outstanding under the Canadian commercial paper program and no amounts were outstanding under the bank credit facility. The Company also has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $197,000. The outstanding commitments under these facilities at November 26, 1995 totaled approximately $104,000, including approximately $51,000 in standby letters of credit for workers' compensation requirements. FINANCIAL POSITION AND CASH FLOWS Due to rapid inventory turnover, the Company's operations provide higher level of supplier accounts payable than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically exceeds the current assets needed to operate the business. Working capital deficit (current liabilities in excess of current assets) totaled $44,934 at November 26, 1995 compared to working capital of $9,381 at September 3, 1995. The decrease in working capital was primarily due to: 1) financing the Company's seasonal working capital requirements through short-term borrowings; and 2) capital expenditures in excess of operating cash flows. The Company's balance sheet as of November 26, 1995, reflects a $488,053 or 11% increase in total assets since September 3, 1995. The net increase is primarily due to higher inventory levels associated with seasonal inventory needs leading into the Christmas holiday season, and a net increase in property and equipment principally related to the Company's expansion program. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 6, 1992, Price was served with a complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleges violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. The Company believes that this lawsuit is without merit and is vigorously defending against this lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. 5 <PAGE> The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting is scheduled for 10:00 a.m. on February 1, 1996 at The Disneyland Pacific Hotel (formerly The Pan Pacific Hotel) in Anaheim, California. Matters to be voted on were included in the Company's proxy statement filed with the Securities and Exchange Commission and distributed to stockholders of record in December 1995. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein or incorporated by reference: (27) Financial Data Schedule (28) Report of Independent Public Accountants (b) No reports on Form 8-K were filed for the 12 weeks ended November 26, 1995. 6 <PAGE> 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. PRICE/COSTCO, INC. REGISTRANT /S/ JAMES D. SINEGAL ----------------------------------- Date: January 8, 1996 James D. Sinegal PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ RICHARD A. GALANTI ----------------------------------- Date: January 8, 1996 Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER 7 <PAGE> PRICE/COSTCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS <TABLE> <CAPTION> NOVEMBER 26, SEPTEMBER 3, 1995 1995 ------------ ------------ <S> <C> <C> (UNAUDITED) CURRENT ASSETS Cash and cash equivalents................................................ $ 12,876 $ 45,688 Receivables, net......................................................... 177,164 146,665 Merchandise inventories.................................................. 1,818,165 1,422,272 Other current assets..................................................... 82,532 87,694 ------------ ------------ Total current assets................................................... 2,090,737 1,702,319 ------------ ------------ PROPERTY AND EQUIPMENT Land, land rights, and land improvements................................. 1,149,671 1,143,860 Buildings and leasehold improvements..................................... 1,326,695 1,215,706 Equipment and fixtures................................................... 640,967 624,398 Construction in progress................................................. 60,304 78,071 ------------ ------------ 3,177,637 3,062,035 Less accumulated depreciation and amortization........................... (551,836) (526,442) ------------ ------------ Net property and equipment............................................. 2,625,801 2,535,593 OTHER ASSETS............................................................... 208,934 199,507 ------------ ------------ $ 4,925,472 $ 4,437,419 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding, less cash on deposit............................ $ 30,120 $ 12,721 Short-term borrowings.................................................... 247,108 75,725 Accounts payable......................................................... 1,438,309 1,233,128 Accrued salaries and benefits............................................ 243,579 205,236 Accrued sales and other taxes............................................ 75,489 91,843 Other current liabilities................................................ 101,066 74,285 ------------ ------------ Total current liabilities.............................................. 2,135,671 1,692,938 LONG-TERM DEBT............................................................. 1,093,580 1,094,615 DEFERRED INCOME TAXES AND OTHER LIABILITIES................................ 68,236 68,284 ------------ ------------ Total liabilities...................................................... 3,297,487 2,855,837 ------------ ------------ MINORITY INTERESTS......................................................... 49,322 50,838 ------------ ------------ STOCKHOLDERS EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding.................................................. -- -- Common stock $.01 par value; 900,000,000 shares authorized; 195,260,000 and 195,164,000 shares issued and outstanding........................... 1,953 1,952 Additional paid-in capital............................................... 304,895 303,989 Accumulated foreign currency translation................................. (54,830) (52,289) Retained earnings........................................................ 1,326,645 1,277,092 ------------ ------------ Total stockholders' equity............................................. 1,578,663 1,530,744 ------------ ------------ $ 4,925,472 $ 4,437,419 ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these financial statements. 8 <PAGE> PRICE/COSTCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> 12 WEEKS ENDED ---------------------------- NOVEMBER 26, NOVEMBER 20, 1995 1994 ------------- ------------- <S> <C> <C> REVENUE Net Sales......................................................................... $ 4,295,862 $ 3,943,718 Membership fees and other......................................................... 87,702 86,205 ------------- ------------- Total revenue................................................................. 4,383,564 4,029,923 ------------- ------------- OPERATING EXPENSES Merchandise costs................................................................. 3,887,116 3,577,444 Selling, general and administrative............................................... 385,973 350,178 Preopening expenses............................................................... 9,450 6,991 ------------- ------------- Operating income.............................................................. 101,025 95,310 ------------- ------------- OTHER INCOME (EXPENSE) Interest expense.................................................................. (17,771) (14,139) Interest income and other......................................................... 1,091 1,079 ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................. 84,345 82,250 Provision for income taxes........................................................ 34,792 33,723 ------------- ------------- INCOME FROM CONTINUING OPERATIONS................................................... $ 49,553 $ 48,527 DISCONTINUED OPERATIONS: Loss on disposal.................................................................. -- -- ------------- ------------- NET INCOME.......................................................................... $ 49,553 $ 48,527 ------------- ------------- ------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED: Continuing operations:............................................................ $ 0.25 $ 0.22 Discontinued operations: Loss on disposal................................................................ -- -- ------------- ------------- Net income........................................................................ $ 0.25 $ 0.22 ------------- ------------- ------------- ------------- Shares used in calculation (000's)............................................ 217,311 239,757 ------------- ------------- ------------- ------------- </TABLE> The accompanying notes are an integral part of these financial statements. 9 <PAGE> PRICE/COSTCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> 12 WEEKS ENDED -------------------------- NOVEMBER 26, NOVEMBER 20, 1995 1994 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................................................... $ 49,553 $ 48,527 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................................................... 34,556 30,790 Increase in merchandise inventories................................................ (397,935) (464,024) Increase in accounts payable....................................................... 207,297 359,636 Other.............................................................................. 30,200 (12,835) ------------ ------------ Total adjustments................................................................ (125,882) (86,433) ------------ ------------ Net cash used in operating activities............................................ (76,329) (37,906) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment................................................ (131,676) (96,608) Proceeds from the sale of property and equipment................................... 395 202 Decrease in short-term investments and restricted cash............................. -- 9,268 Other.............................................................................. (13,989) (4,089) ------------ ------------ Net cash used in investing activities............................................ (145,270) (91,227) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings............................................ 171,813 162,702 Increase (decrease) in bank checks outstanding, less cash on deposit............... 17,501 (2,797) Payments on long-term debt and notes payable....................................... (893) -- Exercise of stock options, including income tax benefit............................ 907 410 Other.............................................................................. (391) 10 ------------ ------------ Net cash provided by financing activities........................................ 188,937 160,325 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. (150) 205 ------------ ------------ Increase (decrease) in cash and cash equivalents................................... (32,812) 31,397 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 45,688 53,638 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 12,876 $ 85,035 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amounts capitalized) (a)........................................ $ 9,952 $ 25,398 Income taxes..................................................................... 17,491 19,617 </TABLE> - ------------------------ (a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible debentures were paid on August 31, and September 1, respectively, prior to the beginning of the first quarter of fiscal 1996, which began on September 4, 1995. In the prior fiscal year, these interest payments were included in the first quarter, which began August 29, 1994. The accompanying notes are an integral part of these financial statements. 10 <PAGE> PRICE/COSTCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of Price/Costco, Inc., a Delaware corporation, and its subsidiaries ("PriceCostco" or the "Company".) PriceCostco is a holding company which operates primarily through its major subsidiaries, The Price Company and subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries ("Costco"). On October 21, 1993, Price and Costco became wholly-owned subsidiaries of PriceCostco. These unaudited consolidated financial statements have been prepared following the pooling-of-interests method of accounting and reflect the combined financial position and operating results of Price and Costco for all periods presented. Price and Costco primarily operate cash and carry membership warehouses. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 3, 1995. BUSINESS The Company historically operated in two reporting business segments: a cash and carry merchandising operation and a non-club real estate operation. In July 1994 the Company discontinued its non-club real estate operations through a spin-off of Price Enterprises, Inc., completed in December, 1994. FISCAL YEARS The Company reports on a 52/53-week fiscal year, ending on the Sunday nearest the end of August. Fiscal 1996 is 52 weeks with the first, second and third quarters consisting of 12 weeks each and the fourth quarter, ending September 1, 1996, consisting of 16 weeks. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used merchandise inventory would have been $18,650 and $16,150 higher at November 26, 1995 and September 3, 1995, respectively. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted to reflect the actual shrinkage results of the physical inventory counts which generally occur in the second and fourth quarters of the Company's fiscal year. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. The calculation for the 12-week period ended November 26, 1995, reflects the reduction of approximately 23.2 million PriceCostco shares tendered in exchange for an equivalent number of Price Enterprises shares as of December 20, 1994. The 11 <PAGE> PRICE/COSTCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED calculation also eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) and the 6 3/4% convertible subordinated debentures (fully diluted only), and includes the additional shares issuable upon conversion of these debentures. NOTE (2) -- DEBT BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS The Company has a domestic multiple option loan facility with a group of 13 banks which provides for borrowings up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At November 26, 1995, $158,000 was outstanding under the commercial paper program and no amount was outstanding under the loan facility. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 30, 1996 at substantially the same terms. In addition, the Company's wholly-owned Eastern Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At November 26, 1995, $89,000 was outstanding under the Canadian commercial paper program and no amounts were outstanding under the bank credit facility. The Company also has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $197,000. The outstanding commitments under these facilities at November 26, 1995 totaled approximately $104,000, including approximately $51,000 in standby letters of credit for workers' compensation requirements. NOTE (3) -- INCOME TAXES The following is a reconciliation of the federal statutory income tax rate to the effective income tax rate for income from continuing operations: <TABLE> <CAPTION> 12 WEEKS ENDED 12 WEEKS ENDED NOVEMBER 26, 1995 NOVEMBER 20, 1994 ---------------------- ---------------------- <S> <C> <C> <C> <C> Federal statutory income tax rate........................... $ 29,521 35.0% $ 28,788 35.0% State, foreign and other income taxes, net.................. 5,271 6.25% 4,935 6.0% --------- ----- --------- --- $ 34,792 41.25% $ 33,723 41.0% --------- ----- --------- --- --------- ----- --------- --- </TABLE> NOTE (4) -- COMMITMENTS AND CONTINGENCIES The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. 12 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-01-1996 <PERIOD-START> SEP-04-1995 <PERIOD-END> NOV-26-1995 <CASH> 12,876 <SECURITIES> 0 <RECEIVABLES> 182,190 <ALLOWANCES> 5,026 <INVENTORY> 1,818,165 <CURRENT-ASSETS> 2,090,737 <PP&E> 3,177,637 <DEPRECIATION> 551,836 <TOTAL-ASSETS> 4,925,472 <CURRENT-LIABILITIES> 2,135,671 <BONDS> 1,098,681 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 306,848 <OTHER-SE> 1,271,815 <TOTAL-LIABILITY-AND-EQUITY> 4,925,472 <SALES> 4,295,862 <TOTAL-REVENUES> 4,383,564 <CGS> 3,887,116 <TOTAL-COSTS> 4,282,539 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 17,771 <INCOME-PRETAX> 84,345 <INCOME-TAX> 34,792 <INCOME-CONTINUING> 49,553 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 49,553 <EPS-PRIMARY> 0 <EPS-DILUTED> .25 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-28 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 28 <TEXT> <PAGE> EXHIBIT 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Price/Costco, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Price/Costco, Inc. (a Delaware corporation) and subsidiaries as of November 26, 1995, and the related condensed consolidated statements of operations and cash flows for the twelve-week periods ended November 26, 1995 and November 20, 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington December 18, 1995 13 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CPB

https://www.sec.gov/Archives/edgar/data/16732/0000893220-96-000432.txt

-----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, KEhpQJPuWkBeUGcP+A1VqCJDaSuEbDWRKc4SOEozckJmzgmc9Dkt0bOWMFkua4sZ 7uOqxTDnyAcEh0YurhbXXQ== <SEC-DOCUMENT>0000893220-96-000432.txt : 19960312 <SEC-HEADER>0000893220-96-000432.hdr.sgml : 19960312 ACCESSION NUMBER: 0000893220-96-000432 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960311 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMPBELL SOUP CO CENTRAL INDEX KEY: 0000016732 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 210419870 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0729 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03822 FILM NUMBER: 96533424 BUSINESS ADDRESS: STREET 1: CAMPBELL PL CITY: CAMDEN STATE: NJ ZIP: 08103 BUSINESS PHONE: 6093424800 MAIL ADDRESS: STREET 1: CAMPBELL PL CITY: CAMDEN STATE: NJ ZIP: 08103 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>CAMPBELL'S SOUP COMPANY FORM 10-Q <TEXT> <PAGE> 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended Commission File Number January 28, 1996 1-3822 [CAMPBELL SOUP COMPANY LOGO] NEW JERSEY 21-0419870 STATE OF INCORPORATION I.R.S.EMPLOYER IDENTIFICATION NO. CAMPBELL PLACE CAMDEN, NEW JERSEY 08103-1799 Principal Executive Offices TELEPHONE NUMBER: (609) 342-4800 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 . ------- ------- THERE WERE 249,413,136 SHARES OF CAPITAL STOCK OUTSTANDING AS OF MARCH 1, 1996. THIS FORM 10-Q CONSISTS OF A TOTAL OF 22 PAGES, INCLUDING EXHIBITS. AN INDEX TO EXHIBITS IS ON PAGE 13. ================================================================================ -1- <PAGE> 2 PART I. FINANCIAL INFORMATION CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (million dollars except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------- ------------------------- JANUARY January* JANUARY January* 28, 1996 29, 1995 28, 1996 29, 1995 -------- -------- -------- --------- <S> <C> <C> <C> <C> Net sales $2,217 $2,031 $4,207 $3,887 ----------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of products sold 1,247 1,174 2,390 2,259 Marketing and selling expenses 438 381 797 713 Administrative expenses 76 81 157 160 Research and development expenses 21 23 41 42 Other expense 20 10 45 27 ----------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,802 1,669 3,430 3,201 ----------------------------------------------------------------------------------------------------------------------------- Earnings before interest and taxes 415 362 777 686 Interest, net 31 14 66 40 ----------------------------------------------------------------------------------------------------------------------------- Earnings before taxes 384 348 711 646 Taxes on earnings 126 117 235 218 ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 258 $ 231 $ 476 $ 428 ============================================================================================================================= Per share Net earnings $ 1.03 $ .93 $ 1.91 $ 1.72 ============================================================================================================================= Dividends $ .35 $ .31 $ .66 $ .59 ============================================================================================================================= Weighted average shares outstanding 249 249 249 249 ============================================================================================================================= </TABLE> See Notes To Financial Statements *Reclassified to conform to this year's presentation -2- <PAGE> 3 CAMPBELL SOUP COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (million dollars) <TABLE> <CAPTION> JANUARY July 28, 1996 30, 1995 -------- -------- <S> <C> <C> Current assets Cash and cash equivalents $ 56 $ 53 Accounts receivable 806 631 Inventories 743 755 Prepaid expenses 147 142 ----------------------------------------------------------------------------------------------- Total current assets 1,752 1,581 ----------------------------------------------------------------------------------------------- Plant assets, net of depreciation 2,577 2,584 Intangible assets, net of amortization 1,798 1,715 Other assets 449 435 ----------------------------------------------------------------------------------------------- Total assets $ 6,576 $ 6,315 =============================================================================================== Current liabilities Notes payable $ 575 $ 865 Payable to suppliers and others 497 556 Accrued liabilities 612 545 Dividend payable 87 78 Accrued income taxes 170 120 ----------------------------------------------------------------------------------------------- Total current liabilities 1,941 2,164 ----------------------------------------------------------------------------------------------- Long-term debt 1,050 857 Nonpension postretirement benefits 454 434 Other liabilities, including deferred income taxes of $239 and $235 398 392 ----------------------------------------------------------------------------------------------- Total liabilities 3,843 3,847 ----------------------------------------------------------------------------------------------- Shareowners' equity Preferred stock; authorized 40 shares; none issued - - Capital stock, $.075 par value; authorized 280 shares; issued 271 shares 20 20 Capital surplus 197 165 Earnings retained in the business 3,068 2,755 Capital stock in treasury, at cost (577) (550) Cumulative translation adjustments 25 78 ----------------------------------------------------------------------------------------------- Total shareowners' equity 2,733 2,468 ----------------------------------------------------------------------------------------------- Total liabilities and shareowners' equity $ 6,576 $ 6,315 =============================================================================================== </TABLE> See Notes to Financial Statements -3- <PAGE> 4 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (million dollars) <TABLE> <CAPTION> Six Months Ended ------------------------------------ JANUARY January 28, 1996 29, 1995 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $476 $428 Non-cash charges to net earnings Depreciation and amortization 159 143 Deferred taxes 4 4 Other, net 49 41 Changes in working capital Accounts receivable (195) (194) Inventories (8) 58 Other current assets and liabilities 41 (5) ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 526 475 ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of plant assets (165) (137) Sales of plant assets 7 16 Businesses acquired (142) (194) Sales of businesses 45 5 Net change in other assets and liabilities (5) 5 ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (260) (305) ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Long-term borrowings 221 3 Repayments of long-term borrowings (27) (17) Short-term borrowings 58 (70) Repayments of short-term borrowings (347) 63 Dividends paid (155) (140) Treasury stock purchased (40) - Treasury stock issued 34 15 ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (256) (146) ------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash (7) (6) ------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 3 18 Cash and cash equivalents - beginning of period 53 96 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents - end of period $ 56 $114 ====================================================================================================== </TABLE> See Notes to Financial Statements -4- <PAGE> 5 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (unaudited) (million dollars) <TABLE> <CAPTION> Earnings Capital Retained Stock Cumulative Total Preferred Capital Capital in the in Translation Shareowners' Stock Stock Surplus Business Treasury Adjustments Equity --------- ------- ------- -------- --------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance at July 31, 1994 $ - $20 $155 $2,359 $(559) $14 $1,989 Net earnings 428 428 Cash dividends ($.59 per share) (147) (147) Treasury stock purchased (1) (1) Treasury stock issued under Management incentive and Stock option plans 6 16 22 Translation adjustments 25 25 --------------------------------------------------------------------------------------------------------------------------------- Balance at January 29, 1995 $ - $20 $161 $2,640 $(544) $39 $2,316 ================================================================================================================================= BALANCE AT JULY 30, 1995 $ - $20 $165 $2,755 $(550) $78 $2,468 NET EARNINGS 476 476 CASH DIVIDENDS ($.66 PER SHARE) (163) (163) TREASURY STOCK PURCHASED (38) (38) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 32 11 43 TRANSLATION ADJUSTMENTS (53) (53) --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 28, 1996 $ - $20 $197 $3,068 $(577) $25 $2,733 ================================================================================================================================= </TABLE> Changes in Number of Shares (unaudited) (thousands of shares) <TABLE> <CAPTION> --------------------------------------------------------------------------------------------------------------------------------- Issued Outstanding In Treasury ------ ----------- ----------- <S> <C> <C> <C> Balance at July 31, 1994 271,245 248,319 22,926 Treasury stock purchased (12) 12 Treasury stock issued under Management incentive and Stock option plans 596 (596) --------------------------------------------------------------------------------------------------------------------------------- Balance at January 29, 1995 271,245 248,903 22,342 ================================================================================================================================= BALANCE AT JULY 30, 1995 271,245 249,231 22,014 TREASURY STOCK PURCHASED (833) 833 TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 1,281 (1,281) --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 28, 1996 271,245 249,679 21,566 ================================================================================================================================= </TABLE> See Notes to Financial Statements -5- <PAGE> 6 CAMPBELL SOUP COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) (millions) (a) The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the indicated periods. All such adjustments areof a normal recurring nature. (b) Net earnings per share are based on the weighted averageshares outstanding during the applicable periods. The potential dilution from the exercise of stock options is not material. (c) Inventories <TABLE> <CAPTION> JANUARY July 28, 1996 30, 1995 -------- -------- <S> <C> <C> Raw materials, containers and supplies $321 $317 Finished products 493 505 ------------------------------------------------------------------------------------------- 814 822 Less - Adjustment of certain inventories to LIFO basis 71 67 ------------------------------------------------------------------------------------------- $743 $755 =========================================================================================== </TABLE> (d) Divestiture and Restructuring Program On January 28, 1993, the company's Board of Directors approved a divestiture and restructuring program which specifically identified six manufacturing plants to be closed and fourteen businesses to be sold. At the time of the Board's approval, charges of $353 ($300 after tax or $1.19 per share) were recorded for the estimated loss on disposition of plant assets, cost of closing each plant and loss on each business divestiture. During the second quarter of 1996, one business was sold. Based on current estimates, existing reserves are adequate to cover expected losses on the remaining businesses to be sold and finalizing other activities. The company plans to complete the program in 1996. A summary of the original reserves and activity through January 28, 1996 follows: <TABLE> <CAPTION> Original Balance BALANCE Reserves Activity 7/30/95 Activity 1/28/96 --------- -------- ------- -------- -------- <S> <C> <C> <C> <C> <C> Loss on disposal of assets $275 $(197) $78 $(1) $77 Severance and other 78 (60) 18 (3) 15 ------------------------------------------------------------------------------------------------ Total $353 $(257) $96 $(4) $92 ================================================================================================ Current $153 $96 $92 Non-current 200 - - ------------------------------------------------------------------------------------------------ Total $353 $96 $92 ================================================================================================ </TABLE> -6- <PAGE> 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAMPBELL SOUP COMPANY RESULTS OF OPERATIONS OVERVIEW Campbell achieved record sales and earnings for the second quarter and first six months ended January 28, 1996. Net sales for the quarter were $2.22 billion, up 9% from the comparable period last year. Earnings per share increased 11% to a quarterly record of $1.03, up from 93 cents in the second quarter last year. Net earnings rose 12% to $258 million from $231 million a year ago. Sales for the six months increased 8% to $4.21 billion, versus$3.89 billion for the comparable period last year. Earnings per share for the six months increased 11% to $1.91, and net earnings increased 11% to $476 million. RESULTS BY DIVISION SECOND QUARTER U.S.A. - U.S. sales for the quarter were $1.36 billion, up 11%over $1.22 billion last year. Operating earnings climbed 18% to$320 million. Soup volume increased 4.5% led by Red & White chicken noodle and"Home Cookin'" ready-to-serve. Strong volume performances were also achieved by "Prego" and "Barilla" brand spaghetti sauces, "Swanson Hungry-Man" dinners,"Swanson" pot pies and "Franco-American" canned pastas. Food Service also achieved substantial volume gains led by frozen soups and chicken pot pies for the away-from-home market. BAKERY & CONFECTIONERY - Bakery & Confectionery sales increased 6% to $466 million from $438 million in the second quarter last year. Operating earnings increased 7% to $67 million from $63 million a year ago. New "Pepperidge Farm" fat-free cookies and brownies gained wide consumer acceptance. "Goldfish" crackers and frozen garlic breads continued to achieve strong double-digit growth. Continental Sweets experienced an earnings decline mostly attributable to economic difficulties in Europe. Arnotts' earnings were flat due to volume declines. Godiva Chocolatier had record holiday season results. This division consists of Pepperidge Farm in the U.S., Arnotts in Australia, Delacre in Europe, Godiva worldwide and the confectionery business in Europe. -7- <PAGE> 8 INTERNATIONAL GROCERY - The International Grocery Division reported sales of $412 million in the second quarter, a 7% increase over last year's $386 million. Operating earnings rose 6% to $42 million, despite heavy marketing expenditures to expand geographies and distribution. Soup volume outside the United States grew 14% during the quarter, with strong gains from the United Kingdom, Hong Kong, Canada and Japan and from the recent introduction of "Red & White" labeled soup into Belgium. Sales also benefited from the acquisitions of "Homepride" cooking sauces in the United Kingdom in August, and the Cheong Chan soup and sauce business in Southeast Asia in December. Earnings in Mexico improved from the last quarter, but were down $1.5 million versus last year due to the economic difficulties there. International Grocery consists of soup, grocery and frozen businesses in Argentina, Asia, Canada, Europe and Mexico. SIX MONTHS U.S.A. - U.S. sales for the six months were $2.56 billion versus $2.35 billion last year. Operating earnings increased 14% to $608 million. Soup volume increased 3.2% led by Red & White chicken noodle,"Home Cookin'" ready-to-serve and Chunky soup. Other strong sales gains came from "Prego" and "Barilla" spaghetti sauces, "Franco-American" canned pastas and Food Service chicken pot pies for the away-from-home market. Frozen foods volume declined, reflecting marketplace conditions. BAKERY & CONFECTIONERY - Bakery & Confectionery sales grew 6% to $901 million from $848 million in the first six months. Operating earnings increased 10% to $120 million. Volume gains were led by new "Pepperidge Farm" fat-free cookies and brownies, "Goldfish" crackers and garlic breads. Arnotts' earnings were flat due to volume declines. Lamy Lutti, a confectionery business in Europe, experienced an earnings decline due to economic difficulties in France. Godiva Chocolatier had record holiday season results. INTERNATIONAL GROCERY - International Grocery reported sales of $794 million in the first six months, a 9% increase over last year. Operating earnings rose 9% to $79 million. Soup volume outside the U.S. was up 9% in the first half of the fiscal year with strong gains from the United Kingdom and Asia. Sales also benefited from the acquisition of "Homepride" cooking sauces in the United Kingdom. -8- <PAGE> 9 STATEMENTS OF EARNINGS Net sales increased 9% for the second quarter and 8% for the six months, compared to the same periods last year. These gains were driven principally by acquisitions and worldwide soup volume gains of 7% in the second quarter and 5% in the first half. Volume gains were particularly strong in Asia, U.K. and Japan with double-digit increases. Gross margins improved 1.6 percentage points to 43.8% in the second quarter and 1.3 percentage points to 43.2% for the six-month period. Gross margin improvements resulted primarily from higher selling prices and manufacturing efficiencies. Marketing and selling expenses increased 15.0% for the second quarter and 12% for the six-month period, over the same periods a year ago. Acquisitions and increased advertising spending, especially for soups, "Franco-American" pasta and Pepperidge Farm "Goldfish" crackers, were the principal reason for the increases. Administrative expenses as a percent of sales decreased .6 percentage points to 3.4% in the second quarter and .4 percentage points to 3.7% for the first six months, reflecting administrative efficiencies. Other expense is up in both the quarter and six-month periods due to amortization of intangibles associated with the recent acquisitions. The increase in interest expense is due to financing costs associated with acquisitions. The effective tax rate for the first six months was 33.0% compared to 33.7% for last year. The company expects its effective tax rate for the full fiscal year 1996 to remain approximately at this level due to tax planning strategies, including utilization of tax loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Strong net earnings improvement drove cash from operations to $526 million in the first six months of 1996, up $51 million from 1995. Capital expenditures were $165 million in 1996, an increase of $28 million from the prior year, due primarily to construction of a new Arnotts' manufacturing facility in Huntingwood, New South Wales, Australia. Capital expenditures are projected to be between $400 and $450 million in 1996. During the year, the company acquired the "Homepride" sauce business, United Kingdom's leading cooking sauce brand, and the Cheong Chan soup and sauce business in Asia. The company also completed the purchase of a 50% interest in the Indonesian biscuit and snack manufacturer, PT Helios Arnott's Indonesia, and increased its Arnotts share ownership to 67%. The company divested Campbell's Groko B.V., a Dutch frozen vegetable processor. Long-term debt increased by $194 million in 1996. During the quarter, the company issued $200 million, 5.5% fixed-rate three-year notes due January 1999. The proceeds were used to repay short-term debt which decreased $289 million this year. The company repurchased 833,000 shares of common stock for the treasury at a cost of $38 million, compared to minimal repurchases in 1995. -9- <PAGE> 10 PART II ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the legal proceedings as reported in Campbell's Form 10-Q for the quarter ended October 29, 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. Campbell's Annual Meeting of Shareowners was held on November 16, 1995. c. The matters voted upon and the results of the vote are as follows: Election of Directors <TABLE> <CAPTION> ========================================================================= Number of Shares ------------------------------ Name For Withheld ------------------------------------------------------------------------- <S> <C> <C> Alva A. App 197,982,644 26,457,840 Edmund M. Carpenter 197,994,514 26,445,970 Bennett Dorrance 197,997,179 26,443,305 Thomas W. Field, Jr. 197,991,934 26,448,550 David W. Johnson 197,967,598 26,472,886 David K. P. Li 197,982,512 26,457,972 Philip E. Lippincott 197,963,239 26,477,245 Mary Alice Malone 197,964,185 26,476,299 Charles H. Mott 197,996,448 26,444,036 Ralph A. Pfeiffer, Jr. 197,967,966 26,472,518 George M. Sherman 197,940,836 26,499,648 Donald M. Stewart 197,984,004 26,456,480 George Strawbridge, Jr. 197,961,924 26,478,560 Robert J. Vlasic 192,218,622 32,221,862 Charlotte C. Weber 197,961,034 26,479,450 ========================================================================= </TABLE> -10- <PAGE> 11 <TABLE> <CAPTION> ========================================================================================================================= Broker For Against Abstentions Non-Votes ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Approval of Amendment of Campbell Soup Company 1994 Long-Term Incentive Plan Regarding Director Compensation 168,613,338 55,166,811 660,335 -0- Ratification of Appointment of Auditors 223,911,159 257,997 271,328 -0- Shareowner Proposal Regarding Term Limits for Directors 2,862,722 212,246,954 1,228,116 8,102,692 ========================================================================================================================= </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits No. 3(ii) Campbell Soup Company's By-Laws, effective November 16, 1995. 4 There is no instrument with respect to long-term debt of the company that involves indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the company upon request of the Securities and Exchange Commission. 27 Financial Data Schedule b. Reports on Form 8-K There were no reports on Form 8-K filed by Campbell during the quarter for which this report is filed. -11- <PAGE> 12 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. CAMPBELL SOUP COMPANY Date: March 8, 1996 By: /s/JOHN M. COLEMAN ----------------------------------- John M. Coleman, Senior Vice President Law and Public Affairs Date: March 8, 1996 By: /s/LEO J. GREANEY ----------------------------------- Leo J. Greaney Vice President - Controller (Chief Accounting Officer) -12- <PAGE> 13 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number Page - -------------- ---- <S> <C> <C> 3(ii) Campbell Soup Company's By-Laws, effective November 16, 1995 14-21 27 Financial Data Schedule 22 </TABLE> -13- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.II <SEQUENCE>2 <DESCRIPTION>CAMPBELL SOUP CO. BY-LAWS EFFECTIVE 11/16/95 <TEXT> <PAGE> 1 CAMPBELL SOUP COMPANY ----------------------- BY-LAWS ----------------------- EFFECTIVE NOVEMBER 16, 1995 <PAGE> 2 CAMPBELL SOUP COMPANY BY-LAWS ---------------------- ARTICLE I. Stockholders Section 1. The annual meeting of the stockholders of the Corporation shall be held at the principal office of the Corporation in New Jersey, or at such other place, within or without New Jersey, as may from time to time be designated by the Board of Directors and stated in the notice of the meeting, on the third Thursday in November in each year (or if said day be a legal holiday, then on the next succeeding day, not earlier than the following Tuesday, not a legal holiday), at such time as may be fixed by the Board of Directors, for the purpose of electing directors of the Corporation, and for the transaction of such other business as may properly be brought before the meeting. Section 2. Special meetings of the stockholders shall be held at the principal office of the Corporation in New Jersey, or at such other place, within or without New Jersey, as may from time to time be designated by the Board of Directors and stated in the notice of the meeting, upon the call of the Chairman of the Board or of the President, or upon the call of a majority of the members of the Board of Directors, and shall be called upon the written request of stockholders of record holding a majority of the capital stock of the Corporation issued and outstanding and entitled to vote at such meeting. Section 3. Notice of the time and place of every meeting of stockholders shall be delivered personally or mailed at least ten but not more than sixty calendar days before the meeting to each stockholder of record entitled to vote at the meeting. Section 4. The holders of record of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders. If there be no such quorum present, the holders of a majority of such shares so present or represented may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such quorum shall have been obtained, when any business may be transacted which might have been transacted at the meeting as first convened, had there been a quorum. Once a quorum is established, the stockholders present in person or by proxy may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. <PAGE> 3 Section 5. The Board of Directors shall in advance of each meeting of stockholders appoint one or more inspectors of election, to act unless the performance of the inspector's function shall be unanimously waived by the stockholders present in person or represented by proxy at such meeting. Each inspector, before entering upon the discharge of his duties, shall first take and subscribe an oath or affirmation to execute the duties of inspector as prescribed by law at such meeting with strict impartiality and according to the best of his ability. The inspector or inspectors shall take charge of the polls and shall make a certificate of the results of the vote taken. No director or candidate for the office of director shall be appointed as such inspector. Section 6. All meetings of the stockholders shall be presided over by the Chairman of the Board, or if he shall not be present, by the Vice Chairman of the Board. If neither the Chairman of the Board nor the Vice Chairman of the Board shall be present, such meeting shall be presided over by the President. If none of the Chairman of the Board, the Vice Chairman of the Board and the President shall be present, such meeting shall be presided over by a Vice President, or if none shall be present, then by a Chairman to be elected by the holders of a majority of the shares present or represented at the meeting. The Secretary of the Corporation, or if he is not present, an Assistant Secretary of the Corporation, if present, shall act as secretary of the meeting. If neither the Secretary nor an Assistant Secretary is present, then the Chairman shall appoint a Secretary of the meeting. Section 7. The Board of Directors shall fix in advance a date, not exceeding sixty nor less than ten calendar days preceding the date of any meeting of the stockholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividend, or any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of stock, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting, or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. ARTICLE II. Directors Section 1. The business and property of the Corporation shall be managed and controlled by a board of fifteen directors. This number may be changed from time to time by amendment of these 2 <PAGE> 4 By-Laws, but the term of office of no director shall be shortened after his or her election by reduction in the number of directors. Upon election each director shall be the holder of at least one hundred shares of the Corporation's capital stock having voting power and within one year of election shall be the holder of at least one thousand shares of capital stock. In the event the number of shares of capital stock is increased at any time after January 28, 1993, by a stock split, stock dividend, or by any other extraordinary distribution of shares, the one thousand shares ownership requirement shall be proportionately adjusted. The director, upon ceasing to hold the required number of shares, shall cease to be a director. The directors shall hold office until the next annual meeting of the stockholders and until their successors are elected and shall have qualified. Section 2. Regular meetings of the Board of Directors shall be held at such times and at such places as may from time to time be fixed by resolution of the Board of Directors. Special meetings of the Board of Directors may be held at any time upon call of the Chairman of the Board or of the Vice Chairman of the Board or of the President or of three directors. Oral, telegraphic or written notice of the time and place of a special meeting shall be duly served on, or given or sent or mailed to, each director not less than two calendar days before the meeting. An organizational meeting of the Board of Directors shall be held, of which no notice shall be necessary, as soon as convenient after the annual meeting of the stockholders. Notice need not be given of regular meetings of the Board of Directors held at the times fixed by resolution of the Board of Directors. Meetings may be held at any time without notice if all of the directors are present or if those not present waive notice of the meeting in writing. Section 3. Six members of the Board of Directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall have been obtained, when any business may be transacted which might have been transacted at the meeting as first convened, had there been a quorum. Section 4. Any vacancy occurring among the directors may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors at the time in office; provided that in case of an increase in the number of directors pursuant to an amendment to these By-Laws made by the stockholders, the stockholders may fill the vacancy or vacancies so created at the meeting at which such amendment is effected or may authorize the Board of Directors to fill such vacancy or vacancies. 3 <PAGE> 5 Section 5. The Board of Directors, by an affirmative vote of a majority of the members of the Board of Directors at the time in office, may appoint an Executive Committee to consist of such directors as the Board of Directors may from time to time determine. The Executive Committee shall have and may exercise, when the Board of Directors is not in session, all of the powers vested in the Board of Directors, except as otherwise provided by law. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve, the Executive Committee. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it shall from time to time deem necessary, unless the Board of Directors shall otherwise provide. A majority of the members of the Executive Committee at the time in office shall constitute a quorum for the transaction of business. A record shall be kept of all proceedings of the Executive Committee which shall be submitted to the Board of Directors at or before the next succeeding meeting of the Board of Directors. Section 6. The Board of Directors may appoint one or more other committees, to consist of such number of the directors and to have such powers as the Board of Directors may from time to time determine. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve, any such committee. A majority of any such committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. Section 7. In addition to reimbursement of reasonable expenses incurred in attending meetings or otherwise in connection with his or her attention to the affairs of the Corporation, each director as such, as Chairman or Vice Chairman of the Board and as a member of the Executive Committee or of any other committee of the Board of Directors, shall be entitled to receive such remuneration as may be fixed from time to time by the Board of Directors, in the form either of fees for attendance at meetings of the Board of Directors and committees thereof or annual retainers, or both; but no director who receives a salary or other remuneration as an employee of the Corporation or any subsidiary thereof shall receive any additional remuneration as a director or member of any committee of the Board of Directors. ARTICLE III. Officers Section 1. The Board of Directors, at its organizational meeting or as soon as may be after the election of directors held in each year, shall elect one of its number Chairman of the Board and one of its number President, and shall also elect a Secretary and a Treasurer, and from time to time may elect or appoint one of its number Vice Chairman of the Board, one or more Vice Presidents, a Controller, and such Assistant Secretaries, Assistant Treasurers 4 <PAGE> 6 and other officers, agents and employees as it may deem proper. More than one office may be held by the same person. Section 2. The term of office of all officers shall be until the next organizational meeting of the Board of Directors or until their respective successors are elected and have qualified, but any officer may be removed from office at any time by the affirmative vote of a majority of the members of the Board of Directors at the time in office. Any other employee of the Corporation, whether appointed by the Board of Directors or otherwise, may be removed at any time by the Board of Directors or by any committee or officer or employee upon whom such power of removal may be conferred by the By-Laws or by the Board of Directors. The Board of Directors shall have power to fill for the unexpired term any vacancy which shall occur in any office by reason of death, resignation, removal or otherwise. Section 3. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors and shall perform such other duties as shall from time to time be prescribed by the Board of Directors. The Vice Chairman of the Board shall in the absence of the Chairman of the Board preside at all meetings of the stockholders and of the Board of Directors and shall perform such other duties as shall from time to time be prescribed by the Board of Directors or the Chairman of the Board. The President shall be the Chief Executive Officer of the Corporation and shall perform such duties as are usually performed by that officer; he shall, in the absence of the Chairman and Vice Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors; and shall perform such other duties as shall from time to time be prescribed by the Board of Directors. The other officers of the Corporation shall have such powers and shall perform such duties as generally pertain to their offices respectively, as well as such powers and duties as shall from time to time be conferred by the Board of Directors. Article IV. Indemnification of Directors and Others Section 1. The Corporation shall indemnify to the full extent from time to time permitted by law any present, former or future director, officer, or employee ("Corporate Agent") made, or threatened to be made, a party to, or a witness or other participant in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, legislative, investigative, or of any other kind, 5 <PAGE> 7 including by or in the right of the Corporation ("Proceeding"), by reason of the fact that such person is or was a Corporate Agent of the Corporation or any subsidiary of the Corporation or, while serving as a Corporate Agent of the Corporation or any subsidiary of the Corporation, serves or served another enterprise (including, without limitation, any sole proprietorship, association, corporation, partnership, joint venture or trust), whether or not for profit, at the request of the Corporation as a director, officer, employee or agent thereof (including service with respect to any employee benefit plan of the Corporation or any subsidiary of the Corporation), against expenses (including attorneys' fees), judgments, fines, penalties, excise taxes and amounts paid in settlement, actually and reasonably incurred by such person in connection with such Proceeding or any appeal therein. No indemnification pursuant to this Article IV shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending Proceeding unless the Corporation has given its prior consent to such settlement or other disposition. Section 2. Expenses incurred in connection with a Proceeding shall be paid by the Corporation for any Corporate Agent of the Corporation in advance of the final disposition of such Proceeding promptly upon receipt of an undertaking by or on behalf of such person to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified by the Corporation. Such an undertaking shall not, however, be required of a nonparty witness. Section 3. The foregoing indemnification and advancement of expenses shall not be deemed exclusive of any other rights to which any person indemnified may be entitled. Section 4. The rights provided to any person by this Article IV shall be enforceable against the Corporation by such person, who shall be presumed to have relied upon it in serving or continuing to serve as a Corporate Agent. No elimination of or amendment to this Article IV shall deprive any person of rights hereunder arising out of alleged or actual occurrences, acts or failures to act occurring prior to such elimination or amendment. The rights provided to any person by this Article IV shall inure to the benefit of such person's legal representative and shall be applicable to Proceedings commenced or continuing after the adoption of this Article IV, whether arising from acts or omissions occurring before or after such adoption. Section 5. The Corporation's Board of Directors may from time to time delegate (i) to a Committee of the Board of Directors of the Corporation or to independent legal counsel the authority to determine whether a Director or officer of the Corporation, and 6 <PAGE> 8 (ii) to one or more officers of the Corporation the authority to determine whether an employee of the Corporation or any subsidiary, other than a Director or officer of the Corporation, is entitled to indemnification or advancement of expenses pursuant to, and in accordance with, applicable law and this Article IV, subject to such conditions and limitations as the Board of Directors may prescribe. ARTICLE V. Fiscal Year The fiscal year shall begin in each calendar year on the Monday following the Sunday which is nearest to July 31, and shall end on the Sunday which is nearest to July 31 of the following year. ARTICLE VI. Corporate Seal The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which seal shall be in the charge of the Secretary; provided that the use of a facsimile of such seal is hereby authorized. ARTICLE VII. Amendment The Board of Directors shall have the power to make, amend and repeal the By-Laws of the Corporation by a vote of a majority of the members of the Board of Directors at the time in office at any regular or special meeting of the Board of Directors. The stockholders, by a majority of the votes cast at a meeting of the stockholders, may adopt, alter, amend or repeal the By-Laws, whether made by the Board of Directors or otherwise. 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>CAMPBELL SOUP COMPANY FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUL-28-1996 <PERIOD-START> JUL-31-1995 <PERIOD-END> JAN-28-1996 <CASH> 56 <SECURITIES> 0 <RECEIVABLES> 877 <ALLOWANCES> 71 <INVENTORY> 743 <CURRENT-ASSETS> 1,752 <PP&E> 4,315 <DEPRECIATION> 1,738 <TOTAL-ASSETS> 6,576 <CURRENT-LIABILITIES> 1,941 <BONDS> 1,050 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 20 <OTHER-SE> 2,713 <TOTAL-LIABILITY-AND-EQUITY> 6,576 <SALES> 4,207 <TOTAL-REVENUES> 4,207 <CGS> 2,390 <TOTAL-COSTS> 2,390 <OTHER-EXPENSES> 838 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 70 <INCOME-PRETAX> 711 <INCOME-TAX> 235 <INCOME-CONTINUING> 476 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 476 <EPS-PRIMARY> 1.91 <EPS-DILUTED> 1.91 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CSCO

https://www.sec.gov/Archives/edgar/data/858877/0000950149-96-000218.txt

-----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, M92xXmzZblLGm7Ty7RzZh+0x8apRqrah5UKzltVPoVDzqfa6TcNHEHH4ndudHdtd uA5C6D4oKDn07nxGHO9yXw== <SEC-DOCUMENT>0000950149-96-000218.txt : 19960314 <SEC-HEADER>0000950149-96-000218.hdr.sgml : 19960314 ACCESSION NUMBER: 0000950149-96-000218 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CISCO SYSTEMS INC CENTRAL INDEX KEY: 0000858877 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770059951 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18225 FILM NUMBER: 96534128 BUSINESS ADDRESS: STREET 1: 170 W TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085264000 MAIL ADDRESS: STREET 1: 170 WEST TASMAN DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134-1706 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>CISCO SYSTEMS FORM 10-Q <TEXT> <PAGE> 1 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 JANUARY 28, 1996 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 0-18225 CISCO SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 77-0059951 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 170 West Tasman Drive San Jose, California 95134 (Address of principal executive office and zip code) (408) 526-4000 (Registrant's telephone number, including area code) 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 filing requirements for the past 90 days. YES X NO ------- ------- As of March 4, 1996 565,495,276 shares of the Registrant's common stock were outstanding. <PAGE> 2 CISCO SYSTEMS, INC. FORM 10-Q FOR THE QUARTER ENDED JANUARY 28, 1996 INDEX <TABLE> <CAPTION> Page <S> <C> <C> Facing sheet 1 Index 2 Part I. Financial information Item 1. a) Consolidated balance sheets at January 28, 1996 and July 30, 1995 3 b) Consolidated statements of operations for the three and six month periods ended January 28, 1996 and January 29, 1995 4 c) Consolidated statements of cash flows for the six month periods ended January 28, 1996 and January 29, 1995 5 d) Notes to consolidated financial statements 6 Item 2. Management's discussion and analysis of financial condition and results of operations 8 Part II. Other information 13 Signature 14 Exhibits Exhibit 3.01, Restated Articles of Incorporation Exhibit 11.01, Computation of net income per share 15 </TABLE> 2 <PAGE> 3 ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CISCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> January 28, July 30, 1996 1995 ----------- ---------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 123,823 $ 204,846 Short-term investments 356,482 234,681 Accounts receivable, net of allowance for doubtful accounts of $15,887 at January 28, 1996 and $13,305 at July 30, 1995 491,223 384,242 Inventories 221,579 71,160 Deferred income taxes 90,450 75,297 Prepaid expenses and other current assets 52,141 25,743 ---------- ---------- Total current assets 1,335,698 995,969 Investments 601,215 403,855 Restricted investments 189,473 173,073 Property and equipment, net 184,601 136,635 Other assets 54,845 47,747 ---------- ---------- Total assets $2,365,832 $1,757,279 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 117,513 $ 45,205 Income taxes payable 97,181 71,583 Accrued payroll and related expenses 113,354 84,695 Other accrued liabilities and deferred revenue 185,523 136,273 ---------- ---------- Total current liabilities 513,571 337,756 Minority interest 40,933 40,792 Shareholders' equity: Preferred stock, no par value, 5,000 shares authorized: none issued or outstanding at January 28, 1996 and July 30, 1995 Common stock, no par value, 1,200,000 shares authorized: 563,713 shares issued and outstanding at January 28, 1996 and 544,492 at July 30, 1995 517,454 362,292 Retained earnings 1,189,618 959,657 Unrealized gains on marketable securities 107,831 50,933 Cumulative translation adjustments (3,575) 5,849 ---------- ---------- Total shareholders' equity 1,811,328 1,378,731 ---------- ---------- Total liabilities and shareholders' equity $2,365,832 $1,757,279 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements. 3 <PAGE> 4 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per-share amounts) <TABLE> <CAPTION> Three Months Ended Six Month Ended --------------------------------------------------- Jan. 28, Jan. 29, Jan. 28, Jan. 29, 1996 1995 1996 1995 --------------------------------------------------- (Unaudited) <S> <C> <C> <C> <C> Net sales $826,482 $454,897 $1,536,673 $847,822 Cost of sales 277,597 148,204 512,000 276,173 -------- -------- ---------- -------- Gross margin 548,885 306,693 1,024,673 571,649 Operating expenses: Research and development 73,262 38,118 136,127 68,166 Sales and marketing 146,895 78,454 275,906 146,776 General and administrative 28,826 16,045 54,562 30,960 Purchased research and development 95,760 95,760 -------- -------- ---------- -------- Total operating expenses 248,983 228,377 466,595 341,662 -------- -------- ---------- -------- Operating income 299,902 78,316 558,078 229,987 Interest and other income, net 14,258 7,950 26,077 15,586 -------- -------- ---------- -------- Income before provision for income taxes 314,160 86,266 584,155 245,573 Provision for income taxes 117,810 32,781 219,058 93,318 -------- -------- ---------- -------- Net income $196,350 $ 53,485 $ 365,097 $152,255 ======== ======== ========== ======== Net income per share $ .34 $ .10 $ .63 $ .28 ======== ======== ========== ======== Shares used in per-share calculation 585,293 557,245 579,137 548,284 ======== ======== ========== ======== </TABLE> The accompanying notes are an integral part of these financial statements. 4 <PAGE> 5 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Six Months Ended ------------------------------ January 28, January 29, 1996 1995 ------------- ------------- (Unaudited) <S> <C> <C> Cash flows from operating activities: Net income $ 365,097 $ 152,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,127 25,733 Deferred income taxes (18,692) (45,991) Change in operating assets and liabilities: Accounts receivable (106,949) (55,531) Inventories (150,419) (26,973) Prepaid expenses and other current assets (26,398) (123) Income taxes payable 102,519 16,803 Accounts payable 72,210 36,110 Accrued payroll and related expenses 28,546 9,304 Other accrued liabilities 30,482 20,076 --------- --------- Total adjustments (31,574) (20,592) --------- --------- Net cash provided by operating activities 333,523 131,663 --------- --------- Cash flows from investing activities: Purchases of short-term investments (312,084) (157,052) Proceeds from sales of short-term investments 105,620 55,738 Maturities of short-term investments 136,355 76,006 Purchases of investments (291,709) (138,019) Proceeds from sales of investments 130,404 104,575 Purchases of restricted investments (72,348) Proceeds from sales of restricted investments 42,564 Maturities of restricted investments 15,601 Acquisition of property and equipment (82,049) (55,484) Acquisition of business, net of cash acquired and purchased research and development (17,920) Other (9,437) 18,509 --------- --------- Net cash used by investing activities (337,083) (113,647) --------- --------- Cash flows from financing activities: Issuance of common stock 44,695 12,995 Repurchase of common stock (112,734) (30,547) Proceeds from sale of subsidiary stock 40,548 Other (9,424) (338) --------- --------- Net cash (used in) provided by financing activities (77,463) 22,658 --------- --------- Net (decrease) increase in cash and equivalents (81,023) 40,674 Cash and equivalents, beginning of period 204,846 53,567 --------- --------- Cash and equivalents, end of period $ 123,823 $ 94,241 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 5 <PAGE> 6 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year is the 52 or 53 weeks ending on the last Sunday in July. Fiscal years 1996 and 1995 are both 52 week years. Basis of Presentation The consolidated balance sheet as of January 28, 1996, and the consolidated statements of operations and cash flows for the periods ended January 28, 1996 and January 29, 1995, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended July 30, 1995. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the three and six month periods ended January 28, 1996 and January 29, 1995, have been made. The results of operations for the period ended January 28, 1996 are not necessarily indicative of the operating results for the full year. The July 30, 1995 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Computation of Net Income Per Share Net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This standard, which establishes a fair value based method of accounting for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees" with disclosures of pro forma net income and earnings per share under the new method. The Company is reviewing the implications of SFAS No. 123 and evaluating the effect, if any, on the financial condition and results of operations of the Company. SFAS No. 123 will be effective for the Company's fiscal year 1997. 6 <PAGE> 7 2. BUSINESS COMBINATIONS In September 1995, the Company acquired Combinet Inc. ("Combinet"), a privately held manufacturer of remote access networking products. The Company issued approximately 3,500,000 shares of common stock for all the outstanding stock of Combinet in a transaction accounted for as a pooling of interests. In addition, the Company assumed options and warrants to purchase Combinet stock that remain outstanding as options to purchase approximately 407,000 shares of the Company's common stock. The historical operations of Combinet are not material to the Company's consolidated operations and financial position individually and when aggregated with previous acquisitions, therefore the Company's financial statements have not been restated. Additionally, in September 1995, the Company acquired Internet Junction, Inc., a developer of Internet gateway software that connects desktop users with the Internet. The Company issued 162,000 shares of stock for the net assets of Internet Junction in a transaction accounted for as a purchase. Accordingly, the results of operations of the acquired business and the fair market values of the acquired assets and liabilities were included in the Company's financial statements as of the acquisition date. Amounts allocated to goodwill will be amortized on a straight-line basis over a four year period. A pro forma summary is not presented as the historical operations of Internet Junction are not material to the Company's consolidated operations and financial position. In November 1995, the Company acquired Grand Junction Networks, Inc. ("Grand Junction") a privately held manufacturer of Fast Ethernet (100BaseT) and Ethernet desktop switching products. Under the terms of the agreement, the Company issued approximately 9,180,000 shares of common stock for all the outstanding stock of Grand Junction in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Grand Junction stock that remain outstanding as options to purchase approximately 737,000 shares of the Company's common stock. The historical operations of Grand Junction are not material to the Company's consolidated operations and financial position. In December 1995, the Company acquired Network Translation, Inc. ("NTI") in a transaction accounted for as a pooling of interests. NTI develops and sells address translation and firewall products for use in accessing the Internet. Financial terms of the transaction are not material to the Company's consolidated operations and financial position. The historical operations of NTI are not material to the Company's consolidated operations and financial position individually and when aggregated with previous acquisitions, therefore the Company's financial statements have not been restated. On January 23, 1996, the Company announced the signing of an agreement to acquire TGV Software Inc ("TGV"). Under the terms of the agreement, two (2) shares of the Company's common stock will be exchanged for every five (5) outstanding shares of TGV common stock in a transaction to be accounted for as a pooling of interests. The agreement is subject to receipt of certain government approvals and approval by TGV shareholders and is expected to be consummated in March 1996. 7 <PAGE> 8 3. SHAREHOLDER'S EQUITY A two-for-one stock split of the Company's common stock was approved by the Board of Directors on January 23, 1996 payable to shareholders of record on February 2, 1996 and was effective February 16, 1996. Share and per-share data for all periods presented have been adjusted to give effect to the two-for-one stock split. 4. BALANCE SHEET DETAIL (In thousands) <TABLE> <CAPTION> Inventories: January 28, July 30, 1996 1995 ----------- -------- (Unaudited) <S> <C> <C> Raw materials $123,271 $33,555 Work in process 56,136 16,913 Finished goods 25,233 9,373 Demonstration systems 16,939 11,319 -------- ------- $221,579 $71,160 ======== ======= </TABLE> 5. INCOME TAXES The Company paid income taxes of $135.3 million for the six months ended January 28, 1996 and $ 122.9 million for the six months ended January 29, 1995. The Company's income taxes currently payable for both federal and state purposes have been reduced by the tax benefit from stock option transactions. This benefit totaled $76.9 million in the first six months of 1996, and was credited directly to shareholders' equity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales grew from $454.9 million in the second quarter of 1995 to $826.5 million in the second quarter of 1996. Net sales for the first half of 1995 were $847.8 million, compared to $1,536.7 million in the first half of 1996. The 81.7% increase in net sales between the two three month periods and the 81.2% increase in net sales between the two six month periods was primarily the result of increasing unit sales of the Cisco 2500 product family, the Cisco 4500, and also reflects the market acceptance of new LAN switching products such as the Catalyst 5000 and also high end routers, primarily the Cisco 7500 product family. These increases were partially offset by decreasing unit sales of the Company's older product lines, consisting of the AGS+ and Cisco 4000, as well as lower average selling prices for the Cisco 7000. Sales to international customers increased from 42.8% of net sales in the second quarter of 1995, to 51.6% for the second quarter of 1996. International sales in the first six months of 1996 were 49.9% of net sales compared with 41.0% of net sales for the same period in 1995. These increases reflect the Company's continued expansion into new geographic markets and growth in existing European and Asian markets. Sales growth between the first and second quarters of fiscal 1996 in Asia exceeded the growth in other international areas. Gross margins decreased from 67.4% in both the second quarter and the first six months of 1995 to 66.4% and 66.7% for the second quarter and the first six months of 1996, respectively. Gross margins were 8 <PAGE> 9 affected by several factors, including higher material costs as a result of certain component shortages and the continued shift in revenue mix to the Company's lower margin products consisting primarily of products in the Company's Access and Workgroup business units. The Company expects this trend of decreasing gross margins to continue in the future, although quarterly fluctuations may occur due to certain factors such as component availability, mix of products sold, manufacturing efficiencies, software content, and warranty costs. Research and development expenses increased $35.1 million from the second quarter of 1995 to the second quarter of 1996, and increased $68.0 million between the first six months of 1995 and the first six months of 1996. This represents an increase from 8.4% to 8.9% of net sales in the quarter to quarter period and from 8.0% to 8.9% of net sales for the first six months of each fiscal year. The increase reflects the Company's continued commitment to develop new technologies internally, including the further development of its CiscoFusion architecture; as well as the acquisition of technologies to bring a broad range of innovative products to market in a timely fashion. A significant portion of the increase was due to the addition of new personnel, primarily from hiring and to a lesser extent through acquisitions, as well as higher material costs for prototypes and depreciation on new equipment. All of the Company's research and development costs are expensed as incurred. Sales and marketing expenses increased $68.4 million between the second quarters of 1995 and 1996, and $129.1 million from the first six months of 1995 to the same period of 1996. This represents increases from 17.2% to 17.8% of net sales in the quarter to quarter period and from 17.3% to 18.0% of net sales for the first six months of each fiscal year. The increases in these expenses resulted from an increase in the size of the Company's direct sales force and related commissions, additional marketing programs to support the launch of new products, the entry into new markets, both domestic and international, and expanding distribution channels. General and administrative expenses rose $12.8 million between the second quarters of 1995 and 1996, but remained at 3.5% of net sales for each period. These expenses increased $23.6 million from the first half of 1995 to the first half of 1996, representing a slight decrease from 3.7% to 3.6% of net sales for the comparable six month periods. The dollar increase in these expenses was due primarily to increased personnel costs, costs associated with the structuring and integration of the Company's various acquisitions (see note 2), as well as to the amortization of goodwill associated with the acquisition of LightStream Corporation in fiscal year 1995. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This standard, which establishes a fair value based method of accounting for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees" with disclosures of pro forma net income and earnings per share under the new method. The Company is reviewing the implications of SFAS No. 123 and evaluating the effect, if any, on the financial condition and results of operations of the Company. SFAS No. 123 will be effective for the Company's fiscal year 1997. 9 <PAGE> 10 Future Growth Subject to Risks The Company's operating performance each quarter is subject to various risks and uncertainties as discussed in the Company's Annual Report on Form 10-K for 1995. This Report on Form 10-Q should be read in conjunction with such Annual Report, particularly "Other Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. The Company's growth is dependent upon market growth and its ability to enhance its existing products and introduce new products on a timely basis. The Company must also maintain its ability to manage any such growth effectively. Failure to manage growth effectively could materially and adversely affect the Company's business and operating results. The Company's growth and ability to meet customer demand also depend, in part, on its ability to obtain timely supplies of parts from its vendors. While lead times for commodity components have improved recently, some components, particularly proprietary ASIC's and other networking specific components, continue to be in short supply. An inability to obtain these items at reasonable prices could have a material and adverse effect on the Company's growth. Each year with the exception of fiscal year 1995 and fiscal year 1996 to date, the Company generally has had one quarter of a fiscal year when backlog has been reduced. Traditionally, it has been the third quarter. While such a reduction did not occur in the past 18 months, such reductions are extremely difficult to predict and may occur in the future. In addition, in response to customer demand, the Company has, from time to time, reduced its product manufacturing lead times and its backlog of orders. To the extent that backlog is reduced during any particular period, it would result in more variability and less predictability in the Company's quarter-to-quarter net sales and operating results. Recently, however, the Company's backlog has been increasing. Resulting lead times for certain parts of its business have seen a corresponding increase. In particular, in the quarter ended January 28, 1996, backlog of orders increased. If manufacturing lead times are not reduced, the Company's customers may cancel, or not place, orders if shorter lead times are available from other manufacturers. The Company expects that gross margins may be adversely affected by increases in material or labor costs, heightened price competition, changes in channels of distribution or in the mix of products sold. In particular, the Company broadened its product line by introducing its first network access product in August 1992. Since that time, sales of these products, which are generally lower-priced and carry lower gross margins than the Company's core products, have increased more rapidly than the sales of the core products. The introduction of the CiscoPro product line during the first quarter of fiscal year 1996, as well as the increasing growth rates experienced in the switching markets, may accelerate this trend. The Company also expects that its operating margins may decrease as it continues to hire additional personnel and increases other operating expenses to support its business. The results of operations for the first six months of 1996 are not necessarily indicative of results to be expected in future periods, and the Company's operating results may be subject to quarterly fluctuations as a result of a number of factors. These factors include the integration of people, operations, and products from acquired businesses and technologies; increased competition, which the Company expects; the introduction and market acceptance of new products, including high-speed switching and ATM 10 <PAGE> 11 technologies; variations in sales channels, product costs, or mix of products sold; the timing of orders and manufacturing lead times; and changes in general economic conditions, any of which could have an adverse impact on operations and financial results. Volatility of Stock Price The Company's Common Stock has experienced substantial price volatility, particularly as a result of variations between the Company's actual or anticipated financial results and the published expectations of analysts and as a result of announcements by the Company and its competitors. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in particular and that have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock. LIQUIDITY AND CAPITAL RESOURCES Cash, short-term investments, and investments increased by $238.1 million from July 30, 1995 to January 28, 1996, primarily as a result of cash generated by operations and to a lesser extent through the exercise of employee stock options. This increase was partially offset by capital expenditures of approximately $82.0 million and by the repurchase of $112.7 million of common stock during this time. Accounts receivable increased 27.8% from July 30, 1995 to January 28, 1996, primarily as a result of higher sales levels. Days sales outstanding in receivables improved from 56 days at July 30, 1995 to 54 days at January 28, 1996. Inventories increased 211.4% between July 30, 1995 and January 28, 1996 which was a planned investment necessary to support the higher sales volumes and desired manufacturing lead times. Additionally, strategic purchases of certain components in short supply contributed to the increase. As a result, inventory turnover on an annualized basis decreased from 11.7 turns at July 30, 1995 to 7.0 turns at January 28, 1996. Accounts payable increased 160.0% from July 30, 1995 to January 28, 1996 because of increases in capital expenditures, operating expenses, and material purchases to support the growth in net sales. The 33.8% increase in accrued payroll and related expenses can be attributed to an increase in personnel during the six month period. Other accrued liabilities increased by 36.1%, primarily due to increases in deferred service contracts. At January 28, 1996, the Company had a line of credit totaling $100.0 million, which expires April 1998. There have been no borrowings under this agreement. The Company has entered into certain lease arrangements in San Jose, California, and Research Triangle Park, North Carolina, where it has established its headquarters operations and certain research and development and customer support activities, respectively. In connection with these transactions, the Company pledged $189.5 million of its investments as collateral for certain obligations of the leases. The restricted investments balance will continue to increase as the Company phases in operations at these lease sites. 11 <PAGE> 12 Under the Company's ongoing stock repurchase program, shares are purchased periodically to meet employee stock plan requirements. During the six months ended January 28, 1996, the Company purchased and retired approximately 3.0 million shares for an aggregate price of $112.7 million. As of January 28, 1996, the Company was authorized to repurchase up to an additional 6.8 million shares of its common stock in the open market or through privately negotiated transactions. The Company's ability to repurchase shares has been restricted, and is expected to continue to be restricted from time to time by virtue of business combinations and limitations imposed under pooling-of-interests accounting. The Company's management believes that its current cash and equivalents, short-term investments, line of credit, and cash generated from operations will satisfy its expected working capital and capital expenditure requirements through 1996. 12 <PAGE> 13 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES A two-for-one stock split of the Company's common stock was approved by the Board of Directors on January 23, 1996 payable to shareholders of record on February 2, 1996 and declared effective February 16, 1996. Share and per-share data for all periods presented have been adjusted to give effect to the two-for-one stock split. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on November 14, 1995. The following actions were taken at this meeting: <TABLE> <CAPTION> Affirmative Negative Votes Broker Votes Votes Withheld Non-Votes ----- ----- -------- --------- <S> <C> <C> <C> <C> a. Election of Directors John T. Chambers 485,616,808 - 851,212 - Michael S. Frankel 485,694,760 - 773,260 - James F. Gibbons 485,654,666 - 813,354 - John P. Morgridge 485,679,768 - 788,252 - Robert L. Puette 485,637,432 - 830,588 - Masayoshi Son 485,626,530 - 841,490 - Donald T. Valentine 485,599,588 - 868,432 - b. Amendment to the 1987 stock option plan. 375,774,922 47,167,788 2,097,862 61,427,448 c. Ratification of Coopers & Lybrand L.L.P. as auditors. 485,476,444 500,696 490,880 - d. Amendment to the Company's Restated Articles of Incorporation 463,522,528 21,998,284 947,208 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.01 The Company's Restated Articles of Incorporation as currently in effect 11.01 Computation of net income per share 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed two reports on Form 8-K during the quarter ended January 28, 1996. Both of the filings were on December 6, 1995. The items reported on were the acquisitions of Combinet, Inc. and Grand Junction Networks, Inc. 13 <PAGE> 14 SIGNATURE 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. Cisco Systems, Inc. Date: March 11, 1996 By /s/ LARRY R. CARTER -------------------------------- Larry R. Carter, Vice President Finance, and Chief Financial Officer (Principal Financial and Accounting Officer) 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.01 <SEQUENCE>2 <DESCRIPTION>CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES <TEXT> <PAGE> 1 EXHIBIT 3.01 CERTIFICATE OF AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION OF CISCO SYSTEMS, INC. I. The undersigned, Larry R. Carter, hereby certifies that he is and at all times herein mentioned has been, the duly elected and acting Vice President and Secretary of Cisco Systems, Inc., a California corporation (the "Corporation"), and further certifies that: II. Article IV (A) of the Restated Articles of Incorporation of the Corporation ("the Restated Articles") is hereby amended to read in its entirety as follows: "(A) CLASSES OF STOCK. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that the corporation is authorized to issue is One Billion Two Hundred Five Million (1,205,000,000) shares. One Billion Two Hundred Million (1,200,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock. As of February 2, 1996, each share of Common Stock outstanding is split into two (2) shares of Common Stock." III. The foregoing Certificate of Amendment has been duly approved by the Board of Directors of the Corporation. <PAGE> 2 IV. The foregoing Certificate of Amendment of the Restated Articles of Incorporation does not require shareholder approval pursuant to Section 902(c) of the General Corporation Law of the State of California. No shares of Preferred Stock are outstanding. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment on January 31, 1996. ------------------------------ Larry R. Carter Vice President and Secretary The undersigned certifies under penalty of perjury that he has read the foregoing Certificate of Amendment and knows the contents thereof, and that the statements therein are true. Executed at San Jose, California, on January 31, 1996 ------------------------------ Larry R. Carter </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11.01 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF NET INCOME <TEXT> <PAGE> 1 EXHIBIT 11.01 COMPUTATION OF NET INCOME PER SHARE IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083 (In thousands, except per-share amounts) <TABLE> <CAPTION> Three Months Six Months Ended Ended ----------------------- ----------------------- Jan. 28, Jan. 29, Jan. 28, Jan. 29, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (Unaudited) <S> <C> <C> <C> <C> PRIMARY EARNINGS PER SHARE Actual weighted average common shares outstanding for the period 563,128 537,093 556,844 529,683 Weighted average shares assuming exercise of employee stock options using average market price 22,165 20,152 22,293 18,601 -------- -------- -------- -------- Shares used in per-share calculations 585,293 557,245 579,137 548,284 ======== ======== ======== ======== Net income applicable to primary income per share $196,350 $ 53,485 $365,097 $152,255 ======== ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ .34 $ .10 $ .63 $ .28 ======== ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE Actual weighted average common shares outstanding for the period 563,128 537,093 556,844 529,683 Weighted average shares assuming exercise of employee stock options using the greater of ending or average market price 22,738 20,290 23,807 19,579 -------- -------- -------- -------- Shares used in per-share calculations 585,866 557,383 580,651 549,262 ======== ======== ======== ======== Net income applicable to fully diluted income per share $196,350 $ 53,485 $365,097 $152,255 ======== ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ .34 $ .10 $ .63 $ .28 ======== ======== ======== ======== </TABLE> These calculations are submitted in accordance with Securities Exchange Act of 1934 Release No. 34-9083 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING JANUARY 28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUL-28-1996 <PERIOD-START> JUL-31-1995 <PERIOD-END> JAN-28-1996 <CASH> 123,823 <SECURITIES> 1,147,470 <RECEIVABLES> 507,110 <ALLOWANCES> 15,887 <INVENTORY> 221,579 <CURRENT-ASSETS> 1,335,698 <PP&E> 324,979 <DEPRECIATION> 140,378 <TOTAL-ASSETS> 2,365,832 <CURRENT-LIABILITIES> 513,571 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 517,454 <OTHER-SE> 1,293,874 <TOTAL-LIABILITY-AND-EQUITY> 2,365,832 <SALES> 1,536,673 <TOTAL-REVENUES> 1,536,673 <CGS> 512,000 <TOTAL-COSTS> 978,595 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 584,155 <INCOME-TAX> 219,058 <INCOME-CONTINUING> 365,097 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 365,097 <EPS-PRIMARY> .63 <EPS-DILUTED> .00 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

CTX

https://www.sec.gov/Archives/edgar/data/818764/0000950134-96-000419.txt

-----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, LVmHtRII4DJFw0B6zf3CedvY07DhBd/QHl8ddZVCpRnKCTCii1Phmo6K8UmaeYwC F8/biGvTlR9P/FZM5DEZrw== <SEC-DOCUMENT>0000950134-96-000419.txt : 19960216 <SEC-HEADER>0000950134-96-000419.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950134-96-000419 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTEX CORP CENTRAL INDEX KEY: 0000018532 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 750778259 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06776 FILM NUMBER: 96518639 BUSINESS ADDRESS: STREET 1: 3333 LEE PARKWAY SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596500 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 FORMER COMPANY: FORMER CONFORMED NAME: CENTEX CONSTRUCTION CO INC DATE OF NAME CHANGE: 19681211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3333 HOLDING CORP CENTRAL INDEX KEY: 0000818762 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 752178860 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09624 FILM NUMBER: 96518640 BUSINESS ADDRESS: STREET 1: 3333 LEE PKWY STREET 2: SUITE 500 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596700 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTEX DEVELOPMENT CO LP CENTRAL INDEX KEY: 0000818764 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 752168471 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09625 FILM NUMBER: 96518641 BUSINESS ADDRESS: STREET 1: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596700 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q PERIOD END 12/31/95 <TEXT> <PAGE> 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q JOINT QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended DECEMBER 31, 1995 Commission File No. 1-6776 [Centex Logo] CENTEX CORPORATION A Nevada Corporation IRS Employer Identification No. 75-0778259 3333 Lee Parkway, Suite 1200 Dallas, Texas 75219 (214) 559-6500 Commission File Nos. 1-9624 and 1-9625, respectively 3333 HOLDING CORPORATION A Nevada Corporation CENTEX DEVELOPMENT COMPANY, L.P. A Delaware Limited Partnership IRS Employer Identification Nos. 75-2178860 and 75-2168471, respectively 3333 Lee Parkway, Suite 500 Dallas, Texas 75219 (214) 559-6700 The registrants have 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 and have been subject to such filing requirements for the past 90 days. - -------------------------------------------------------------------------------- As of the close of business on February 9, 1996, 28,401,342 shares of Centex Corporation common stock were outstanding, 1,000 shares of common stock of 3333 Holding Corporation were outstanding, and 1,000 class A units of limited partnership interest of Centex Development Company, L.P. were outstanding. - -------------------------------------------------------------------------------- <PAGE> 2 CENTEX CORPORATION 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. FORM 10-Q TABLE OF CONTENTS DECEMBER 31, 1995 CENTEX CORPORATION <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements 1 Condensed Consolidated Statement of Earnings for the Three Months Ended December 31, 1995 2 Condensed Consolidated Statement of Earnings for the Nine Months Ended December 31, 1995 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended December 31, 1995 5 Notes to Condensed Consolidated Financial Statements 6-8 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-12 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 </TABLE> -i- <PAGE> 3 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Combining Financial Statements 15 Condensed Combining Statement of Operations for the Three Months Ended December 31, 1995 16 Condensed Combining Statement of Operations for the Nine Months Ended December 31, 1995 17 Condensed Combining Balance Sheets 18 Condensed Combining Statement of Cash Flows for the Nine Months Ended December 31, 1995 19 Notes to Condensed Combining Financial Statements 20 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 21 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23-24 </TABLE> -ii- <PAGE> 4 CENTEX CORPORATION PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ITEM 1. The condensed consolidated financial statements include the accounts of Centex Corporation and subsidiaries ("Centex" or the "Company"), and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments necessary to present fairly the information in the following condensed consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. -1- <PAGE> 5 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (dollars in thousands, except per share data) (unaudited) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED December 31, -------------------------------- 1995 1994 ----------- ----------- <S> <C> <C> REVENUES Home Building $ 499,199 $ 485,042 Financial Services 33,307 27,258 Contracting and Construction Services 257,643 280,905 ----------- ----------- 790,149 793,205 ----------- ----------- COSTS AND EXPENSES Home Building 470,612 460,691 Financial Services 28,080 23,269 Contracting and Construction Services 259,593 281,475 Other, net 29 398 Equity in Earnings of Affiliate (CXP) (7,519) (4,337) Corporate General and Administrative 3,540 3,980 Interest Expense 10,908 8,418 ----------- ----------- 765,243 773,894 ----------- ----------- EARNINGS BEFORE INCOME TAXES 24,906 19,311 Income Taxes 9,750 6,254 ----------- ----------- NET EARNINGS $ 15,156 $ 13,057 =========== =========== EARNINGS PER SHARE $ 0.52 $ 0.44 =========== =========== AVERAGE SHARES OUTSTANDING 29,229,616 29,485,220 =========== =========== CASH DIVIDENDS PER SHARE $ 0.05 $ 0.05 =========== =========== </TABLE> See notes to condensed consolidated financial statements. -2- <PAGE> 6 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (dollars in thousands, except per share data) (unaudited) <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED December 31, -------------------------------- 1995 1994 ----------- ----------- <S> <C> <C> REVENUES Home Building $ 1,410,522 $ 1,571,897 Financial Services 93,243 94,731 Contracting and Construction Services 774,180 814,803 ----------- ----------- 2,277,945 2,481,431 ----------- ----------- COSTS AND EXPENSES Home Building 1,338,903 1,487,282 Financial Services 81,044 83,744 Contracting and Construction Services 775,975 816,523 Other, net 275 1,306 Equity in Earnings of Affiliate (CXP) (21,358) (13,812) Corporate General and Administrative 10,910 11,320 Interest Expense 30,202 23,219 ----------- ----------- 2,215,951 2,409,582 ----------- ----------- EARNINGS BEFORE GAIN ON CXP INITIAL PUBLIC OFFERING AND INCOME TAXES 61,994 71,849 Gain on CXP Initial Public Offering - 59,328 ----------- ----------- EARNINGS BEFORE INCOME TAXES 61,994 131,177 Income Taxes 24,414 47,821 ----------- ----------- NET EARNINGS $ 37,580 $ 83,356 =========== =========== EARNINGS PER SHARE $ 1.29 $ 2.71 =========== =========== AVERAGE SHARES OUTSTANDING 29,050,846 30,722,621 =========== =========== CASH DIVIDENDS PER SHARE $ 0.15 $ 0.15 =========== =========== </TABLE> See notes to condensed consolidated financial statements. -3- <PAGE> 7 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> Centex Corporation and Subsidiaries Centex Corporation ------------------------------- ----------------------------- December 31, March 31, December 31, March 31, 1995* 1995** 1995* 1995** --------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> ASSETS Cash and Cash Equivalents $ 23,256 $ 23,785 $ 18,186 $ 18,534 Receivables - Residential Mortgage Loans 592,356 413,802 - - Other 247,234 235,795 234,243 226,744 Affiliates - - - - Inventories 1,257,902 1,166,471 1,257,902 1,166,471 Investments - Centex Development Company, L. P. 40,660 46,585 40,660 46,585 Centex Construction Products, Inc. 103,732 89,871 103,732 89,871 Joint Ventures and Other 5,522 5,695 5,522 5,695 Unconsolidated Subsidiaries - - 35,865 29,082 Property and Equipment, net 37,776 41,267 25,523 25,341 Other Assets and Deferred Charges 23,288 26,427 16,495 19,739 --------------- -------------- ------------- ------------- $ 2,331,726 $ 2,049,698 $ 1,738,128 $ 1,628,062 =============== ============== ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 587,336 $ 555,944 $ 537,097 $ 504,659 Short-term Debt 702,546 576,260 159,187 204,851 Long-term Debt 320,981 222,530 320,981 222,530 Deferred Income Taxes 12,921 26,737 12,921 27,795 Stockholders' Equity - Preferred Stock, Authorized 5,000,000 Shares, None Issued - - - - Common Stock $.25 Par Value: Authorized 50,000,000 Shares: Issued and Outstanding 28,398,842 and 28,070,978, respectively 7,100 7,018 7,100 7,018 Capital in Excess of Par Value 6,291 - 6,291 - Retained Earnings 694,551 661,209 694,551 661,209 --------------- -------------- ------------- ------------- Total Stockholders' Equity 707,942 668,227 707,942 668,227 --------------- -------------- ------------- ------------- $ 2,331,726 $ 2,049,698 $ 1,738,128 $ 1,628,062 =============== ============== ============= ============= <CAPTION> Financial Services ------------------------------ December 31, March 31, 1995* 1995** ------------ ------------ <S> <C> <C> ASSETS Cash and Cash Equivalents $ 5,070 $ 5,251 Receivables - Residential Mortgage Loans 592,356 413,802 Other 12,991 9,051 Affiliates 1,446 65,521 Inventories - - Investments - Centex Development Company, L. P. - - Centex Construction Products, Inc. - - Joint Ventures and Other - - Unconsolidated Subsidiaries - - Property and Equipment, net 12,253 15,926 Other Assets and Deferred Charges 6,793 6,688 ------------ ------------ $ 630,909 $ 516,239 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 50,239 $ 51,285 Short-term Debt 543,359 371,409 Long-term Debt - - Deferred Income Taxes - (1,058) Stockholders' Equity - Preferred Stock, Authorized 5,000,000 Shares, None Issued - - Common Stock $.25 Par Value: Authorized 50,000,000 Shares: Issued and Outstanding 28,398,842 and 28,070,978, respectively 2 12 Capital in Excess of Par Value 36,685 51,908 Retained Earnings 624 42,683 ------------ ------------ Total Stockholders' Equity 37,311 94,603 ------------ ------------ $ 630,909 $ 516,239 ============ ============ See notes to condensed consolidated financial statements. In the supplemental data presented above, "Centex Corporation" represents the adding together of all subsidiaries other than * Unaudited those included in Financial Services (CTX Mortgage and ** Condensed from audited financial statements. Affiliates). Transactions between Centex Corporation and Financial Services have been eliminated from the Centex Corporation and Subsidiaries balance sheets. </TABLE> -4- <PAGE> 8 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands) (unaudited) <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED December 31, ------------------------------ 1995 1994 ---------- ---------- <S> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net Earnings $ 37,580 $ 83,356 Adjustments - Depreciation and Amortization 9,396 2,938 Deferred Income Taxes (8,425) (8,543) Gain Related to CXP's IPO, net of Tax - (37,495) Equity in Earnings of CXP, CDC and Joint Ventures (14,192) (8,169) Increase in Receivables (8,934) (16,744) (Increase) Decrease in Residential Mortgage Loans (178,554) 399,146 Decrease (Increase) in Inventories 3,007 (120,023) Decrease in Government-Guaranteed S&L Assets - 43,767 Increase (Decrease) in Payables and Accruals 17,558 (43,315) Decrease (Increase) in Other Assets 2,597 (8,515) Other, net (3,518) (7,311) ---------- ---------- (143,485) 279,092 ---------- ---------- CASH FLOWS - INVESTING ACTIVITIES Decrease in Advances to CDC and Joint Ventures 6,429 9,841 Acquisition of Vista Properties (85,422) - Dividend and Other Receipts Related to CXP's IPO - 186,525 Property and Equipment Additions, net (4,923) (11,185) Decrease in Marketable Securities - 76,697 ---------- ---------- (83,916) 261,878 ---------- ---------- CASH FLOWS - FINANCING ACTIVITIES Decrease in S&L Deposits and Debt - (211,055) Increase (Decrease) in Debt 224,737 (305,961) Retirement of Common Stock - (74,040) Proceeds from Stock Option Exercises 6,373 1,170 Dividends Paid (4,238) (4,498) ---------- ---------- 226,872 (594,384) ---------- ---------- NET DECREASE IN CASH (529) (53,414) CASH AT BEGINNING OF YEAR 23,785 76,287 ---------- ---------- CASH AT END OF PERIOD $ 23,256 $ 22,873 ========== ========== </TABLE> See notes to condensed consolidated financial statements. -5- <PAGE> 9 Centex Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements December 31, 1995 (unaudited) (A) A summary of changes in stockholders' equity is presented below: <TABLE> <CAPTION> Capital in Preferred Common Excess of Retained Stock Stock Par Value Earnings Total ---------- ----------- ----------- ---------- ------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> Balance, March 31, 1995 $ - $ 7,018 $ - $ 661,209 $ 668,227 Net Earnings - - - 37,580 37,580 Exercise of Stock Options - 82 6,291 - 6,373 Cash Dividends - - - (4,238) (4,238) ---------- ---------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1995 $ - $ 7,100 $ 6,291 $ 694,551 $ 707,942 ========== ========== =========== ========== ============ </TABLE> (B) On November 30, 1987 the Company distributed to a nominee, all of the issued and outstanding shares of common stock of 3333 Holding Corporation and warrants to purchase approximately 80% of the Class B units of limited partnership interest in Centex Development Company, L. P. A wholly-owned subsidiary of 3333 Holding Corporation serves as general partner of Centex Development Company, L. P. These securities are held by the nominee on behalf of Centex stockholders, and will trade in tandem with the common stock of Centex, until such time as they are detached. Supplementary condensed combined financial statements for Centex, 3333 Holding Corporation and Subsidiary and Centex Development Company, L. P. are as follows: -6- <PAGE> 10 NOTES - continued Centex Corporation and Subsidiaries, 3333 Holding Corporation and Subsidiary and Centex Development Company, L. P. Supplementary Condensed Combined Balance Sheets (dollars in thousands) <TABLE> <CAPTION> December 31, March 31, 1995 1995 * ------------------- ------------------ <S> <C> <C> ASSETS Cash and Cash Equivalents $ 24,465 $ 25,207 Receivables 846,577 653,622 Inventories 1,297,002 1,266,509 Investments in Centex Construction Products, Inc. 103,732 89,871 Joint Ventures and Unconsolidated Subsidiaries 5,673 5,695 Property and Equipment, net 37,776 41,267 Other Assets and Deferred Charges 23,288 26,427 ------------------- ------------------ $ 2,338,513 $ 2,108,598 =================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 590,204 $ 557,640 Short-term Debt 705,522 632,745 Long-term Debt 320,981 222,530 Deferred Income Taxes 12,921 26,737 Stockholders' Equity 708,885 668,946 ------------------- ------------------ $ 2,338,513 $ 2,108,598 =================== ================== </TABLE> *Condensed from audited financial statements. Supplementary Condensed Combined Statement of Earnings (dollars in thousands) <TABLE> <CAPTION> December 31, ------------------------------------------- FOR THE NINE MONTHS ENDED 1995 1994 ------------------- ------------------ <S> <C> <C> <C> <C> Revenues $ 2,289,790 $ 2,485,202 Costs and Expenses 2,227,572 2,353,954 ------------------- ------------------ Earnings Before Income Taxes 62,218 131,248 Income Taxes 24,414 47,821 ------------------- ------------------ NET EARNINGS $ 37,804 $ 83,427 =================== ================== </TABLE> -7- <PAGE> 11 NOTES - continued (C) In order to assure the future availability of land for home building, the Company has made deposits totaling $11 million as of December 31, 1995 for options to purchase undeveloped land and developed lots having a total purchase price of approximately $308 million. These options and commitments expire at various dates to the year 2000. The Company has also committed to purchase land and developed lots totaling approximately $58 million. In addition, the Company has executed lot purchase contracts with CDC which aggregate approximately $5 million. (D) Interest expenses relating to the financial services operations are included in their respective costs and expenses. Interest related to non-financial services operations are included as interest expense as summarized below. <TABLE> <CAPTION> Nine Months Ended -------------------------------- 12/31/95 12/31/94 ------------ ------------ <S> <C> <C> Total Interest Incurred $ 51,681 $ 45,026 Less Financial Services (21,479) (21,807) ------------ ------------ INTEREST EXPENSE $ 30,202 $ 23,219 ============ ============ </TABLE> (E) During the quarter ended September 30, 1995, the Company completed the acquisition of an equity interest in Vista Properties, Inc. ("Vista") for approximately $85 million. Vista currently owns approximately 3,300 acres of land in seven states. The land is zoned, planned or developed for single- and multi-family residential, office, retail, industrial, and other commercial uses. Vista's board and management are in process of evaluating what benefits could be derived from coordinating, combining or consolidating the business activities of Vista and certain of the Company's subsidiaries. Although these evaluations are ongoing, Vista and Centex have initiated planning and development work in several key residential sites within Vista's portfolio and have identified commercial development opportunities in three of Vista's major projects. Vista has also initiated discussions with potential joint venture partners on select properties and is continuing with its marketing activities on the balance of its portfolio. In addition, Vista has substantial tax loss carryforwards and other significant tax related benefits which may become partially useable in future years. (F) Certain prior year balances have been reclassified to be consistent with the fiscal 1996 presentation. -8- <PAGE> 12 CENTEX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Centex consolidated revenues for the quarter were $790 million, about the same as revenues of $793 million for the same quarter last year. Net earnings for the quarter were $15.2 million, 16% more than $13.1 million for the same quarter a year ago. Earnings per share for this year's quarter were $.52, an 18% increase over $.44 for the same quarter in fiscal 1995. For the nine months ended December 31, 1995, corporate revenues totaled $2.3 billion, 8% less than $2.5 billion for the same period last year. Earnings before income taxes were $62.0 million for the period this year, 14% less than $71.8 million for the same period last year. Total earnings before income taxes for the period last year, including the gain on the sale of 51% of CXP, were $131.2 million. Net earnings for the current nine months were $37.6 million, 18% less than $45.9 million for the same period last year. Total net earnings for the nine months last year, including the gain on the CXP sale, were $83.4 million. Earnings per share for the current nine months were $1.29 compared to $1.49 last year. Total earnings per share for the nine months last year, including the gain from the CXP sale, were $2.71. Earnings per share for both the quarter and the nine months this year declined slightly less than net earnings for the respective periods last year due to fewer average shares outstanding in the current periods. During the fiscal year ended March 31, 1995, Centex repurchased 3.74 million shares of its common stock, or about 12% of the shares outstanding at the beginning of its 1995 fiscal year. HOME BUILDING The following summarizes Home Building results for the quarter and fiscal year-to-date ended December 31, 1995 compared to the quarter and fiscal year-to-date ended December 31, 1994 (dollars in millions, except per unit data): <TABLE> <CAPTION> Quarter Ended Quarter Ended 12/31/95 12/31/94 --------------------------- --------------------------- <S> <C> <C> <C> <C> Home Building Revenues $ 499.2 100.0% $ 485.0 100.0% Cost of Sales (410.9) (82.3%) (398.8) (82.2%) Selling, General & Administrative (59.7) (12.0%) (61.9) (12.8%) ---------- ----- ---------- ----- Operating Earnings $ 28.6 5.7% $ 24.3 5.0% ---------- ----- ---------- ----- Units Closed 2,948 2,994 Unit Sales Price $ 165,262 $ 160,331 % Change 3.1% 8.4% Operating Earnings per Unit $ 9,697 $ 8,133 % Change 19.2% 0.5% Backlog Units 4,773 3,966 % Change 20.3% (28.0%) </TABLE> -9- <PAGE> 13 <TABLE> <CAPTION> Fiscal Fiscal Year-to-Date Year-to-Date 12/31/95 12/31/94 ---------------------------- ---------------------------- <S> <C> <C> <C> <C> Home Building Revenues $ 1,410.5 100.0% $ 1,571.9 100.0% Cost of Sales (1,160.9) (82.3%) (1,302.1) (82.8%) Selling, General & Administrative (178.0) (12.6%) (185.2) (11.8%) ----------- ----- ----------- ----- Operating Earnings $ 71.6 5.1% $ 84.6 5.4% ----------- ----- ----------- ----- Units Closed 8,522 9,696 Unit Sales Price $ 162,927 $ 157,814 % Change 3.2% 8.8% Operating Earnings per Unit $ 8,404 $ 8,727 % Change (3.7%) 22.7% Backlog Units 4,773 3,966 % Change 20.3% (28.0%) </TABLE> The operating earnings for the quarter ended December 31, 1995 were higher as a percentage of revenues and on a per unit basis compared to the same period last year as a result of an increase in the per unit sales price and a reduction in selling, general and administrative costs. The operating earnings for the fiscal year-to-date ended December 31, 1995 were lower as a percentage of revenues and on a per unit basis compared to the same period last year primarily as a result of certain general and administrative costs being absorbed by 12% fewer closed units in the nine months ended December 31, 1995. FINANCIAL SERVICES The Financial Services segment consists of Mortgage Banking in 1995 and Mortgage Banking and Savings and Loan in 1994. The following summarizes Financial Services' results for the quarter and fiscal year-to-date ended December 31, 1995 compared to the quarter and fiscal year-to-date ended December 31, 1994 (dollars in millions): <TABLE> <CAPTION> Fiscal Fiscal Quarter Ended Quarter Ended Year-to-Date Year-to-Date 12/31/95 12/31/94 12/31/95 12/31/94 ------------- ------------- ------------ ------------ <S> <C> <C> <C> <C> Revenues $ 33.3 $ 27.3 $ 93.2 $ 94.7 ------- ------- ---------- ---------- Operating Earnings $ 5.2 $ 4.0 * $ 12.2 $ 11.0 * ------- ------- ---------- ---------- Origination Volume $ 1,207 $ 939 $ 3,515 $ 3,364 ------- ------- ---------- ---------- Number of Loans Originated Centex-built Homes 2,108 1,851 5,859 6,403 Non-Centex-built Homes ("spot") 8,096 6,399 24,180 23,507 ------- ------- ---------- ---------- 10,204 8,250 30,039 29,910 ======= ======= ========== ========== </TABLE> *Includes operating earnings from the savings and loan of $6.1 million and $7.9 million for the quarter and nine months ended December 31, 1994, respectively. -10- <PAGE> 14 Declining interest rates during the first nine months of the fiscal year has resulted in an increase in mortgage applications and originations over the same period last year. Applications for the current quarter totaled 9,754, 36% higher than 7,160 applications for the same quarter last year. Builder applications rose 11% while spot applications increased 45%. Applications for the nine months were 32,337, up 19% from 27,110 for the same period in the prior fiscal year. Builder applications rose 42% for the period while spot applications increased 14%. These increases occurred even though Mortgage Banking had substantially fewer offices than it had during the prior fiscal year. Savings and Loan revenues were $4.8 million for the quarter ended December 31, 1994 and $9.3 million for the nine months then ended. Centex finalized the sale of its savings and loan operations during the quarter ended December 31, 1994. CONTRACTING AND CONSTRUCTION SERVICES The following summarizes Contracting and Construction Services results for the quarter and fiscal year-to-date ended December 31, 1995 compared to the quarter and fiscal year-to-date ended December 31, 1994 (dollars in millions): <TABLE> <CAPTION> Fiscal Fiscal Quarter Ended Quarter Ended Year-to-Date Year-to-Date 12/31/95 12/31/94 12/31/95 12/31/94 ------------- ------------- ------------ ------------ <S> <C> <C> <C> <C> Revenues $ 257.6 $ 280.9 $ 774.2 $ 814.8 -------- -------- --------- --------- Operating Loss $ (2.0) $ (.5) $ (1.8) $ (1.7) -------- -------- --------- --------- New Contracts Received $ 116 $ 305 $ 682 $ 982 -------- -------- --------- --------- Backlog of Uncompleted Contracts $ 1,236 $ 1,403 $ 1,236 $ 1,403 -------- -------- --------- --------- </TABLE> The current quarter loss was due primarily to the non-recognition during the quarter of earnings related to a contract to build the Harrah's New Orleans Casino and write-downs of certain other projects. The Harrah's contract was suspended on November 22, 1995 due to a bankruptcy filing by the Harrah's Jazz Company partnership, the developer of the casino. Centex and its subcontractors have claims totalling nearly $40 million against the partnership for completed but unpaid work. Centex's liability to its subcontractors is for less than the total claim. Centex has filed a $40 million lawsuit against Harrah's Entertainment, Inc., parent company of the major partner in the partnership. Centex believes that it and its subcontractors will ultimately recover a substantial portion of the money owed to them. Centex will complete the evaluation of its recovery potential and determine what, if any, reserve provisions may be required during the quarter ending March 31, 1996. The Contracting and Construction Services operation provided a positive average net cash flow in excess of Centex's investment in the group of approximately $60 million during the current and prior year quarters. EQUITY IN EARNINGS OF AFFILIATE (CXP) Centex's 49% "Equity in Earnings of Affiliate (CXP)" was $7.5 million for the current quarter, a 73% increase over $4.3 million for the same quarter a year ago. For the current nine months, Centex's 49% equity in CXP totaled $21.4 million, 55% higher than $13.8 million for the same period in the prior fiscal year. Centex Construction Products, Inc. benefited during the quarter from continued strong product demand, improved operating efficiencies in its wallboard plants and stronger than expected product shipments due to unseasonably mild weather. -11- <PAGE> 15 FINANCIAL CONDITION AND LIQUIDITY Centex fulfills its short-term financing requirements with cash generated from its operations and funds available under its credit facilities. These credit facilities also serve as back-up lines for overnight borrowings under its uncommitted bank facilities and commercial paper program. In addition, CTX Mortgage Company has its own credit facilities which aggregate $600 million. These facilities are used by CTX to finance mortgages held during the period they are being securitized and readied for delivery against forward sale commitments. During the nine months ended December 31, 1995 debt increased by approximately $225 million. This includes a $172 million increase in CTX Mortgage Company's credit facilities which funded the majority of the $178 million increase in residential mortgage loans. Approximately $50 million of debt was used to fund the acquisition of Vista Properties. The Company believes it has adequate resources and sufficient credit facilities to satisfy its current needs and provide for future growth. OUTLOOK Recent lower level of interest rates has had a positive impact on both the Home Building and Financial Services businesses. Improving backlog in the businesses, coupled with the continuation of favorable results from CXP, should continue to generate earnings gains for the remainder of fiscal 1996 and provide the foundation for additional improvements in fiscal year 1997. -12- <PAGE> 16 CENTEX CORPORATION PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated October 12, 1995, reporting the acquisition of equity securities of Vista Properties, Inc., a Nevada Corporation. All other items required under Part II are omitted because they are not applicable. -13- <PAGE> 17 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. CENTEX CORPORATION --------------------------------------- Registrant February 9, 1996 /s/ David W. Quinn --------------------------------------- David W. Quinn Executive Vice President and Chief Financial Officer (principal financial officer) February 9, 1996 /s/ Michael S. Albright --------------------------------------- Michael S. Albright Vice President - Finance and Controller (chief accounting officer) -14- <PAGE> 18 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. PART I. FINANCIAL INFORMATION CONDENSED COMBINING FINANCIAL STATEMENTS ITEM 1. The condensed combining financial statements include the accounts of 3333 Holding Corporation and subsidiary and Centex Development Company, L.P. (collectively the "Companies"), and have been prepared by the Companies, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Companies believe that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed combining financial statements be read in conjunction with the financial statements and the notes thereto included in the Companies' latest annual report on Form 10-K. In the opinion of the Companies, all adjustments necessary to present fairly the information in the following condensed financial statements of the Companies have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. -15- <PAGE> 19 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF OPERATIONS (dollars in thousands, except per share/unit data) (unaudited) <TABLE> <CAPTION> For The Three Months Ended December 31, ---------------------------------------------------------------------------------- 1995 1994 --------------------------------------- ---------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY -------- ------------- ------------ -------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 3,508 $ 3,371 $ 465 $ 4,467 $ 4,325 $ 379 Costs and Expenses 3,315 3,187 456 4,728 4,608 357 -------- -------- ------ -------- --------- ------- Earnings (Loss) Before Income Taxes 193 184 9 (261) (283) 22 Income Taxes - - - - - - -------- -------- ------ -------- --------- ------- NET EARNINGS (LOSS) $ 193 $ 184 $ 9 $ (261) $ (283) $ 22 ======== ======== ====== ======== ========= ======= EARNINGS (LOSS) PER SHARE/UNIT (AVERAGE OUTSTANDING SHARES, 1,000; Units, 1,000) $ 184 $ 9 $ (283) $ 22 ======== ====== ========= ======= </TABLE> See notes to condensed combining financial statements. -16- <PAGE> 20 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF OPERATIONS (dollars in thousands, except per share/unit data) (unaudited) <TABLE> <CAPTION> For The Nine Months Ended December 31, ---------------------------------------------------------------------------------- 1995 1994 --------------------------------------- ---------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY -------- ------------- ------------ -------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 13,989 $ 13,610 $ 1,546 $ 8,902 $ 8,499 $ 1,091 Costs and Expenses 13,600 13,445 1,322 9,529 9,197 1,020 -------- -------- ------- ------- ------- ------- Earnings (Loss) Before Income Taxes 389 165 224 (627) (698) 71 Income Taxes - - - - - - -------- -------- ------- ------- ------- ------- NET EARNINGS (LOSS) $ 389 $ 165 $ 224 $ (627) $ (698) $ 71 ======== ======== ======= ======= ======= ======= EARNINGS (LOSS) PER SHARE/UNIT (Average Outstanding Shares, 1,000; Units, 1,000) $ 165 $ 224 $ (698) $ 71 ======== ======= ======= ======= </TABLE> See notes to condensed combining financial statements. -17- <PAGE> 21 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> December 31, 1995* March 31, 1995** -------------------------------------- ------------------------------------------ 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY -------- ------------- ------------ -------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> ASSETS Cash $ 1,209 $ 1,206 $ 3 $ 1,422 $ 1,403 $ 19 Accounts Receivable 419 590 188 187 570 187 Notes Receivable - Centex Corporation and Subsidiaries 7,700 - 7,700 7,700 - 7,700 Other 6,756 6,756 - 4,025 4,025 - Investment in Affiliate - - 767 - - 767 Investment in Real Estate Joint Venture 151 151 - - - - Projects Held for Development & Sale - Forster Ranch - - - 53,493 53,493 - Other 38,155 38,155 - 46,455 46,455 - -------- -------- ------- -------- --------- ------- $ 54,390 $ 46,858 $ 8,658 $113,282 $ 105,946 $ 8,673 ======== ======== ======= ======== ========= ======= LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Accounts Payable and Accrued Liabilities $ 3,013 $ 2,757 $ 615 $ 2,480 $ 2,196 $ 854 Notes Payable - Centex Corporation and Subsidiaries 7,600 - 7,600 7,600 - 7,600 Forster Ranch - - - 53,493 53,493 - Other 2,976 2,976 - 2,992 2,992 - Land Sale Deposits - - - 5 5 - -------- -------- ------- -------- --------- ------- Total Liabilities 13,589 5,733 8,215 66,570 58,686 8,454 Stockholders' Equity and Partners' Capital 40,801 41,125 443 46,712 47,260 219 -------- -------- ------- -------- --------- ------- $ 54,390 $ 46,858 $ 8,658 $113,282 $ 105,946 $ 8,673 ======== ======== ======= ======== ========= ======= </TABLE> * Unaudited ** Condensed from audited financial statements. See notes to condensed combining financial statements. -18- <PAGE> 22 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF CASH FLOWS (dollars in thousands) (unaudited) <TABLE> <CAPTION> For The Nine Months Ended December 31, ------------------------------------------------------------------------------------- 1995 1994 ---------------------------------------- ------------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY --------- ------------- ------------ -------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net Earnings (Loss) $ 389 $ 165 $ 224 $ (627) $ (698) $ 71 Net Change in Payables, Accruals, Deposits and Receivables 296 536 (240) 321 390 (69) Increase in Notes Receivable (2,731) (2,731) - (2,897) (2,897) - Increase in Advances to Joint Venture (151) (151) - - - - Decrease in Projects Held for Development and Sale 61,793 61,793 - 2,174 2,174 - --------- --------- ------- -------- --------- --------- 59,596 59,612 (16) (1,029) (1,031) 2 --------- --------- ------- -------- --------- --------- CASH FLOWS - FINANCING ACTIVITIES (Decrease) Increase in Notes Payable (53,509) (53,509) - 2,158 2,158 - Capital Distributions (6,300) (6,300) - - - - --------- --------- ------- -------- --------- --------- (59,809) (59,809) - 2,158 2,158 - --------- --------- ------- -------- --------- --------- NET (DECREASE) INCREASE IN CASH (213) (197) (16) 1,129 1,127 2 CASH AT BEGINNING OF YEAR 1,422 1,403 19 101 101 - --------- --------- ------- -------- --------- --------- CASH AT END OF PERIOD $ 1,209 $ 1,206 $ 3 $ 1,230 $ 1,228 $ 2 ========= ========= ======= ======== ========= ========= </TABLE> See notes to condensed combining financial statements. -19- <PAGE> 23 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. NOTES TO CONDENSED COMBINING FINANCIAL STATEMENTS DECEMBER 31, 1995 (unaudited) (A) On November 30, 1987 Centex Corporation ("Centex") distributed to a nominee all of the issued and outstanding shares of common stock of 3333 Holding Corporation ("Holding") and warrants to purchase approximately 80% of the Class B units of limited partnership interest in Centex Development Company, L.P. (the "Partnership"). 3333 Development Company ("Development"), a wholly-owned subsidiary of Holding, serves as general partner of the Partnership. These securities are held by the nominee on behalf of Centex stockholders and will trade in tandem with the common stock of Centex until such time as they are detached. (B) See Note B to the condensed consolidated financial statements of Centex Corporation and subsidiaries included elsewhere in this Form 10-Q for supplementary condensed combined financial statements for Centex Corporation and subsidiaries, Holding and subsidiary and the Partnership. (C) The Partnership sells lots to Centex Real Estate Corporation ("CREC") pursuant to certain purchase and sale agreements. Revenues from these sales totaled $4,382,000 and $4,243,000 for the nine months ended December 31, 1995 and 1994 respectively. (D) A summary of changes in stockholders' equity is presented below (dollars in thousands). <TABLE> <CAPTION> For the Nine Months Ended December 31, 1995 ----------------------------------------------------------------- 3333 Holding Corporation Centex Development Company, L.P. and Subsidiary -------------------------------- ------------------------------ CLASS B GENERAL LIMITED CAPITAL IN UNITS PARTNERS' PARTNERS' STOCK EXCESS OF RETAINED COMBINED WARRANTS CAPITAL CAPITAL WARRANTS PAR VALUE EARNINGS -------- -------- -------- -------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at March 31, 1995 $ 46,712 $ 500 $ 767 $ 45,993 $ 1 $ 800 $ (582) Capital Distribution (6,300) - - (6,300) - - - Net Earnings 389 - - 165 - - 224 ---------- -------- -------- -------- -------- --------- -------- BALANCE AT DECEMBER 31, 1995 $ 40,801 $ 500 $ 767 $ 39,858 $ 1 $ 800 $ (358) ========== ======== ======== ======== ======== ========= ======== </TABLE> During the quarter ended December 31, 1995, the Partnership made capital distributions of $2.5 million to CREC. (E) During November 1995, the Partnership tendered to its non-recourse lender a deed to the remaining property in Forster Ranch, the Partnership's pro rata portion of the 1995-1996 real property taxes, an assignment of the Development Agreement made between the Partnership and the City of San Clemente and payment of certain developer fee credits. With these deliveries, the Partnership has surrendered any and all interest it may have in the Forster Ranch property to the lender. The Forster Ranch property was carried by the Partnership at an amount equal to the non-recourse indebtedness. Accordingly, these events had no adverse effect on the financial condition or results of operations of the Partnership or any related entities. -20- <PAGE> 24 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS On a combined basis, revenues for the quarter and nine months ended December 31, 1995 of $3.5 million and $14.0 million, respectively, included results from the sale of commercial property in Texas, and residential property in Florida and New Jersey. Revenues of $4.5 million and $8.9 million for the quarter and nine months ended December 31, 1994, respectively, included the sale of commercial property in California and Texas, and residential property in Florida, New Jersey and Illinois. The quarter ended December 31, 1995 reflected combined net earnings of $193,000 compared to a net loss of $261,000 for the same quarter last year. The nine months ended December 31, 1995 reflected combined net earnings of $389,000 compared to a net loss of $627,000 for the same period last year. The improvement in earnings relates to the higher gross margin on real estate sales in the periods ended December 31, 1995 compared to the same periods last year. During November 1995, the Partnership tendered to its non-recourse lender a deed to the remaining property in Forster Ranch, the Partnership's pro rata portion of the 1995-1996 real property taxes, an assignment of the Development Agreement made between the Partnership and the City of San Clemente and payment of certain developer fee credits. With these deliveries, the Partnership has surrendered any and all interest it may have in the Forster Ranch property to the lender. The Forster Ranch property was carried by the Partnership at an amount equal to the non-recourse indebtedness. Accordingly, these events had no adverse effect on the financial condition or results of operations of the Partnership or any related entities. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended December 31, 1995, the Partnership made capital distributions of $2.5 million to CREC, and for the nine months has made total distributions of $6.3 million. Holding, Development and the Partnership believe that they will be able to provide or obtain the necessary funding for their current operations and future expansion needs. The revenues, earnings and liquidity of these companies are largely dependent on future land sales, the timing of which is uncertain. The ability to obtain external debt or equity capital is subject to the provisions of Holding's loan agreement with Centex and the Partnership Agreement governing the Partnership. -21- <PAGE> 25 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27.1 - Financial Data Schedule Exhibit 27.2 - Financial Data Schedule (b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated November 22, 1995, relating to the Forster Ranch property. All other items required under Part II are omitted because they are not applicable. -22- <PAGE> 26 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. 3333 HOLDING CORPORATION ---------------------------- Registrant February 9, 1996 /s/ J. Stephen Bilheimer ---------------------------- J. Stephen Bilheimer President February 9, 1996 /s/ Roger Sefzik ---------------------------- Roger Sefzik Vice President and Treasurer (chief accounting officer) -23- <PAGE> 27 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. CENTEX DEVELOPMENT COMPANY, L.P. ---------------------------------- Registrant By: 3333 Development Corporation, General Partner February 9, 1996 /s/ J. Stephen Bilheimer ---------------------------------- J. Stephen Bilheimer President February 9, 1996 /s/ Roger Sefzik ---------------------------------- Roger Sefzik Vice President and Treasurer (chief accounting officer) -24- <PAGE> 28 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description - ------- ----------------------- <S> <C> 27 Financial Data Schedule 27.1 Financial Data Schedule 27.2 Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE - CENTEX DEVELOPMENT CO. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX DEVELOPMENT COMPANY L.P.'S DECEMBER 31, 1995, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000818764 <NAME> CENTEX DEVELOPMENT COMPANY, L.P. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1996 <PERIOD-START> APR-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 1,206 <SECURITIES> 0 <RECEIVABLES> 7,346 <ALLOWANCES> 0 <INVENTORY> 38,155 <CURRENT-ASSETS> 0 <PP&E> 0 <DEPRECIATION> 0 <TOTAL-ASSETS> 46,858 <CURRENT-LIABILITIES> 0 <BONDS> 0 <COMMON> 500 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 40,625 <TOTAL-LIABILITY-AND-EQUITY> 46,858 <SALES> 13,610 <TOTAL-REVENUES> 13,610 <CGS> 13,445 <TOTAL-COSTS> 13,445 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 165 <INCOME-TAX> 0 <INCOME-CONTINUING> 165 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 165 <EPS-PRIMARY> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE - CENTEX CORPORATION <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX CORPORATION'S DECEMBER 31, 1995, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000018532 <NAME> CENTEX CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1996 <PERIOD-START> APR-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 23,256 <SECURITIES> 0 <RECEIVABLES> 839,590 <ALLOWANCES> 0 <INVENTORY> 1,257,902 <CURRENT-ASSETS> 0 <PP&E> 83,376 <DEPRECIATION> 45,600 <TOTAL-ASSETS> 2,331,726 <CURRENT-LIABILITIES> 0 <BONDS> 320,981 <COMMON> 7,100 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 700,842 <TOTAL-LIABILITY-AND-EQUITY> 2,331,726 <SALES> 2,277,945 <TOTAL-REVENUES> 2,299,303 <CGS> 2,196,197 <TOTAL-COSTS> 2,196,197 <OTHER-EXPENSES> 10,910 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 30,202 <INCOME-PRETAX> 61,994 <INCOME-TAX> 24,414 <INCOME-CONTINUING> 37,580 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 37,580 <EPS-PRIMARY> 1.29 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE - 3333 HOLDING CORP. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3333 HOLDING CORPORATION'S DECEMBER 31, 1995, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000818762 <NAME> 3333 HOLDING CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1996 <PERIOD-START> APR-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 3 <SECURITIES> 0 <RECEIVABLES> 7,888 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 0 <PP&E> 0 <DEPRECIATION> 0 <TOTAL-ASSETS> 8,658 <CURRENT-LIABILITIES> 0 <BONDS> 0 <COMMON> 1 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 442 <TOTAL-LIABILITY-AND-EQUITY> 8,658 <SALES> 1,546 <TOTAL-REVENUES> 1,546 <CGS> 1,322 <TOTAL-COSTS> 1,322 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 224 <INCOME-TAX> 0 <INCOME-CONTINUING> 224 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 224 <EPS-PRIMARY> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/315189/0000315189-96-000005.txt

-----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, L04YIHztDsiwDUxdy9F5urVoBVISJ3nYDnhkLxvjeJInfw+bqnijoabeTAZJATV3 HQCtQcE2UAy2ZQkdzCuShA== <SEC-DOCUMENT>0000315189-96-000005.txt : 19960311 <SEC-HEADER>0000315189-96-000005.hdr.sgml : 19960311 ACCESSION NUMBER: 0000315189-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960308 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEERE & CO CENTRAL INDEX KEY: 0000315189 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 362382580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04121 FILM NUMBER: 96532668 BUSINESS ADDRESS: STREET 1: JOHN DEERE RD CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097658000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ___________________ FORM 10-Q ___________________ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended January 31, 1996 ______________________________ Commission file no: 1-4121 ______________________________ DEERE & COMPANY Delaware 36-2382580 (State of incorporation) (IRS employer identification no.) John Deere Road Moline, Illinois 61265 (Address of principal executive offices) Telephone Number: (309) 765-8000 ______________________________ 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 At January 31, 1996, 262,587,284 shares of common stock, $1 par value, of the registrant were outstanding. _________________________________________________________________ Page 1 of 21 Pages. Index to Exhibits: Page 18. <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY CONSOLIDATED STATEMENT OF CONSOLIDATED INCOME (Deere & Company and Consolidated Subsidiaries) Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment $1,936.6 $1,730.5 Finance and interest income 180.2 153.6 Insurance and health care premiums 163.4 161.8 Investment income 16.5 25.9 Other income 20.8 15.8 Total 2,317.5 2,087.6 Costs and Expenses Cost of goods sold 1,501.2 1,349.8 Research and development expenses 80.0 67.0 Selling, administrative and general expenses 238.4 221.6 Interest expense 98.7 88.4 Insurance and health care claims and benefits 127.3 128.5 Other operating expenses 13.6 10.9 Total 2,059.2 1,866.2 Income of Consolidated Group Before Income Taxes 258.3 221.4 Provision for income taxes 93.5 83.5 Income of Consolidated Group 164.8 137.9 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit Insurance .7 Health care Other 1.4 (.2) Total 1.4 .5 Net Income $ 166.2 $ 138.4 Net income per share, primary and fully diluted $ .63 $ .53 <PAGE> See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY EQUIPMENT OPERATIONS STATEMENT OF CONSOLIDATED INCOME (Deere & Company with Financial Services on the Equity Basis) Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment $1,936.6 $1,730.5 Finance and interest income 30.5 23.8 Insurance and health care premiums Investment income Other income 5.8 6.1 Total 1,972.9 1,760.4 Costs and Expenses Cost of goods sold 1,507.7 1,353.2 Research and development expenses 80.0 67.0 Selling, administrative and general expenses 167.5 154.5 Interest expense 27.0 27.8 Insurance and health care claims and benefits Other operating expenses 6.9 5.7 Total 1,789.1 1,608.2 Income of Consolidated Group Before Income Taxes 183.8 152.2 Provision for income taxes 67.7 56.4 Income of Consolidated Group 116.1 95.8 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit 34.5 29.7 Insurance 9.6 8.2 Health care 4.6 4.9 Other 1.4 (.2) Total 50.1 42.6 Net Income $ 166.2 $ 138.4 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY FINANCIAL SERVICES STATEMENT OF CONSOLIDATED INCOME Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment Finance and interest income $151.4 $131.2 Insurance and health care premiums 173.5 171.6 Investment income 16.5 25.9 Other income 16.2 10.5 Total 357.6 339.2 Costs and Expenses Cost of goods sold Research and development expenses Selling, administrative and general expenses 75.3 70.6 Interest expense 73.4 62.0 Insurance and health care claims and benefits 127.9 132.2 Other operating expenses 6.5 5.2 Total 283.1 270.0 Income of Consolidated Group Before Income Taxes 74.5 69.2 Provision for income taxes 25.8 27.1 Income of Consolidated Group 48.7 42.1 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit Insurance .7 Health care Other Total .7 Net Income $ 48.7 $ 42.8 <PAGE> DEERE & COMPANY CONSOLIDATED CONDENSED CONSOLIDATED (Deere & Company and Consolidated Subsidiaries) Jan 31 Oct 31 Jan 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $364.2 $363.7 $518.1 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 364.2 363.7 518.1 Marketable securities 855.7 829.7 1,103.3 Receivables from unconsolidated subsidiaries and affiliates 4.6 2.3 .9 Dealer accounts and notes receivable - net 3,377.6 3,259.7 3,015.6 Credit receivables - net 5,502.3 5,345.2 4,662.2 Other receivables 488.5 492.4 420.0 Equipment on operating leases - net 271.6 258.8 215.6 Inventories 979.8 720.8 942.6 Property and equipment - net 1,294.0 1,335.6 1,282.6 Investments in unconsolidated subsidiaries and affiliates 172.8 115.2 152.0 Intangible assets - net 315.9 305.0 282.4 Deferred income taxes 625.1 639.8 684.1 Other assets and deferred charges 194.8 179.2 191.3 Total $14,446.9 $13,847.4 $13,470.7 Liabilities and Stockholders' Equity Short-term borrowings $3,774.4 $3,139.8 $3,329.4 Payables to unconsolidated subsidiaries and affiliates 24.1 27.5 35.9 Accounts payable and accrued expenses 2,234.8 2,533.0 2,123.0 Insurance and health care claims and reserves 462.0 470.3 774.2 Accrued taxes 149.1 72.8 132.0 Deferred income taxes 16.9 15.6 12.9 Long-term borrowings 2,215.4 2,175.8 2,101.9 Retirement benefit accruals and other liabilities 2,343.2 2,327.2 2,337.4 Total liabilities 11,219.9 10,762.0 10,846.7 Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 1,743.5 1,728.7 1,493.5 Retained earnings 1,804.2 1,690.3 1,444.9 Minimum pension liability adjustment (300.4) (300.4) (248.4) Cumulative translation adjustment (23.5) (11.6) (33.9) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation (11.6) (12.1) (11.1) Common stock in treasury, at cost (15.1) (13.1) (10.1) Stockholders' equity 3,227.0 3,085.4 2,624.0 Total $14,446.9 $13,847.4 $13,470.7 See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. <PAGE> DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED CONSOLIDATED (Deere & Company with Financial BALANCE SHEET Services on the Equity Basis) January 31 October 31 January 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $ 97.3 $71.0 $ 144.5 Cash deposited with unconsolidated subsidiaries 118.9 460.1 65.0 Cash and cash equivalents 216.2 531.1 209.5 Marketable securities Receivables from unconsolidated subsidiaries and affiliates 49.7 55.5 58.6 Dealer accounts and notes receivable - net 3,377.6 3,259.7 3,015.6 Credit receivables - net 105.0 118.3 109.2 Other receivables 4.3 3.2 Equipment on operating leases - net 120.3 119.3 94.9 Inventories 979.8 720.8 942.6 Property and equipment - net 1,249.0 1,295.0 1,249.1 Investments in unconsolidated subsidiaries and affiliates 1,467.4 1,378.4 1,286.4 Intangible assets - net 306.6 295.4 266.4 Deferred income taxes 576.8 578.9 619.7 Other assets and deferred charges 122.9 108.5 101.5 Total $8,575.6 $8,464.1 $7,953.5 Liabilities and Stockholders' Equity Short-term borrowings $ 615.2 $ 395.7 $403.5 Payables to unconsolidated subsidiaries and affiliates 24.1 27.5 35.9 Accounts payable and accrued expenses 1,531.6 1,859.9 1,414.1 Insurance and health care claims and reserves Accrued taxes 149.2 72.4 130.7 Deferred income taxes 15.7 15.6 12.9 Long-term borrowings 692.4 702.9 1,018.2 Retirement benefit accruals and other liabilities 2,320.4 2,304.7 2,314.2 Total liabilities 5,348.6 5,378.7 5,329.5 <PAGE> Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 1,743.5 1,728.7 1,493.5 Retained earnings 1,804.2 1,690.3 1,444.9 Minimum pension liability adjustment (300.4) (300.4) (248.4) Cumulative translation adjustment (23.5) (11.6) (33.9) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation (11.6) (12.1) (11.1) Common stock in treasury, at cost (15.1) (13.1) (10.1) Stockholders' equity 3,227.0 3,085.4 2,624.0 Total $8,575.6 $8,464.1 $7,953.5 <PAGE> DEERE & COMPANY FINANCIAL SERVICES CONDENSED CONSOLIDATED BALANCE SHEET Jan Oct Jan 31 31 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $267.0 $292.7 $373.6 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 267.0 292.7 373.6 Marketable securities 855.7 829.7 1,103.3 Receivables from unconsolidated subsidiaries and affiliates Dealer accounts and notes receivable - net Credit receivables - net 5,397.3 5,226.9 4,553.1 Other receivables 485.2 490.2 420.9 Equipment on operating leases - net 151.3 139.5 120.6 Inventories Property and equipment - net 45.1 40.6 33.5 Investments in unconsolidated subsidiaries and affiliates 53.2 Intangible assets - net 9.3 9.6 16.0 Deferred income taxes 48.3 61.0 64.4 Other assets and deferred charges 71.8 70.6 89.8 Total $7,331.0 $7,160.8 $6,828.4 Liabilities and Stockholders' Equity Short-term borrowings $3,159.3 $2,744.1 $2,925.8 Payables to unconsolidated subsidiaries and affiliates 164.0 513.3 122.6 Accounts payable and accrued expenses 704.2 674.1 709.8 Insurance and health care claims and reserves 462.0 470.3 774.2 Accrued taxes .3 1.4 Deferred income taxes 1.2 .1 Long-term borrowings 1,523.0 1,472.9 1,083.6 Retirement benefit accruals and other liabilities 22.7 22.6 23.2 Total liabilities 6,036.4 5,897.6 5,640.7 <PAGE> Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 209.4 209.4 209.4 Retained earnings 1,060.2 1,054.3 995.8 Minimum pension liability adjustment Cumulative translation adjustment (4.9) (4.1) (6.6) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation Common stock in treasury, at cost Stockholders' equity 1,294.6 1,263.2 1,187.7 Total $7,331.0 $7,160.8 $6,828.4 <PAGE> DEERE & COMPANY CONSOLIDATED CONDENSED STATEMENT OF (Deere & Company and CONSOLIDATED CASH FLOWS Consolidated Subsidiaries) Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $166.2 $138.4 Adjustments to reconcile net income to net cash provided by (used for) operating activities (551.3) (383.7) Net cash provided by (used for) operating activities (385.1) (245.3) Cash Flows from Investing Activities Collections and sales of credit receivables 1,154.1 884.3 Proceeds from maturities and sales of marketable securities 26.1 35.4 Cost of credit receivables acquired (1,318.9) (1,072.1) Purchases of marketable securities (12.2) (26.0) Purchases of property and equipment (39.4) (34.7) Cost of operating leases acquired (48.5) (23.7) Acquisitions of businesses (32.4) Other 19.0 45.2 Net cash used for investing activities (252.2) (191.6) Cash Flows from Financing Activities Increase in short-term borrowings 681.1 889.0 Change in intercompany receivables/payables Proceeds from long-term borrowings 50.0 90.0 Principal payments on long-term borrowings (49.3) (219.2) Proceeds from issuance of common stock 11.9 .9 Dividends paid (52.4) (47.5) Other (2.1) (1.1) Net cash provided by financing activities 639.2 712.1 Effect of Exchange Rate Changes on Cash (1.4) (2.5) Net Increase (Decrease) in Cash and Cash Equivalents .5 272.7 Cash and Cash Equivalents at Beginning of Period 363.7 245.4 Cash and Cash Equivalents at End of Period $364.2 $518.1 <PAGE> See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. <PAGE> DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED STATEMENT OF (Deere & Company CONSOLIDATED CASH FLOWS with Financial Services on the Equity Basis) Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $ 166.2 $ 138.4 Adjustments to reconcile net income to net cash provided by (used for) operating activities (560.6) (434.4) Net cash provided by (used for) operating activities (394.4) (296.0) Cash Flows from Investing Activities Collections and sales of credit receivables 18.8 16.3 Proceeds from maturities and sales of marketable securities Cost of credit receivables acquired (4.5) (8.2) Purchases of marketable securities Purchases of property and equipment (33.2) (31.9) Cost of operating leases acquired (16.0) (17.9) Acquisitions of businesses (32.4) Other (29.8) 12.1 Net cash used for investing activities (97.1) (29.6) Cash Flows from Financing Activities Increase in short-term borrowings 213.8 353.3 Change in intercompany receivables/payables 8.1 130.2 Proceeds from long-term borrowings Principal payments on long-term borrowings (1.3) (2.2) Proceeds from issuance of common stock 11.9 .9 Dividends paid (52.4) (47.5) Other (2.1) (1.1) Net cash provided by financing activities 178.0 433.6 Effect of Exchange Rate Changes on Cash (1.4) (2.5) Net Increase (Decrease) in Cash and Cash Equivalents (314.9) 105.5 Cash and Cash Equivalents at Beginning of Period 531.1 104.0 Cash and Cash Equivalents at End of Period $ 216.2 $ 209.5 <PAGE> DEERE & COMPANY FINANCIAL SERVICES CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $48.7 $42.8 Adjustments to reconcile net income to net cash provided by (used for) operating activities 3.4 35.3 Net cash provided by (used for) operating activities 52.1 78.1 Cash Flows from Investing Activities Collections and sales of credit receivables 1,135.4 868.0 Proceeds from maturities and sales of marketable securities 26.1 35.4 Cost of credit receivables acquired (1,314.4) 1,064.0) Purchases of marketable securities (12.2) (26.0) Purchases of property and equipment (6.1) (2.8) Cost of operating leases acquired (32.5) (5.8) Acquisitions of businesses Other 48.7 33.2 Net cash used for investing activities (155.0) (162.0) Cash Flows from Financing Activities Increase in short-term borrowings 467.3 535.7 Change in intercompany receivables/payables (349.3) (65.3) Proceeds from long-term borrowings 50.0 90.0 Principal payments on long-term borrowings (48.0) (217.0) Proceeds from issuance of common stock Dividends paid (42.8) (27.3) Other Net cash provided by financing activities 77.2 316.1 Effect of Exchange Rate Changes on Cash Net Increase (Decrease) in Cash and Cash Equivalents (25.7) 232.2 Cash and Cash Equivalents at Beginning of Period 292.7 141.4 Cash and Cash Equivalents at End of Period $ 267.0 $373.6 <PAGE> Notes to Interim Financial Statements (1) The consolidated financial statements of Deere & Company and consolidated subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year. (2) The Company's consolidated financial statements and some information in the notes and related commentary are presented in a format which includes data grouped as follows: Equipment Operations - These data include the Company's agricultural equipment, industrial equipment and lawn and grounds care equipment operations with Financial Services reflected on the equity basis. Data relating to the above equipment operations, including the consolidated group data in the income statement, are also referred to as "Equipment Operations" in this report. Financial Services - These data include the Company's credit, insurance and health care operations. Consolidated - These data represent the consolidation of the Equipment Operations and Financial Services in conformity with Financial Accounting Standards Board (FASB) Statement No. 94. References to "Deere & Company" or "the Company" refer to the entire enterprise. (3) An analysis of the Company's retained earnings follows in millions of dollars: Three Months Ended January 31 1996 1995 Balance, beginning of period......... $1,690.3 $1,353.9 Net income........................... 166.2 138.4 Dividends declared................... (52.3) (47.4) Balance, end of period............... $1,804.2 $1,444.9 <PAGE> (4) An analysis of the cumulative translation adjustment follows in millions of dollars: Three Months Ended January 31 1996 1995 Balance, beginning of period......... $11.6 $17.9 Translation adjustment............... 11.4 16.0 Income taxes applicable to translation adjustments .5 Balance, end of period............... $23.5 $33.9 (5) Substantially all inventories owned by Deere & Company and its United States equipment subsidiaries are valued at cost on the last-in, first-out (LIFO) method. If all of the Company's inventories had been valued on an approximate first-in, first-out (FIFO) value, estimated inventories by major classification in millions of dollars would have been as follows: January 31 October 31 January 31 1996 1995 1995 Raw materials and supplies.............. $ 234 $ 223 $ 224 Work-in-process......... 412 343 432 Finished machines and parts................. 1,342 1,100 1,247 Total FIFO value........ 1,988 1,666 1,903 Adjustment to LIFO basis................. 1,008 945 960 Inventories............. $ 980 $ 721 $ 943 (6) At January 31, 1996, the net unpaid balance of all retail notes previously sold by the Financial Services subsidiaries and the Equipment Operations was $1,051 million. At January 31, 1996, the Company's maximum exposure under all credit receivable recourse provisions was $186 million for all retail notes sold. Certain foreign subsidiaries have pledged assets with a balance sheet value of $37 million as collateral for bank advances of $1 million as of January 31, 1996. At January 31, 1996, the Company had commitments of approximately $64 million for construction and acquisition of property and equipment. (7) Dividends declared and paid on a per share basis were as follows: <PAGE> Three Months Ended January 31 1996 1995 Dividends declared................... $.20 $.18-1/3 Dividends paid....................... $.20 $.18-1/3 <PAGE> (8) Worldwide net sales and revenues and operating profit in millions of dollars follow: Three Months Ended January 31 % 1996 1995 Change Net sales: Agricultural equipment $1,186 $1,022 +16 Industrial equipment 443 408 + 9 Lawn and grounds care equipment 308 301 + 2 Total net sales 1,937 1,731 +12 Financial Services revenues 347 329 + 5 Other revenues 34 28 +21 Total net sales and revenues $2,318 $2,088 +11 United States and Canada: Equipment net sales $1,397 $1,326 + 5 Financial Services revenues 347 329 + 5 Total 1,744 1,655 + 5 Overseas net sales 540 405 +33 Other revenues 34 28 +21 Total net sales and revenues $2,318 $2,088 +11 Operating profit: Agricultural equipment $ 148 $ 115 Industrial equipment 52 45 Lawn and grounds care equipment 21 28 Financial Services* 75 70 Total operating profit 296 258 Interest and corporate expenses-net (37) (36) Income taxes (93) (84) Net income $ 166 $ 138 * Operating profit of Financial Services includes the effect of interest expense. (9) The calculation of primary net income per share is based on the average number of shares outstanding during the three months ended January 31, 1996 and 1995 of 262,229,000 and 259,457,000, respectively, on a post-split basis. On November 15, 1995, the Company declared a three-for-one stock split in the form of a 200 percent stock dividend effective November 17, 1995. The calculation of fully diluted net income per share recognizes the dilutive effect of the assumed exercise of stock options, stock appreciation rights and conversion of convertible debentures. The effect of the fully diluted calculation was immaterial. <PAGE> (10) In December 1995, the Company granted options to employees for the purchase of 1,676,953 shares of common stock at an exercise price of $34.13 per share. At January 31, 1996, options for 7,723,823 shares were outstanding at option prices in a range of $7.77 to $34.13 per share and a total of 5,717,270 shares remained available for the granting of future options. (11) On February 28, 1996, the stockholders approved an amendment to the 1991 John Deere Stock Option Plan which extends the period for grants to eligible employees under the stock option plan to December 31, 2000 and increased by 10,500,000 on a post-split basis the number of shares for which stock options and stock appreciation rights may be granted under this plan. The stockholders also approved an amendment to the 1989 John Deere Restricted Stock Plan, which extends the period for grants under this restricted stock plan for up to an additional 10 years by extending the allowable ending date for restriction periods to October 31, 2009. (12) The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability and retail credit matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operations. (13) During the second quarter of 1993, the Company initiated plans to downsize and rationalize its European operations. This resulted in a restructuring charge of $80 million after income taxes or $.34 per share ($107 million before income taxes). The charge mainly represents the cost of employment reductions to be implemented during 1993 and the next few years. As of January 31, 1996, the expected employment reductions and the disbursement of the $107 million accrual were both approximately 85 percent complete. (14) During November 1995, in concurrence with the adoption of "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities - Questions and Answers," the Company transferred all its held-to-maturity debt securities to the available-for-sale category. Held-to- maturity debt securities are carried at amortized cost. Available-for-sale securities are carried at fair value with unrealized gains and losses after income taxes shown as a separate component of stockholders' equity. The amortized cost of these debt securities at the time of transfer was $484 million and the unrealized gain was $29 million ($19 million after income taxes). Although the Company's intention to hold a majority of its debt securities to maturity has not changed, the transfer was made to increase flexibility in responding to future changes. <PAGE> (15) In the first quarter of 1996, Deere & Company purchased 40 percent of Sunstate Equipment Company, which is a regional rental equipment company based in Phoenix, Arizona. Deere & Company also made an additional investment in its unconsolidated affiliate in Brazil. (16) On February 28, 1996, the Company announced its intention to repurchase up to $500 million of Deere & Company common stock. At the Company's discretion, repurchases of common stock will be made from time to time in the open market and through privately negotiated transactions. The purpose of the stock repurchase program is to enhance shareholder value. (17) On February 29, 1996, the Company announced that it will build a new facility for the production of off-highway diesel engines in Torreon, State of Coahuila, Mexico. The factory is being built to expand production capacity for the Company's 300-series diesel engines to meet future growth opportunities. The size of the new facility is estimated to be approximately 400,000 to 500,000 square feet and construction will begin in April 1996, with initial engine production scheduled for late 1997. <PAGE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Deere & Company achieved record first quarter net income of $166.2 million or $.63 per share, an increase of 20 percent compared with 1995 first quarter net income of $138.4 million or $.53 per share. Results of both the Equipment and Financial Services Operations improved compared with a year ago, reflecting the continued strong retail demand in most of the Company's major markets. Worldwide net sales and revenues increased 11 percent to $2,318 million in the first quarter of 1996 compared with $2,088 million last year. Net sales to dealers of agricultural, industrial and lawn and grounds care equipment totaled $1,937 million in the first quarter of 1996, an increase of 12 percent from sales of $1,731 million last year. All of the equipment businesses reported higher net sales during the quarter compared with last year. Export sales from the United States continued to strengthen and totaled $308 million, a gain of 19 percent over last year's export sales of $259 million. Additionally, overseas net sales and physical volume of sales were 33 percent and 24 percent higher, respectively, in the first quarter of 1996 compared with the same period a year ago. Overall, the Company's worldwide physical volume of net sales to dealers increased eight percent in the first quarter compared with last year, an increase which was slightly lower than anticipated due to shipping delays related to the extreme winter weather conditions in North America. The Company's worldwide Equipment Operations, which exclude the Financial Services subsidiaries and unconsolidated affiliates, had income of $116.1 million in the first quarter of 1996 compared with $95.8 million last year. Worldwide agricultural and industrial equipment operating profits for the quarter were higher compared with last year, primarily due to increased production and sales volumes. Overseas results continued to improve significantly, reflecting higher sales and production volumes as well as continued cost improvements. Operating profits for the lawn and grounds care equipment operations declined compared with last year, reflecting higher selling and promotional expenses associated with new products, coupled with increased returns and allowances for hand- held products. The ratio of cost of goods sold to net sales of the Equipment Operations decreased from 78.2 percent in the first quarter of 1995 to 77.8 percent in the same period this year. Operating profit is defined as income before interest expense, foreign exchange gains and losses, income taxes and certain corporate expenses, except for the operating profit of the credit segment, which includes the effect of interest expense. Additional information on business segments is presented in Note 8 to the interim financial statements. Net income of the Company's credit operations was $34.5 million for the first quarter of 1996 compared to $29.7 million last year. The increase in income resulted primarily from a larger average receivable and lease portfolio financed, slightly offset by lower financing spreads. Total revenues of the credit operations increased 17 percent from $142 million in the first quarter of 1995 to $166 million in the first quarter of 1996. The average balance of receivables and leases financed was 19 percent higher than in the first three months of last year. Interest expense increased 19 percent compared with the first quarter of 1995 primarily as a result of an increase in average borrowings. The credit subsidiaries' consolidated ratio of earnings to fixed charges was 1.73 to 1 during the first three months this year compared with 1.75 to 1 in the comparable period of 1995. Net income from insurance operations was $9.6 million in the first quarter of 1996 compared with $8.2 million last year, reflecting improved underwriting results and a lower effective tax rate, partially offset by lower investment income. For the three-month period, insurance premiums increased five percent in 1996 compared with the same period last year, while total claims, benefits, and selling, administrative and general expenses increased one percent this year. Net income from health care operations was $4.6 million in the first quarter of 1996 compared with $4.9 million last year. Although managed care membership grew by 15 percent from a year ago, health care premiums and administrative services revenues decreased four percent in the first three months of 1996 compared with the same period last year due to a shift from insured to self-insured accounts. Total claims, benefits, and selling, administrative and general expenses decreased four percent this year also due to the shift from insured to self-insured business. The high level of worldwide retail sales of John Deere agricultural equipment in the first quarter provides a solid base for operations during the remainder of the year. The continued strong worldwide demand for agricultural commodities, coupled with lower than anticipated harvest yields, have resulted in substantial increases in commodity prices. Additionally, world grain stocks, relative to use, are currently at the lowest levels in more than 35 years. The Company believes these positive conditions are maintaining farmers' confidence at very high levels, which should result in continued strong demand for new and used agricultural equipment. North American demand for John Deere industrial and lawn and grounds care equipment and Financial Services products also remained strong during the first quarter of 1996. The markets for these products are benefiting from the positive effects of lower interest rates and the solid economic fundamentals of most of the markets in which the Company competes. In response to these positive market conditions and based on current 1996 production schedules, the Company's worldwide physical volume of sales to dealers for 1996 is expected to increase by approximately five percent compared with 1995. During the second quarter, the worldwide physical volume of sales is expected to increase approximately 11 percent compared with last year. <PAGE> CAPITAL RESOURCES AND LIQUIDITY The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company's Equipment Operations, Financial Services operations and the consolidated totals. Equipment Operations The Company's equipment businesses are capital intensive and are subject to large seasonal variations in financing requirements for receivables from dealers and inventories. Accordingly, to the extent necessary, funds provided from operations are supplemented from external borrowing sources. Negative cash flows from operating activities of $394 million in the first quarter of 1996 resulted from the normal seasonal increases in Company-owned inventories and dealer receivables, and annual volume discount program payments made to dealers. Partially offsetting these operating cash outflows were positive cash flows from net income and dividends received from the Financial Services operations. The resulting net cash requirement for operating activities, along with payment of dividends, purchases of property and equipment, and acquisitions of businesses were provided primarily from an increase in borrowings and a decrease in cash and cash equivalents. In the first quarter of 1995, the negative cash flows from operating activities of $296 million resulted from the normal seasonal increases in Company-owned inventories and dealer receivables, and annual volume discount program payments made to dealers. Partially offsetting these operating cash outflows were positive cash flows from net income and dividends received from the Financial Services operations. The resulting net cash requirements for operating activities, along with cash required for increases in cash and cash equivalents, payment of dividends and purchases of property and equipment were provided primarily from an increase in borrowings and a decrease in receivables from the Financial Services operations. Net dealer accounts and notes receivable, which largely represent dealers' inventories financed by the Company, increased $118 million during the first quarter reflecting the normal seasonal increase. Dealer receivables were $362 million higher than one year ago primarily due to a higher level of retail demand and higher dealer inventories of used equipment. The ratios of worldwide net dealer accounts and notes receivable to the last 12 months' net sales were 37 percent at January 31, 1996, 37 percent at October 31, 1995 and 38 percent at January 31, 1995. North American agricultural equipment and lawn and grounds care equipment dealer receivables increased approximately $210 million and $65 million, respectively, compared with the levels 12 months earlier, while industrial equipment dealer receivables were approximately equal to one year ago. Total overseas dealer receivables were approximately $85 million higher than a year ago. The percentage of total worldwide dealer receivables outstanding for periods exceeding 12 months was nine percent at January 31, 1996, eight percent at October 31, 1995 and seven percent at January 31, 1995. Company-owned inventories at January 31, 1996 have increased by $259 million compared with the end of the previous fiscal year and $37 million compared to January 31, 1995, reflecting a normal seasonal increase in the first quarter and increased sales and production volumes from a year ago. Total interest-bearing debt of the Equipment Operations was $1,308 million at January 31, 1996 compared with $1,099 million at the end of fiscal year 1995 and $1,422 million at January 31, 1995. The ratio of total debt to total capital (total interest-bearing debt and stockholders' equity) was 29 percent, 26 percent and 35 percent at January 31, 1996, October 31, 1995 and January 31, 1995, respectively. Financial Services The Financial Services' credit subsidiaries rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the credit subsidiaries periodically sell substantial amounts of retail notes in the public market. The insurance and health care operations generate their funds through internal operations and have no external borrowings. During the first quarter of 1996, the aggregate cash provided from operating and financing activities was used primarily to increase credit receivables. Cash provided from Financial Services operating activities was $52 million in the current quarter. Cash provided by financing activities totaled $77 million in 1996, resulting from a $120 million increase in total borrowings, which was partially offset by payment of a $43 million dividend to the Equipment Operations. Cash used for investing activities totaled $155 million in the current quarter, primarily due to the cost of credit receivables acquired exceeding collections. Cash and cash equivalents decreased $26 million during the first quarter. In the first quarter of last year, the aggregate cash provided from operating and financing activities was used primarily to increase credit receivables and cash and cash equivalents. Cash provided from Financial Services operating activities was $78 million in the first quarter of 1995. Cash provided by financing activities totaled $316 million in 1995, resulting from a $343 million increase in total borrowings, which was partially offset by a $27 million dividend to the Equipment Operations. Cash used for investing activities totaled $162 million in 1995, primarily due to the cost of credit receivables acquired exceeding collections. Cash and cash equivalents increased $232 million during the first quarter of last year. Marketable securities consist primarily of debt securities held by the insurance and health care operations in support of their obligations to policyholders. During the first quarter of 1996, marketable securities increased $26 million due to the transfer of debt securities from the held-to-maturity category to the available- for-sale category in November 1995 (see note 14) and an increase in the unrealized gain associated with all marketable securities. During the past 12 months, marketable securities have decreased $248 million primarily from the sale of the John Deere Life Insurance Company in 1995. Credit receivables increased by $170 million in the first quarter of 1996 and $844 million during the past 12 months. These receivables consist of retail notes originating in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere-related customers, revolving charge accounts, financing leases and wholesale notes receivable. The credit subsidiaries' receivables increased during the last 12 months due to the cost of credit receivables acquired exceeding collections, which was partially offset by the sale of retail notes during the same period. Total acquisitions of credit receivables were 24 percent higher in the first quarter of 1996 compared with the same period last year. This significant increase resulted from increased acquisitions of retail notes, revolving charge accounts, leases and wholesale receivables. At January 31, 1996, the levels of retail notes, revolving charge accounts, leases and wholesale receivables were all higher than one year ago. Credit receivables administered by the credit subsidiaries, which include receivables previously sold, amounted to $6,466 million at January 31, 1996 compared with $6,526 million at October 31, 1995 and $5,540 million at January 31, 1995. At January 31, 1996, the unpaid balance of all retail notes previously sold was $1,051 million compared with $1,278 million at October 31, 1995 and $952 million at January 31, 1995. Additional sales of retail notes are expected to be made in the future. Total outside interest-bearing debt of the credit subsidiaries was $4,682 million at January 31, 1996 compared with $4,217 million at the end of fiscal year 1995 and $4,009 million at January 31, 1995. Total outside borrowings increased during the first quarter of 1996 and the past 12 months, generally corresponding with the level of the credit receivable and lease portfolio financed, the level of cash and cash equivalents and the change in payables owed to the Equipment Operations. The credit subsidiaries' ratio of total interest-bearing debt to stockholder's equity was 6.2 to 1 at January 31, 1996 compared with 6.1 to 1 at October 31, 1995 and 5.7 to 1 at January 31, 1995. The Capital Corporation issued $50 million and retired $48 million of medium-term notes during the current quarter. Consolidated The Company maintains unsecured lines of credit with various banks in North America and overseas. Some of the lines are available to both the Equipment Operations and certain credit subsidiaries. Worldwide lines of credit totaled $4,138 million at January 31, 1996, $988 million of which were unused. For the purpose of computing unused credit lines, total short-term borrowings, excluding the current portion of long-term borrowings, were considered to constitute utilization. Included in the total credit lines is a long-term credit agreement commitment totaling $3,500 million. Stockholders' equity was $3,227 million at January 31, 1996 compared with $3,085 million at October 31, 1995 and $2,624 million at January 31, 1995. The increase of $142 million in the first three months of 1996 resulted primarily from net income of $166 million and an increase in the unrealized gain on marketable securities of $26 million (see note 14), partially offset by dividends declared of $52 million. In February 1996, the Company announced its intention to repurchase $500 million of Deere & Company common stock (see note 16). The Company also announced that it will build a new 400,000 to 500,000 square foot engine production facility in Mexico (see note 17). The Board of Directors at its meeting on February 28, 1996 declared a quarterly dividend of 20 cents per share payable May 1, 1996 to stockholders of record on March 31, 1996. <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note (12) to the Interim Financial Statements. Item 2. Changes in Securities On November 15, 1995, the Company declared a three-for- one stock split in the form of a 200 percent stock dividend to stockholders of record on November 17, 1995. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders A special meeting of stockholders was held on November 15, 1995. The purpose of the meeting was to approve an amendment to Article Four of the Company's restated Certificate of Incorporation increasing the number of shares of stock the Company is authorized to issue from 203 million (200 million in common stock and 3 million in preferred stock) to 609 million (600 million in common stock and 9 million in preferred stock). The increase in authorized shares was necessary to provide the Company with authority to issue a sufficient number of shares to effect a three-for-one stock split. There were 71,753,934 votes cast for the proposal, 1,544,947 votes against the proposal and 82,905 abstentions. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See the index to exhibits immediately preceding the exhibits filed with this report. Certain instruments relating to long-term debt constituting less than 10% of the registrant's total assets are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A)of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. (b) Reports on Form 8-K Current Report on Form 8-K dated November 15, 1995 (Item 5). Current Report on Form 8-K dated November 30, 1995 (Item 7).<PAGE> 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. DEERE & COMPANY Date: March 6, 1996 By /s//Robert W. Lane Robert W. Lane Senior Vice President, Principal Financial Officer and Principal Accounting Officer <PAGE> INDEX TO EXHIBITS Number Page 2 Not applicable - 3 Not applicable - 4 Not applicable - 10 Not applicable - 11 Computation of net income per share 19 12 Computation of ratio of earnings to fixed charges 20 15 Not applicable - 18 Not applicable - 19 Not applicable - 22 Not applicable - 23 Not applicable - 24 Not applicable - 27 Financial data schedule 21 99 Not applicable - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> Exhibit 11 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE (Shares and dollars in thousands except per share amounts) For the Three Months Ended January 31 1996 1995 1. Net income ............................. $166,244 $138,416 2. Adjustment - Interest expense, after tax benefit, applicable to convertible debentures outstanding.................. 5 6 3. Net income applicable to common stock - before interest applicable to convertible debentures.................. $166,249 $138,422 PRIMARY NET INCOME PER COMMON SHARE: Shares: 4. Weighted average number of common shares outstanding.................... 262,229 259,457 5. Incremental shares: Dilutive common stock options......... 2,184 1,227 Dilutive stock appreciation rights.... 57 53 Total incremental shares............ 2,241 1,280 6. Primary net income per common share (1 divided by 4)........................ $ .63* $ .53* FULLY DILUTED NET INCOME PER COMMON SHARE: Shares: 7. Weighted average number of common shares outstanding.................... 262,229 259,457 8. Incremental shares: Dilutive common stock options......... 2,485 1,409 Dilutive stock appreciation rights.... 61 53 9. Common equivalent shares from assumed conversion of convertible debentures: 5-1/2% debentures due 2001.......... 52 58 10. Total............................... 264,827 260,977 11. Fully diluted net income per common share (3 divided by 10).............. $ .63* $ .53* ____________ * Net income per common share outstanding was used in the designated calculations since the dilutive effects of common stock options, stock appreciation rights and assumed conversion of convertible debentures were immaterial. All share and per share amounts have been adjusted retroactively for a three-for-one stock split effective November 17, 1995. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Three Months Ended January 31 1996 1995 (In thousands of dollars) Earnings: Income (loss) of consolidated group before income taxes and changes in accounting $258,288 $221,427 Dividends received from less-than-fifty-percent owned affiliates 5,454 373 Fixed charges net of capitalized interest 100,403 90,120 Total earnings $364,145 $311,920 Fixed charges: Interest expense of con- solidated group (includes capitalized interest) $ 98,738 $ 88,432 Portion of rental charges deemed to be interest 1,665 1,752 Total fixed charges $100,403 $ 90,184 Ratio of earnings to fixed charges ** 3.63 3.46 <PAGE> EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended October 31 1995 1994 (In thousands of dollars) Earnings: Income (loss) of consolidated group before income taxes and changes in accounting $1,092,751 $ 920,920 Dividends received from less-than-fifty-percent owned affiliates 2,023 2,329 Fixed charges net of capitalized interest 399,056 310,047 Total earnings $ $1,493,830 $1,233,296 Fixed charges: Interest expense of con- solidated group (includes capitalized interest) $ 392,408 $ 303,080 Portion of rental charges deemed to be interest 6,661 7,008 Total fixed charges $ 399,069 $ 310,088 Ratio of earnings to fixed charges ** 3.74 3.98 <PAGE> EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended October 31 1993 1992 1991 (In thousands of dollars) Earnings: Income (loss) of consolidated group before income taxes and changes in accounting $272,345 $ 43,488 $(26,176) Dividends received from less-than-fifty-percent owned affiliates 1,706 2,325 6,229 Fixed charges net of capitalized interest 375,238 420,133 454,092 Total earnings $649,289 $465,946 $434,145 Fixed charges: Interest expense of con- solidated group (includes capitalized interest) $369,325 $415,205 $451,936 Portion of rental charges deemed to be interest 6,127 6,720 4,088 Total fixed charges $375,452 $421,925 $456,024 Ratio of earnings to fixed charges ** 1.73 1.10 * <PAGE> The computation of the ratio of earnings to fixed charges is based on applicable amounts of the Company and its consolidated subsidiaries plus dividends received from less-than-fifty- percent owned affiliates. "Earnings" consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges excluding capitalized interest. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense which is deemed to be representative of the interest factor, and capitalized interest. * For the year ended October 31, 1991, earnings available for fixed charges coverage were $22 million less than the amount required for a ratio of earnings to fixed charges of 1.0. ** The Company has not issued preferred stock. Therefore, the ratios of earnings to combined fixed charges and preferred stock dividends are the same as the ratios presented above. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <FLAWED> <TEXT> WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. <TABLE> <S> <C> EXHIBIT 27 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES FINANCIAL DATA SCHEDULE (In millions of dollars except per share amounts) <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <RESTATED> <CIK> 0000315189 <NAME> DEERE&COMPANY <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS. <FISCAL-YEAR-END> OCT-31-1996 <PERIOD-START> NOV- 1-1995 <PERIOD-END> JAN-31-1996 <EXCHANGE-RATE> 1 <CASH> 364 <SECURITIES> 856 <RECEIVABLES> 9,486 <ALLOWANCES> 113 <INVENTORY> 980 <CURRENT-ASSETS> 0 <PP&E> 4,178 <DEPRECIATION> 2,884 <TOTAL-ASSETS> 14,447 <CURRENT-LIABILITIES> 0 <BONDS> 2,215 <COMMON> 1,743 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,484 <TOTAL-LIABILITY-AND-EQUITY> 14,447 <SALES> 1,937 <TOTAL-REVENUES> 2,318 <CGS> 1,501 <TOTAL-COSTS> 1,722 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 7 <INTEREST-EXPENSE> 99 <INCOME-PRETAX> 258 <INCOME-TAX> 93 <INCOME-CONTINUING> 166 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 166 <EPS-PRIMARY> .63 <EPS-DILUTED> .63 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

EMR

https://www.sec.gov/Archives/edgar/data/32604/0000032604-96-000003.txt

-----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, MOovbD3R4CPOIx95MWqhgA4R+stexLWhnGXFMTx+gs+YwImgVlWQDc38UGmlqW/H lfMc9QYT3/OgcI0KB/CA2Q== <SEC-DOCUMENT>0000032604-96-000003.txt : 19960216 <SEC-HEADER>0000032604-96-000003.hdr.sgml : 19960216 ACCESSION NUMBER: 0000032604-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERSON ELECTRIC CO CENTRAL INDEX KEY: 0000032604 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 430259330 STATE OF INCORPORATION: MO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00278 FILM NUMBER: 96518196 BUSINESS ADDRESS: STREET 1: 8000 W FLORISSANT AVE STREET 2: P O BOX 4100 CITY: ST LOUIS STATE: MO ZIP: 63136 BUSINESS PHONE: 3145532000 MAIL ADDRESS: STREET 1: 8000 W. FLORISSANT STREET 2: P.O. BOX 4100 CITY: ST LOUIS STATE: MO ZIP: 63136 FORMER COMPANY: FORMER CONFORMED NAME: EMERSON ELECTRIC MANUFACTUING CO DATE OF NAME CHANGE: 19730710 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 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 1-278 EMERSON ELECTRIC CO. (Exact name of registrant as specified in its charter) Missouri 43-0259330 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8000 W. Florissant Ave. P.O. Box 4100 St. Louis, Missouri 63136 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 553-2000 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, and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Common stock outstanding at December 31, 1995: 224,036,674 shares. 1 <PAGE> PART I. FINANCIAL INFORMATION FORM 10-Q Item 1. Financial Statements. EMERSON ELECTRIC CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (Dollars in millions except per share amounts; unaudited) Three Months Ended December 31, --------------------- 1995 1994 ---------- -------- Net sales $ 2,565.8 2,284.6 ---------- -------- Costs and expenses: Cost of sales 1,650.4 1,492.6 Selling, general and administrative expenses 517.0 440.9 Interest expense 30.1 21.2 Gain on sale of business and other non-recurring items - (34.3) Other deductions, net 6.4 9.9 ---------- -------- Total costs and expenses 2,203.9 1,930.3 ---------- -------- Income before income taxes and cumulative effect of change in accounting principle 361.9 354.3 Income taxes 131.4 129.6 ---------- -------- Income before cumulative effect of change in accounting principle 230.5 224.7 Cumulative effect of change in accounting principle; $.10 per common share - (21.3) ---------- -------- Net earnings $ 230.5 203.4 ========== ======== Earnings per common share $ 1.03 .91 ========== ======== Cash dividends per common share $ .49 .43 ========== ======== Average number of shares used in computing earnings per common share (in thousands) 224,053 223,526 ========== ======== See accompanying notes to consolidated financial statements. ___________________________________________________________________________ NOTE: Including the pretax impact of the cumulative effect of accounting change, income before income taxes would have been: $ 361.9 319.3 ========== ======== 2 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q CONSOLIDATED BALANCE SHEETS (Dollars in millions except per share amounts; unaudited) December 31, September 30, ASSETS 1995 1995 ------ --------- ------- CURRENT ASSETS Cash and equivalents $ 227.9 117.3 Receivables, less allowances of $48.5 and $45.2 1,852.2 1,757.6 Inventories 1,650.0 1,602.6 Other current assets 292.8 306.6 --------- ------- Total current assets 4,022.9 3,784.1 --------- ------- PROPERTY, PLANT AND EQUIPMENT, NET 2,174.5 2,134.9 --------- ------- OTHER ASSETS Excess of cost over net assets of purchased businesses 2,426.0 2,384.9 Other 1,109.8 1,095.1 --------- ------- Total other assets 3,535.8 3,480.0 --------- ------- $ 9,733.2 9,399.0 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Short-term borrowings and current maturities of long-term debt $ 1,430.8 1,387.1 Accounts payable 645.1 740.2 Accrued expenses 897.6 979.8 Income taxes 258.2 173.6 --------- ------- Total current liabilities 3,231.7 3,280.7 --------- ------- LONG-TERM DEBT 455.7 208.6 --------- ------- OTHER LIABILITIES 1,053.7 1,038.9 --------- ------- STOCKHOLDERS' EQUITY Preferred stock of $2.50 par value per share. Authorized 5,400,000 shares; issued - none - - Common stock of $1 par value per share. Authorized 400,000,000 shares; issued 238,338,503 shares 238.3 238.3 Additional paid in capital 13.2 15.0 Retained earnings 5,249.1 5,128.3 Cumulative translation adjustments 20.9 17.0 Cost of common stock in treasury, 14,301,829 shares and 14,439,861 shares (529.4) (527.8) --------- ------- Total stockholders' equity 4,992.1 4,870.8 --------- ------- $ 9,733.2 9,399.0 ========= ======= See accompanying notes to consolidated financial statements. 3 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (Dollars in millions; unaudited) 1995 1994 --------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 140.2 170.7 INVESTING ACTIVITIES Capital expenditures (106.4) (77.7) Purchases of businesses, net of cash and equivalents acquired (47.8) (75.2) Proceeds from divestiture of business - 7.7 Other (14.0) 49.6 --------- ------- Net cash used in investing activities (168.2) (95.6) --------- ------- FINANCING ACTIVITIES Net increase in short-term borrowings with maturities of 90 days or less 55.5 307.5 Principal payments on short-term borrowings (1.0) (27.6) Proceeds from long-term debt 249.2 - Principal payments on long-term debt (8.7) (121.9) Dividends paid (109.8) (96.2) Other (44.7) (46.4) --------- ------- Net cash provided by financing activities 140.5 15.4 --------- ------- Effect of exchange rate changes on cash and equivalents (1.9) (3.8) --------- ------- INCREASE IN CASH AND EQUIVALENTS 110.6 86.7 Beginning cash and equivalents 117.3 113.3 --------- ------- ENDING CASH AND EQUIVALENTS $ 227.9 200.0 ========= ======= See accompanying notes to consolidated financial statements. 4 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Notes to Consolidated Financial Statements 1. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. 2. Other Financial Information (Dollars in millions; unaudited) December 31, September 30, Inventories 1995 1995 ----------- --------- ------- Finished products $ 632.6 587.2 Raw materials and work in process 1,017.4 1,015.4 --------- ------- $ 1,650.0 1,602.6 ========= ======= December 31, September 30, Property, plant and equipment, net 1995 1995 ---------------------------------- --------- ------- Property, plant and equipment, at cost $ 4,341.9 4,230.5 Less accumulated depreciation 2,167.4 2,095.6 --------- ------- $ 2,174.5 2,134.9 ========= ======= 3. The Company has effectively guaranteed 50 percent of the indebtedness of a joint venture. For further information, refer to the Company's 1995 Annual Report on Form 10-K. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Results of Operations Sales, net earnings and earnings per share for the first quarter of fiscal 1996 were the highest for any first quarter in the Company's history. Net sales for the quarter ended December 31, 1995 were $2,565.8 million, an increase of 12.3 percent over net sales of $2,284.6 million for the quarter ended December 31, 1994, reflecting double-digit sales growth for the Commercial and Industrial segment, modest Appliance and Construction- Related segment sales growth and the contribution of fiscal 1995 acquisitions. These results reflect continued strength in the international markets and sluggish domestic market demand. Excluding the positive impact of currency, underlying international sales including exports reported double-digit sales growth. With the exception of North America, all major geographic regions experienced strong sales growth. 5 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q The Commercial and Industrial segment achieved a double-digit sales increase compared to the first quarter of the prior year. The industrial motors and drives business reported the largest sales gains for the quarter due to strong international capital goods demand and the acquisitions of F.G. Wilson and Control Techniques. The process business reported double-digit sales growth as a result of strong domestic and international market demand for measurement, distributed control systems and control valve product lines. This business continues to report robust growth in orders. The electronics business also experienced double-digit sales growth due to strong domestic demand and recent acquisitions. Sales of the industrial components and equipment business increased modestly. The Appliance and Construction-Related segment reported modest sales growth compared to the first quarter of 1995. Strong sales by the heating, ventilating and air conditioning business reflected strengthening domestic end-markets, continued strong international demand, further acceptance of new products and market penetration. Sales of the fractional motor business increased slightly while sales of the tools and appliance components businesses decreased modestly as international sales gains were offset by a soft domestic market. Cost of sales for the first quarter was $1,650.4 million or 64.3 percent of sales, compared with $1,492.6 million, or 65.3 percent of sales, for the first quarter of 1995. Selling, general and administrative expenses for the three months ended December 31, 1995 were $517.0 million, or 20.2 percent of sales, compared to $440.9 million, or 19.3 percent of sales for the same period a year ago. Consolidated profit margins improved from the high levels of the prior year as a result of ongoing commitments to cost reduction efforts and productivity improvement programs across the Company. Margin improvement was achieved despite the Company's continued investment in its defined growth programs. During the quarter, the Company benefited from improvement in international operating efficiencies. Earnings in the first quarter of fiscal 1995 included a $41.3 million preferential distribution from the S-B Power Tool joint venture which was substantially offset by other non-recurring items and the adoption of SFAS No. 112 ($21.3 million, net of $13.7 million in related income tax benefits). Financial Condition A comparison of key elements of the Company's financial condition at the end of the first quarter as compared to the end of the prior fiscal year follows: December 31, September 30, 1995 1995 -------- -------- Working capital (in millions) $791.2 503.4 Current ratio 1.2 to 1 1.2 to 1 Total debt to total capital 27.4% 24.7% Net debt to net capital 24.9% 23.3% 6 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q The Company's interest coverage ratio (earnings before income taxes, non-recurring items and interest expense, divided by interest expense) was 13.0 times for the quarter ended December 31, 1995 compared to 16.1 times for the same period one year earlier. The decrease in the interest coverage ratio and increases in the debt to capital ratios reflect additional debt related to prior year acquisitions. In the first quarter, the Company issued $250 million of 6.3%, 10-year notes which were used to reduce outstanding U.S. commercial paper. Cash flow provided by operating activities was $140.2 million for the three months ended December 31, 1995 versus $170.7 million for the same period in the prior year. These results reflect increases in receivables and inventories associated with continued sales growth and international mix. Cash flow provided by operating activities and an increase in borrowings of $295.0 million were used primarily to fund capital expenditures of $106.4 million and pay dividends of $109.8 million. In the first quarter of fiscal 1995, $271.1 million of notes were issued to the sellers to finance the F.G. Wilson acquisition. The Company is in a strong financial position and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing the capital structure. 7 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). 3(a) Restated Articles of Incorporation of Emerson Electric Co., incorporated by reference to Emerson Electric Co. 1989 Form 10-K, Exhibit 3(a). 3(b) Bylaws of Emerson Electric Co., as amended through May 3, 1994, incorporated by reference to Emerson Electric Co. 1994 Form 10-K, Exhibit 3(b). 27 Financial Data Schedule. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 1995. SIGNATURE 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. EMERSON ELECTRIC CO. Date: February 13, 1996 By /s/ Walter J. Galvin ----------------------- Walter J. Galvin Senior Vice President - Finance and Chief Financial Officer (on behalf of the registrant and as Chief Financial Officer) 8 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMERSON ELECTRIC CO. CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 FILED WITH THE COMPANY'S 1996 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 227,900 <SECURITIES> 0 <RECEIVABLES> 1,900,700 <ALLOWANCES> 48,500 <INVENTORY> 1,650,000 <CURRENT-ASSETS> 4,022,900 <PP&E> 4,341,900 <DEPRECIATION> 2,167,400 <TOTAL-ASSETS> 9,733,200 <CURRENT-LIABILITIES> 3,231,700 <BONDS> 455,700 <COMMON> 238,300 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 4,753,800 <TOTAL-LIABILITY-AND-EQUITY> 9,733,200 <SALES> 2,565,800 <TOTAL-REVENUES> 2,565,800 <CGS> 1,650,400 <TOTAL-COSTS> 1,650,400 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 30,100 <INCOME-PRETAX> 361,900 <INCOME-TAX> 131,400 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 230,500 <EPS-PRIMARY> 1.03 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

ETS

https://www.sec.gov/Archives/edgar/data/846909/0000846909-96-000004.txt

-----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, MbFXFpfDEN7rVHpjwJOrGypzh/JR1lUD8xeW8drLmnebW+wEpDdlaIMHLrXcCh8X u0WHRAmP+FUZE25Ya1KyuQ== <SEC-DOCUMENT>0000846909-96-000004.txt : 19960112 <SEC-HEADER>0000846909-96-000004.hdr.sgml : 19960111 ACCESSION NUMBER: 0000846909-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960110 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABLETRON SYSTEMS INC CENTRAL INDEX KEY: 0000846909 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042797263 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10228 FILM NUMBER: 96502219 BUSINESS ADDRESS: STREET 1: 35 INDUSTRIAL WAY CITY: EAST ROCHESTER STATE: NH ZIP: 03867 BUSINESS PHONE: 6033329400 MAIL ADDRESS: STREET 1: 35 INDUSTRIAL WAY CITY: ROCHESTER STATE: NH ZIP: 03867 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED: November 30,1995 COMMISSION FILE NUMBER: 1-10228 CABLETRON SYSTEMS, INC. Exact name of registrant as specified in its charter DELAWARE 04-2797263 (State of incorporation) (I.R.S. Employer I.D.) 35 Industrial Way, Rochester, New Hampshire 03867 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (603) 332-9400 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 As of December 30, 1995 72,153,169 shares of the Registrant's Common Stock were outstanding. This document contains 13 pages Exhibit index on page 12 INDEX Page Facing Page 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- November 30, 1995 and February 28, 1995 3 Consolidated Statements of Income -- Three and nine months ended November 30, 1995 and 1994 4 Consolidated Statements of Cash Flows -- Nine months ended November 30, 1995 and 1994 5 Notes to Consolidated Financial Statements -- November 30, 1995 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Index to the Exhibits 12 Exhibit 11 - Statement re: Computation of Per Share Earnings 13 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CABLETRON SYSTEMS, INC. Consolidated Balance Sheets (in thousands of dollars) (unaudited) November 30, February 28, Asset 1995 1995 Current Assets: Cash and cash equivalents $140,984 $114,032 Short-term investments 140,878 130,563 Accounts receivable, net 127,168 91,411 Inventories 139,820 103,030 Deferred taxes 20,086 20,062 Prepaid expenses and other assets 25,580 11,998 Total current assets 594,516 471,096 Long-term investments 173,520 101,333 Property, plant and equipment, net 139,191 116,761 Capitalized software costs, net 386 730 Total assets $907,613 $689,920 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 38,120 $28,923 Accrued expenses 80,391 52,366 Income taxes payable 24,072 14,982 Total current liabilities 142,583 96,271 Deferred taxes 6,117 6,128 Total liabilities 148,700 102,399 Stockholders' equity Preferred stock, $1.00 par value. Authorized 2,000 shares; none issued - - Common stock $0.01 par value. Authorized 240,000 shares; issued and outstanding 72,091 and 71,469 respectively 721 715 Additional paid-in capital 124,651 110,564 Retained earnings 634,709 477,780 760,081 589,059 Cumulative translation adjustment (1,144) (1,364) Notes receivable, stockholders (24) (174) Total stockholders' equity 758,913 587,521 Total liabilities and stockholders' equity $907,613 $689,920 See accompanying notes to the consolidated financial statements. CABLETRON SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars, except earnings per share) (unaudited) Three Months Ended Nine MonthsEnded November 30, November 30, 1995 1994 1995 1994 Net sales $275,464 $210,013 $773,517 $584,712 Cost of sales 111,673 85,435 313,226 237,962 Gross profit 163,791 124,578 460,291 346,750 Operating expenses: Research and development 29,554 22,003 83,434 60,350 Selling, general and administrative 53,674 41,036 149,902 114,619 Total operating expenses 83,228 63,039 233,336 174,969 Income from operations 80,563 61,539 226,955 171,781 Interest income 4,594 2,421 12,260 6,631 Income before income taxes 85,157 63,960 239,215 178,412 Income taxes 29,294 22,130 82,285 61,957 Net income $55,863 $41,830 $156,930 $116,455 Net income per common share $0.78 $0.59 $2.19 $1.63 Weighted average number of shares outstanding 71,988 71,503 71,726 71,451 See accompanying notes to the consolidated financial statements. CABLETRON SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited) Nine Months Ended November 30, November 30, 1995 1994 Cash flows from operating activities: Net income $156,930 $116,455 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,042 19,030 Recovery of losses on accounts receivable (297) (915) Forgiveness of notes receivables from shareholders 151 131 (Gain) loss on disposal of property plant and equipment (63) 131 Deferred taxes (35) - Changes in assets and liabilities: Accounts receivables (33,508) (11,060) Inventories (36,739) (29,103) Prepaid expenses and other assets (13,701) (1,808) Accounts payable and accrued expenses 35,427 2,186 Income taxes payable 9,250 (4,454) Common stock issued to employee stock purchase plan 12,894 1,028 Net cash provided by operating activities 155,351 100,529 Cash flows from investing activities: Capital expenditures (47,111) (45,193) Purchases of marketable securities (82,554) (25,100) Net cash used in investing activities (129,665) (70,293) Cash flows from financing activities: Proceeds from exercise of stock options 1,197 (1,115) Net cash provided by (used in) financing activities 1,197 (1,115) Effect of exchange rate changes on cash 69 444 Net increase in cash and cash equivalents 26,952 29,565 Cash and cash equivalents, beginning of period 114,032 54,563 Cash and cash equivalents, end of period $140,984 $84,128 Cash paid during the year for: Income taxes $72,584 $57,197 See accompanying notes to the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policy The information included in the foregoing interim financial statements is unaudited. In the opinion of management, all adjustments consisting of normal accruals necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. 2. Inventories The components of inventory are as follows: 11/30/95 2/28/95 Raw materials and supplies $43,323 $22,420 Work in process 28,808 22,869 Finished goods 67,689 57,741 Total inventories $139,820 $103,030 3. Proposed acquisition On November 28, 1995, the Company announced it has entered into a letter of intent to purchase certain assets and technology of SMC's Local Area Network Switching business segment of the Enterprise Networks Business Unit for $77.5 million in cash. The acquisition is subject to approval by various regulatory agencies and the Board of Directors of SMC. It is expected that the consummation of this transaction will occur in the fourth quarter of fiscal 1996. SMC's Enterprise Networks Business Unit is a supplier of fast LAN technologies including 10/100 Fast Ethernet Switches. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of the Third Quarter ended November 30, 1995 vs Third Quarter ended November 30, 1994 Cabletron Systems' worldwide net sales of $275.5 million for the fiscal quarter ended November 30, 1995 represented a 31.2 percent increase over net sales of $210.0 million reported in the same quarter of the preceding year. The increase was primarily the result of higher sales of Multi Media Access Centers (MMAC (TM)) and related items, inclusive of MMAC Plus which is the next generation intelligent switching hubs, and small stackable hubs. International sales as a percentage of total net sales decreased slightly to 29.6 percent in the quarter ended November 30, 1995 from 30.2 percent for the same quarter of the preceding fiscal year. Gross profit as a percentage of net sales for the three months ended November 30, 1995 increased slightly to 59.5 percent compared to 59.3 percent for the quarter ended November 30, 1994 predominantly due to decreasing material costs. Research and development costs for the three months ended November 30, 1995 increased to $29.6 million compared to $22.0 million for the same quarter of the preceding fiscal year. As a percentage of net sales, spending for research and development increased to 10.7 percent from 10.5 percent. The higher spending for research and development reflected increased numbers of software and hardware engineers hired and associated costs related to the development of new products, inclusive of MMAC Plus. Spending for selling, general and administrative expenses for the three months ended November 30, 1995 increased to $53.7 million compared to $41.0 million for the same period of the preceding fiscal year. As a percentage of net sales, spending for selling, general and administration was 19.5 percent compared to 19.5 percent for the same period of the preceding fiscal year. The absolute increase in spending was the result of increases in both the inside and outside sales forces in the United States and overseas and other administrative expenses which were primarily volume related. Net interest income for the three months ended November 30, 1995 was 4.6 million, compared to $2.4 million in the same period of the preceding fiscal year. The increase in interest income resulted from higher interest rates and increased cash reserves. Income before income taxes increased to $85.2 million compared to $64.0 million for the same period of the prior fiscal year. As a percentage of net sales, income before income taxes increased to 30.9 percent from 30.5 percent from the same period of the preceding fiscal year, primarily due to decreasing material costs and increased interest income. For the three months ended November 30, 1995 net income of $55.9 million represented an increase of 33.7 percent from $41.8 million for the same period of the preceding fiscal year. Results of the Nine Months ended November 30, 1995 vs Nine Months ended November 30, 1994 Cabletron Systems' worldwide net sales of $773.5 million for the nine months ended November 30, 1995 represented a 32.3 percent increase over net sales of $584.7 million reported for the same period of the preceding fiscal year. The increase was primarily the result of higher sales of Multi Media Access Centers (MMAC (TM)) and related items, inclusive of MMAC Plus which is the next generation intelligent switching hubs and small stackable hubs. International sales as a percentage of total net sales increased to 29.9 percent from 28.3 percent for the same period of the preceding fiscal year. Gross profit as a percentage of net sales for the nine months ended November 30, 1995 was 59.5 percent compared to 59.3 percent for the nine months ended November 30, 1994. This increase was predominantly due to decreasing raw material costs. Research and development costs for the nine months ended November 30, 1995 increased to $83.4 million compared to $60.4 million for the same period of the preceding fiscal year. As a percentage of net sales, spending for research and development increased to 10.8 percent from 10.3 percent compared to the same period of the preceding fiscal year. The higher spending for research and development reflected increased numbers of software and hardware engineers hired and associated costs related to development of new products. Spending for selling, general and administrative expenses for the nine months ended November 30, 1995 increased to $149.9 million compared to $114.6 million for the same period of the preceding fiscal year. As a percentage of net sales, spending for selling, general and administration decreased to 19.4 percent from 19.6 for the same period of the preceding fiscal year. The absolute increase in spending was the result of increases in both the inside and outside sales forces in the United States and overseas and other administrative expenses which were primarily volume related. As a percentage of sales, selling and general administrative expenses decreased slightly due to a net gain on sale of securities in the second quarter of fiscal year 1996. Net interest income for the nine months ended November 30, 1995 was 12.3 million compared to $6.6 million in the same period of the preceding fiscal year. The increase in interest income resulted from higher interest rates and increased cash reserves. Income before income taxes for the nine months ended November 30, 1995 increased to $239.2 million compared to $178.4 million for the same period of the prior fiscal year. As a percentage of net sales, income before income taxes increased to 30.9 percent from 30.5 percent from the same period of the prior fiscal year, primarily due to decreasing material costs and a net gain on sale of securities in the second quarter of fiscal year 1996. Net income of $156.9 million represented an increase of 34.7 percent from $116.5 million for the same period a year ago. Liquidity and Capital Resources Cash and cash equivalents and long term investments increased $109.5 million from $345.9 million at February 28, 1995 to $455.4 million at November 30, 1995, primarily due to favorable operating results. Accounts receivable at November 30, 1995 were $127.2 million compared to $91.4 million at February 28, 1995. Days sales outstanding increased to 40 days compared to 33 days at the end of the prior fiscal year. The increase was predominantly due to the increase in sales and the timing of collections. The 40 days sales outstanding is more indicative of what to expect in future periods. The Company has historically maintained higher levels of inventory than its competitors in the LAN industry in order to implement its policy of shipping most orders requiring immediate delivery within 24 to 48 hours. Worldwide inventory at November 30, 1995 was $139.8 million, or 104 days of inventory, compared to $103.0 million, or 104 days of inventory at the end of the prior fiscal year. The increase in absolute inventory dollars was predominantly due to build up in inventory due to the development of new products and the general expansion in global distribution. Capital expenditures for the first nine months ended November 30, 1995 were $47.1 million compared to $45.2 million for the same period of the preceding year. Capital expenditures the first nine months of fiscal 1996 included approximately $7.3 million for building costs of which approximately $6.0 million was for the purchase and remodeling of a 114,000-square-foot engineering building. Additionally, another $14.5 million was spent on computer and computer related equipment, $3.8 million for manufacturing and related equipment and $3.9 million was spent on expanding global sales operations. Current liabilities at November 30, 1995 were $142.6 million compared to $96.3 million at the end of the prior fiscal year. This increase was mainly due to the growth in operations and the timing of disbursements. In the opinion of management, internally generated funds from operations and existing cash, cash equivalents and short-term investments will prove adequate to support the Company's working capital and capital expenditure requirements for the next twelve months. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Statement re: Computation of Per Share Earnings (page 13 of this report). (b) There were no reports on Form 8-K filed during the quarter ended November 30, 1995. 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. CABLETRON SYSTEMS, INC. (REGISTRANT) December 28, 1995 /s/ Craig R.Benson (Date) Craig R. Benson Chairman of the Board,Treasurer and Chief Operating Officer December 28, 1995 /s/ David Kirkpatrick (Date) David Kirkpatrick Director of Finance and Chief Financial Officer Exhibit Index Page Exhibit 11 Statement re: Computation of Per Share Earnings 13 EXHIBIT 11 CABLETRON SYSTEMS, INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS For the periods ended November 30, 1995 and 1994 (in thousands, except per share amount) (unaudited) (unaudited) Three Months Nine Months Ended Ended November 30, November 30, 1995 1994 1995 1994 Net Income Per Common Share (non-dilutive) Net income $55,863 $41,830 $156,930 $116,455 Weighted average common shares outstanding 71,988 71,503 71,726 71,451 Reported net income per common share $0.78 $0.59 $2.19 $1.63 Net Income Per Common Share (full dilution) Net income $55,863 $41,830 $156,930 $116,455 Average common shares outstanding 71,988 71,503 71,726 71,451 Add: additional common shares upon exercise of stock options, net of purchase of treasury stock 2,135 1,151 2,135 1,151 Adjusted average common shares outstanding 74,123 72,654 73,861 72,602 Net income per common share (full dilution) $0.75 $0.58 $2.12 $ 1.60 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-28-1996 <PERIOD-END> NOV-30-1995 <CASH> 140,984 <SECURITIES> 140,878 <RECEIVABLES> 132,912 <ALLOWANCES> 5,744 <INVENTORY> 139,820 <CURRENT-ASSETS> 594,516 <PP&E> 230,375 <DEPRECIATION> 90,798 <TOTAL-ASSETS> 907,613 <CURRENT-LIABILITIES> 142,583 <BONDS> 0 <COMMON> 721 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 758,913 <TOTAL-LIABILITY-AND-EQUITY> 907,613 <SALES> 275,464 <TOTAL-REVENUES> 275,464 <CGS> 111,673 <TOTAL-COSTS> 111,673 <OTHER-EXPENSES> 80,563 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (4,594) <INCOME-PRETAX> 85,157 <INCOME-TAX> 29,294 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 55,863 <EPS-PRIMARY> $0.74 <EPS-DILUTED> $0.75 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

GIS

https://www.sec.gov/Archives/edgar/data/40704/0000040704-96-000004.txt

-----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, HDUW7T9iznYuslSCElq0Kp3nuiXnYUqOoti69sILVpQW9YEp41u8baFk7fSmN+gT iTFc62tQM0jTsXXEWjXC/w== <SEC-DOCUMENT>0000040704-96-000004.txt : 19960111 <SEC-HEADER>0000040704-96-000004.hdr.sgml : 19960111 ACCESSION NUMBER: 0000040704-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951126 FILED AS OF DATE: 19960108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MILLS INC CENTRAL INDEX KEY: 0000040704 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 410274440 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01185 FILM NUMBER: 96501807 BUSINESS ADDRESS: STREET 1: NUMBER ONE GENERAL MILLS BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55426 BUSINESS PHONE: 6125402311 MAIL ADDRESS: STREET 1: P O BOX 1113 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>SECOND QUARTER 10-Q <TEXT> 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 NOVEMBER 26, 1995 / / 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: 1-1185 GENERAL MILLS, INC. (Exact name of registrant as specified in its charter) Delaware 41-0274440 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Number One General Mills Boulevard Minneapolis, MN 55426 (Mail: P.O. Box 1113) (Mail: 55440) (Address of principal executive offices) (Zip Code) (612) 540-2311 (Registrant's telephone number, including area code) 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 ___ As of December 15, 1995, General Mills had 159,105,977 shares of its $.10 par value common stock outstanding (excluding 45,047,355 shares held in treasury). Part I. FINANCIAL INFORMATION Item 1. Financial Statements GENERAL MILLS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In Millions, Except per Share Data) Thirteen Weeks Ended Twenty-Six Weeks Ended November 26, November 27, November 26, November 27, 1995 1994 1995 1994 Continuing Operations: Sales $1,448.4 $1,417.3 $2,724.7 $2,574.0 Costs and Expenses: Cost of sales 596.1 595.1 1,121.7 1,055.3 Selling, general and administrative 551.7 537.5 1,010.3 977.1 Depreciation and amortization 46.7 44.2 93.4 91.1 Interest, net 25.8 25.4 52.8 47.5 Total Costs and Expenses 1,220.3 1,202.2 2,278.2 2,171.0 Earnings from Continuing Operations before Taxes 228.1 215.1 446.5 403.0 Income Taxes 82.4 80.3 163.9 150.2 Earnings from Continuing Operations 145.7 134.8 282.6 252.8 Discontinued Operations after Taxes - 14.4 - 47.2 Net Earnings $ 145.7 $ 149.2 $ 282.6 $ 300.0 Earnings per Share: Continuing operations $ .92 $ .85 $ 1.78 $ 1.60 Discontinued operations - .10 - .30 Net Earnings per Share $ .92 $ .95 $ 1.78 $ 1.90 Dividends per Share $ .47 $ .47 $ .94 $ .94 Average Number of Common Shares 158.8 157.7 158.6 157.9 See accompanying notes to consolidated condensed financial statements. GENERAL MILLS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Millions) (Unaudited) (Unaudited) November 26, November 27, May 28, 1995 1994 1995 ASSETS Current Assets: Cash and cash equivalents $ 44.0 $ 52.5 $ 13.0 Receivables 381.4 387.0 277.3 Inventories: Valued primarily at FIFO 230.2 163.7 134.7 Valued at LIFO (FIFO value exceeds LIFO by $56.0, $45.4 and $53.0, respectively) 215.5 305.6 237.3 Prepaid expenses and other current assets 84.3 80.3 80.8 Deferred income taxes 125.4 134.3 153.8 Total Current Assets 1,080.8 1,123.4 896.9 Land, Buildings and Equipment, at Cost 2,607.5 2,547.3 2,611.9 Less accumulated depreciation (1,205.7) (1,082.3)(1,155.3) Net Land, Buildings and Equipment 1,401.8 1,465.0 1,456.6 Net Assets of Discontinued Operations - 1,695.7 - Other Assets 1,033.0 977.4 1,004.7 Total Assets $3,515.6 $5,261.5 $3,358.2 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 538.7 $ 506.3 $ 494.0 Current portion of long-term debt 64.9 122.8 93.7 Notes payable 299.3 761.5 112.9 Accrued taxes 130.2 112.7 108.8 Other current liabilities 338.0 265.1 411.5 Total Current Liabilities 1,371.1 1,768.4 1,220.9 Long-term Debt 1,246.4 1,484.4 1,400.9 Deferred Income Taxes 259.4 244.1 248.6 Deferred Income Taxes - Tax Leases 163.4 184.9 169.1 Other Liabilities 175.6 175.8 177.7 Total Liabilities 3,215.9 3,857.6 3,217.2 Common Stock Subject to Put Options - 25.1 - Stockholders' Equity: Cumulative preference stock, none issued - - - Common stock, 204.2 shares issued 381.6 349.4 379.5 Retained earnings 1,367.7 2,610.2 1,233.3 Less common stock in treasury, at cost, shares of 45.2, 46.4 and 46.3, respectively (1,349.9) (1,381.7)(1,372.1) Unearned compensation and other (52.8) (140.6) (57.9) Cumulative foreign currency adjustment (46.9) (58.5) (41.8) Total Stockholders' Equity 299.7 1,378.8 141.0 Total Liabilities and Equity $3,515.6 $5,261.5 $3,358.2 See accompanying notes to consolidated condensed financial statements. GENERAL MILLS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions) Twenty-Six Weeks Ended November 26, November 27, 1995 1994 Cash Flows - Operating Activities: Earnings from continuing operations $282.6 $252.8 Adjustments to reconcile earnings to cash flow: Depreciation and amortization 93.4 91.1 Deferred income taxes 34.9 85.7 Change in current assets and liabilities (152.7) (358.0) Other, net (3.4) .4 Cash provided by continuing operations 254.8 72.0 Cash provided (used) by discontinued operations (11.2) 59.9 Net Cash Provided by Operating Activities 243.6 131.9 Cash Flows - Investment Activities: Purchases of land, buildings and equipment (57.5) (61.9) Investments in businesses, intangibles and affiliates (20.3) (26.9) Purchases of marketable investments (3.6) (3.4) Proceeds from sale of marketable investments 7.0 2.7 Other, net (6.7) (21.5) Discontinued operations investments activities, net - (195.0) Net Cash Used by Investment Activities (81.1) (306.0) Cash Flows - Financing Activities: Increase in notes payable 109.7 324.0 Issuance of long-term debt 38.6 130.5 Payment of long-term debt (146.1) (50.0) Common stock issued 22.1 7.8 Purchases of common stock for treasury - (57.7) Dividends paid (149.1) (149.2) Other, net (6.7) (6.6) Net Cash Provided (Used) by Financing Activities (131.5) 198.8 Increase in Cash and Cash Equivalents $31.0 $24.7 See accompanying notes to consolidated condensed financial statements. GENERAL MILLS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (1) Background These financial statements do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the twenty-six weeks ended November 26, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ending May 26, 1996. These statements should be read in conjunction with the financial statements and footnotes included in our annual report for the year ended May 28, 1995. The accounting policies used in preparing these financial statements are the same as those described in our annual report. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. (2) Discontinued Operations As of May 28, 1995, General Mills distributed the common stock of Darden Restaurants, Inc. (Darden) to General Mills' shareholders. This distribution reduced Stockholders' Equity by $1,218.7 million. Our former restaurant operations included in Darden are now presented as a part of Discontinued Operations for all periods presented. On May 18, 1995, we sold Gorton's, a leading marketer of frozen and canned seafood products, to Unilever United States, Inc. Gorton's is also included in Discontinued Operations for all periods presented. (3) Statements of Cash Flows During the first six months, we paid $59.9 million for interest (net of amount capitalized) and $99.5 million for income taxes. (4) Updated Rights Plan Subsequent to the end of the quarter, the Board of Directors adopted a new Preferred Share Purchase Rights Plan to replace the existing rights plan which expires in March 1996. The existing plan is described in Note 11 to the consolidated financial statements for the year ended May 28, 1995. The new Rights are similar in purpose and effect to the existing Rights and entitle each outstanding share of common stock on and after January 10, 1996 to one right. The new Rights will expire on February 1, 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION During the fiscal year ended May 28, 1995 the company spun off its restaurant operations as a separate, free-standing company, Darden Restaurants, Inc., and sold the Gorton's frozen and canned seafood products business. The financial statements for the second quarter of fiscal 1995 have been restated to present assets and results of these operations as Discontinued Operations. The restaurant spinoff reduced Stockholders' Equity by $1,218.7 million at May 28, 1995. Continuing operations generated $182.8 million more cash in the first half of fiscal 1996 than in the same prior-year period. The increase in cash provided by continuing operations is due mainly to a lower rate of increase in working capital. Fiscal 1996 capital expenditures are estimated to be approximately $150 million. During the first six months, capital expenditures totaled $57.5 million. Our short-term outside financing is obtained through private placement of commercial paper and bank notes. Our level of notes payable fluctuates based on cash flow needs. Our long-term outside financing is obtained primarily through our medium-term note program. First half activity included new debt of $35.0 million and principal payments of $141.3 million under this program. RESULTS OF OPERATIONS Second quarter sales of $1,448.4 million grew 2 percent from the prior year. First half sales of $2,724.7 million grew 6 percent. Second quarter earnings from operations of $145.7 million ($.92 per share) were up 8 percent from $134.8 million ($.85 per share) reported last year. Cumulative earnings of $282.6 million ($1.78 per share) were up 12 percent from $252.8 million ($1.60 per share) reported for last year's first half. The prior-year comparisons exclude results for Gorton's and the restaurant operations. Record results for the first half met company expectations, with cumulative domestic retail unit volume growth of 6 percent, continued strong productivity increases and improving profitability from international operations. As anticipated, the company's rate of growth in the second quarter was slower than the 15 percent earnings-per-share increase achieved in the first quarter, reflecting volume fluctuations in the prior year due to the oats-related business disruption and changes in promotion timing. Second-quarter overall domestic volume was up slightly as promotional changes primarily affected snack products where volume declined 21 percent, offsetting a large first quarter gain. Volume for the company's remaining domestic businesses grew 4 percent, led by a 6 percent volume gain by Big G cereals. Total unit volume, including strong gains by international joint ventures that are not consolidated in the company's sales results, grew 3 percent in the second quarter and 8 percent for the first half. Consumer retail sales were even or up for most major product lines, excluding domestic snacks. Big G cereals led General Mills' performance, both in the half and the latest quarter. Through six months, cereal volume was up 12 percent and profit growth was even stronger. The second quarter's 6 percent volume gain was led by new Frosted Cheerios, which began shipping Sept. 11 and achieved a 1.6 percent pound market share for the period. Other contributors to the second quarter volume gain included improved versions of Apple Cinnamon Cheerios and Lucky Charms, and growing business in non- traditional retail outlets. Big G's second-quarter pound share of the U.S. grocery cereal market was 23.5 percent, up a full percentage point from the same period a year earlier. Snack foods' 21 percent volume decline in the second quarter followed a 10 percent gain in the first quarter. The decline reflected shifts in promotional strategies and timing toward first-quarter back-to-school merchandising, and strong levels of competitive new-product and merchandising activity in the grain snack segment. Volume growth in the company's other domestic retail businesses was led by Yoplait and Colombo yogurt, Helper dinner mixes, and new Whipped Deluxe frosting and fat-free Sweet Rewards cake mixes. Additionally, the company's Foodservice operations achieved a 13 percent volume gain in the first half. General Mills' Canadian food operations reported a 14 percent increase in first-half unit volume, including a 13 percent gain in the second quarter. Cereal Partners Worldwide (CPW), the company's strategic alliance with Nestle, posted volume growth of 19 percent in the quarter and 22 percent through six months, with share gains in most markets. Snack Ventures Europe, the company's joint venture with PepsiCo Foods International, reported volume gains of 16 percent for both the second quarter and first half. Each of these joint ventures and the company's fully-owned international operations contributed to first-half earnings growth. Net interest expense for the first six months increased by $5.3 million compared to last year, primarily due to higher interest rates. The effective tax rate for the first six months of fiscal 1996 of 36.7% was less than the 37.3% rate for the first six months of fiscal 1995 due primarily to the effects of state taxes. PART II Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on September 18, 1995. (b) All directors nominated were elected at the Annual Meeting. (c) For the election of directors, the results were as follows: Richard M. Bressler For 134,678,727 Withheld 682,432 Livio D. DeSimone For 135,342,058 Withheld 19,101 William T. Esrey For 135,324,654 Withheld 36,505 Charles W. Gaillard For 135,314,580 Withheld 46,579 Judith R. Hope For 135,243,799 Withheld 117,360 Kenneth A. Macke For 135,310,121 Withheld 51,038 George Putnam For 135,300,397 Withheld 60,762 Michael D. Rose For 135,305,288 Withheld 55,871 Stephen W. Sanger For 135,341,378 Withheld 19,781 A. Michael Spence For 135,279,549 Withheld 81,610 Dorothy A. Terrell For 135,205,934 Withheld 155,225 C. Angus Wurtele For 135,332,246 Withheld 28,913 On the ratification of the appointment of KPMG Peat Marwick LLP as auditors for fiscal 1996 the results were as follows: For: 135,401,311 Withheld: 334,521 Abstain: 277,775 On the proposal to adopt the General Mills, Inc. 1995 Salary Replacement Stock Option Plan, the results were as follows: For: 122,890,196 Against: 11,702,115 Abstain: 1,421,296 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 11 Statement re Computation of Earnings per Share. Exhibit 12 Statement re Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the second quarter of fiscal 1996. 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. GENERAL MILLS, INC. (Registrant) Date January 8, 1996 /s/ S. S. Marshall S. S. Marshall Senior Vice President, General Counsel and Secretary Date January 8, 1996 /s/ K. L. Thome K. L. Thome Senior Vice President, Financial Operations Exhibit 11 GENERAL MILLS, INC. COMPUTATION OF EARNINGS PER SHARE (In Millions, Except per Share Data) Twenty-Six Weeks Ended November 26, November 27, 1995 1994 Net Earnings $282.6 $300.0 Computation of Shares: Weighted average number of shares outstanding, excluding shares held in treasury (a) 158.6 157.9 Net shares resulting from the assumed exercise of certain stock options (b) 3.0* 1.9* Shares potentially issuable under compensation plans -* .1* Total common shares and common share equivalents 161.6 159.9 Earnings per Share $1.78 $1.90 Notes to Exhibit 11: (a)Computed as the weighted average of net shares outstanding on stock- exchange trading days. (b)Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. * Common share equivalents are not material. As a result, earnings per share have been computed using the weighted average number of shares outstanding of 158.6 million and 157.9 million for the first six months of fiscal 1996 and 1995, respectively. Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Twenty-Six Weeks Ended Fiscal Year Ended November 26, November 27, May 28, May 29, May 30, May 31, May 26, 1995 1994 1995 1994 1993 1992 1991 Ratio of Earnings to Fixed Charges 7.87 7.52 4.10 6.18 8.62 9.28 8.06 For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the proportion deemed representative of the interest factor) of rents of continuing operations. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 TO 10-Q <TEXT> Exhibit 11 GENERAL MILLS, INC. COMPUTATION OF EARNINGS PER SHARE (In Millions, Except per Share Data) Twenty-Six Weeks Ended November 26, November 27, 1995 1994 Net Earnings $282.6 $300.0 Computation of Shares: Weighted average number of shares outstanding, excluding shares held in treasury (a) 158.6 157.9 Net shares resulting from the assumed exercise of certain stock options (b) 3.0* 1.9* Shares potentially issuable under compensation plans -* .1* Total common shares and common share equivalents 161.6 159.9 Earnings per Share $1.78 $1.90 Notes to Exhibit 11: (a)Computed as the weighted average of net shares outstanding on stock- exchange trading days. (b)Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. * Common share equivalents are not material. As a result, earnings per share have been computed using the weighted average number of shares outstanding of 158.6 million and 157.9 million for the first six months of fiscal 1996 and 1995, respectively. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 12 TO 10-Q <TEXT> Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Twenty-Six Weeks Ended Fiscal Year Ended November 26, November 27, May 28, May 29, May 30, May 31, May 26, 1995 1994 1995 1994 1993 1992 1991 Ratio of Earnings to Fixed Charges 7.87 7.52 4.10 6.18 8.62 9.28 8.06 For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the proportion deemed representative of the interest factor) of rents of continuing operations. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR 2ND QTR. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from our Form 10-Q for the twenty-six week period ended November 26, 1995 and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-28-1995 <PERIOD-END> NOV-26-1995 <CASH> 44,000,000 <SECURITIES> 0 <RECEIVABLES> 381,400,000 <ALLOWANCES> 0 <INVENTORY> 445,700,000 <CURRENT-ASSETS> 1,080,800,000 <PP&E> 2,607,500,000 <DEPRECIATION> (1,205,700,000) <TOTAL-ASSETS> 3,515,600,000 <CURRENT-LIABILITIES> 1,371,100,000 <BONDS> 1,246,400,000 <COMMON> 381,600,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> (81,900,000) <TOTAL-LIABILITY-AND-EQUITY> 3,515,600,000 <SALES> 2,724,700,000 <TOTAL-REVENUES> 2,724,700,000 <CGS> 1,121,700,000 <TOTAL-COSTS> 1,121,700,000 <OTHER-EXPENSES> 93,400,000 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 52,800,000 <INCOME-PRETAX> 446,500,000 <INCOME-TAX> 163,900,000 <INCOME-CONTINUING> 282,600,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 282,600,000 <EPS-PRIMARY> 1.78 <EPS-DILUTED> 1.78 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

HDLM

https://www.sec.gov/Archives/edgar/data/314727/0000950131-96-001096.txt

-----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, BFFeHY0l8hWyePDrwaT3jgYBK1BZJ9ZDgmU96Umd5vxH1DC/WjJN/4v6jkVrUQNG lRGIoZPWnZJ6kXg1M7V1cw== <SEC-DOCUMENT>0000950131-96-001096.txt : 19960315 <SEC-HEADER>0000950131-96-001096.hdr.sgml : 19960315 ACCESSION NUMBER: 0000950131-96-001096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960314 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANDLEMAN CO /MI/ CENTRAL INDEX KEY: 0000314727 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 381242806 STATE OF INCORPORATION: MI FISCAL YEAR END: 0429 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07923 FILM NUMBER: 96534922 BUSINESS ADDRESS: STREET 1: 500 KIRTS BLVD STREET 2: PO BOX 7045 CITY: TROY STATE: MI ZIP: 48084-4142 BUSINESS PHONE: 8103624400 MAIL ADDRESS: STREET 1: 500 KIRTS BLVD STREET 2: P O BOX 7045 CITY: TROY STATE: MI ZIP: 48084-4142 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 3rd quarter ended January 31, 1996 Commission File Number 1-7923 HANDLEMAN COMPANY ------------------------------------------------------------ (Exact name of registrant as specified in its charter) MICHIGAN 38-1242806 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 500 KIRTS BOULEVARD, TROY, MICHIGAN 48084-4142 Area Code 810 362-4400 - ---------------------------------------- ------------ ----------------------- (Address of principal executive offices) (Zip code) (Registrant's telephone number) Indicate by checkmark 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 at least the past 90 days. YES X NO ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS DATE SHARES OUTSTANDING - ----------------------------- ------------- ------------------ Common Stock - $.01 Par Value March 8, 1996 33,580,569 <PAGE> HANDLEMAN COMPANY INDEX PAGE NUMBER ----------- PART I -- FINANCIAL INFORMATION Consolidated Statement of Operations....................... 1 Consolidated Balance Sheet................................. 2 Consolidated Statement of Shareholders' Equity............. 3 Consolidated Statement of Cash Flows....................... 4 Notes to Consolidated Financial Statements................. 5 Management's Discussion and Analysis of Operations......... 6 - 8 PART II -- OTHER INFORMATION AND SIGNATURES....................... 9 <PAGE> HANDLEMAN COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (amounts in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended -------------------------- -------------------------- January 31, January 31, January 31, January 31, 1996 1995 1996 1995 ----------- ------------ ----------- ----------- <S> <C> <C> <C> <C> Net sales $345,605 $362,911 $871,564 $922,535 Direct product costs 274,675 280,824 676,997 709,200 -------- -------- -------- -------- Gross profit 70,930 82,087 194,567 213,335 Selling, general and administrative expenses 63,032 59,686 180,805 157,973 Provision for realignment of operations 1,500 -- 1,500 -- Amortization of acquisition costs 1,908 1,703 6,066 4,956 Interest expense, net 2,857 1,804 9,343 4,838 -------- -------- -------- -------- Income (loss) before income taxes 1,633 18,894 (3,147) 45,568 Income tax expense (benefit) 536 7,798 (1,140) 18,091 -------- -------- -------- -------- Net income (loss) $1,097 $11,096 ($2,007) $27,477 ======== ======== ======== ======== Earnings per average common share outstanding during the period $0.03 $0.33 ($0.06) $0.82 ======== ======== ======== ======== Average number of shares outstanding during the period 33,583 33,537 33,580 33,512 ======== ======== ======== ======== Dividends per share $0.05 $0.11 $0.27 $0.33 ======== ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -1- <PAGE> HANDLEMAN COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (amounts in thousands except share data) <TABLE> <CAPTION> January 31, April 29, 1996 1995 ASSETS ------------ ------------ <S> <C> <C> Current assets: Cash and cash equivalents $11,877 $24,392 Accounts receivable, less allowance of $22,610 at January 31, 1996 and $24,053 at April 29, 1995 for gross profit impact of estimated future returns 266,369 258,651 Merchandise inventories 252,571 276,109 Other current assets 3,212 1,779 ------------ ------------ Total current assets 534,029 560,931 ------------ ------------ Property and equipment: Land 4,869 6,741 Buildings and improvements 31,824 42,312 Display fixtures 111,393 109,747 Equipment, furniture and other 59,332 49,716 Leasehold improvements 3,629 3,101 ------------ ------------ 211,047 211,617 Less accumulated depreciation and amortization 95,041 86,845 ------------ ------------ 116,006 124,772 ------------ ------------ Other assets, net of allowances 71,560 68,373 ------------ ------------ Total assets $721,595 $754,076 ============ ============ LIABILITIES Current liabilities: Accounts payable $208,259 $243,138 Accrued and other liabilities 37,146 46,823 ------------ ------------ Total current liabilities 245,405 289,961 ------------ ------------ Debt, non-current 170,100 146,200 Deferred income taxes 6,268 6,263 SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 60,000,000 shares authorized; 33,581,000 and 33,533,000 shares issued at January 31, 1996 and April 29, 1995, respectively 336 335 Paid-in capital 33,193 33,188 Foreign currency translation adjustment and other (8,889) (8,130) Retained earnings 275,182 286,259 ------------ ------------ Total shareholders' equity 299,822 311,652 ------------ ------------ Total liabilities and shareholders' equity $721,595 $754,076 ============ ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -2- <PAGE> <TABLE> <CAPTION> HANDLEMAN COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (amounts in thousands except per share data) Nine Months Ended January 31, 1996 ----------------------------------------------------------------------- Foreign Common Stock Currency ------------------ Translation Total Shares Paid-in Adjustment Retained Shareholders' Issued Amount Capital and Other Earnings Equity ------- -------- -------- ----------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> April 29, 1995 33,533 $335 $33,188 ($8,130) $286,259 $311,652 Net loss (2,007) (2,007) Cash dividends, $.27 per share (9,070) (9,070) Common stock issued for employee benefit plans, net of forfeitures 48 1 5 41 47 Adjustment for foreign currency translation (800) (800) ------- -------- -------- ----------- --------- ------------- January 31, 1996 33,581 $336 $33,193 ($8,889) $275,182 $299,822 ======= ======== ======== =========== ========= ============= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -3- <PAGE> HANDLEMAN COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (amounts in thousands) <TABLE> <CAPTION> Nine Months Ended ----------------------------- January 31, January 31, 1996 1995 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income (loss) ($2,007) $27,477 ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided from (used by) operating activities: Depreciation 20,555 18,515 Amortization of acquisition costs 6,066 4,956 Recoupment of license advances 6,057 7,578 (Increase) decrease in assets: Accounts receivable (7,718) (38,179) Merchandise inventories 23,538 (56,022) Other current assets (1,433) (593) Other assets, net of allowances (7,824) (2,493) Increase (decrease) in liabilities: Accounts payable (34,879) 54,431 Accrued and other liabilities (11,611) 7,036 Deferred income taxes 5 683 ------------ ------------ Total adjustments (7,244) (4,088) ------------ ------------ Net cash provided from (used by) operating activities (9,251) 23,389 ------------ ------------ Cash flows from investing activities: Additions to property and equipment (23,983) (28,952) Retirements of property and equipment 15,866 2,650 License advances (11,158) (7,868) Acquisition of business, net of cash acquired 0 (22,521) Bulk purchase of inventory and other assets 0 (16,126) ------------ ------------ Net cash used by investing activities (19,275) (72,817) ------------ ------------ Cash flows from financing activities: Issuances of debt 1,765,210 836,009 Repayments of debt (1,739,376) (784,586) Cash dividends (9,070) (11,066) Other changes in shareholders' equity, net (753) (1,263) ------------ ------------ Net cash provided from financing activities 16,011 39,094 ------------ ------------ Net decrease in cash and cash equivalents (12,515) (10,334) Cash and cash equivalents at beginning of period 24,392 10,568 Cash and cash equivalents at end of ------------ ------------ period $11,877 $234 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -4- <PAGE> HANDLEMAN COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of Management, the accompanying consolidated balance sheet and consolidated statements of operations, shareholders' equity and cash flows contain all adjustments, consisting only of normal recurring adjustments, except as noted below, necessary to present fairly the financial position of the Company as of January 31, 1996, and the results of operations for the three and nine months then ended, and changes in cash flows for the nine months then ended. Because of the seasonal nature of the Company's business, sales and earnings results for the nine months ended January 31, 1996 are not necessarily indicative of what the results will be for the full year. The consolidated balance sheet as of April 29, 1995 is derived from the audited consolidated financial statements of the Company included in the Company's 1995 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Reference should be made to the Company's Form 10-K for the year ended April 29, 1995. 2. During the third quarter, the Company announced the closing of Entertainment Zone, a subsidiary which sold music, video and book products in departments leased from certain retailers. In connection with closing this subsidiary, the Company recognized a $1.5 million pre-tax provision for realignment of operations in the third quarter of fiscal 1996, primarily related to the write-off of display fixtures. -5- <PAGE> HANDLEMAN COMPANY ----------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- Net sales for the third quarter ended January 31, 1996 decreased 5% to $345.6 million from $362.9 million for the third quarter last year. As a result of the lower sales level, coupled with a lower gross profit margin percentage and higher selling, general and administrative (SG&A) expenses, the Company's net income for the quarter ended January 31, 1996 decreased to $1.1 million or $.03 per share, from $11.1 million or $.33 per share for the third quarter last year. Net income for the third quarter ended January 31, 1996 reflects a $1.5 million pre-tax charge ($.03 per share), principally related to display fixture write- offs, in connection with closing Entertainment Zone, a subsidiary which sold music, video and book products in departments leased from certain retailers. Net sales for the first nine months of fiscal 1996 were $871.6 million, compared to $922.5 million last year, a decrease of 6%. For the first nine months of this year, the Company had a net loss of $2.0 million (a loss of $.06 per share), compared to net income of $27.5 million (or income of $.82 per share) last year. Music sales were $200.1 million for the third quarter this year, compared to $219.2 million for the third quarter last year, a decrease of 9%. This decrease was a result of lower sales to certain key customers resulting from customer shipment restrictions, as well as continuing softness in the retail music marketplace. Compact disc sales for the third quarter this year were $137.6 million, or 69% of Handleman music sales, compared to $126.0 million or 58% of music sales for the third quarter of last year. Music sales for the nine months ended January 31, 1996 were $515.8 million, compared to $508.2 million for the nine months ended January 31, 1995, an increase of 1%. Video sales for the third quarter this year were $111.9 million, up slightly from the $111.5 million for the third quarter of last year. For the first nine months of fiscal 1996 video sales were $264.4 million, compared to $331.4 million for the comparable period last year, a decrease of 20%. Book sales were $14.8 million for the third quarter of fiscal 1996, compared to $16.1 million for the third quarter of last year, a decrease of 8%. This decrease in book sales primarily resulted from lower sales to a major customer caused by a decrease in the number of departments shipped. For the first nine months of this year, book sales were $43.8 million, compared to $46.0 million for the same period of last year, a decrease of 5%. Personal computer software sales increased 17% to $18.8 million for the third quarter this year, from $16.1 million last year, principally resulting from sales growth within the existing customer base. For the first nine months of this year, personal computer software sales were $47.6 million, compared to $36.9 million for the same period of last year, an increase of 29%. North Coast Entertainment, Inc. ("NCE"), a subsidiary of Handleman Company, includes the Company's proprietary product operations. NCE sales, which are included in the results reported above, represent sales of licensed video, music and personal computer software products. NCE sales (excluding Entertainment Zone sales in both periods) for the third quarter of fiscal 1996 were $25.2 million, compared to $18.2 million in the third quarter last year, a 38% increase. NCE sales (excluding Entertainment Zone in both periods) for the first nine months of fiscal 1996 were $83.7 million, compared to $57.3 million for the first nine months last year, an increase of 46%. The sales increase for both the third quarter and first nine months was primarily attributable to sales from companies acquired in fiscal 1995. The Company is pursuing opportunities to increase sales of proprietary products, which contribute a relatively higher gross profit margin percentage. - 6 - <PAGE> Gross profit margin for the third quarter this year was 20.5%, compared to 22.6% for the third quarter last year. The decrease in gross profit margin percentage was primarily caused by both lower sales and reduced margin on video catalog and budget products, and the shift of music sales to higher-priced compact disc product, which carries a lower gross profit margin percentage than other music products. The gross profit margin percentage for the nine months ended January 31, 1996 was 22.3%, compared to 23.1% for the comparable prior year period. SG&A expenses increased to $63.0 million or 18.2% of net sales for the third quarter this year, from $59.7 million or 16.4% of net sales for the third quarter last year. The Core Rackjobbing division contributed to the increase in SG&A expense as a percentage of net sales due to: incremental costs associated with providing services not offered last year, including servicing key account book departments, expansion of in-store interactive devices and re-fixturing; the effect of the relationship of fixed costs (e.g., computer and administrative staffs) on a lower sales level; and additional costs resulting from the transition to the Midwest automated distribution center ("ADC"). NCE also contributed to the increase in SG&A expense as a percentage of net sales. NCE has a higher SG&A expense to net sales percentage than the comparable percentage for the Core Rackjobbing division. NCE sales represented a greater proportion of overall sales this year than last year, thus increasing the overall SG&A expense to net sales percentage. SG&A expenses for the first nine months of fiscal 1996 were $180.8 million or 20.7% of net sales, compared to $158.0 million or 17.1% of net sales for the first nine months of fiscal 1995. Interest expense for the third quarter and first nine months of this year was $2.9 million and $9.3 million, respectively, compared to $1.8 million and $4.8 million, respectively, last year. These increases were due to both higher borrowings and higher average interest rates. Forces affecting sales and gross profit margin include pricing pressures from customers and competition from direct-to-retail manufacturers. As a result, the Company expects to experience a continuing deterioration in its overall gross profit margin percentage from prior year levels on a going forward basis. The Company expects SG&A expenses, and SG&A expenses as a percentage of net sales, for the fourth quarter of fiscal 1996 to exceed those for the comparable quarter last year. The Company is taking steps to reduce SG&A expenses, however, year- to-year benefit is not expected until fiscal 1997. The Company has taken, and continues to take, many steps to reduce SG&A expenses including implementation of ADCs, reorganization of the sales force, increased use of automation and technology, and continued focus on employee headcount and discretionary expenditures. Full implementation of the second ADC by the summer of 1996 will enable the Company to reduce U.S. shipping locations from 14 to 6, and further reductions are being studied. The benefits to be derived from the ADCs and other technological initiatives include lower inventory levels, reduced product distribution costs, improved delivery times, reduced customer return rates and an increase in the quality of service to customers. The Company has already reduced its inventory by 15% from the same period of last year, and expects consequential reductions going forward. On an ongoing basis, all opportunities for SG&A expense reduction are being aggressively pursued, with the only caveat being maintenance of superior customer service. Merchandise inventories at January 31, 1996 totaled $252.6 million, compared to $276.1 million at April 29, 1995. The decrease in merchandise inventories was primarily attributable to Company efforts to reduce overall inventory levels. Buildings and improvements at January 31, 1996 were $31.8 million, compared to $42.3 million at April 29, 1995. The decrease in buildings and improvements was principally due to the sale of certain Company owned facilities resulting from the continuing transition to the ADC concept. - 7 - <PAGE> Accounts payable decreased to $208.3 million at January 31, 1996, from $243.1 million at April 29, 1995. The decrease in accounts payable was primarily attributable to the decrease in merchandise inventories. Effective January 30, 1996, the Credit Agreement between the Company and its banks was amended. The amendment reduced the interest coverage ratio for the quarter ended January 31, 1996. The Company and its banks are negotiating another amendment to the Credit Agreement which should enable the Company to comply with the interest coverage ratio covenant for the quarter ending April 27, 1996, and subsequent fiscal quarters. Management expects that the Company will enter into a satisfactory amendment with its banks prior to the conclusion of the fiscal quarter ending April 27, 1996. Management's Discussion and Analysis of Operations included in the Company's Form 10-Q for the first and second quarters of fiscal 1996 provide additional discussion regarding sales and earnings results for those quarters, and are incorporated herein by reference. * * * * * On December 6, 1995, the quarterly dividend was reduced from the prior level of $.11 per share to $.05 per share. On March 6, 1996, the Board of Directors eliminated the quarterly dividend in view of the Company's current operating results. The Board will continue to review the dividend payout on a quarterly basis based upon the performance of the Company. - 8 - <PAGE> PART II - OTHER INFORMATION Item 6. Exhibits or Reports on Form 8-K No reports on Form 8-K were filed during the quarter. SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANDLEMAN COMPANY DATE: March 14, 1996 BY: /s/ Stephen Strome ------------------------------- -------------------------------- STEPHEN STROME President and Chief Executive Officer DATE: March 14, 1996 BY: /s/ Richard J. Morris ------------------------------- -------------------------------- RICHARD J. MORRIS Senior Vice President/Finance- Chief Financial Officer and Secretary -9- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> APR-27-1996 <PERIOD-START> APR-30-1995 <PERIOD-END> JAN-31-1996 <CASH> 11,877 <SECURITIES> 0 <RECEIVABLES> 266,369 <ALLOWANCES> 0 <INVENTORY> 252,571 <CURRENT-ASSETS> 534,029 <PP&E> 211,047 <DEPRECIATION> 95,041 <TOTAL-ASSETS> 721,595 <CURRENT-LIABILITIES> 245,405 <BONDS> 170,100 <COMMON> 336 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 299,486 <TOTAL-LIABILITY-AND-EQUITY> 721,595 <SALES> 345,605 <TOTAL-REVENUES> 345,605 <CGS> 274,675 <TOTAL-COSTS> 274,675 <OTHER-EXPENSES> 66,440 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 2,857 <INCOME-PRETAX> 1,633 <INCOME-TAX> 536 <INCOME-CONTINUING> 1,097 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,097 <EPS-PRIMARY> .03 <EPS-DILUTED> .03 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

HNZ

https://www.sec.gov/Archives/edgar/data/46640/0000950132-96-000146.txt

-----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, Rlo4+gJ7qx5RnsgIJrUqDR8grilw7ORjaff+7uFd4AVUttsQ1XJXIbszCe5knL1S Guaf02TPWVHbTz+jIhA6jQ== <SEC-DOCUMENT>0000950132-96-000146.txt : 19960319 <SEC-HEADER>0000950132-96-000146.hdr.sgml : 19960319 ACCESSION NUMBER: 0000950132-96-000146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960318 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEINZ H J CO CENTRAL INDEX KEY: 0000046640 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 250542520 STATE OF INCORPORATION: PA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03385 FILM NUMBER: 96535867 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>HEINZ FORM 10-Q <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------------------- ------------------ FOR THE NINE MONTHS ENDED JANUARY 31, 1996 COMMISSION FILE NUMBER 1-3385 H. J. HEINZ COMPANY (Exact name of registrant as specified in its charter) <TABLE> <S> <C> PENNSYLVANIA 25-0542520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of Principal Executive Offices) (Zip Code) </TABLE> REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-456-5700 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 requirements for the past 90 days. Yes X No ---- ---- The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of February 29, 1996, was 370,263,929 shares. <PAGE> PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Nine Months Nine Months Ended Ended January 31, 1996 January 25, 1995 ---------------- ---------------- FY 1996 FY 1995 (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales.................................................................... $ 6,575,708 $ 5,665,334 Cost of products sold.................................................... 4,166,161 3,603,479 ----------------- ----------------- Gross profit............................................................. 2,409,547 2,061,855 Selling, general and administrative expenses............................. 1,427,731 1,228,604 ----------------- ----------------- Operating income......................................................... 981,816 833,251 Interest income.......................................................... 30,392 25,655 Interest expense......................................................... 208,849 141,576 Other expense, net....................................................... 23,243 30,395 ----------------- ----------------- Income before income taxes............................................... 780,116 686,935 Provision for income taxes............................................... 290,996 254,360 ----------------- ----------------- Net income............................................................... $ 489,120 $ 432,575 ================= ================= Net income per share..................................................... $ 1.30 $ 1.16 ================= ================= Cash dividends per share................................................. $ .77 $ .70 ================= ================= Average common shares outstanding........................................ 376,929 373,399 ================= ================= </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 2 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Three Months Ended Ended January 31, 1996 January 25, 1995 ---------------- ---------------- FY 1996 FY 1995 (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales.................................................................... $ 2,193,138 $ 1,953,855 Cost of products sold.................................................... 1,380,830 1,232,404 ----------------- ----------------- Gross profit............................................................. 812,308 721,451 Selling, general and administrative expenses............................. 497,873 447,078 ----------------- ----------------- Operating income......................................................... 314,435 274,373 Interest income.......................................................... 10,869 9,021 Interest expense......................................................... 70,858 55,315 Other expense, net....................................................... 9,114 12,037 ----------------- ----------------- Income before income taxes............................................... 245,332 216,042 Provision for income taxes............................................... 88,848 77,775 ----------------- ----------------- Net income............................................................... $ 156,484 $ 138,267 ================= ================= Net income per share..................................................... $ .42 $ .38 ================= ================= Cash dividends per share................................................. $ .26-1/2 $ .24 ================= ================= Average common shares outstanding........................................ 376,929 373,399 ================= ================= </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 3 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 31, 1996 May 3, 1995* ---------------- ------------ FY 1996 FY 1995 (Unaudited) (Thousands of Dollars) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents.................................................. $ 154,037 $ 124,338 Short-term investments, at cost which approximates market...................................................... 60,922 82,693 Receivables, net........................................................... 1,109,728 1,030,790 Inventories................................................................ 1,564,487 1,374,570 Prepaid expenses and other current assets.................................. 280,092 210,631 ----------------- ------------- Total current assets.................................................. 3,169,266 2,823,022 ----------------- ------------- Property, plant and equipment.............................................. 4,197,288 4,004,654 Less accumulated depreciation.............................................. 1,605,475 1,470,278 ----------------- ------------- Total property, plant and equipment, net.............................. 2,591,813 2,534,376 ----------------- ------------- Investments, advances and other assets..................................... 520,558 543,032 Goodwill, net.............................................................. 1,683,918 1,682,933 Other intangibles, net..................................................... 652,631 663,825 ----------------- ------------- Total other noncurrent assets......................................... 2,857,107 2,889,790 ----------------- ------------- Total assets.......................................................... $ 8,618,186 $ 8,247,188 ================= ============= </TABLE> *Summarized from audited fiscal year 1995 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 31, 1996 May 3, 1995* ---------------- ------------ FY 1996 FY 1995 (Unaudited) (Thousands of Dollars) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................................ $ 1,281,472 $ 1,018,354 Portion of long-term debt due within one year.............................. 88,405 55,937 Accounts payable........................................................... 710,488 720,747 Salaries and wages......................................................... 60,263 77,276 Accrued marketing.......................................................... 116,825 141,701 Other accrued liabilities.................................................. 369,643 470,842 Income taxes............................................................... 137,259 79,209 ----------------- ------------- Total current liabilities............................................. 2,764,355 2,564,066 ----------------- ------------- Long-term debt............................................................. 2,238,975 2,326,785 Deferred income taxes...................................................... 367,880 348,576 Non-pension postretirement benefits........................................ 209,152 220,673 Other liabilities.......................................................... 334,165 314,219 ----------------- ------------- Total long-term debt and other liabilities............................ 3,150,172 3,210,253 ----------------- ------------- Shareholders' Equity: Capital stock.............................................................. 108,093 108,132 Additional capital......................................................... 158,731 121,291 Retained earnings.......................................................... 4,084,191 3,878,988 Cumulative translation adjustments......................................... (178,093) (157,159) ----------------- ------------- 4,172,922 3,951,252 Less: Treasury stock at cost (61,371,837 shares at January 31, 1996 and 65,587,400 shares at May 3, 1995)............................ 1,445,450 1,450,724 Unearned compensation relating to the ESOP............................... 23,813 27,659 ----------------- ------------- Total shareholders' equity............................................ 2,703,659 2,472,869 ----------------- ------------- Total liabilities and shareholders' equity............................ $ 8,618,186 $ 8,247,188 ================= ============= </TABLE> *Summarized from audited fiscal year 1995 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 5 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Nine Months Ended Ended January 31, 1996 January 25, 1995 ---------------- ---------------- FY 1996 FY 1995 (Unaudited) (Thousands of Dollars) <S> <C> <C> Cash Provided by Operating Activities.................................. $ 274,191 $ 286,401 ----------------- ----------------- Cash Flows from Investing Activities: Capital expenditures.............................................. (246,069) (210,601) Acquisitions, net of cash acquired................................ (96,532) (449,212) Purchases of short-term investments............................... (864,989) (1,368,048) Sales and maturities of short-term investments.................... 890,427 1,372,627 Investment in tax benefits........................................ 61,952 15,807 Other items, net.................................................. 58,524 (1,504) ----------------- ----------------- Cash (used for) investing activities......................... (196,687) (640,931) ----------------- ----------------- Cash Flows from Financing Activities: Proceeds from long-term debt...................................... 5,606 318,923 Payments on long-term debt........................................ (51,141) (10,247) Proceeds from short-term debt, net................................ 237,431 471,194 Dividends......................................................... (283,917) (257,820) Purchases of treasury stock....................................... (65,118) (255,634) Exercise of stock options......................................... 70,716 23,705 Tax benefit from stock options exercised.......................... 36,330 4,942 Proceeds from minority interest................................... -- 56,971 Proceeds from borrowings against insurance policies............... 6,361 70,931 Repayments of borrowings against insurance policies............... -- (68,898) Other items, net.................................................. 3,580 4,850 ----------------- ----------------- Cash (used for) provided by financing activities............. (40,152) 358,917 ----------------- ----------------- Effect of exchange rate changes on cash and cash equivalents.......................................................... (7,653) 13,197 ----------------- ----------------- Net increase in cash and cash equivalents.............................. 29,699 17,584 Cash and cash equivalents at beginning of year......................... 124,338 98,536 ----------------- ----------------- Cash and cash equivalents at end of period............................. $ 154,037 $ 116,120 ================= ================= </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 6 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's annual report on Form 10-K for the fiscal year ended May 3, 1995 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the company's business. Certain prior year amounts have been reclassified in order to conform with the fiscal 1996 presentation. (3) In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. (4) The composition of inventories at the balance sheet dates was as follows: <TABLE> <CAPTION> January 31, 1996 May 3, 1995 ---------------- ----------- <S> <C> <C> (Thousands of Dollars) Finished goods and work-in-process.................................... $ 1,161,839 $ 1,004,350 Packaging material and ingredients.................................... 402,648 370,220 ----------------- ------------- $ 1,564,487 $ 1,374,570 ================= ============= </TABLE> (5) The provision for income taxes consists of provisions for federal, state, U.S. possessions and foreign income taxes. The company operates in an international environment with significant operations in various locations outside the United States. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. (6) On September 5, 1995, the company amended the line of credit agreements which support its domestic commercial paper programs. Total availability under the domestic commercial paper programs is $2.0 billion, compared to $2.3 billion under the fiscal 1995 programs. The company amended the line of credit agreements which support the $1.6 billion domestic commercial paper program. The amended line of credit agreements total $1.6 billion, of which $800 million expires on September 3, 1996 unless otherwise extended and the remaining $800 million expires in September 2000. As a result, $800 million of the $1.5 billion domestic commercial paper outstanding is classified as long-term debt as of January 31, 1996. As of May 3, 1995, $800 million of domestic commercial paper was classified as long-term debt. The company also amended the $700 million line of credit agreement which supported its short-term privately placed commercial paper program. This program initially had been used to finance the acquisition of the North American pet food businesses of The Quaker Oats Company. The amended line of credit agreement provides for borrowings of up to $400 million and expires on September 3, 1996. A portion of the fiscal 1995 privately placed commercial paper had previously been repaid through the issuance of long-term debt in April 1995. (7) On September 12, 1995, the company's board of directors authorized a three-for-two stock split, effective October 3, 1995. There was no adjustment in the par value or the total number of authorized common shares. All prior year share and per share amounts have been adjusted to reflect the three-for-two common stock split. 7 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) (8) On September 12, 1995, the company's board of directors increased the quarterly dividend on the company's common stock to $0.26-1/2 per share from $0.24 per share, for an indicated annual rate of $1.06 per share. 8 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS NINE MONTHS ENDED JANUARY 31, 1996 AND JANUARY 25, 1995 For the nine months ended January 31, 1996, sales increased $910.4 million, or 16%, to $6,575.7 million from $5,665.3 million recorded in the same period a year ago. The sales increase came primarily from acquisitions (net of divestitures) of 9%, volume gains of 5%, the favorable effects of foreign exchange translation rates of 1% and price increases of 1%. Domestic operations provided 57% of the current period's net sales compared to 56% in the same period last year. Volume increases in Ore-Ida frozen potatoes, StarKist tuna, Heinz ketchup, baby food, pasta, coated products and Ore-Ida Bagel Bites were partially offset by decreases in weight loss products and single-serve condiments. Price increases in single-serve condiments, Heinz grocery ketchup and baby food were partially offset by price decreases in StarKist tuna, frozen entrees and pet food. Contributing to the sales dollar increase were the following fiscal 1995 acquisitions: The North American pet food businesses of The Quaker Oats Company (the "Pet Food Business"); The All American Gourmet Company; the Farley's infant foods and adult nutrition business; and the Family Products Division of Glaxo India Ltd. During the first six months of fiscal 1996, the company acquired a majority interest in PMV/Zabreh, a producer of infant formulas and dairy products located in Zabreh, Moravia, Czech Republic. PMV/Zabreh holds leading market shares in both the Czech and Slovak Republics for infant formula, sold through pharmacies under the Sunar and Feminar brand names. The company also increased its investment to 97% of Kecskemeti Konzervgyar R.T., which produces jarred baby foods and canned vegetable products in Kecskemet, Hungary. Also contributing to the sales dollar increase were the following fiscal 1996 third quarter acquisitions: Britwest Ltd. in the United Kingdom and Fattoria Scaldasole S.p.A. in Italy. Britwest Ltd. markets single-serve condiments, beverages and sauces in Britain and France. Fattoria Scaldasole S.p.A. processes organic foods such as yogurts, milk, dairy products and fruit juices. Divestitures impacting the nine month sales comparison include a domestic bulk oil business and an overseas sweetener business. Gross profit increased $347.7 million to $2,409.5 million from $2,061.9 million a year ago. The ratio of gross profit to sales increased to 36.6% from 36.4%. The current year's gross profit ratio was favorably impacted by cost reductions and profit mix, which more than offset the effect of increased goodwill amortization associated with recent acquisitions. Operating income increased $148.6 million, or 18%, to $981.8 million from $833.3 million for the same period last year. The increase in operating income was primarily due to the sales-driven increase in gross profit, partially offset by increased marketing expenses; higher selling and distribution expenses related to increased volume; and higher general and administrative expenses associated with acquisitions. For the nine months ended January 31, 1996, domestic operations provided 56% of operating income compared to 55% in the same period last year. The Weight Watchers meeting business in the U.S. continues to show weakness, offset somewhat by improvements overseas. Domestic classroom attendance was affected by the severe winter weather. Increased competitor trade promotions adversely affected frozen entree and dinner volume. Through the third quarter of fiscal 1996, Heinz U.K.'s results continue to show improvement over the prior year due to improved sales volumes and sales prices. 9 <PAGE> Net interest expense increased $62.5 million to $178.5 million from $115.9 million a year ago mainly due to higher borrowings resulting from acquisitions and higher short-term interest rates. The effective tax rate for the first nine months of the current fiscal year increased to 37.3% from 37.0% for the same period a year ago. Net income for the current period was $489.1 million, compared to $432.6 million for the same period last year, and earnings per share was $1.30 compared to $1.16. Earnings per share amounts reflect the three-for-two stock split, which was effective October 3, 1995. RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 1996 AND JANUARY 25, 1995 For the three months ended January 31, 1996, sales increased $239.3 million, or 12%, to $2,193.1 million from $1,953.9 million recorded in the same period a year ago. The sales increase came primarily from volume gains of 5%, acquisitions (net of divestitures) of 5% and price increases of 2%. Foreign exchange translation rates had a negligible effect on sales. Volume increases were noted in Ore-Ida frozen foodservice potatoes, StarKist tuna, pet food, coated products and pasta. These increases were partially offset by a decrease in frozen entrees. Price increases in single-serve condiments, Heinz grocery ketchup, baby food and Ore-Ida retail potatoes were partially offset by price decreases in pet food, StarKist tuna and soups. Contributing to the third quarter sales dollar increase were the following acquisitions: the Pet Food Business; The All American Gourmet Company; PMV/Zabreh; Kecskemeti Konzervgyar R.T.; Britwest Ltd.; and Fattoria Scaldasole S.p.A. Divestitures impacting the third quarter sales comparison include a domestic bulk oil business and an overseas sweetener business. Gross profit increased $90.9 million to $812.3 million from $721.5 million a year ago. The ratio of gross profit to sales increased slightly to 37.0% from 36.9%. The current quarter's gross profit ratio was favorably impacted by cost reductions and profit mix, which more than offset the effect of increased goodwill amortization associated with recent acquisitions. Operating income increased $40.1 million, or 15%, to $314.4 million from $274.4 million for the same period last year. The increase in operating income was primarily due to the sales-driven increase in gross profit, partially offset by increased marketing expenses; higher selling and distribution expenses related to increased volume; and higher general and administrative expenses associated with acquisitions. Net interest expense increased $13.7 million to $60.0 million from $46.3 million in the third quarter a year ago mainly due to higher borrowings resulting from acquisitions. The effective tax rate for the third quarter was 36.2% versus 36.0% for the same period a year ago. Net income for the current quarter was $156.5 million compared to $138.3 million for the same period last year, and earnings per share was $0.42 compared to $0.38. Earnings per share amounts reflect the three-for-two stock split, which was effective October 3, 1995. LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities totaled $274.2 million for the nine month period ended January 31, 1996 compared to $286.4 million last year. Higher operating earnings were offset somewhat by increased working capital requirements in the current nine month period. Cash used for investing activities required $196.7 million compared to $640.9 million last year. Cash used for acquisitions in the current period totaled $96.5 million, primarily due to the purchase of PMV/Zabreh in the Czech Republic; the additional investment in Kecskemeti Konzervgyar R.T. in Hungary; the purchase of Britwest Ltd. in the United Kingdom; the purchase 10 <PAGE> of Fattoria Scaldasole S.p.A. in Italy; the purchase of the Craigs brand of jams and dressings from Kraft General Foods New Zealand Ltd.; and the purchase of a majority interest in Indian Ocean Tuna Ltd., located in the Seychelles. Cash used for acquisitions in the prior year's comparable period totaled $449.2 million and included The All American Gourmet Company; the Family Products Division of Glaxo India Ltd.; Farley's infant foods and adult nutrition business; the Borden Foodservice Group; DEGA, a foodservice company located in Italy; and other smaller acquisitions. Investments in tax benefits provided $62.0 million compared to $15.8 million a year ago, due mainly to the termination of certain domestic investments. Purchases of property, plant and equipment totaled $246.1 million compared to $210.6 million a year ago. Cash used for financing activities required $40.2 million compared to providing $358.9 million last year. Cash used for dividend payments totaled $283.9 million compared to $257.8 million in the prior period. Cash used for treasury stock purchases decreased to $65.1 million (2.1 million shares) from $255.6 million (10.8 million shares) in the prior period. Net proceeds on short-term debt provided $237.4 million versus $471.2 million in the prior year's comparable period. Proceeds from long-term debt decreased to $5.6 million from the prior period total of $318.9 million, which was mainly due to the issuance of $300 million three-year 8.0% notes in the prior period. On September 5, 1995, the company amended the line of credit agreements which support its domestic commercial paper programs. Total availability under the domestic commercial paper programs is $2.0 billion, compared to $2.3 billion under the fiscal 1995 programs. The company amended the line of credit agreements which support the $1.6 billion domestic commercial paper program. The amended line of credit agreements total $1.6 billion, of which $800 million expires on September 3, 1996 unless otherwise extended, and the remaining $800 million expires in September 2000. As a result, $800 million of the $1.5 billion domestic commercial paper outstanding is classified as long-term debt as of January 31, 1996. As of May 3, 1995, $800 million of domestic commercial paper was classified as long-term debt. The company also amended the $700 million line of credit agreement which supported its short-term privately placed commercial paper program. This program initially had been used to finance the acquisition of the Pet Food Business. The amended line of credit agreement provides for borrowings of up to $400 million and expires on September 3, 1996. A portion of the fiscal 1995 privately placed commercial paper had previously been repaid through the issuance of long-term debt in April 1995. The company continues to evaluate other long-term financing vehicles in order to reduce short-term variable interest rate debt. On September 12, 1995, the company's board of directors authorized a three-for-two stock split, effective October 3, 1995. There was no adjustment in the par value or the total number of authorized common shares. Also on September 12, 1995, the company's board of directors increased the quarterly dividend on the company's common stock to $0.26-1/2 per share from $0.24 per share, for an indicated annual rate of $1.06 per share. On March 13, 1996, the company's board of directors declared the quarterly dividend on the company's common stock of $0.26-1/2 per share to shareholders of record as of the close of business March 25, 1996, payable April 10, 1996. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. OTHER MATTERS On March 6, 1996, the company announced that it had completed the acquisition of Earth's Best, Inc. of Boulder, Colorado, a leading marketer of organic baby foods. Earth's Best products are sold primarily in the United States, Canada, Australia and the Far East. 11 <PAGE> The company continues to implement its strategy to combine recent acquisitions with existing operations. Cash expenditures related to exiting activities and terminating or relocating certain employees of the acquired companies have begun, and are expected to continue over approximately the next twelve months. The company will finalize its integration plans by the end of the fiscal year, making any necessary adjustments to the preliminary allocations of purchase price. In management's opinion, the opening balance sheet accruals for employee severance/relocation costs and facilities consolidation/closure costs provided for in the preliminary allocations of purchase price are adequate. On September 12, 1995, the Weight Watchers Gourmet Food Company announced plans to close The All American Gourmet plant in Atlanta, Georgia. Operations were phased out as of January 1996. The facility's dinner and entree production lines have been consolidated with other company facilities. This closure is part of the above mentioned strategy to combine recent acquisitions with existing operations. The employee severance and exit costs related to this closure had previously been provided for in the year end 1995 balance sheet as "other accrued liabilities." 12 <PAGE> PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION On March 6, 1996, the company announced that it had completed the acquisition of Earth's Best, Inc. of Boulder, Colorado, a leading marketer of organic baby foods. Earth's Best products are sold primarily in the United States, Canada, Australia and the Far East. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are listed below and are filed as part hereof. The Registrant has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 11. Computation of net income per share. 27. Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended January 31, 1996. 13 <PAGE> 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. <TABLE> <S> <C> H. J. HEINZ COMPANY (Registrant) /s/ DAVID R. WILLIAMS Date: March 18, 1996 By...................................................... David R. Williams Senior Vice President--Finance and Chief Financial Officer (Principal Financial Officer) /s/ TRACY E. QUINN Date: March 18, 1996 By...................................................... Tracy E. Quinn Corporate Controller (Principal Accounting Officer) </TABLE> 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF NET INCOME PER SHARE <TEXT> <PAGE> EXHIBIT 11 H. J. Heinz Company and Subsidiaries COMPUTATION OF NET INCOME PER SHARE (Unaudited) <TABLE> <CAPTION> Nine Months Ended ------------------------ January 31, January 25, 1996 1995 ---- ---- FY 1996 FY 1995 <S> <C> <C> Primary income per share: Net income....................................................................... $ 489,120 $ 432,575 Preferred dividends.............................................................. 44 49 ------------ ------------ Net income applicable to common stock............................................ $ 489,076 $ 432,526 ============ ============ Average common shares outstanding and common stock equivalents....................................................... 376,929 373,399 ============ ============ Net income per share--primary.................................................... $ 1.30 $ 1.16 ============ ============ Fully diluted income per share: Net income....................................................................... $ 489,120 $ 432,575 ============ ============ Average common shares outstanding and common stock equivalents....................................................... 376,929 373,399 Additional common shares assuming: Conversion of $1.70 third cumulative preferred stock........................... 469 519 Additional common shares assuming options were exercised at the period-end market price.............................................. 1,372 1,033 ------------ ------------ Average common shares outstanding and common stock equivalents....................................................... 378,770 374,951 ============ ============ Net income per share--fully diluted............................................ $ 1.29 $ 1.15 ============ ============ </TABLE> All amounts in thousands except per share amounts. Note: Prior year share and per share amounts have been adjusted to reflect the three-for-two stock split, which was effective October 3, 1995. ------------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAY-01-1996 <PERIOD-START> MAY-04-1995 <PERIOD-END> JAN-31-1996 <CASH> 154,037 <SECURITIES> 60,922 <RECEIVABLES> 1,109,728 <ALLOWANCES> 0 <INVENTORY> 1,564,487 <CURRENT-ASSETS> 3,169,266 <PP&E> 4,197,288 <DEPRECIATION> 1,605,475 <TOTAL-ASSETS> 8,618,186 <CURRENT-LIABILITIES> 2,764,355 <BONDS> 2,238,975 <PREFERRED-MANDATORY> 0 <PREFERRED> 319 <COMMON> 107,774 <OTHER-SE> 2,595,566 <TOTAL-LIABILITY-AND-EQUITY> 8,618,186 <SALES> 6,575,708 <TOTAL-REVENUES> 6,575,708 <CGS> 4,166,161 <TOTAL-COSTS> 4,166,161 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 208,849 <INCOME-PRETAX> 780,116 <INCOME-TAX> 290,996 <INCOME-CONTINUING> 489,120 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 489,120 <EPS-PRIMARY> 1.30 <EPS-DILUTED> 1.29 <FN> <F1>Per share amounts reflect the three-for-two stock split, which was effective October 3, 1995. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

HP

https://www.sec.gov/Archives/edgar/data/46765/0000950134-96-000377.txt

-----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, Mh8c+omcB1SP4KOUdgWBMJqhRsnck9MJ/9CBWHqkhOXX+2jaFMEFbjI189tG8vHj AcUs2TxzWeAAQ4EJuEg1vg== <SEC-DOCUMENT>0000950134-96-000377.txt : 19960216 <SEC-HEADER>0000950134-96-000377.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950134-96-000377 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELMERICH & PAYNE INC CENTRAL INDEX KEY: 0000046765 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 730679879 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04221 FILM NUMBER: 96517079 BUSINESS ADDRESS: STREET 1: UTICA AT 21ST ST CITY: TULSA STATE: OK ZIP: 74114 BUSINESS PHONE: 9187425531 MAIL ADDRESS: STREET 1: UTICA AT 21ST ST CITY: TULSA STATE: OK ZIP: 74114 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 30549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended: DECEMBER 31, 1995 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: 1-4221 HELMERICH & PAYNE, INC. (Exact name of registrant as specified in its charter) DELAWARE 73-0679879 (State or other jurisdiction of incorporation (I.R.S. Employer I.D. Number) or organization) UTICA AT TWENTY-FIRST STREET, TULSA, OKLAHOMA 74114 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (918) 742-5531 NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- CLASS OUTSTANDING AT DECEMBER 31, 1995 - ---------------------------- -------------------------------- Common Stock, .10 par value 24,764,620 AUTHORIZED AT DECEMBER 31, 1995 -------------------------------- 26,764,476 Total Number of Pages 11 ------ <PAGE> 2 HELMERICH & PAYNE, INC. INDEX <TABLE> <S> <C> PART I. FINANCIAL INFORMATION PAGE NO. Consolidated Condensed Balance Sheets - December 31, 1995 and September 30, 1995 . . . . . . . . . . 3 Consolidated Condensed Statements of Income - Three Months Ended December 31, 1995 and 1994. . . . . . . . 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended December 31, 1995 and 1994. . . . . . . . 5 Consolidated Condensed Statement of Shareholders' Equity - Three Months Ended December 31, 1995 . . . . . . . . . . . . 6 Notes to Consolidated Condensed Financial Statements . . . . 7 Revenues and Income by Business Segments . . . . . . . . . . 8 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . 9 PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 10 Signature Page . . . . . . . . . . . . . . . . . . . . . . . 11 </TABLE> -2- <PAGE> 3 PART I FINANCIAL INFORMATION HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> (Unaudited) December 31 September 30 1995 1995 ----------- ------------ <S> <C> <C> ASSETS - ------ Current Assets Cash and cash equivalents $ 8,606 $ 19,661 Short-term investments 8,989 8,989 Accounts receivable, net 66,400 59,314 Inventories 21,787 21,313 Prepaid expenses and other 6,350 5,717 ----------- ------------ Total Current Assets 112,132 114,994 ----------- ------------ Investments 157,502 156,908 Property, Plant and Equipment, Net 448,801 423,762 Other Assets 14,433 14,501 ----------- ------------ Total Assets $ 732,868 $ 710,165 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 24,983 $ 26,382 Accrued liabilities 24,663 21,529 Notes Payable 23,700 21,700 ----------- ------------ Total Current Liabilities 73,346 69,611 ----------- ------------ Noncurrent Liabilities Deferred income taxes 69,598 66,047 Other 13,738 12,072 ----------- ------------ Total Noncurrent Liabilities 83,336 78,119 ----------- ------------ Shareholders' Equity Common stock, par value $.10 per share 2,677 2,677 Preferred stock, no shares issued - - Additional paid-in capital 48,436 48,436 Net unrealized holding gains 43,332 38,004 Retained earnings 504,115 495,692 ----------- ------------ 598,560 584,809 Less treasury stock, at cost 22,374 22,374 ----------- ------------ Total Shareholders' Equity 576,186 562,435 ----------- ------------ $ 732,868 $ 710,165 =========== ============ </TABLE> See accompanying notes to financial statements. -3- <PAGE> 4 HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) <TABLE> <S> <C> Three Months Ended December 31 1995 1994 -------------- -------------- REVENUES: Sales and other operating revenues $ 93,418 $ 78,555 Income from investments 1,167 1,389 ------------ ------------ 94,585 79,944 ------------ ------------ COST AND EXPENSES: Operating costs 56,377 51,248 Depreciation, depletion and amortization 13,737 13,630 Dry holes and abandonments 928 2,179 Taxes, other than income taxes 3,833 3,978 General and administrative 2,348 2,094 Interest 79 99 ------------ ------------ 77,302 73,228 ------------ ------------ INCOME BEFORE INCOME TAXES AND EQUITY IN INCOME OF AFFILIATE 17,283 6,716 INCOME TAX EXPENSE 6,384 2,481 EQUITY IN INCOME OF AFFILIATE, net of income taxes 194 181 ------------ ------------ NET INCOME $ 11,093 $ 4,416 ============ ============ NET INCOME PER AVERAGE COMMON SHARE $ .45 $ .18 ============ ============ CASH DIVIDENDS (Note 2) $ .125 $ .125 AVERAGE COMMON SHARES OUTSTANDING 24,603 24,479 </TABLE> See accompanying notes to financial statements. -4- <PAGE> 5 HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended December 31 1995 1994 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- Net Income $ 11,093 $ 4,416 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation, depletion and amortization 13,737 13,630 Dry holes and abandonments 928 2,179 Equity in income of affiliate before income taxes ( 313) ( 291) Amortization of deferred compensation 425 458 Other, net 448 ( 332) Change in assets and liabilities- Increase in accounts receivable ( 7,086) ( 26) Increase in inventories ( 474) ( 295) Increase in prepaid exps. & other ( 565) ( 2,087) Increase(decrease) in accounts payable ( 336) 3,601 Increase(decrease) in accrued liabilities 6,088 ( 2,127) Increase in deferred income taxes 286 393 Increase in other noncurrent liabilities 1,666 1,115 ------------ ------------ Total Adjustments 14,804 16,218 ------------ ------------ Net cash provided by operating activities 25,897 20,634 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Capital expenditures, including dry hole costs ( 35,929) ( 27,404) Proceeds from sales of property, plant and equipment 72 644 Purchase of investments - ( 4,978) ------------ ------------ Net cash used in investing activities ( 35,857) ( 31,738) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Proceeds from notes payable 22,000 - Payments made on notes payable ( 20,000) - Dividends paid ( 3,095) ( 3,084) Proceeds from exercise of stock options - 175 ------------ ------------ Net cash used in financing activities ( 1,095) ( 2,909) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS ( 11,055) ( 14,013) CASH AND CASH EQUIVALENTS, beginning of period 19,661 29,447 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 8,606 $ 15,434 ============ ============ </TABLE> See accompanying notes to financial statements. -5- <PAGE> 6 HELMERICH & PAYNE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands) <TABLE> <CAPTION> Net Common Stock Unrlzed Treasury Stock ---------------- Paid-In Holding Retained -------------- Shares Amount Capital Gains Earnings Shares Amount ------ ------ ------- ------- -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> Balance, September 30, 1995 26,764 $2,677 $48,436 $38,004 $495,692 2,000 $(22,374) Change in net unrealized holding gains, net of income taxes of $3,265 - - - 5,328 - - - Cash dividends ($0.125 per share) - - - - (3,095) - - Amortization of deferred compensation - - - - 425 - - Net income - - - - 11,093 - - ------------------------------------------------------------------------- Balance, December 31, 1995 26,764 $2,677 $48,436 $43,332 $504,115 2,000 $(22,374) ========================================================================= </TABLE> See accompanying notes to financial statements. -6- <PAGE> 7 HELMERICH & PAYNE, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the results of the periods presented. The results of operations for the three months ended December 31, 1995, and December 31, 1994, are not necessarily indicative of the results to be expected for the full year. 2. The $.125 cash dividend declared in September, 1995 was paid December 1, 1995. On December 6, 1995, a cash dividend of $.125 per share was declared for shareholders of record on February 15, 1996, payable March 1, 1996. 3. Inventories consisted of the following (in thousands of dollars): <TABLE> <CAPTION> 12-31-95 09-30-95 -------- -------- <S> <C> <C> Raw Materials $ 209 $ 100 Works in Progress 304 315 Finished Goods 1,703 1,435 Materials & Supplies 19,571 19,463 -------- -------- $ 21,787 $ 21,313 ======== ======== </TABLE> 4. Income from investments does not include any gains or losses on sales of available-for-sale securities during the first quarter of 1996 or 1995. 5. In May, 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of the new standard for investments held as of or acquired after October 1, 1994. <TABLE> <CAPTION> Gross Gross Est. Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) --------------------------------------- <S> <C> <C> <C> <C> Equity Securities 12/31/95 $64,804 $70,184 $294 $134,694 Equity Securities 09/30/95 $64,804 $61,455 $158 $126,101 </TABLE> During the quarter ended December 31, 1995 the net unrealized holding gains of the Company's securities classified as available-for-sale increased $5,328,000 (net of $3,265,000 in deferred income taxes). 6. The Company maintains a line of credit agreement with certain banks which provides for maximum borrowing of $75,000,000 at adjustable interest rates. Under the agreement, $75,000,000 may be borrowed through May 1996, and $45,000,000 may be borrowed through May 1998. As of December 31, 1995, the Company had borrowed $23,700,000 at a weighted average interest rate of 6.14% leaving an unused portion of $51,300,000. Under the line of credit agreement, the Company must meet certain requirements regarding levels of debt, net worth and earnings. -7- <PAGE> 8 HELMERICH & PAYNE, INC. REVENUES AND INCOME BY BUSINESS SEGMENTS (in thousands) <TABLE> <CAPTION> FY 1996 FY 1995 1st Qtr 1st Qtr ------- ------- <S> <C> <C> SALES AND OTHER REVENUES: Contract Drilling-Domestic $23,020 $25,488 Contract Drilling-Internat. 33,935 22,150 ------- ------- Total Contract Drilling Division 56,955 47,638 ------- ------- Exploration and Production 15,460 13,471 Natural Gas Marketing 12,786 9,479 ------- ------- Total Oil & Gas Division 28,246 22,950 ------- ------- Chemical Division 6,158 5,951 Real Estate Division 2,008 1,846 Investment and Other 1,218 1,559 ------- ------- Total Revenues $94,585 $79,944 ======= ======= OPERATING PROFIT(LOSS): Contract Drilling-Domestic $ 1,915 $ 1,125 Contract Drilling-Internat. 8,309 3,355 ------- ------- Total Contract Drilling Division 10,224 4,480 ------- ------- Exploration and Production 4,075 ( 538) Natural Gas Marketing 757 287 ------- ------- Total Oil & Gas Division 4,832 ( 251) ------- ------- Chemical Division 2,739 2,636 Real Estate Division 1,221 1,121 ------- ------- Total Operating Profit 19,016 7,986 ------- ------- OTHER (1,733) (1,270) ------- ------- INCOME BEFORE INCOME TAXES AND EQUITY IN INCOME OF AFFILIATE $17,283 $ 6,716 ======= ======= </TABLE> See accompanying notes to financial statements. -8- <PAGE> 9 HELMERICH & PAYNE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DECEMBER 31, 1995 Results of Operations The Company reported net income of $11,093,000 ($0.45 per share) on revenues of $94,585,000 for the first quarter of fiscal year 1996, compared with net income of $4,416,000 ($0.18 per share) on revenues of $79,944,000 during the first quarter of fiscal 1995. The Contract Drilling Division reported an operating profit of $10,224,000 for the first quarter of 1996, compared with $4,480,000 for the same period in fiscal 1995. Operating profit from international drilling operations increased 148% to $8,309,000 for the first quarter of fiscal 1996, compared with $3,355,000 for the first quarter of 1995. Additional rigs sent to Colombia (3) and Venezuela (4) during 1995 was the primary reason for the significant increase. Utilization for all international rigs was 90% during the first quarter, compared with 84% during the first quarter of fiscal 1995. Utilization is expected to remain strong for the remainder of the year in Venezuela and Colombia, but softer in other South American countries. Exploration and Production reported an operating profit of $4,075,000 for the first quarter of fiscal 1996, compared with an operating loss of $538,000 in the first quarter of fiscal 1995. The improvement in operating profit from the prior year was primarily the result of higher natural gas prices, increased production volumes and lower operating expenses. The average natural gas price increased from $1.37 per mcf in the first quarter of fiscal 1995 to $1.49 per mcf in the first quarter of fiscal 1996. Production volumes increased from 78.2 Mmcf/day during the first quarter of 1995 to 89.3 Mmcf/day in the same period of 1996. Reductions in depreciation and depletion, dry hole costs, and geophysical expense totaled $2,756,000. A significant increase in the Company's exploration activity is expected to occur in the second and third quarters, providing increased exposure to dry hole costs. Both the Chemical Division and the Real Estate Division had slightly higher operating profits than a year ago on increased revenues. In August 1994, the Company entered into a joint venture with its equity affiliate, Atwood Oceanics, Inc. to construct a new generation offshore platform rig for work offshore Australia. The rig has been completed and is ready for shipment to Australia. The rig was originally scheduled to commence operating offshore Australia in early 1996, however, due to project delays in Australia unrelated to the rig construction activities, the shipment of the rig to Australia has been delayed until early 1997. Under terms of the contract, revenues from a holding rate will commence on January 1, 1996, and will be reflected in the international contract drilling segment. -9- <PAGE> 10 Liquidity and Capital Resources Net cash provided by operating activities was $25,897,000 for the first three months of fiscal 1996, compared with $20,634,000 for the same period in 1995. Capital expenditures for the first quarter of fiscal 1996 were $35,929,000, compared with $27,404,000 for the first quarter of fiscal 1995. It is anticipated for fiscal 1996 that capital expenditures will exceed internally generated cash flows and that the Company will have to borrow under its line of credit agreement or sell a portion of its investment portfolio. In the current quarter the Company increased the amount borrowed under its line of credit agreement by $2,000,000. There were no other significant changes in the Company's financial position since September 30, 1995. PART II. OTHER INFORMATION HELMERICH & PAYNE, INC. Item 1. Legal Proceedings On November 15, 1995, a lawsuit captioned William G. Caldwell, et al. vs. Helmerich & Payne, Inc. was filed in the District Court of Washita County, Oklahoma, in which five (5) named plaintiffs, on behalf of themselves and other unnamed plaintiffs, are demanding their royalty share of a gas contract settlement. The plaintiffs are attempting to certify a class which would contain certain of the Company's lessors and certain other mineral owners who own an interest in wells covered by such gas contract settlement. Item 6(b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended December 31, 1995. -10- <PAGE> 11 HELMERICH & PAYNE, INC. 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. Date: FEBRUARY 13, 1996 /S/ DOUGLAS E. FEARS ----------------------------------------- Douglas E. Fears, Chief Financial Officer Date: FEBRUARY 13, 1996 /S/ HANS C. HELMERICH ----------------------------------------- Hans C. Helmerich, President -11- <PAGE> 12 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-START> OCT-01-1995 <PERIOD-END> DEC-31-1995 <CASH> 8,606 <SECURITIES> 157,502 <RECEIVABLES> 66,862 <ALLOWANCES> 462 <INVENTORY> 21,787 <CURRENT-ASSETS> 112,132 <PP&E> 1,045,919 <DEPRECIATION> 597,118 <TOTAL-ASSETS> 732,868 <CURRENT-LIABILITIES> 73,346 <BONDS> 0 <COMMON> 2,677 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 573,509 <TOTAL-LIABILITY-AND-EQUITY> 732,868 <SALES> 93,418 <TOTAL-REVENUES> 94,585 <CGS> 74,875 <TOTAL-COSTS> 74,875 <OTHER-EXPENSES> 2,348 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 79 <INCOME-PRETAX> 17,283 <INCOME-TAX> 6,384 <INCOME-CONTINUING> 11,093 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 11,093 <EPS-PRIMARY> .45 <EPS-DILUTED> .45 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

HPQ

https://www.sec.gov/Archives/edgar/data/47217/0000047217-96-000008.txt

-----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, SPcWgpNZoId9/fwhE81MkcjskZQsQQfPC2CrXZzwqTEYS9x/iKckxXHx0kZOc6Tn sPCNbtGObINzuWglaIlbYg== <SEC-DOCUMENT>0000047217-96-000008.txt : 19960318 <SEC-HEADER>0000047217-96-000008.hdr.sgml : 19960318 ACCESSION NUMBER: 0000047217-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960315 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEWLETT PACKARD CO CENTRAL INDEX KEY: 0000047217 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 941081436 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04423 FILM NUMBER: 96535120 BUSINESS ADDRESS: STREET 1: 3000 HANOVER ST CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4158571501 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q FILING FOR QUARTER ENDING JANUARY 31, 1996 <TEXT> 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 January 31, 1996 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: 1-4423 HEWLETT-PACKARD COMPANY ---------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-1081436 ------------------------------- --------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3000 Hanover Street, Palo Alto, California 94304 ------------------------------------------ ------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 857-1501 -------------- ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1996 -------------------------- ------------------------------- Common Stock, $1 par value 509.9 million shares HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX ----- Page No. -------- Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Balance Sheet January 31, 1996 (Unaudited) and October 31, 1995 2 Consolidated Condensed Statement of Earnings (Unaudited) Three months ended January 31, 1996 and 1995 3 Consolidated Condensed Statement of Cash Flows (Unaudited) Three months ended January 31, 1996 and 1995 4 Notes to Consolidated Condensed Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). 6-8 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders. 9 Item 6. Exhibits and Reports on Form 8-K. 9 Signature 10 Exhibit Index 11 <TABLE> Item 1. Financial Statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET ------------------------------------ (Millions except par value and number of shares) <CAPTION> January 31 October 31 1996 1995 ---------- ---------- (Unaudited) Assets ------ <S> <C> <C> Current assets: Cash and cash equivalents $ 2,458 $ 1,973 Short-term investments 838 643 Accounts and notes receivable 6,479 6,735 Inventories: Finished goods 3,871 3,368 Purchased parts and fabricated assemblies 2,917 2,645 Other current assets 933 875 ------ ------ Total current assets 17,496 16,239 ------ ------ Property, plant and equipment (less accumulated depreciation: January 31, 1996 - $4,232; October 31, 1995 - $4,036) 4,791 4,711 Long-term investments and other assets 3,466 3,477 ------ ------ 25,753 24,427 ====== ====== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Notes payable and short-term borrowings $ 3,437 $ 3,214 Accounts payable 2,160 2,422 Employee compensation and benefits 1,468 1,568 Taxes on earnings 1,671 1,494 Deferred revenues 925 782 Other accrued liabilities 1,763 1,464 ------- ------- Total current liabilities 11,424 10,944 ------- ------- Long-term debt 1,094 663 Other liabilities 993 981 Shareholders' equity: Preferred stock, $1 par value (300,000,000 shares authorized; none issued) Common stock and capital in excess of $1 par value (1,200,000,000 shares authorized; 509,932,000 and 509,955,000 shares issued and outstanding at January 31, 1996 and October 31,1995, respectively) 850 871 Retained earnings 11,392 10,968 ------- ------- Total shareholders' equity 12,242 11,839 ------- ------- $25,753 $24,427 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. </TABLE> 2 <TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS -------------------------------------------- (Unaudited) (Millions except per share amounts) <CAPTION> Three months ended January 31 ------------------ 1996 1995 ---- ---- <S> Net revenue: <C> <C> Products $8,040 $6,285 Services 1,248 1,019 ------ ------ 9,288 7,304 ------ ------ Costs and expenses: Cost of products sold and services 5,988 4,547 Research and development 612 535 Selling, general and administrative 1,493 1,290 ------ ------ 8,093 6,372 ------ ------ Earnings from operations 1,195 932 Interest income and other, net 37 33 Interest expense 70 46 ------ ------ Earnings before taxes 1,162 919 Provision for taxes 372 317 ------ ------ Net earnings $ 790 $ 602 ====== ====== Net earnings per share* $ 1.50 $ 1.15 ====== ====== Cash dividends declared per share* $ .40 $ .30 ====== ====== Average shares and equivalents used in computing net earnings per share* 526 524 ====== ====== The accompanying notes are an integral part of these consolidated condensed financial statements. * 1995 amounts have been restated to reflect the retroactive effect of the March 1995 2-for-1 stock split. See Note 5 for a discussion of the stock split. </TABLE> 3 <TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------- (Unaudited) (Millions) <CAPTION> Three months ended January 31 ------------------ 1996 1995 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 790 $ 602 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 289 273 Deferred taxes on earnings (55) (88) Changes in assets and liabilities: Accounts and notes receivable 263 24 Inventories (743) (128) Accounts payable (270) 4 Taxes on earnings 198 98 Other current assets and liabilities 73 150 Other, net 73 (5) ------ ------ Net cash provided by operating activities 618 930 ------ ------ Cash flows from investing activities: Investment in property, plant and equipment (429) (386) Disposition of property, plant and equipment 138 118 Purchase of short-term investments (1,959) (671) Maturities of short-term investments 1,824 621 Other, net (6) --- ------ ------ Net cash used in investing activities (432) (318) ------ ------ Cash flows from financing activities: Change in notes payable and short-term borrowings 186 (413) Issuance of long-term debt 441 289 Payment of current maturities of long-term debt (2) (19) Issuance of common stock under employee stock plans 86 93 Repurchase of common stock (309) (177) Dividends (103) (76) ------ ------ Net cash provided by (used in) financing activities 299 (303) ------ ------ Increase in cash and cash equivalents 485 309 Cash and cash equivalents at beginning of period 1,973 1,357 ------ ------ Cash and cash equivalents at end of period $2,458 $1,666 ====== ====== The accompanying notes are an integral part of these consolidated condensed financial statements. Certain amounts have been reclassified to conform to the 1996 presentation. </TABLE> 4 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. In the opinion of the Company's management, the accompanying consolidated condensed financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position as of January 31, 1996 and October 31, 1995, and the results of operations and cash flows for the three months ended January 31, 1996 and 1995. The results of operations for the three months ended January 31, 1996 are not necessarily indicative of the results to be expected for the full year. 2. Net earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effect of outstanding stock options. 3. Income tax provisions for interim periods are based on estimated effective annual income tax rates. The effective income tax rate varies from the U.S. federal statutory income tax rate primarily because of variations in the tax rates on foreign income. 4. The Company paid interest of $58 million and $27 million during the three months ended January 31, 1996 and 1995, respectively. During the same periods, the Company paid income taxes of $208 million and $258 million, respectively. The effect of foreign currency exchange rate fluctuations on cash balances held in foreign currencies was not material. 5. The Company made a 2-for-1 split of its $1 par value common stock in the form of a 100 percent distribution to shareholders of record as of March 24, 1995. As a result of the stock split, authorized, outstanding and reserved common shares doubled and capital in excess of par value was reduced by the par value of the additional common shares issued. The rights of the holders of these securities were not otherwise modified. All references in the consolidated condensed statement of earnings for the period ended January 31, 1995 to number of shares and per share amounts of the Company's common stock have been restated. 6. In December 1995, the Company acquired all of the outstanding shares of common stock of Convex Computer Corporation ("Convex") in exchange for 1,528,000 shares of the Company's common stock. Convex Computer Corporation designs, manufactures, markets and supports high performance computers for engineering, scientific and technical users. The merger has been accounted for using the pooling-of -interests method, however, the accompanying consolidated condensed financial statements have not been restated due to immateriality. Convex's accumulated deficit and results of operations have been included in the Company's consolidated condensed financial statements commencing from the effective date of the merger. 7. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." The Company is required to adopt FAS 123 by fiscal 1997, and upon adoption will elect to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Pro forma disclosure of net earnings and net earnings per share will reflect the difference between compensation cost included in net earnings and the related cost measured by the fair-value based method defined in FAS 123, including tax effects, that would have been recognized in the consolidated statement of earnings if the fair value-based method had been used. 5 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). RESULTS OF OPERATIONS Net Revenue - Net revenue for the first three months of fiscal 1996 was $9.3 billion, an increase of 27 percent from the same period of fiscal 1995. Product sales increased 28 percent and service revenue grew 22 percent over the corresponding period of fiscal 1995. Net revenue grew 33 percent to $5.5 billion internationally and 20 percent to $3.8 billion in the U.S. The first quarter growth in net revenue was principally due to strong demand for the Company's printer products and related supplies, personal computer and PC networking products, PC and UNIX servers, and professional services and consulting. Costs and Expenses - Cost of products sold and services as a percentage of net revenue was 64.5 percent for the first quarter of fiscal 1996, compared to 62.3 percent for the first quarter of fiscal 1995. This increase over fiscal 1995 was the result of continued competitive pricing pressures, an ongoing shift in the mix of products sold towards lower-margin, high-volume product families, and ramp-up costs for continued introductions of new products. These factors are likely to continue to cause the cost of sales ratio to trend upward in the future. Operating expenses as a percentage of net revenue were 22.6 percent for the first quarter of fiscal 1996, compared to 24.9 percent for the first quarter of fiscal 1995, a decrease of 2.3 percentage points. This decrease reflects ongoing efforts to achieve expense structures appropriate for the Company's changing business. Operating expenses increased 15 percent for the first quarter of fiscal 1996 over the corresponding year-ago period. This increase resulted primarily from increased marketing and selling expenses, reflecting increased advertising and commissions, and research and development expenses, reflecting the Company's commitment to ensuring a continuing flow of high quality products. A part of the increase is also attributable to increased employment in selected operating areas. Provision for Taxes - The provision for taxes as a percentage of earnings before taxes was 32.0 percent for the first quarter of fiscal 1996, compared to 34.5 percent for the first quarter of fiscal 1995. The lower tax rate resulted from changes in the geographic mix of the Company's earnings and resolution of certain issues related to tax returns filed in previous years. Net Earnings - Net earnings for the first quarter of fiscal 1996 were $790 million or $1.50 per share on an average of 526 million shares, compared to net earnings of $602 million, or $1.15 per share on an average of 524 million shares for the first quarter of fiscal 1995, as restated to reflect the retroactive effect of the March 1995 2-for-1 stock split. FINANCIAL CONDITION Liquidity and Capital Resources - The Company's financial position remains strong, with cash and cash equivalents and short-term investments of $3.3 billion at January 31, 1996, compared with $2.6 billion at October 31, 1995. Cash flows from operating activities were $618 million during the first three months of fiscal 1996 compared to $930 million for the corresponding period of fiscal 1995. Despite higher net earnings, cash generated from operations declined compared to the prior period primarily as a result of significant growth in inventories, partially offset by a decline in accounts and notes receivable. Inventories grew 54% compared to the year-ago quarter versus revenue growth of 27% for the same period. 6 The Company believes that the majority of this increase was necessary to meet increased demand and customer delivery expectations, due in part to increasing presence in the retail channel. Inventory management, however, continues to be an area of focus. Capital expenditures for the first three months of fiscal 1996 were $429 million, compared to $386 million for the corresponding period in the previous year. The increase in capital expenditures was primarily due to expansion of capacity for increased levels of business. The changes in investment and borrowing activities during the first three months of fiscal 1996, when compared to the same period in 1995, resulted from changes in the Company's liquidity requirements to meet short-term working capital needs. Under the Company's ongoing stock repurchase program, shares have been purchased periodically to meet employee stock plan requirements. During the three months ended January 31, 1996, the Company purchased and retired approximately 3.7 million shares for an aggregate price of $309 million. During the three months ended January 31, 1995, the Company repurchased and retired approximately 3.8 million shares for an aggregate price of $177 million. FACTORS THAT MAY AFFECT FUTURE RESULTS HP's future operating results may be adversely affected if the Company is unable to continue to rapidly develop, manufacture and market innovative products that meet customers' needs. The process of developing new high technology products is complex and uncertain and requires accurate anticipation of customer needs and technological trends. After the products are developed, the Company must quickly manufacture them in sufficient volumes at acceptable costs to meet demand. In addition, portions of the Company's manufacturing operations are dependent on the ability of significant suppliers to deliver completed products, integral subassemblies and components in time to meet critical distribution and manufacturing schedules. The Company periodically experiences constrained supply of certain component parts in some product lines, as a result of strong demand in those product lines as well as strong demand in the industry. Continued constraints may adversely affect the Company's operating results until alternate sourcing could be developed. The Company continues to expand into third-party distribution channels to accommodate changing industry practices and customer preferences. As more of the Company's products are distributed through resellers, these resellers become more important to the Company's success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. The Company's financial results could be adversely affected if the financial condition of these resellers substantially weakens. The operations of the Company involve the use of substances regulated under various federal, state and international laws governing the environment. It is the Company's policy to apply strict standards for environmental protection to sites inside and outside the U.S., even if not subject to regulations imposed by local governments. The liability for environmental remediation and related costs is accrued when it is considered probable and the costs can be estimated. Environmental costs are presently not material to the Company's operations or financial position. 7 A portion of the Company's research and development activities, its corporate headquarters and other critical business operations are located near major earthquake faults. The ultimate impact on the Company, significant suppliers and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. The Company is predominantly self-insured for losses and interruptions caused by earthquakes. Although the Company believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. Factors external to the Company can result in volatility of the Company's common stock price. Because of the foregoing factors, recent trends should not be considered reliable indicators of future stock prices or financial results. 8 PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders. (a) The Company's Annual Meeting of Shareholders was held on February 27, 1996. (b) At said Annual Meeting, shareholders voted on two matters: the election of directors and the appointment of Price Waterhouse LLP as the Company's independent accountants. The shareholders elected all members of the management slate in an uncontested election and approved the appointment of independent accountants, by the following votes, respectively. Directors --------- Votes Withheld/ Director Votes For Abstentions -------- --------- --------------- Thomas E. Everhart 416,604,382 1,017,777 John B. Fery 416,549,193 1,072,966 Jean-Paul G. Gimon 416,608,421 1,013,738 Sam Ginn 416,582,504 1,039,655 Richard A. Hackborn 416,619,862 1,002,297 Walter B. Hewlett 416,608,767 1,013,392 George A. Keyworth II 416,607,509 1,014,650 David M. Lawrence, M.D. 416,545,752 1,076,407 Paul F. Miller, Jr. 416,608,977 1,013,182 Susan P. Orr 416,597,382 1,024,777 David W. Packard 416,600,506 1,021,653 Donald E. Petersen 416,597,498 1,024,661 Lewis E. Platt 416,624,124 998,035 Robert P. Wayman 416,599,350 1,022,809 Accountants ----------- Votes Withheld/ Votes for Votes Against Abstentions --------- ------------- -------------- 416,718,437 409,171 494,551 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: A list of exhibits is set forth in the Exhibit Index found on page 11 of this report. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended January 31, 1996. 9 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES SIGNATURE --------- 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. HEWLETT-PACKARD COMPANY (Registrant) Dated: March 14, 1996 By: ROBERT P. WAYMAN ------------------------- Robert P. Wayman Executive Vice President, Finance and Administration (Chief Financial Officer) 10 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX ------------- Exhibits: 1. Not applicable. 2. None. 3. Amended Bylaws. 4. None. 5-9. Not applicable. 10-11. None. 12-14. Not applicable. 15. None. 16-17. Not applicable. 18-19. None. 20-21. Not applicable. 22-24. None. 25-26. Not applicable. 27. Financial Data Schedule. 28. Not applicable. 99. None. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <DESCRIPTION>HEWLETT-PACKARD COMPANY BYLAWS <TEXT> BY-LAWS of HEWLETT-PACKARD COMPANY (a California Corporation) _________________ ARTICLE I OFFICES Section 1.1 PRINCIPAL OFFICE. The principal office for the transaction of the business of the corporation is hereby fixed and located at 3000 Hanover Street, in the city of Palo Alto, State of California. The Board of Directors is hereby granted full power and authority to change said principal office to another location within or without the State of California. Section 1.2 OTHER OFFICES. One or more branch or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate. ARTICLE II DIRECTORS Section 2.1 EXERCISE OF CORPORATE POWERS. Except as other- wise provided by the Articles of Incorporation of the corporation or by the laws Of the State of California now or hereafter in force, the business and affairs of the corporation shall be man- aged and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation as permitted by law provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 2.2 NUMBER. The number of the Corporation's directors shall be not less than eleven (11) nor more than twenty-one (21) until changed by an amendment of this Section 2.2 adopted by the Shareholders or Board of Directors. Within such limits the exact number of directors shall be fourteen (14) until changed by an amendment to this Section 2.2 adopted by the shareholders or by the Board of Directors. Section 2.3 NEED NOT BE SHAREHOLDERS. The directors Of the corporation need not be shareholders of the corporation. Section 2.4 COMPENSATION. Directors shall receive for their services as directors such stated fees or other compensation and allowances for expenses of attendance as may from time to time be fixed by the Board of Directors. The directors may also serve the corporation in other capacities and receive compensation therefor. Section 2.5 ELECTION AND TERM OF OFFICE. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting, provided, that if for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall begin immediately after their election and shall continue until the expiration of the term for which elected and until their respective successors have been elected and qualified. Section 2.6 VACANCIES. A vacancy or vacancies in the Board of Directors shall exist when any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors (by the Board or the shareholders) or otherwise. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director may be filled only by the approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election requires the affirmative vote of a majority of the outstanding shares entitled to vote and must be made at a meeting duly called and held in accordance with Article X. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 2.7 REMOVAL. (a) Any and all of the directors may be removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote at an election of directors, subject to the following: (1) No director may be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected; and (2) When by the provisions of the Articles the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series. (b) Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. Section 2.8 NOTIFICATION OF NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Any shareholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company not later than (I) with respect to an election to be held at an annual meeting of shareholders, 90 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated, (b) a representation that such shareholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such shareholder, (d) Such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated by the Board of Directors, and (e) the consent of each nominee to serve as a director of the Company if so elected. The chairman of a shareholder meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. (As amended November 21, 1985.) ARTICLE III OFFICERS Section 3.1 ELECTION AND QUALIFICATIONS. The officers of this corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer who Shall be chosen by the Board of Directors, and such other officers, including but not limited to a Chairman of the Board, a Vice Chairman of the Board, a Chairman of the Executive Committee and a Treasurer as the Board of Directors shall deem expedient, who shall be chosen in such manner and hold their offices for such terms as the Board of Directors may prescribe. Any two or more of such offices may be held by the same person. The Board Of Directors may designate one or more Vice Presidents as Executive Vice Presidents or Senior Vice Presidents. Either the Chairman of the Board, the Vice Chairman of the Board, the Chairman Of the Executive Committee, or the President, as the Board of Directors may designate from time to time, shall be the Chief Executive Officer of the corporation. The Board of Directors may from time to time designate the President or any Executive Vice President as the Chief Operating Officer of the corporation. Any Vice President, Treasurer or Assistant Treasurer, or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer, or the Secretary, respectively, as directed by the Board of Directors and shall perform such other duties as are imposed upon such officer by the By-Laws or the Board of Directors. (As amended January 20, 1978.) Section 3.2 TERMS OF OFFICE AND COMPENSATION. The term of office and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the Board of Directors and may be altered by said Board from time to time at its pleasure, subject to the rights, if any, of said officers under any contract of employment. Section 3.3 REMOVAL AND VACANCIES. Any officer of the corporation may be removed at the pleasure of the Board of Directors at any meeting or by vote of shareholders entitled to exercise the majority of voting power of the corporation at any meeting or at the pleasure of any officer who may be granted such power by resolution of the Board of Directors. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. If any vacancy occurs in any office of the corporation, the Board of Directors may elect a successor to fill such vacancy for the remainder of the unexpired term and until a successor is duly chosen and qualified. ARTICLE IV CHAIRMAN OF THE BOARD Section 4.1 POWERS AND DUTIES. The Chairman Of the Board Of Directors, if there be one, shall preside at all meetings of the shareholders and of the Board of Directors, and shall have the power to call meetings of the shareholders and the Board of Directors to be held within the limitations prescribed by law or by these By-Laws, at such times and at such places as the Chairman of the Board shall deem proper. The Chairman of the Board shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe. (As amended January 20, 1978.) ARTICLE IVa VICE CHAIRMAN OF THE BOARD Section 4.la POWERS AND DUTIES. The Vice Chairman Of the Board of Directors, if there shall be one, shall, in the case of the absence, disability or death of the Chairman, exercise all the powers and perform all the duties of the Chairman of the Board. The Vice Chairman shall have such other powers and perform such other duties as may be granted or prescribed by the Board of Directors. ARTICLE IVb CHAIRMAN OF THE EXECUTIVE COMMITTEE Section 4.lb POWERS AND DUTIES. The Chairman of the Executive Committee, if there be one, shall have the power to call meetings of the shareholders and also of the Board of Directors to be held, subject to the limitations prescribed by law or by these By-Laws, at such times and at such places as the Chairman of the Executive Committee shall deem proper. The Chairman of the Executive Committee shall have such other powers and be subject to such other duties as the Board of Directors may from time to time prescribe. (As amended January 20, 1978.) ARTICLE V PRESIDENT Section 5.1 POWERS AND DUTIES. The powers and duties of the President are: (a) To call meetings of the shareholders and also of the Board of Directors to be held, subject to the limitations prescribed by law or by these By-Laws, at such times and at such places as the President shall deem proper. (b) To affix the signature of the corporation to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the President, should be executed on behalf of the corporation, and to sign certificates for shares of stock of the corporation. (c) To have such other powers and be subject to such other duties as the Board of Directors may from time to time prescribe. ARTICLE VI VICE PRESIDENT Section 6.1 POWERS AND DUTIES. In Case Of the absence, disability or death of the President, the Vice President, or one of the Vice Presidents, shall exercise all the powers and perform all the duties of the President. If there is more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be as fixed by the Board of Directors. The Vice President or Vice Presidents shall have such other powers and perform such other duties as may be granted or prescribed by the Board of Directors. ARTICLE VII SECRETARY Section 7.1 POWERS AND DUTIES. The powers and duties of the Secretary are: (a) To keep a book of minutes at the principal office of the corporation, or such other place as the Board of Directors may order, of all meetings of its directors and shareholders with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. (b) To keep the Seal of the Corporation and to affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal office of the corporation, or at the office of the transfer agent or agents, a share register, or duplicate share registers, showing the names of the shareholders and their addresses, the number and classes of shares, and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the corporation any and all shares of the corporation; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the corporation then has one or more duly appointed and acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 12.4 hereof. (f) To make service and publication of all notices that may be necessary or proper, and without command or direction from anyone. In case of the absence, disability, refusal, or neglect of the Secretary to make service or publication of any notices, then such notices may be served and/or published by the President or a Vice President, or by any person thereunto authorized by either of them or by the Board of Directors or by the holders of a majority of the outstanding shares of the corporation. (g) Generally to do and perform all such duties as pertain to the office of Secretary and as may be required by the Board of Directors. ARTICLE VIII CHIEF FINANCIAL OFFICER Section 8.1 POWERS AND DUTIES. The powers and duties of the Chief Financial Officer are: (a) To supervise the corporate-wide treasury functions and financial reporting to external bodies. (b) To have the custody of all funds, securities, evidence of indebtedness and other valuable documents of the corporation and, at the Chief Financial Officer's discretion, to cause any or all thereof to be deposited for the account of the corporation at such depositary as may be designated from time to time by the Board of Directors. (c) To receive or cause to be received, and to give or cause to be given, receipts and acquittances for monies paid in for the account of the corporation. (d) To disburse, Or Cause to be disbursed, all funds of the corporation as may be directed by the Board of Directors, taking proper vouchers for such disbursements. (e) To render to the President and to the Board Of Directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to do and perform all such duties as pertain to the office of Chief Financial Officer and as may be required by the Board of Directors. ARTICLE IX COMMITTEES OF THE BOARD Section 9.1 APPOINTMENT AND PROCEDURE. The Board Of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board. The Board may designate one (1) Or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Section 9.2 POWERS. Any committee appointed by the Board of Directors, to the extent provided in the resolution of the Board or in these By-Laws, shall have all the authority of the Board except with respect to: (a) the approval of any action which requires the approval or vote of the shareholders; (b) the filling of vacancies on the Board or on any committee; (c) the fixing of compensation of the director for serving on the Board or on any committee; (d) the amendment or repeal of By-Laws or the adoption of new By-Laws ; (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board; (g) the appointment of other committees of the Board Or the members thereof. Section 9.3 EXECUTIVE COMMITTEE. In the event that the Board of Directors appoints an Executive Committee, such Executive Committee, in all cases in which specific directions to the contrary shall not have been given by the Board of Directors, shall have and may exercise, during the intervals between the meetings of the Board of Directors, all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation (except as provided in Section 9.2 hereof) in such manner as the Executive Committee may deem in the best interests of the corporation. ARTICLE X MEETINGS OF SHAREHOLDERS Section 10.1 PLACE OF MEETINGS. Meetings (whether regular, special or adjourned) of the shareholders of the corporation shall be held at the principal office for the transaction of business as specified in accordance with Section 1.1 hereof, or any place within or without the State which may be designated by written consent of all the shareholders entitled to vote thereat, or which may be designated by the Board of Directors. Section 10.2 TIME OF ANNUAL MEETINGS. The annual meeting of the shareholders shall be held at the hour of 2:00 o'clock in the afternoon on the fourth Tuesday in February of each year, if not a legal holiday, and if a legal holiday, then On the next succeeding business day not a legal holiday. Section 10.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President or the holders of shares entitled to cast not less than 10% of the vote at the meeting. Section 10.4 NOTICE OF MEETINGS. (a) Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 nor more than 60 days before the day of the meeting to each shareholder entitled to vote thereat. Such notice Shall State the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and that no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to the provisions of subdivision (b) any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. (b) Any shareholder approval at a meeting, other than unanimous approval by those entitled to vote, on any of the matters listed below shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice; (1) a proposal to approve a contract or other transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more directors has a material financial interest; (2) a proposal to amend the Articles of Incorporation; (3) a proposal regarding a reorganization, merger or consolidation involving the corporation; (4) a proposal to wind up and dissolve the corporation; (5) a proposal to adopt a plan of distribution of the shares, obligations or securities of any other corporation, domestic or foreign, or assets other than money which is not in accordance with the liquidation rights of any preferred shares as specified in the Articles of Incorporation. Section 10.5 DELIVERY OF NOTICE. Notice of a shareholders' meeting or any report shall be given either personally or by mail or other means of written communication, addressed to the share holder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this section, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the shareholders at the address of such shareholder appearing on the books of the corporation is returned to the corporation by United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice to all other shareholders. Section 10.6 ADJOURNED MEETINGS. When a shareholders' meeting is adjourned to another time or place, unless the By-Laws otherwise require and except as provided in this section, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 10.7 CONSENT TO SHAREHOLDERS' MEETING. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person objects at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included in the notice if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, unless otherwise provided in the Articles of Incorporation or By-Laws, except as provided in subdivision (b) of Section 10.4. Section 10.8 QUORUM. (a) The presence in person or by proxy of the persons entitled to vote the majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation of these By-Laws and except as provided in subdivision (b). (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of the number of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in subdivision (b). Section 10.9 ACTION BY CONSENT. Subject to the rights of the holders of shares of any series of Preferred Stock or any other class of stock or series thereof having a preference over the Common Stock as to dividend or upon liquidation, any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing by such stockholders. (As amended November 21, 1985). Section 10.10 VOTING RIGHTS. Except as provided in Section 10.12 or in the Articles of Incorporation or in any statute relating to the election of directors or to other particular matters, each outstanding share, regardless of class, shall be entitled to one vote on any matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Section 10.11 DETERMINATION OF HOLDERS OF RECORD. (a) In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote, or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. (b) In the absence of any record date set by the Board of Directors pursuant to subdivision (a) above then: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. (c) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than forty- five (45) days from the date set for the original meeting. (d) Shareholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation of these By-Laws or by agreement or applicable law. Section 10.12 ELECTION FOR DIRECTORS. (a) Every shareholder complying with subdivision (b) and entitled to Vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. (b) No Shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the shareholder's shares) unless such candidates or candidates' names have been placed in nomination prior to the voting and the shareholder has given written notice to the chairman of the meeting at the meeting prior to the voting of the shareholder's intention to cumulate the Shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (c) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. (d) Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins or unless the By-Laws so require. Section 10.13 PROXIES. (a) Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. Any proxy purporting to be executed in accordance with the provisions of the General Corporation Law of the State of California shall be presumptively valid. (b) No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in this section. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (c) A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. Section 10.14 INSPECTORS OF ELECTION. (a) In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) Or three (3) inspectors are to be appointed. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. (c) The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 10.15 ORGANIZATION. The Chairman of the Board Of Directors shall preside at each meeting of shareholders. In the absence of the Chairman, the meeting shall be chaired by an officer of the corporation in accordance with the following order: Vice Chairman, Chairman of the Executive Committee, President, Executive Vice President, Senior Vice President and Vice President. In the absence of all such officers, the meeting shall be chaired by a person chosen by the vote of a majority in interest of the shareholders present in person or represented by proxy and entitled to vote thereat, shall act as chairman. The Secretary or in his or her absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof. The Board of Directors of the Company shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the Company and their duly authorized and constituted proxies, and such other persons as the Chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot, unless, and to the extent, determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with rules of parliamentary procedure. (As amended November 21, 1985). ARTICLE XI MEETING OF DIRECTORS Section 11.1 PLACE OF MEETINGS. Unless otherwise specified in the notice thereof, meetings (whether regular, special, or adjourned) of the Board of Directors of this corporation shall be held at the principal office of the corporation for the transaction of business, as specified in accordance with Section 1.1 hereof, which is hereby designed as an office for such purpose in accordance with the laws of the State of California, or in any other place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. Section 11.2 REGULAR MEETINGS. Regular meetings of the Board of Directors, of which no notice need be given except as required by the laws of the State of California, at such times as may be designated from time to time by the Board of Directors. Section 11.3 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the Vice Chairman of the Board, the President, the Chairman of the Executive Committee, any Vice President or the Secretary or by any two (2) Or more of the directors. (As amended January 20, 1978.) Section 11.4 NOTICE OF MEETINGS. Except in the case of regular meetings, notice of which has been dispensed with, the meetings of the Board of Directors shall be held upon four (4) days' notice by mail or forty-eight (48) hours' notice delivered personally or by telephone, telegraph or other electronic or wireless means. If the address of a director is not shown on the records and is not readily ascertainable, notice shall be addressed to him at the city or place in which the meetings of the directors are regularly held. Except as set forth in Section 11.6, notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 11.5 QUORUM. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, except as otherwise provided by law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 11.6 ADJOURNED MEETINGS. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 11.7 WAIVER OF NOTICE AND CONSENT. (a) Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. (b) The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 11.8 ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as an unanimous vote of such directors. Section 11.9 CONFERENCE TELEPHONE MEETINGS. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this section constitutes presence in person at such meeting. Section 11.10 ORGANIZATION. The Chairman Of the Board shall preside at all meetings of the Board of Directors. In the absence of the Chairman, the meeting shall be chaired by one of the following directors in the order stated: Vice Chairman, Chairman of the Executive Committee, President and Executive Vice President. In the absence of all such directors, a President Pro Tem chosen by a majority of the directors present shall preside at the meeting. Section 11.11 MEETINGS OF COMMITTEES. The provisions of this Article, except for Section 11.10, apply also to committees of the Board and action by such committees. ARTICLE XII SUNDRY PROVISIONS Section 12.1 INSTRUMENTS IN WRITING. All checks, drafts, demands for money and notes of the corporation, as all written contracts of the corporation, shall be signed by such officer or officers, agent or agents, as the Board of Directors may from time to time by resolution designate. No officer, agent, or employee of the corporation shall have power to bind the corporation by contract or otherwise unless authorized to do so by these By-Laws or by the Board of Directors. Section 12.2 FISCAL YEAR. The fiscal year of this corporation shall begin on the first day of November of each year and end on the last day of October of the following year. Section 12.3 SHARES HELD BY THE CORPORATION. Shares in other corporations standing in the name of this corporation may be voted or represented and all rights incident thereto may be exercised on behalf of this corporation by the President or by any other officer of this corporation authorized so to do by resolution of the Board of Directors. Section 12.4 CERTIFICATES OF STOCK. There shall be issued to each holder of fully paid shares of the capital stock of the corporation a certificate or certificates for such shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or the Treasurer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 12.5 LOST CERTIFICATES. The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. The Board of Directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. Section 12.6 CERTIFICATION AND INSPECTION OF BY-LAWS. The corporation shall keep at its principal executive office in this state, or if its principal executive office is not in this state at its principal business office in this state, the original or a copy of these By-Laws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, it shall upon the written request of any shareholder furnish to such shareholder a copy of the By-Laws as amended to date. Section 12.7 NOTICES. Any reference in these By-Laws to the time a notice is given or sent means, unless otherwise expressly provided, the time a written notice by mail is deposited in the United States mails, postage prepaid; or the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient; or the time any oral notice is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 12.8 REPORTS TO SHAREHOLDERS. Except as may other- wise be required by law, the rendition of an annual report to the shareholders is waived so long as there are less than one hundred (100) holders of record of the shares of the corporation (determined as provided in Section 605 of the California General Corporation Law). At Such time or times, if any, that the corporation has one hundred (100) or more holders of record of its shares, the Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year or within such shorter time period as may be required by applicable law, and such annual report shall contain such information and be accompanied by such other documents as may be required by applicable law. ARTICLE XIII CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW Section 13.1 DEFINITIONS. Unless defined Otherwise in these By-Laws or, unless the context otherwise requires, terms used herein shall have the same meaning, if any, ascribed thereto in the California General Corporation Law, as amended from time to time. Section 13.2 BY-LAW PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO PROVISIONS OF LAW. All restrictions, limitations, requirements and other provisions of these By-Laws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. Section 13.3 BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence, clause or phrase of these By-Laws which upon being construed in the manner provided in Section 13.2 hereof, shall be contrary to or inconsistent with any applicable provision of law, shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity or applicability of any other portions of these By-Laws, it being hereby declared that these By-Laws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. ARTICLE XIV AMENDMENTS All by-laws of the Company shall be subject to alteration, amendment, or repeal, in whole or in part, and new By-Laws not inconsistent with the laws of the State of California or any provision of the Certificate of Incorporation may be made, either by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board, or by the affirmative vote of the holders of a majority of the issued and outstanding stock of the Company entitled to vote in respect thereof, given at an annual meeting or at any special meeting at which a quorum shall be present, provided that, in each case of a proposed alteration, amendment, or repeal of the By-Laws of or the proposal of new By-Laws to be voted on at a meeting of stockholders notices thereof shall be included in the notice of the meeting of the stockholders. As amended February 27, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>ARTICLE 5 FDS FOR 1ST QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1996 <PERIOD-END> JAN-31-1996 <CASH> 2,458 <SECURITIES> 838 <RECEIVABLES> 6,479 <ALLOWANCES> 0 <INVENTORY> 6,788 <CURRENT-ASSETS> 17,496 <PP&E> 9,023 <DEPRECIATION> 4,232 <TOTAL-ASSETS> 25,753 <CURRENT-LIABILITIES> 11,424 <BONDS> 1,094 <COMMON> 850 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 11,392 <TOTAL-LIABILITY-AND-EQUITY> 25,753 <SALES> 8,040 <TOTAL-REVENUES> 9,288 <CGS> 0 <TOTAL-COSTS> 5,988 <OTHER-EXPENSES> 612 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 70 <INCOME-PRETAX> 1,162 <INCOME-TAX> 372 <INCOME-CONTINUING> 790 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 790 <EPS-PRIMARY> 1.50 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

HRB

https://www.sec.gov/Archives/edgar/data/12659/0000950124-96-001175.txt

-----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, QNjlGtjavoeSLrtWQDYzfIoVfLgPURvT5cF6fBUI6QSbaI2pROiRM03sEza9wcGx lmD19jUvDapCmi5wDWWB9g== <SEC-DOCUMENT>0000950124-96-001175.txt : 19960320 <SEC-HEADER>0000950124-96-001175.hdr.sgml : 19960320 ACCESSION NUMBER: 0000950124-96-001175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960318 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: H&R BLOCK INC CENTRAL INDEX KEY: 0000012659 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 440607856 STATE OF INCORPORATION: MO FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06089 FILM NUMBER: 96535959 BUSINESS ADDRESS: STREET 1: 4410 MAIN ST CITY: KANSAS CITY STATE: MO ZIP: 64111 BUSINESS PHONE: 8167536900 MAIL ADDRESS: STREET 1: 4410 MAIN STREET CITY: KANSAS CITY STATE: MO ZIP: 64111 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q DATED 1/31/96 <TEXT> <PAGE> 1 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 January 31, 1996 [ ] 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 1-6089 H&R BLOCK, INC. (Exact name of registrant as specified in its charter) MISSOURI 44-0607856 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4400 Main Street Kansas City, Missouri 64111 (Address of principal executive offices, including zip code) (816) 753-6900 (Registrant's telephone number, including area code) 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 ----- ----- The number of shares outstanding of the registrant's Common Stock, without par value, at March 8, 1996 was 103,385,215 shares. <PAGE> 2 TABLE OF CONTENTS Page PART I Financial Information Consolidated Balance Sheets January 31, 1996 (Unaudited) and April 30, 1995 (Audited) . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Operations Three Months Ended January 31, 1996 and 1995 (Unaudited) . . . . . 2 Nine Months Ended January 31, 1996 and 1995 (Unaudited). . . . . . 3 Consolidated Statements of Cash Flows Nine Months Ended January 31, 1996 and 1995 (Unaudited). . . . . . 4 Notes to Consolidated Financial Statements (Unaudited). . . . . . . . 5 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 7 PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 <PAGE> 3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS Amounts in thousands, except share amounts <TABLE> <CAPTION> JANUARY 31, APRIL 30, 1996 1995 ------------------- ------------------- ASSETS (UNAUDITED) (AUDITED) <S> <C> <C> CURRENT ASSETS Cash (including certificates of deposit of $8,114 and $25,781) $ 60,681 $ 90,248 Marketable securities 36,741 263,239 Receivables, less allowance for doubtful accounts of $10,653 and $7,274 344,899 260,198 Prepaid expenses 51,586 21,823 ---------- ---------- TOTAL CURRENT ASSETS 493,907 635,508 INVESTMENTS AND OTHER ASSETS Investments in marketable securities - 91,494 Excess of cost over fair value of net tangible assets acquired, net of amortization 60,062 78,205 Other 130,187 45,383 ---------- ---------- 190,249 215,082 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 344,450 227,448 ---------- ---------- $1,028,606 $1,078,038 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 244,539 $ 49,421 Accounts payable, accrued expenses and deposits 157,670 145,909 Accrued salaries, wages and payroll taxes 43,514 71,281 Accrued taxes on income 29,280 92,100 ---------- ---------- TOTAL CURRENT LIABILITIES 475,003 358,711 OTHER NONCURRENT LIABILITIES 37,780 33,462 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Convertible preferred stock, no par, stated value $.01 per share 4 4 Additional paid-in capital 139,549 140,578 Retained earnings 591,206 700,423 ---------- ---------- 731,848 842,094 Less cost of 5,624,754 and 4,109,662 shares of common stock in treasury 216,025 156,229 ---------- ---------- 515,823 685,865 ---------- ---------- $1,028,606 $1,078,038 ========== ========== </TABLE> See Notes to Consolidated Financial Statements. -1- <PAGE> 4 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited, amounts in thousands, except per share amounts <TABLE> <CAPTION> THREE MONTHS ENDED JANUARY 31, ------------------ 1996 1995 ------------------- ------------------- <S> <C> <C> REVENUES Service revenues $296,060 $252,528 Royalties 9,068 8,931 Investment income 229 4,104 Other income 6,715 2,451 -------- -------- 312,072 268,014 -------- -------- EXPENSES Employee compensation and benefits 105,124 94,643 Occupancy and equipment 98,738 74,777 Marketing and advertising 21,151 17,649 Supplies, freight and postage 29,812 20,490 Other 66,129 47,353 -------- -------- 320,954 254,912 -------- -------- EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (8,882) 13,102 Income tax expense (benefit) (3,411) 5,018 -------- -------- NET EARNINGS (LOSS) $ (5,471) $ 8,084 ======== ======== Weighted average number of common shares outstanding 103,361 105,658 ======== ======== Net earnings (loss) per share $ (.05) $ .08 ======== ======== Dividends per share $ .32 $ .3125 ======== ======== </TABLE> See Notes to Consolidated Financial Statements. -2- <PAGE> 5 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited, amounts in thousands, except per share amounts <TABLE> <CAPTION> NINE MONTHS ENDED JANUARY 31, ----------------- 1996 1995 ------------------- ------------------- <S> <C> <C> REVENUES Service revenues $711,871 $551,651 Royalties 14,045 13,560 Investment income 7,402 13,809 Other income 20,781 7,251 -------- -------- 754,099 586,271 -------- -------- EXPENSES Employee compensation and benefits 221,551 189,545 Occupancy and equipment 269,976 199,759 Marketing and advertising 41,300 37,972 Supplies, freight and postage 62,954 38,048 Other 172,187 114,671 -------- -------- 767,968 579,995 -------- -------- EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (13,869) 6,276 Income tax expense (benefit) (5,326) 2,404 -------- -------- NET EARNINGS (LOSS) $ (8,543) $ 3,872 ======== ======== Weighted average number of common shares outstanding 104,069 105,729 ======== ======== Net earnings (loss) per share $ (.08) $ .04 ======== ======== Dividends per share $ .9525 $ .905 ======== ======== </TABLE> See Notes to Consolidated Financial Statements. -3- <PAGE> 6 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited, amounts in thousands <TABLE> <CAPTION> NINE MONTHS ENDED JANUARY 31, ----------------- 1996 1995 ------------------- ------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (8,543) $ 3,872 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 74,528 49,364 Amortization of deferred subscriber acquisition costs 9,267 - Gain on sale of subsidiaries (12,445) (2,796) Other noncurrent liabilities 4,318 10,417 Changes in: Receivables (90,460) (97,944) Prepaid expenses (30,384) (12,321) Deferred subscriber acquisition costs (74,876) - Accounts payable, accrued expenses and deposits 14,597 (38,961) Accrued salaries, wages and payroll taxes (27,229) (13,254) Accrued taxes on income (63,609) (99,223) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (204,836) (200,846) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (356,855) (1,166,754) Maturities and sales of marketable securities 676,895 1,537,046 Purchases of property and equipment (180,829) (82,675) Excess of cost over fair value of net tangible assets acquired (11,264) (6,042) Proceeds from sale of subsidiary 35,000 - Other, net (22,158) (1,314) ---------- ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES 140,789 280,261 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of notes payable (1,452,392) (1,353,360) Proceeds from issuance of notes payable 1,647,510 1,443,984 Dividends paid (99,813) (95,185) Payments to acquire treasury shares (71,897) (110,668) Proceeds from stock options exercised 11,072 54,469 ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,480 (60,760) ---------- ---------- NET INCREASE (DECREASE) IN CASH (29,567) 18,655 CASH AT BEGINNING OF PERIOD 90,248 41,343 ---------- ---------- CASH AT END OF PERIOD $ 60,681 $ 59,998 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income taxes paid $ 58,281 $ 101,627 Interest paid 2,898 2,635 </TABLE> See Notes to Consolidated Financial Statements. -4- <PAGE> 7 H&R BLOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1. The Consolidated Balance Sheet as of January 31, 1996, the Consolidated Statements of Operations for the three and nine months ended January 31, 1996 and 1995, and the Consolidated Statements of Cash Flows for the nine months ended January 31, 1996 and 1995 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 1996 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's April 30, 1995 Annual Report to Shareholders. Operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Thus, the nine-month results are not indicative of results to be expected for the year. 2. On May 1, 1995, the Company sold its wholly-owned subsidiary, MECA Software, Inc., exclusive of its rights to publish TaxCut, for $35,000,000 cash. The sale resulted in a pretax gain of $12,445,000, which is included in other income in the Consolidated Statements of Operations. MECA Software, Inc. was part of the Financial Services segment. 3. On May 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used. In connection with the adoption of this Statement, the Company reviewed the assets and related goodwill of its personal tax preparation software business for impairment. Since the expected future cash flows of this business, undiscounted and without interest charges, were less than the carrying value of the assets, the Company recognized an impairment loss of $8,389,000. The impairment loss represents the amount by which the carrying value of the tax preparation software business assets, including goodwill, exceeded the estimated fair value of those assets. The estimated fair value was determined as the present value of estimated expected future cash flows using a discount rate appropriate for the risks associated with the personal software industry. The loss is included in other expenses in the Consolidated Statements of Operations. The personal tax preparation business is reported in the Financial Services segment. 4. On May 1, 1995, the Company changed its method of accounting for direct response advertising costs to conform with the requirements of the American Institute of Certified Public Accountants Statement of Position 93-7, "Reporting on Advertising Costs," which specifies the accounting for direct response advertising. Under this accounting method, direct response advertising costs that meet certain criteria are reported as assets and are amortized on a cost-pool-by-cost-pool basis over the period during which the future benefits are expected to be received. Such assets are amortized over a 24-month period, on an accelerated basis, beginning in the month subsequent to the expenditure. Direct response advertising consists primarily of magazine and newspaper advertisements, broadcast, direct mail costs including mailing lists and postage, and disk and CD-ROM costs related directly to new subscriber solicitations. No indirect costs are included in the capitalized direct response advertising. The net effect of the -5- <PAGE> 8 change in accounting increased assets by $65,609,000 at January 31, 1996, and decreased the net loss by $40,415,000 and the net loss per share by $.39 for the nine months ended January 31, 1996. Amortization of direct response advertising assets was $9,267,000 for the nine months ended January 31, 1996. The Company expenses advertising costs not classified as direct response the first time the advertising takes place. 5. During the nine months ended January 31, 1996, the net unrealized holding gain on available-for-sale securities increased $1,261,000 to $1,496,000. 6. The Company files its Federal and state income tax returns on a calendar year basis. The Consolidated Statements of Operations reflect the effective tax rates expected to be applicable for the respective full fiscal years. 7. Net earnings (loss) per common share is based on the weighted average number of shares outstanding during each period, and in periods in which they have a dilutive effect, the effect of common shares contingently issuable from stock options and convertible preferred stock. The weighted average shares outstanding for the nine months ended January 31, 1996 is 104,069,000 compared to 105,729,000 in the prior year, due to repurchase of outstanding shares and the exclusion of common stock equivalents from weighted shares outstanding for the nine months ended January 31, 1996 because of their dilutive effect. 8. During the nine months ended January 31, 1996 and 1995, the Company issued 318,108 and 1,496,273 shares, respectively, pursuant to provisions for exercise of stock options under its stock option plans; during the same periods, the Company acquired 1,833,200 and 2,790,900 shares of its common stock at an aggregate cost of $71,897,000 and $110,668,000, respectively. -6- <PAGE> 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION These comments should be read in conjunction with the Consolidated Balance Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4, respectively. Working capital decreased from $276.8 million at April 30, 1995 to $18.9 million at January 31, 1996. The working capital ratio at January 31, 1996 is 1.0 to 1, compared to 1.8 to 1 at April 30, 1995. The decrease in working capital and working capital ratio must be viewed in the context of the Company's business which is seasonal, with peak activity in the fourth quarter, due to the nature of the Company's Tax Services segment. Tax return preparation occurs almost entirely in the fourth quarter and has the effect of increasing certain assets and liabilities during this time. Additionally, the Company has used its working capital to fund the investment initiatives of CompuServe Incorporated approved by the Board of Directors in July 1995. The Company has no long-term debt. However, the Company maintains seasonal lines of credit to support short-term borrowing facilities in the United States and Canada. During the months of January through April, the Company's Canadian Tax Services regularly incurs short-term commercial paper borrowings to purchase refunds due its clients. Block Financial Corporation (BFC), a wholly-owned subsidiary of the Company, incurs short-term commercial paper borrowings throughout the year to fund receivables associated with its credit card program. At January 31, 1996, short-term borrowings used to purchase refunds in Canada and fund credit card receivables totaled $22.4 million and $62.1 million, respectively, compared to $49.4 million related entirely to credit card receivables at April 30, 1995. The Company also maintains a year-round $100 million line of credit to support various financial activities conducted by BFC. The Company's acquisition of treasury shares, capital expenditures and dividend payments during the first nine months were funded through both internally-generated funds and short-term borrowing. During the third quarter of fiscal 1996, the Company obtained a $200 million line of credit facility to fund short-term operating needs of the Company. At January 31, 1996, $160.0 million was outstanding under this line of credit facility. The Company expects to extend the line of credit, which expires in April 1996. The Company's Board of Directors has approved a series of investment initiatives for CompuServe Incorporated (CompuServe) designed to enhance its long-term competitiveness and take advantage of accelerating growth opportunities in the market for online services. These initiatives include the launch of a new consumer online service, a simplified and less expensive pricing structure, two new interfaces, infrastructure expenditures and expansion of Internet activities offered through the various online services. The estimated cost of this undertaking, net of capitalized direct response advertising, is expected to reduce the Company's fiscal 1996 profitability. However, management anticipates that these initiatives will have a positive impact on CompuServe's revenues in fiscal 1996 and on its earnings beginning in fiscal 1997. During the second quarter, the Company's Board of Directors announced resumption of the previously approved stock buyback program for ten million shares, initiated in December 1993. This program had been suspended while consideration was given to the strategic investments in CompuServe described above. The buyback program was also suspended during the third quarter while management considered the initial public offering of stock by CompuServe. As of January 31, 1996, the Company has purchased 4,757,200 of the ten million shares authorized for repurchase. -7- <PAGE> 10 On February 20, 1996, the Board of Directors approved a plan that will separate CompuServe from the Company. Management anticipates that, in April 1996, up to 20% of CompuServe will be offered through an initial public offering of common stock. The Company has announced its intention to completely separate CompuServe from the Company through a tax-free spin-off or split-off within 12 months after the initial public offering. The distribution will be subject to receiving a favorable ruling from the Internal Revenue Service or an opinion of counsel regarding the tax-free nature of the transaction, certain other conditions, and the absence of any change in market conditions or circumstances that causes the Board of Directors to conclude that the distribution is not in the best interest of the Company's shareholders. CompuServe will repay certain intercompany debt from the proceeds of the initial public offering; CompuServe will retain all remaining proceeds to fund accelerated investment initiatives described above. Subject to developments in the Company's business, its results from operations and the annual review of its dividend policy, the quarterly dividend will remain at $.32 per share. The quarterly dividend may also be affected by further review in connection with the contemplated distribution of CompuServe. -8- <PAGE> 11 RESULTS OF OPERATIONS The analysis that follows should be read in conjunction with the table below and the Consolidated Statements of Operations found on pages 2 and 3. During the first quarter of fiscal 1996, the Company sold its wholly-owned subsidiary, MECA Software, Inc., for $35 million cash, and recorded a pretax gain of $12.445 million. Additionally, an impairment loss of $8.389 million was recognized related to the assets of the tax preparation software operations of the Company. The operations of MECA prior to the sale, the gain on the sale and the impairment loss are included in the Financial Services segment. Prior year amounts have been reclassified to conform to current year presentation. THREE MONTHS ENDED JANUARY 31, 1996 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1995 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) ---------------------------- ---------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Computer services $203,032 $154,172 $ 22,121 $ 41,207 Tax services 97,581 96,002 (29,393) (28,762) Financial services 12,750 14,911 2,112 706 Intersegment sales (2,001) (2,774) - - -------- -------- -------- -------- 311,362 262,311 (5,160) 13,151 Investment income 227 4,104 227 4,104 Unallocated corporate 483 1,599 (3,949) (4,153) -------- -------- -------- -------- $312,072 $268,014 (8,882) 13,102 ======== ======== Income tax expense (benefit) (3,411) 5,018 -------- -------- Net earnings (loss) $ (5,471) $ 8,084 ======== ======== </TABLE> Consolidated revenues for the three months ended January 31, 1996 increased 16.4% to $312.072 million from $268.014 million last year. The increase is primarily due to greater revenues reported by the Computer Services segment. The consolidated pretax loss for the third quarter of fiscal 1996 was $8.882 million, compared to pretax earnings of $13.102 million in the third quarter of last year. The significant change in third quarter results is due to the Computer Services segment and investment income, slightly offset by improved results reported by the Financial Services segment. The net loss was $5.471 million, or $.05 per share, compared to net earnings of $8.084 million, or $.08 per share, for the same period last year. An analysis of operations by segment follows. COMPUTER SERVICES Revenues increased 31.7% to $203.032 million from $154.172 million in the comparable period last year, due to increases in consumer and network revenues. Consumer Services revenues were 31.6% better than last year, despite two price decreases introduced in September 1995 and February 1995. The growth in consumer revenues is due to customer acquisitions and increased usage. The number of worldwide users -9- <PAGE> 12 of CompuServe and its licensee and distributors increased 1.6 million to 4.3 million at the end of the third quarter of fiscal 1996. Network Services revenues were 33.7% better than last year, also due to increasing usage and new customers. As of January 31, 1996, CompuServe had 928 network customers, a 32.8% increase compared to the same date a year ago. Pretax earnings decreased 46.3% to $22.121 million from $41.207 million in the third quarter of fiscal 1995. Pretax earnings as a percentage of revenues was 10.9% for the third quarter of fiscal 1996, compared to 26.7% for the same period last year. The decrease in pretax earnings and the pretax margin resulted from the significant price decreases in February and September 1995 related to the CompuServe online services. TAX SERVICES Revenues increased 1.6% to $97.581 million from $96.002 million last year, primarily due to an increase in sales of supplies to franchises in the United States. The pretax loss increased by 2.2% to $29.393 million from $28.762 million in the third quarter of last year, due to expected inflationary increases in employee costs and office rent. FINANCIAL SERVICES Revenues decreased 14.5% to $12.750 million from $14.911 million in the same period last year. The decrease in revenues was due to lower revenues from sales of TaxCut software and the revenues of certain operations sold or transferred in May 1995. Pretax earnings improved to $2.112 million from $706 thousand in the third quarter of fiscal 1995, due to lower marketing and advertising expense and lower amortization of goodwill, partially offset by higher bad debt expense. INVESTMENT INCOME Net investment income decreased 94.5% to $227 thousand from $4.104 million last year. The decrease resulted primarily from less funds available for investment, caused by increased capital expenditures and investments in marketing and advertising, particularly related to the Computer Services segment, a decrease in proceeds from stock options exercised in September by seasonal employees, and interest expense incurred for corporate borrowings. CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss for the third quarter decreased 4.9% to $3.949 million from $4.153 million in the comparable period last year, due to lower employee benefits expense. -10- <PAGE> 13 THREE MONTHS ENDED JANUARY 31, 1996 (THIRD QUARTER) COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1995 (SECOND QUARTER) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) ---------------------------- ------------------------------- 3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr ------------- ------------- ---------------- ------------- <S> <C> <C> <C> <C> Computer services $203,032 $188,373 $ 22,121 $ 22,072 Tax services 97,581 27,602 (29,393) (34,351) Financial services 12,750 6,815 2,112 (1,504) Intersegment sales (2,001) (1,999) - - -------- -------- -------- -------- 311,362 220,791 (5,160) (13,783) Investment income 227 2,867 227 2,867 Unallocated corporate 483 255 (3,949) (2,554) -------- -------- -------- -------- $312,072 $223,913 (8,882) (13,470) ======== ======== Income tax benefit (3,411) (5,172) -------- -------- Net loss $ (5,471) $ (8,298) ======== ======== </TABLE> Consolidated revenues increased 39.4% to $312.072 million from $223.913 million in the second quarter of fiscal 1996. The improvement is due to higher revenues generated by all of the operating segments, with the majority of the increase attributable to the Tax Services segment, due to the beginning of the tax filing period. The consolidated pretax loss decreased 34.1% to $8.882 million from $13.470 million for the three months ended October 31, 1995. The improvement is largely due to the Tax Services and Financial Services segments, partially offset by lower investment income and higher corporate expenses. The net loss also decreased 34.1% to $5.471 million, or $.05 per share, from $8.298 million, or $.08 per share, for the second quarter of fiscal 1996. An analysis of operations by segment follows. COMPUTER SERVICES Revenues increased 7.8% to $203.032 million from $188.373 million reported in the second quarter of fiscal 1996. The increase is due to greater revenues generated by the Consumer Services and Network Services divisions. Consumer Services and Network Services revenues for the three months ended January 31, 1996 increased 6.3% and 7.4%, respectively, as compared to the second quarter of fiscal 1996. The growth in Consumer Services is due to customer acquisitions, partially offset by a decrease in the monthly revenue per subscriber resulting from the September 1995 price reductions. The number of worldwide users of CompuServe and its licensee and distributors increased 490,000 during the third quarter. The growth in Network Services resulted from new customers, which increased 7.5% during the third quarter to 928. Pretax earnings increased .2% to $22.121 million from $22.072 million in the second quarter of fiscal 1996. Pretax earnings as a percentage of revenues was 10.9% for the third quarter, compared to 11.7% for the second quarter of the fiscal year. The decrease in the pretax margin was caused by the price reductions implemented in September 1995 related to CompuServe's consumer information service. -11- <PAGE> 14 TAX SERVICES Revenues increased to $97.581 million from $27.602 million in the second quarter of fiscal 1996. The pretax loss decreased 14.4% to $29.393 million from $34.351 million for the three months ended October 31, 1995. The improved results are due to the onset of the tax filing season in the United States and Canada in January. FINANCIAL SERVICES Revenues increased 87.1% to $12.750 million from $6.815 million for the three months ended October 31, 1995. The increase resulted almost entirely from sales of TaxCut software. Tax preparation software sales are highly seasonal, and normally peak in the third and fourth quarters of the fiscal year concurrent with the tax filing season. Pretax earnings were $2.112 million, compared to a pretax loss of $1.504 million for the second quarter of fiscal 1996, due to earnings related to TaxCut software sales and lower marketing and advertising expense, partially offset by higher bad debt expense, both related to credit card operations. INVESTMENT INCOME Net investment income decreased 92.1% to $227 thousand from $2.867 million for the three months ended October 31, 1995, due to the resources required to fund operations during the Tax Services segment's off-season, the significant marketing and capital investments made in the Computer Services segment and interest incurred on corporate borrowings. CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss increased 54.6% to $3.949 million from $2.554 million in the second quarter of fiscal 1996, resulting primarily from increased employee benefits expense and professional fees. -12- <PAGE> 15 NINE MONTHS ENDED JANUARY 31, 1996 (FYTD) COMPARED TO NINE MONTHS ENDED JANUARY 31, 1995 (FYTD) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) ---------------------------- ---------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Computer services $ 577,955 $ 418,699 $ 88,323 $ 109,455 Tax services 135,139 133,298 (104,963) (103,874) Financial services 38,302 24,652 4,092 (4,388) Intersegment sales (6,011) (8,324) - - --------- --------- --------- --------- 745,385 568,325 (12,548) 1,193 Investment income 7,401 13,809 7,401 13,809 Unallocated corporate 1,313 4,137 (8,722) (8,726) --------- --------- --------- --------- $ 754,099 $ 586,271 (13,869) 6,276 ========= ========= Income tax expense (benefit) (5,326) 2,404 --------- --------- Net earnings (loss) $ (8,543) $ 3,872 ========= ========= </TABLE> Consolidated revenues for the nine months ended January 31, 1996 increased 28.6% to $754.099 million from $586.271 million last year. The increase is principally due to greater revenues reported by the Computer Services and Financial Services segments, which includes the gain on the sale of MECA Software, Inc. of $12.445 million. The consolidated pretax loss was $13.869 million, compared to pretax earnings of $6.276 million in the comparable period last year. The decline in operating results is primarily due to the Computer Services segment and lower investment income, offset by the gain on the sale of MECA Software, Inc. of $12.445 million and an impairment loss of $8.389 million recognized on the assets of the tax preparation software business, both of which are included in Financial Services. The net loss was $8.543 million, or $.08 per share, compared to net earnings of $3.872 million, or $.04 per share, for the comparable period last year. An analysis of operations by segment follows. COMPUTER SERVICES Revenues increased 38.0% to $577.955 million from $418.699 million last year due to increases in both Consumer Services and Network Services revenues. Consumer Services revenues increased 45.2% over last year. The growth is due to the increase in customers and usage, offset by price reductions introduced in February and September 1995. The number of worldwide users of CompuServe and its licensee and distributors has increased 1.6 million as compared to last year to 4.3 million. Network Services revenues were 33.7% better than last year, due to increasing usage and new customers. At January 31, 1996, network customers increased 32.8% as compared with the same date last year. Pretax earnings decreased 19.3% to $88.323 million from $109.455 million last year. Pretax earnings as a percentage of revenues was 15.3% for the nine months ended January 31, 1996, compared to 26.1% for the same period last year. The decrease in pretax earnings and the pretax margin resulted primarily from the two price reductions which have been implemented since January 1995. -13- <PAGE> 16 TAX SERVICES Revenues increased 1.4% to $135.139 million from $133.298 million last year, primarily due to higher revenues generated from Australian tax operations which completed its tax filing season during the third quarter. The pretax loss increased 1.0% to $104.963 million from $103.874 a year earlier, due to the late mailing of W-2s by employers, which resulted in a delay in the start of the early peak in tax return preparation and electronic filing in the United States. FINANCIAL SERVICES Revenues increased 55.4% to $38.302 million from $24.652 million last year, largely due to the gain on the sale of MECA Software, Inc. in fiscal 1996 of $12.445 million and increased revenues produced by credit card operations, offset by revenues of operations sold or transferred at the beginning of fiscal 1995. Pretax earnings for the first nine months was $4.092 million, compared to a pretax loss of $4.388 million last year, due to the net effect of the gain on the sale of MECA and the impairment loss of $8.389 million realized on the assets of the tax preparation software business and improved earnings from credit card operations, attributable to lower advertising and marketing expense and higher revolving account balances. INVESTMENT INCOME Net investment income decreased 46.4% to $7.401 million from $13.809 million last year. The decrease resulted primarily from less funds available for investment, due to the marketing and capital investments being made in CompuServe, a decrease in proceeds from seasonal stock option exercises and interest expense associated with corporate borrowings. CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss of $8.722 million remained relatively level with last year's loss of $8.726 million. -14- <PAGE> 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (10)(a) The Company's 1993 Long-Term Executive Compensation Plan, as amended. (10)(b) Letter setting forth compensatory arrangement for George T. Robson, Senior Vice President and Chief Financial Officer of the Company. (27) Financial Data Schedule. (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the third quarter of fiscal year 1996. -15- <PAGE> 18 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. H&R BLOCK, INC. -------------------------------- (Registrant) DATE 3/15/96 BY /s/ George T. Robson ----------- ------------------------------ George T. Robson Senior Vice President and Chief Financial Officer DATE 3/15/96 BY /s/ Ozzie Wenich ----------- ------------------------------ Ozzie Wenich Vice President, Finance and Treasurer -16- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(A) <SEQUENCE>2 <DESCRIPTION>1993 EXECUTIVE LONG-TERM COMPENSATION PLAN <TEXT> <PAGE> 1 EXHIBIT (10)(a) H&R BLOCK, INC. 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN (As Amended) 1. PURPOSES. The purposes of this 1993 Long-Term Executive Compensation Plan are to provide incentives and rewards to those employees largely responsible for the success and growth of H&R Block, Inc., and its subsidiary corporations and to assist all such corporations in attracting and retaining executives and other key employees with experience and ability. 2. DEFINITIONS. (a) AWARD means one or more of the following: shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights, Performance Shares, Performance Units and any other rights which may be granted to a Recipient under the Plan. (b) COMMON STOCK means the Common Stock, without par value, of the Company. (c) COMPANY means H&R Block, Inc., a Missouri corporation, and, unless the context otherwise requires, includes its subsidiary corporations and their respective divisions, departments and subsidiaries and the respective divisions, departments and subsidiaries of such subsidiaries. (d) INCENTIVE STOCK OPTION means a Stock Option which meets all of the requirements of an "incentive stock option" as defined in Section 422(b) of the Internal Revenue Code of 1986, as now in effect or hereafter amended (the "Internal Revenue Code"). (e) PERFORMANCE PERIOD means that period of time specified by the Committee during which a Recipient must satisfy any designated performance goals in order to receive an Award. (f) PERFORMANCE SHARE means the right to receive, upon satisfying designated performance goals within a Performance Period, shares of Common Stock, cash, or a combination of cash and shares of Common Stock, based on the market value of shares of Common Stock covered by such Performance Shares at the close of the Performance Period. (g) PERFORMANCE UNIT means the right to receive, upon satisfying designated performance goals within a Performance Period, shares of Common Stock, cash, or a combination of cash and shares of Common Stock. (h) PLAN means this 1993 Long-Term Executive Compensation Plan, as the same may be amended from time to time. <PAGE> 2 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN (i) RECIPIENT means an employee of the Company who has been granted an Award under the Plan. (j) RESTRICTED SHARE means a share of Common Stock issued to a Recipient hereunder subject to such terms and conditions, including, without limitation, forfeiture or resale to the Company, and to such restrictions against sale, transfer or other disposition, as the Committee may determine at the time of issuance. (k) STOCK APPRECIATION RIGHT means the right to receive, upon exercise of a Stock Appreciation Right granted under this Plan, shares of Common Stock, cash, or a combination of cash and shares of Common Stock, based on the increase in the market value of the shares of Common Stock covered by such Stock Appreciation Right from the initial day of the Performance Period for such Stock Appreciation Right to the date of exercise. (l) STOCK OPTION means the right to purchase, upon exercise of a Stock Option granted under this Plan, shares of the Company's Common Stock. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a Compensation Committee (the "Committee") consisting of directors of the Company, to be appointed by and to serve at the pleasure of the Board of Directors of the Company. A majority of the Committee members shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Commitee, shall be valid acts of the Committee, however designated, or the Board of Directors of the Company if the Board has not appointed a Committee. The Committee shall have full power and authority to construe, interpret and administer the Plan and, subject to the powers herein specifically reserved to the Board of Directors and subject to the other provisions of this Plan, to make determinations which shall be final, conclusive and binding upon all persons including, without limitation, the Company, the shareholders of the Company, the Board of Directors, the Recipients and any persons having any interest in any Awards which may be granted under the Plan. The Committee shall impose such additional conditions upon the grant and exercise of Awards under this Plan as may from time to time be deemed necessary or advisable, in the opinion of counsel to the Company, to comply with applicable laws and regulations. The Committee from time to time may adopt rules and regulations for carrying out the Plan and written policies for implementation of the Plan. Such policies may include, but need not be limited to, the type, size and terms of Awards to be made to Recipients and the conditions for payment of such Awards. 2 <PAGE> 3 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN 4. ABSOLUTE DISCRETION. The Committee may, in its sole and absolute discretion (subject to the Committee's power to delegate certain authority in accordance with the second paragraph of this Section 4), at any time and from time to time during the continuance of the Plan, (i) determine which employees of the Company shall be granted Awards under the Plan, (ii) grant to any employee so selected such an Award, (iii) determine the type, size and terms of Awards to be granted (subject to Sections 6, 10 and 11 hereof, as hereafter amended), (iv) establish objectives and conditions for receipt of Awards, (v) place conditions or restrictions on the payment or exercise of Awards, and (vi) do all other things necessary and proper to carry out the intentions of this Plan; provided, however, that, in each and every case, those Awards which are Incentive Stock Options shall contain and be subject to those requirements specified in Section 422 of the Internal Revenue Code and shall be granted only to those employees eligible thereunder to receive the same. The Committee may at any time and from time to time delegate to the Chief Executive Officer of the Company authority to take any or all of the actions that may be taken by the Committee as specified in this Section 4 or in other sections of the Plan in connection with the determination of Recipients, types, sizes, terms and conditions of Awards under the Plan and the grant of any such Awards, provided that any authority so delegated (a) shall apply only to Awards to employees of the Company that are not officers of Company under Regulation Section 240.16a-1(f) promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, and (b) shall be exercised only in accordance with the Plan and such rules, regulations, guidelines, and limitations as the Committee shall prescribe. 5. ELIGIBILITY. Awards may be granted to any employee of the Company. No member of the Committee (other than any ex officio member) shall be eligible for grants of Awards under the Plan. An employee may be granted multiple forms of Awards under the Plan. Incentive Stock Options may be granted under the Plan to a Recipient during any calendar year only if the aggregate fair market value (determined as of the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by such Recipient during any calendar year under the Plan and any other "incentive stock option plans" (as defined in the Internal Revenue Code) maintained by the Company does not exceed the sum of $100,000. 6. STOCK SUBJECT TO THE PLAN. The total number of shares of Common Stock issuable under this Plan may not at any time exceed 7,000,000 shares, subject to adjustment as provided herein. All of such shares may be issued or issuable in connection with the 3 <PAGE> 4 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN exercise of Incentive Stock Options. Shares of Common Stock not actually issued pursuant to an Award shall be available for future Awards. Shares of Common Stock to be delivered or purchased under the Plan may be either authorized but unissued Common Stock or treasury shares. 7. AWARDS. (a) Awards under the Plan may include, but need not be limited to, shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights, Performance Shares and Performance Units. The amount of each Award may be based upon the market value of a share of Common Stock. The Committee may make any other type of Award which it shall determine is consistent with the objectives and limitations of the Plan. (b) The Committee may establish performance goals to be achieved within such Performance Periods as may be selected by it using such measures of the performance of the Company as it may select as a condition to the receipt of any Award. 8. VESTING REQUIREMENTS. The Committee may determine that all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, shall be vested at such times and upon such terms as may be selected by it. 9. DEFERRED PAYMENTS AND DIVIDEND AND INTEREST EQUIVALENTS. (a) The Committee may determine that the receipt of all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, shall be deferred. Deferrals shall be for such periods and upon such terms as the Committee may determine. (b) The Committee may provide, in its sole and absolute discretion, that a Recipient to whom an Award is payable in whole or in part at a future time in shares of Common Stock shall be entitled to receive an amount per share equal in value to the cash dividends paid per share on issued and outstanding shares as of the dividend record dates occurring during the period from the date of the Award to the date of delivery of such share to the Recipient. The Committee may also authorize, in its sole and absolute discretion, payment of an amount which a Recipient would have received in interest on (i) any Award payable at a future time in cash during the period from the date of the Award to the date of payment, and (ii) any cash dividends paid on issued and outstanding shares as of the dividend record dates occurring during the period from the date of an Award to the date of delivery of shares pursuant to the Award. Any amounts provided under this subsection shall be payable in such manner, at such time or times, and subject to such terms 4 <PAGE> 5 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN and conditions as the Committee may determine in its sole and absolute discretion. 10. STOCK OPTION PRICE. The purchase price per share of Common Stock under each Stock Option shall be determined by the Committee, but shall not be less than market value (as determined by the Committee) of one share of Common Stock on the date the Stock Option or Incentive Stock Option is granted. Payment for exercise of any Stock Option granted hereunder shall be made (a) in cash, or (b) by delivery of Common Stock having a market value equal to the aggregate option price, or (c) by a combination of payment of cash and delivery of Common Stock in amounts such that the amount of cash plus the market value of the Common Stock equals the aggregate option price. 11. STOCK APPRECIATION RIGHT VALUE. The base value per share of Common Stock covered by an Award in the form of a Stock Appreciation Right shall be the market value of one share of Common Stock on the date the Award is granted. 12. CONTINUATION OF EMPLOYMENT. The Committee shall require that a Recipient be an employee of the Company at the time an Award is paid or exercised. The Committee may provide for the termination of an outstanding Award if a Recipient ceases to be an employee of the Company and may establish such other provisions with respect to the termination or disposition of an Award on the death or retirement of a Recipient as it, in its sole discretion, deems advisable. The Committee shall have the sole power to determine the date of any circumstances which shall constitute a cessation of employment and to determine whether such cessation is the result of retirement, death or any other reason. 13. REGISTRATION OF STOCK. Each Award shall be subject to the requirement that if at any time the Committee shall determine that qualification or registration under any state or federal law of the shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, or other securities thereby covered or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with the granting of such Award or the purchase of shares thereunder, the Award may not be paid or exercised in whole or in part unless and until such qualification, registration, consent or approval shall have been effected or obtained free of any conditions the Committee, in its discretion, deems unacceptable. 14. EMPLOYMENT STATUS. No Award shall be construed as imposing upon the Company the obligation to continue the employment of a Recipient. No employee or other person shall have any claim or right to be granted an Award under the Plan. 5 <PAGE> 6 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN 15. ASSIGNABILITY. No Award granted pursuant to the Plan shall be transferable or assignable by the Recipient other than by will or the laws of descent and distribution and during the lifetime of the Recipient shall be exercisable or payable only by or to him or her. 16. DILUTION OR OTHER ADJUSTMENTS. In the event of any changes in the capital structure of the Company, including but not limited to a change resulting from a stock dividend or split-up, or combination or reclassification of shares, the Board of Directors shall make such equitable adjustments with respect to Awards or any provisions of this Plan as it deems necessary and appropriate, including, if necessary, any adjustment in the maximum number of shares of Common Stock subject to the Plan or the number of shares of Common Stock subject to an outstanding Award. 17. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. If the Company shall become a party to any corporate merger, consolidation, major acquisition of property for stock, reorganization, or liquidation, the Board of Directors shall make such arrangements it deems advisable with respect to outstanding Awards, which shall be binding upon the Recipients of outstanding Awards, including, but not limited to, the substitution of new Awards for any Awards then outstanding, the assumption of any such Awards and the termination of or payment for such Awards. 18. WITHHOLDING TAXES. The Company shall have the right to deduct from all Awards hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such Awards and, with respect to Awards paid in other than cash, to require the payment (through withholding from the Recipient's salary or otherwise) of any such taxes. Subject to such conditions as the Committee may establish, Awards under the Plan payable in shares of Common Stock may provide that the Recipients thereof may elect, in accordance with any applicable regulations, to have the Company withhold shares of Common Stock to satisfy all or part of any such tax withholding obligations, with the value of such withheld shares of Common Stock based upon their fair market value on the date the tax withholding is required to be made. 19. COSTS AND EXPENSES. The cost and expenses of administering the Plan shall be borne by the Company and not charged to any Award nor to any Recipient. 20. FUNDING OF PLAN. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Award under the Plan. 6 <PAGE> 7 1993 LONG-TERM EXECUTIVE COMPENSATION PLAN 21. AWARD CONTRACTS. The Committee shall have the power to specify the form of Award contracts to be granted from time to time pursuant to and in accordance with the provisions of the Plan and such contracts shall be final, conclusive and binding upon the Company, the shareholders of the Company and the Recipients. No Recipient shall have or acquire any rights under the Plan except such as are evidenced by a duly executed contract in the form thus specified. No Recipient shall have any rights as a holder of Common Stock with respect to Awards hereunder unless and until certificates for shares of Common Stock or Restricted Shares are issued to the Recipient. 22. GUIDELINES. The Board of Directors of the Company shall have the power to provide guidelines for administration of the Plan by the Committee and to make any changes in such guidelines as from time to time the Board deems necessary. 23. AMENDMENT AND DISCONTINUANCE. The Board of Directors of the Company shall have the right at any time during the continuance of the Plan to amend, modify, supplement, suspend or terminate the Plan, provided that in the absence of the approval of the holders of a majority of the shares of Common Stock of the Company present in person or by proxy at a duly constituted meeting of shareholders of the Company, no such amendment, modification or supplement shall (i) increase the aggregate number of shares which may be issued under the Plan, unless such increase is by reason of any change in capital structure referred to in Section 16 hereof, (ii) change the termination date of the Plan provided in Section 24, or (iii) delete or amend the market value restrictions contained in Sections 10 and 11 hereof, and provided further, that no amendment, modification or termination of the Plan shall in any manner affect any Award of any kind theretofore granted under the Plan without the consent of the Recipient of the Award, unless such amendment, modification or termination is by reason of any change in capital structure referred to in Section 16 hereof or unless the same is by reason of the matters referred to in Section 17 hereof. 24. TERMINATION. The Committee may grant Awards at any time prior to September 7, 2003, on which date this Plan will terminate except as to Awards then outstanding hereunder, which Awards shall remain in effect until they have expired according to their terms or until September 7, 2003, whichever first occurs. No Incentive Stock Option shall be exercisable later than 10 years following the date it is granted. 25. APPROVAL. This Plan shall take effect upon due approval by the shareholders of the Company. 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(B) <SEQUENCE>3 <DESCRIPTION>LETTER RE: GEORGE T. ROBSON COMPENSATION <TEXT> <PAGE> 1 EXHIBIT (10)(b) H&R Block, Inc. Richard H. Brown 4410 Main Street President and Kansas City, Missouri 64111 Chief Executive Officer (816) 932-7577 Fax (816) 753-8628 December 20, 1995 BY FAX (610-525-7947) AND BY OVERNIGHT DELIVERY Mr. George T. Robson 300 Caversham Road Bryn Mawr, Pennsylvania 19010 Dear George: I am delighted you have accepted my offer of employment as Chief Financial Officer of H&R Block, Inc. and I offer my sincere congratulations. I am looking forward to working with you. As is the case with other officers of the parent holding company, your actual employer will be HRB Management, Inc. ("HRB"), an indirect wholly owned subsidiary of H&R Block, Inc. ("Block"). We have agreed that your employment with HRB will commence on January 15, 1995, or on such earlier date as you are able to leave your current employment and assume your responsibilities at Block. This letter will confirm the various matters that we have discussed relating to your compensation. 1. You will receive a base annual salary of $400,000, with a review of your salary by the Compensation Committee of the Board of Directors in June 1996 and any resulting adjustment effective in September 1996. 2. You will participate in the H&R Block Management Incentive Plan for fiscal year 1996 (the year ended April 30, 1996), with a target bonus amount for such year of $230,000. You will be paid $100,000 of such bonus on the effective date of your employment by HRB and the $100,000 is nonforfeitable. Any remaining bonus earned will be paid following the close of Block's books for the fiscal year (usually on or about June 30). Under the Plan, the actual award can range from zero to 150% of the target bonus amount, depending upon the attainment of certain financial goals by Block. For purposes of the Management Incentive Plan for fiscal year 1996, you will be considered to have been employed since May 1, 1995, and your actual award will not be prorated. 3. You will be eligible to participate in the H&R Block Deferred Compensation Plan for Executives in accordance with the provisions of such Plan. The Plan allows you to defer up to 35% of your base salary each year and up to 100% of bonus compensation, subject to <PAGE> 2 Letter to Mr. George T. Robson December 20, 1995 Page 2 aggregate maximum deferrals for all years under the Plan of 280% of base salary. The Plan provides for a Company match of $.50 for each dollar deferred. 4. On the effective date of your employment, you will be granted an option to purchase 150,000 shares of Block Common Stock with an option price equal to the closing price for such stock on the New York Stock Exchange on the date of grant. The options will vest in one-third annual increments, commencing one year after the date of grant. 5. You will be eligible to participate in the H&R Block Executive Survivor Plan. The ESP provides for basic term life insurance coverage at Company expense in an amount equal to three times your base salary. You also have the opportunity to obtain supplemental coverage equal to two times your base salary, at reasonable premiums, and to prepay post-retirement premiums. 6. You will be protected against an involuntary "Change of Control" of Block, should such a Change of Control occur during the five-year period following the commencement of your employment with HRB. If at any time during the one-year period following such involuntary Change of Control, your employment is terminated without "cause" under Block's or HRB's policies in existence immediately prior to the Change of Control, or if you terminate your employment for any reason (or no reason) during the 60-day period following such involuntary Change of Control of Block, certain elements of your compensation will continue. HRB will continue to pay your base salary for a two-year period following such termination, HRB will pay to you bonus compensation for the fiscal year in which the termination occurs and for the fiscal year following the year of termination, such bonus compensation to be equal to the target award amount for the year in which the termination occurs, vesting of nonvested stock options will accelerate and all stock options may be exercisable for three months following termination, and HRB will continue health, life and disability insurance benefits for up to two years following the termination to the extent that you do not obtain similar benefits from another party. An involuntary Change of Control means (i) acquisition of beneficial ownership of 50% or more of Block's voting securities by an individual, entity or group other than Block or any of its affiliates without the prior approval of the Board of Directors of Block, or (ii) turnover of more than a majority of the directors on the Board of Directors of Block as a result of a proxy contest or series of proxy contests under the Securities and Exchange Commission proxy rules. On the fifth anniversary of your employment by HRB, Block will consider and discuss with you the possible extension of the Change of Control provisions. <PAGE> 3 Letter to Mr. George T. Robson December 20, 1995 Page 3 7. HRB provides to the officers of Block an income tax return preparation benefit pursuant to which HRB will reimburse you for fees that you pay for income tax return preparation services. You may select H&R Block, its Executive Tax Service, or another firm as the preparer of your returns. HRB will also "gross up" the amount of the reimbursement to cover any additional taxes that you will pay by virtue of the reimbursement of tax preparation fees. 8. HRB will provide to you at its expense a personal computer and a facsimile machine for use by you at your home during the term of your employment. 9. As an HRB employee, you will be eligible for a full range of employee benefits as per HRB's normal executive benefit program. 10. HRB will assist in your move to the Kansas City area in accordance with its normal relocation program, a copy of which is attached hereto. In addition, you will be paid a $10,000 allowance for incidental expenses related to your move to Kansas City. If the foregoing reflects your understanding of the your compensation and benefits, please sign the acknowledgement below. I am confident that your contribution to H&R Block's growth will be significant. We look forward to your joining our management team. Sincerely, /s/ Richard H. Brown Acknowledgement: /s/George T. Robson - -------------------------- George T. Robson </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> APR-30-1996 <PERIOD-END> JAN-31-1996 <CASH> 60,681 <SECURITIES> 36,741 <RECEIVABLES> 355,552 <ALLOWANCES> 10,653 <INVENTORY> 0 <CURRENT-ASSETS> 493,907 <PP&E> 344,450<F1> <DEPRECIATION> 0 <TOTAL-ASSETS> 1,028,606 <CURRENT-LIABILITIES> 475,003 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 4 <COMMON> 1,089 <OTHER-SE> 514,730 <TOTAL-LIABILITY-AND-EQUITY> 1,028,606 <SALES> 0 <TOTAL-REVENUES> 754,099 <CGS> 0 <TOTAL-COSTS> 767,968 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> (13,869) <INCOME-TAX> (5,326) <INCOME-CONTINUING> (8,543) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (8,543) <EPS-PRIMARY> (.08) <EPS-DILUTED> 0 <FN> <F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

IKN

https://www.sec.gov/Archives/edgar/data/3370/0000950109-96-000801.txt

-----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, Gga00ZsoIwCioGOjvOqY3m0xCfDHbtPDYT7Z5MbhJ7pLiKylGTT/fzc9b98/66gw 37fFBDLgehzmq1KC5oF0Jw== <SEC-DOCUMENT>0000950109-96-000801.txt : 19960216 <SEC-HEADER>0000950109-96-000801.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950109-96-000801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALCO STANDARD CORP CENTRAL INDEX KEY: 0000003370 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 230334400 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05964 FILM NUMBER: 96518789 BUSINESS ADDRESS: STREET 1: P O BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2152968000 MAIL ADDRESS: STREET 1: BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: ALCO CHEMICAL CORP DATE OF NAME CHANGE: 19680218 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One)* [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 1995 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 1-5964 ---------------------------------------- ALCO STANDARD CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 23-0334400 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Box 834, Valley Forge, Pennsylvania 19482 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 296-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- * Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ * Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 31, 1996. Common Stock, no par value 118,978,227 shares <PAGE> INDEX ALCO STANDARD CORPORATION PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets--December 31, 1995 and September 30, 1995 Consolidated Statements of Income--Three months ended December 31, 1995 and December 31, 1994 Consolidated Statements of Cash Flows--Three months ended December 31, 1995 and December 31, 1994 Notes to Consolidated Financial Statements-- December 31, 1995 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K SIGNATURES - ---------- <PAGE> PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) - ---------------------------------------- ALCO STANDARD CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31 SEPTEMBER 30 ASSETS 1995 1995 - ------ ------------- -------------- <S> <C> <C> CURRENT ASSETS Cash $ 67,231 $ 90,106 Accounts receivable, less allowance for doubtful accounts: 12/95 - $38,269; 9/95 - $48,628 1,131,930 1,175,699 Inventories 886,298 747,895 Prepaid expenses and deferred taxes 182,867 146,867 ---------- ---------- Total current assets 2,268,326 2,160,567 ---------- ---------- INVESTMENTS AND LONG-TERM RECEIVABLES 58,091 56,086 PROPERTY AND EQUIPMENT, AT COST 738,068 745,235 Less accumulated depreciation 347,511 375,285 ---------- ---------- 390,557 369,950 ---------- ---------- OTHER ASSETS Goodwill 1,173,749 1,058,214 Miscellaneous 152,980 109,436 ---------- ---------- 1,326,729 1,167,650 ---------- ---------- FINANCE SUBSIDIARIES ASSETS 1,098,156 983,322 ---------- ---------- $ 5,141,859 $ 4,737,575 ========== ========== </TABLE> See notes to consolidated financial statements. <PAGE> ALCO STANDARD CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31 SEPTEMBER 30 LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1995 - ------------------------------------- -------------- -------------- <S> <C> <C> CURRENT LIABILITIES Current portion of long-term debt $ 47,299 $ 26,319 Notes payable 95,039 280,832 Trade accounts payable 489,115 501,316 Accrued salaries, wages and commissions 71,437 115,874 Deferred revenues 171,526 172,900 Restructuring costs 19,068 33,302 Other accrued expenses 310,440 259,534 ----------- ----------- Total current liabilities 1,203,924 1,390,077 ----------- ----------- LONG-TERM DEBT 783,039 325,314 OTHER LIABILITIES Deferred taxes 95,664 96,082 Restructuring costs 6,000 6,000 Other long term liabilities 174,265 178,782 ----------- ----------- 275,929 280,864 ----------- ----------- FINANCE SUBSIDIARIES LIABILITIES; including debt of: 12/95 - $908,168; 9/95 - $817,585 961,850 872,783 SHAREHOLDERS' EQUITY Series AA convertible preferred stock, no par value: Depositary shares issued and outstanding 12/95 - 3,832 shares; 9/95 - 4,025 shares 192,779 201,924 Series BB conversion preferred stock, no par value: 3,877 depositary shares issued and outstanding 290,175 290,152 Common stock, no par value: Authorized 150,000 shares Issued 12/95 - 113,368 shares; 9/95 - 112,182 shares 688,430 637,414 Retained earnings 789,666 765,309 Foreign currency translation adjustment (23,095) (21,536) Cost of common shares in treasury: 12/95 - 508 shares; 9/95 - 118 shares (20,838) (4,726) ----------- ----------- 1,917,117 1,868,537 ----------- ----------- $ 5,141,859 $ 4,737,575 =========== =========== </TABLE> See notes to consolidated financial statements. <PAGE> ALCO STANDARD CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31 -------------------------------- 1995 1994 ------------- ------------- <S> <C> <C> REVENUES Net sales $ 2,533,617 $ 2,160,791 Dividends, interest and other income 1,014 870 Finance subsidiaries 31,795 19,940 ------------- ------------- 2,566,426 2,181,601 ------------- ------------- COSTS AND EXPENSES Cost of goods sold 1,849,436 1,606,209 Selling and administrative 586,495 479,274 Interest 14,327 11,950 Finance subsidiaries interest 14,809 9,619 ------------- ------------- 2,465,067 2,107,052 ------------- ------------- INCOME BEFORE TAXES 101,359 74,549 TAXES ON INCOME 39,944 29,080 ------------- ------------- NET INCOME 61,415 45,469 PREFERRED DIVIDENDS 7,664 2,893 ------------- ------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 53,751 $ 42,576 ============= ============= EARNINGS PER SHARE (1) $0.47 $0.38 ============= ============= Cash dividends per share of common stock $0.14 $0.13 ============= ============= </TABLE> (1) See Exhibit 11 for computation of earnings per share. See notes to consolidated financial statements. <PAGE> <TABLE> <CAPTION> ALCO STANDARD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) THREE MONTHS ENDED DECEMBER 31, --------------------------------- 1995 1994 ------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 61,415 $ 45,469 Additions (deductions) to reconcile net income to net cash used in operating activities: Depreciation 21,090 18,116 Amortization 9,851 7,591 Payment of restructuring costs (13,644) (7,503) Provision for losses on accounts receivable 6,708 5,526 Changes in operating assets and liabilities, net of effects from acquisitions: Decrease (increase) in accounts receivable 62,219 (58,129) Increase in inventories (115,782) (130,349) Increase in prepaid expenses (41,846) (9,886) Decrease in accounts payable, deferred revenues and accrued expenses (41,649) (63,852) Miscellaneous (8,892) 1,688 -------------- -------------- Net cash used (60,530) (191,329) INVESTING ACTIVITIES Proceeds from sale of property and equipment 9,326 7,776 Payments received on long-term receivables 962 913 Cost of companies acquired, net of cash acquired (86,425) (22,460) Expenditures for property and equipment (33,831) (20,564) Purchase of miscellaneous assets (29,914) (23,057) Finance subsidiaries receivables - additions (191,094) (133,398) Finance subsidiaries receivables - collections 76,097 54,580 -------------- -------------- Net cash used (254,879) (136,210) FINANCING ACTIVITIES Proceeds (repayments) from short-term borrowings, net (156,977) 156,000 Proceeds from issuance of long-term debt 431,675 108,814 Proceeds from option exercises and sale of treasury shares 13,281 20,735 Proceeds from sale of finance subsidiaries lease receivables 13,154 16,909 Debt issue costs (5,875) Long-term debt repayments (17,714) (2,456) Finance subsidiaries debt - additions 134,985 99,246 Finance subsidiaries debt - repayments (44,402) (38,589) Dividends paid (22,917) (16,555) Purchase of treasury shares (52,676) (36,807) -------------- -------------- Net cash provided 292,534 307,297 -------------- -------------- NET DECREASE IN CASH (22,875) (20,242) CASH AT BEGINNING OF PERIOD 90,106 53,369 -------------- -------------- CASH AT END OF PERIOD $ 67,231 $ 33,127 ============== ============== </TABLE> See notes to consolidated financial statements. <PAGE> ALCO STANDARD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 1: Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1995. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2: Debt ---- On December 11, 1995, the Company issued $300 million of 30 year bonds at a stated interest rate of 6.75% to the public at a discount price of 98.48%. The effective yield on the bonds is 6.87%. The bonds will be redeemable as a whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to maturity on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield (as defined) plus 15 basis points, plus in each case accrued interest to the date of redemption. Interest on the bonds is paid semi-annually. The bonds are not subject to sinking fund provisions. Note 3: Series AA Preferred Stock Redemption ------------------------------------ On January 10, 1996, the Company announced its intention to redeem all of its Series AA Preferred Stock effective February 9, 1996. Holders of record of the depositary shares of Series AA Preferred Stock on the redemption date will be entitled to receive approximately 2.2402 shares of common stock for each depositary share redeemed. As of December 31, 1995, 3,832,100 depositary shares of Series AA Preferred Stock were outstanding. <PAGE> ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND - --------------------------------------------------------------------------- FINANCIAL CONDITION AND LIQUIDITY - --------------------------------- RESULTS OF OPERATIONS --------------------- The discussion of the results of operations reviews the operations of the Company as contained in the Consolidated Statements of Income. THREE MONTHS ENDED DECEMBER 31, 1995 COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1994 -------------------------------------------------- Revenues and income before taxes for the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995 were as follows: <TABLE> <CAPTION> Revenues Income Before Taxes ------------------------ -------------------------- December 31 % December 31 % --------------- -------------- 1995 1994 Change 1995 1994 Change ---- ---- ------ ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> (in millions) Alco Office Products $ 852 $ 636 34.0% $76.1 $ 55.1 38.1% Unisource United States 1,520 1,367 11.2 47.7 36.1 32.1 Canada 196 180 8.9 8.3 6.5 27.7 --- --- --- --- Total Unisource 1,716 1,547 10.9 56.0 42.6 31.5 ----- ----- ---- ---- Operating 2,568 2,183 17.6 132.1 97.7 35.2 Interest (14.3) (11.9) Eliminations and non-allocated (2) (1) (16.4) (11.2) -- -- ----- ----- $2,566 $2,182 17.6% $101.4 $74.6 35.9% ====== ====== ====== ===== </TABLE> The Company's revenues for the first quarter of fiscal year 1996 were $2.6 billion, a 17.6% increase over the comparable period in the prior year. Operating income increased 35.2% to $132.1 million from $97.7 million reported in the first quarter of fiscal year 1995. Earnings per share of $.47 were 23.7% higher than the $.38 reported in the first quarter of the prior year. ALCO OFFICE PRODUCTS Alco Office Products (AOP) generated $216 million in increased revenues in the first quarter of fiscal 1996, a 34.0% increase over the prior year, of which $62 million related to AOP's base companies and $154 million to current and prior year acquisitions. Internal revenue growth (approximately 10%) in AOP's base companies continues across all revenue segments, but primarily in equipment sales, supplies and outsourcing businesses. AOP expects its internal revenue growth to increase in the last three quarters of the fiscal year to yield at least a 15% internal growth rate for fiscal 1996. Internal revenue growth in the first quarter was adversely affected due to an emphasis on operating income and margin improvement and not on machine placements. AOP's operating income increased by $21.0 million, or 38.1% over the prior year. Current and prior year acquisitions contributed $13.2 million. The remaining $7.8 million represents internal growth from its base companies, net of transformation costs. This growth primarily represents higher operating contributions from the equipment, supplies and outsourcing areas of AOP's businesses, as well as increased operating income related to its leasing activities through Alco Capital Resource, Inc. (Alco Capital). Alco Capital contributed 11.2% of AOP's operating income in the first quarter of fiscal 1996 compared to 10.2% in the first quarter of fiscal 1995. Operating margins were 8.9% in the first quarter of fiscal 1996, compared to 8.7% in fiscal 1995. <PAGE> AOP TRANSFORMATION The Company has developed a long range strategy to transform AOP. The strategy includes broadening the business into three market segments - analog, networking and outsourcing. The transformation will include consolidating administrative functions, rationalizing the supply chain, establishing new vendor alliances, developing a new information technology system, adopting a single name, developing a major/national accounts program and moving to a market-place focus to strengthen local service. AOP is in the early stages of this transformation, which is expected to take up to four years. UNISOURCE Revenues from Unisource's U.S. operations increased by $153 million, or 11.2% over the prior year. Current and prior year acquisitions accounted for $76 million of this increase. On a quarter to quarter comparison, paper prices were up an average of 18%, while shipments were down approximately 6% due to inventory buildups throughout the industry in the latter part of fiscal 1995. Paper prices have dropped significantly since September, but demand and prices are expected to recover as inventories are reduced. Supply systems volume, excluding acquisitions, was essentially flat compared to first quarter of fiscal 1995. Unisource's Canadian operations increased revenues by $16 million, including $4 million contributed by a 1995 acquisition. The remaining increase represents the net effect of higher pricing in fiscal 1996, offset by a reduction in shipments. Operating income from Unisource's U.S. operations increased $11.6 million, of which $7.7 million is from its base companies and $3.9 million is from current and prior year acquisitions. The increase in operating income from base companies was primarily due to paper price increases. The increase of $1.8 million in the Canadian paper operation also reflects the positive effects of price increases. Operating margins were 3.3% in the first quarter of fiscal 1996, compared to 2.8% in the first quarter of fiscal 1995. UNISOURCE RESTRUCTURING During the quarter, Unisource began testing its new information technology system. Due to some required software modifications, Unisource does not expect the system to be fully implemented until the end of 1997. Unisource still expects to deliver $50 million of incremental restructuring benefits in fiscal 1996, with most of these benefits to be captured in the second half of this year. At December 31, 1995, the remaining restructuring reserve is $25.1 million. FOREIGN OPERATIONS Revenues from the Company's paper and office products operations outside the U.S. were $320 million for the first quarter of fiscal 1996 compared to $247 million for the same period of the prior fiscal year, an increase of 29.6%. AOP's European operations accounted for $43 million of the increase, primarily the result of the acquisitions of A:Copy (UK) PLC and Copymore PLC in the third and fourth quarter of fiscal 1995. The increase also includes $30 million from Unisource and AOP Canadian operations. Operating income from foreign operations was $19.9 million for the three months ended December 31, 1995, up $9.9 million from the prior year, of which $7.0 million is attributable to AOP's European operations. Unisource and AOP's Canadian operations added $2.9 million of operating income to the first quarter of fiscal 1996. There was no material effect of foreign currency exchange rate fluctuations on the results of operations during the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. <PAGE> ACQUISITIONS In the first quarter of fiscal 1996, AOP completed 24 acquisitions with annualized revenues of $137 million. In addition, AOP announced two strategic acquisitions with combined annualized revenues of $225 million - Legal Copies International (LCI) and CDP Imaging Systems (CDP). The LCI transaction was completed on January 12, 1996 and CDP is expected to close in mid-February. These acquisitions will expand AOP's capacity and expertise in networking and outsourcing, two of the group's strategic focus areas in its transformation to become the premier provider of office solutions. Unisource completed 11 acquisitions in the first quarter of fiscal 1996 with annualized revenues of $275 million. Nine of those acquisitions are U.S.- based supply systems companies, reflecting Unisource's goal of a balanced revenue contribution between its paper and supply systems segments by the year 2000. Two of the acquisitions are located in Mexico, significantly expanding the group's presence in that market. OTHER Interest expense increased by approximately $2.4 million, primarily the result of increased borrowing levels during the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. Income before taxes increased by $26.8 million, or 35.9% over the prior year, primarily reflecting the combined result of improved operations from base companies, along with earnings contributed by acquisitions, net of increased interest costs and corporate expenses. The effective income tax rate is currently 39.4% compared with 39.0% for the comparative period in fiscal 1995. Weighted average shares of 114.6 million at December 31, 1995 were 3.8 million shares greater than the 110.8 million at December 31, 1994, primarily the result of acquisitions. On January 10, 1996, the Company announced its intention to redeem all of its Series AA Preferred Stock effective February 9, 1996. As of December 31, 1995, there were approximately 3.8 million depositary shares of Series AA Preferred Stock outstanding. Each depositary share is convertible to 2.2402 shares of common stock. There will be no material effect to earnings per share for fiscal 1996 as a result of the conversion. The Company now anticipates adopting Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to Be Disposed Of" in the first quarter of fiscal 1997. It is not expected to have a material effect on the financial statements. <PAGE> FINANCIAL CONDITION AND LIQUIDITY --------------------------------- The Company's cash usage from operating activities is the result of increased working capital, primarily due to inventory buildups. Unisource's inventory buildup is primarily a result of decreased sales volume during the quarter. AOP's inventory increase is a result of restocking after strong fourth quarter 1995 sales and continued growth in the Oce product line. Other major cash usages for the quarter include acquisitions, capital expenditures and dividends. These cash usages in the first quarter were funded by cash flow from operations and increased debt. Debt, excluding finance subsidiaries, was $925 million at December 31, 1995, an increase of $293 million from the Company's debt balance at September 30, 1995 of $632 million. In November 1995, the Company filed a shelf registration with the SEC under which it may issue up to $750 million of debt or equity securities. On December 11, 1995, the Company issued $300 million of 30 year bonds with a stated interest rate of 6.75% to the public at a discount price of 98.48% under this shelf. The proceeds were used to repay short term borrowings. The Company had a total of $600 million in bank credit commitments as of December 31, 1995. Short term borrowings supported by these facilities totaled $89 million leaving $511 million unused and available. At December 31, 1995, debt as a percentage of capitalization was 32.6% and the current ratio was 1.9 to 1. The Company also filed a shelf registration for 10 million shares of common stock in December 1995. Shares issued under this shelf will be used exclusively for acquisitions. The Company estimates that total cash expenditures in connection with the Unisource restructuring plan will amount to $143 million. In addition to the $112 million spent through fiscal 1995, $14 million was expended in the first quarter of fiscal 1996, totaling $126 million spent to date. Unisource anticipates spending an additional $17 million during the remainder of fiscal 1996. The remaining commitment under Unisource's $300 million 10 year information technology outsourcing agreement, which was effective January 1, 1994, is $206 million at December 31, 1995. The foregoing commitments are anticipated to be funded from Unisource's operating cash flow. Finance subsidiaries debt grew by $91 million from September 30, 1995, as a result of increased leasing activity. During the three months ended December 31, 1995, Alco Capital issued an additional $120 million under its medium term notes program. At December 31, 1995, $722 million of medium term notes were outstanding with a weighted interest rate of 6.8%, leaving $778 million available under this program. Under its $125 million asset securitization agreement commenced in September 1994, Alco Capital sold $13 million in direct financing leases during the first quarter of fiscal 1996, replacing leases which had been liquidated and leaving the amount of contracts sold unchanged. The Company believes that its operating cash flow together with unused lines of credit and other financing arrangements will be sufficient to finance current operating requirements including capital expenditures, acquisitions and restructuring and transformation programs. <PAGE> PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The following Exhibits are furnished pursuant to Item 601 of Regulation S-K: Exhibit No. (11) Computation of Earnings Per Share Exhibit No. (27) Financial Data Schedule Exhibit No. (99) Additional Exhibits Press Release dated February 6, 1996 (b) Reports on Form 8-K On December 27, 1995, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, certain exhibits relating to its offering of $300,000,000 6.75% Bonds due December 1, 2025 <PAGE> 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. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant. ALCO STANDARD CORPORATION Date February 14, 1996 /s/ Michael J. Dillon ------------------- ------------------------------- Michael J. Dillon Vice President and Controller (Chief Accounting Officer) <PAGE> INDEX TO EXHIBITS ----------------- <TABLE> <CAPTION> Exhibit Number - -------------- <S> <C> (11) Computation of Earnings Per Share (27) Financial Data Schedule (99) Additional Exhibits </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> EXHIBIT 11 - ---------- ALCO STANDARD CORPORATION COMPUTATIONS OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) <TABLE> <CAPTION> 1995 1994 ----------------------- ------------------------ FULLY Fully PRIMARY DILUTED(1) Primary Diluted(1) --------- ---------- --------- ---------- THREE MONTHS ENDED DECEMBER 31 <S> <C> <C> <C> <C> AVERAGE SHARES OUTSTANDING Common shares 112,361 112,361 108,762 108,762 Preferred stock Senior Securities 8,694 9,016 Convertible loan notes 380 Options 2,229 2,300 2,078 2,282 --------- ---------- --------- ---------- Total shares 114,590 123,735 110,840 120,060 ========= ========== ========= ========== INCOME Net Income $ 61,415 $ 61,415 $ 45,469 $ 45,469 Less: Preferred dividends 7,664 4,885 2,893 --------- ---------- --------- ---------- Net income available to common shareholders $ 53,751 $ 56,530 $ 42,576 $ 45,469 ========= ========== ========= ========== --------- ---------- --------- ---------- EARNINGS PER SHARE $0.47 $0.46 $0.38 $0.38 ========= ========== ========= ========== </TABLE> (1) This calculation is submitted in accordance with Regulation S-K item 601 (b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ALCO STANDARD CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 67,231,000 <SECURITIES> 0 <RECEIVABLES> 1,170,199,000 <ALLOWANCES> 38,269,000 <INVENTORY> 886,298,000 <CURRENT-ASSETS> 2,268,326,000 <PP&E> 738,068,000 <DEPRECIATION> 347,511,000 <TOTAL-ASSETS> 5,141,859,000<F1> <CURRENT-LIABILITIES> 1,203,924,000 <BONDS> 783,039,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 482,954,000 <COMMON> 688,430,000 <OTHER-SE> 745,733,000 <TOTAL-LIABILITY-AND-EQUITY> 5,141,859,000<F2> <SALES> 2,533,617,000 <TOTAL-REVENUES> 2,566,426,000 <CGS> 1,849,436,000 <TOTAL-COSTS> 1,864,245,000<F3> <OTHER-EXPENSES> 586,495,000<F4> <LOSS-PROVISION> 6,708,000 <INTEREST-EXPENSE> 14,327,000 <INCOME-PRETAX> 101,359,000 <INCOME-TAX> 39,944,000 <INCOME-CONTINUING> 61,415,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 61,415,000 <EPS-PRIMARY> 0.47 <EPS-DILUTED> 0.46 <FN> <F1>Includes Finance Subsidiaries assets (primarily lease receivables) of $1,098,156,000 <F2>Includes Finance Subsidiaries liabilities (primarily debt) of $961,850,000 <F3>Includes Finance Subsidiaries interest of $14,809,000 <F4>Represents selling, general, and administrative expenses. </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>4 <DESCRIPTION>ALCO STANDARD COMMENTS ON STRATEGIC OPTIONS <TEXT> <PAGE> Exhibit 99 [Letterhead of ALCO Standard Corporation] ALCO STANDARD COMMENTS ON STRATEGIC OPTIONS VALLEY FORGE, PENNSYLVANIA--FEBRUARY 6, 1996--In response to a security analyst report issued today, Alco Standard Corporation confirmed that it continues to consider the possibility of establishing Alco Office Products and Unisource as separate public companies. John Stuart, Alco's chairman and chief executive officer, said "Our goal remains to take all appropriate steps to insure long-term growth for shareholders. We believe that as separately capitalized and managed companies, AOP and Unisource may have better long-term growth prospects than under common ownership. There are many complex structural and operational issues which will need to be evaluated before we will be in position to come to any judgment on what course of action, if any, should be taken." No timetable has been established for finalizing any decisions concerning such a transaction. Alco Standard Corporation is headquartered in Valley Forge, Pennsylvania. Alco operates the largest independent marketer and distributor of office equipment in North America and the United Kingdom through Alco Office Products and is the largest marketer and distributor of paper and supply systems in North America through Unisource Worldwide, Inc. Revenues for fiscal year 1995, which ended September 30, were nearly $10 billion. # # # </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

JAVA

https://www.sec.gov/Archives/edgar/data/709519/0000950005-96-000061.txt

-----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, SvD8ylYRC95DUI6aLzCzMXyYpgpmFUw1qgImzH2XG92U0zkrm2njQR7pezALJQ07 yO/kqeFv5BglEBr25oXtOA== <SEC-DOCUMENT>0000950005-96-000061.txt : 19960213 <SEC-HEADER>0000950005-96-000061.hdr.sgml : 19960213 ACCESSION NUMBER: 0000950005-96-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC CENTRAL INDEX KEY: 0000709519 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 942805249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15086 FILM NUMBER: 96514710 BUSINESS ADDRESS: STREET 1: 2550 GARCIA AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 BUSINESS PHONE: 4159601300 MAIL ADDRESS: STREET 1: 2550 GARCIA AVENUE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - ---- Act of 1934 for the quarterly period ended December 31, 1995 or - ---- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to --------- ----------- Commission file number:0-15086 SUN MICROSYSTEMS, INC. (Exact Name of registrant as specified in its charter) Delaware 94-2805249 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2550 Garcia Avenue, Mountain View, CA 94043-1100 (Address of principal executive offices with zip code) Registrant's telephone number, including area code: (415) 960-1300 N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- -------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO -------- -------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at December 31, 1995 Common stock - $0.00067 par value 183,306,237 <PAGE> INDEX PAGE ---- COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II - OTHER INFORMATION Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8 - K 15 SIGNATURES 16 2 <PAGE> PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) December 31, June 30, 1995 1995 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 470,591 $ 413,869 Short-term investments 305,540 814,151 Accounts receivable, net 1,072,492 1,041,804 Inventories 379,936 319,672 Other current assets 394,162 344,868 ----------- ----------- Total current assets 2,622,721 2,934,364 Property, plant and equipment, at cost 1,148,614 1,045,876 Accumulated depreciation and amortization (685,841) (616,871) ----------- ----------- 462,773 429,005 Other assets, net 183,005 181,184 ----------- ----------- $ 3,268,499 $ 3,544,553 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 13,877 $ 50,786 Accounts payable 344,493 303,995 Accrued liabilities 695,422 688,325 Other current liabilities 222,985 287,676 ----------- ----------- Total current liabilities 1,276,777 1,330,782 Long-term debt and other obligations 65,843 91,176 Stockholders' Equity 1,925,879 2,122,595 ----------- ----------- $ 3,268,499 $ 3,544,553 =========== =========== See accompanying notes 3 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) <CAPTION> Three Months Ended Six Months Ended ----------------------------- ------------------------------ December 31, January 1, December 31, January 1, 1995 1995 1995 1995 ------------ ---------- ---------- ---------- <S> <C> <C> <C> <C> Net revenues $1,751,383 $1,475,349 $3,236,661 $2,748,788 Cost and expenses: Cost of sales 984,665 862,113 1,813,698 1,623,491 Research and development 167,495 142,862 312,180 272,083 Selling, general and administrative 421,252 353,415 819,868 682,437 ---------- ---------- ---------- ---------- Total costs and expenses 1,573,412 1,358,390 2,945,746 2,578,011 Operating Income 177,971 116,959 290,915 170,777 Interest income, net 7,395 3,076 19,004 5,768 ---------- ---------- ---------- ---------- Income before income taxes 185,366 120,035 309,919 176,545 Provision for income taxes 59,317 38,411 99,174 56,494 ---------- ---------- ---------- ---------- Net Income $ 126,049 $ 81,624 $ 210,745 $ 120,051 ========== ========== ========== ========== Net income per common and and common - equivalent share $0.65 $0.42 $1.07 $0.62 ===== ===== ===== ===== Common and common-equivalent shares used in the calculation of net income per share 194,300 195,518 196,799 193,954 ======= ======= ======= ======= <FN> See accompanying notes. </FN> </TABLE> 4 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) <CAPTION> Six Months Ended ------------------------------------ December 31, January 1, 1995 1995 ----------- ----------- <S> <C> <C> Cash flow from operating activities: Net income $ 210,745 $ 120,051 Adjustments to reconcile net income to operating cash flows: Depreciation, amortization and other non-cash items 172,120 133,581 Decrease (increase) in accounts receivable (30,688) 8,201 Increase in inventories (60,264) (20,236) Increase (decrease) in accounts payable 40,498 (94,243) Net increase in other current and non-current assets (35,566) (41,109) Net increase (decrease) in other current and non-current liabilities (62,899) 117,814 ----------- ----------- Net cash provided from operating activities 233,946 224,059 ----------- ----------- Cash flow from investing activities: Acquisition of property, plant and equipment (137,380) (137,174) Acquisition of other assets (47,892) (22,164) Acquisition of short-term investments (1,027,664) (1,376,229) Maturities of short-term investments 1,538,666 1,418,071 ----------- ----------- Net cash (used by) provided from investing activities 325,730 (117,496) ----------- ----------- Cash flow from financing activities: Issuance of common stock 29,814 20,279 Acquisition of treasury stock (484,047) (18,979) Proceeds from employee stock purchase plans 27,770 21,034 Reduction of short - term borrowings, net (36,909) (46,181) Reduction of long - term borrowings and other (39,582) (42,312) ----------- ----------- Net cash used by financing activities (502,954) (66,159) ----------- ----------- Net increase in cash and cash equivalents $ 56,722 $ 40,404 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 9,669 $ 9,057 Income taxes $ 131,396 $ 32,978 <FN> See accompanying notes. </FN> </TABLE> 5 <PAGE> SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sun Microsystems, Inc. ("Sun" or "the Company") and its wholly owned subsidiaries. Intercompany accounts and transaction have been eliminated. Certain amounts from prior years have been reclassified to conform to current year presentation. While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The information included in this report should be read in conjunction with the 1995 Annual Report to Stockholders which is incorporated by reference in the Company's 1995 Form 10-K. INVENTORIES (in thousands) December 31, 1995 June 30, 1995 ----------------- ------------- Raw materials $211,072 $170,337 Work in process 60,142 32,356 Finished goods 108,722 116,979 -------- -------- $379,936 $319,672 ======== ======== INCOME TAXES The Company accounts for income taxes under the liability method of Statement of Financial Accounting Standards No. 109. The provision for income taxes during the interim periods considers anticipated annual income before taxes, earnings of foreign subsidiaries permanently invested in foreign operations, and other differences. STOCK DIVIDEND The Company effected a two-for-one stock split (effected in the form of a stock dividend) to stockholders of record as of the close of business on November 20, 1995. Share and per share amounts presented have been adjusted to reflect the stock dividend. 6 <PAGE> SUBSEQUENT EVENT On January 24, 1996, a punitive class action entitled Abraham and Evelyn Kostick Trust v. Peter O. Crisp, et al. No. CV755458, was filed in the Superior Court of the State of California in the County of Santa Clara. The plaintiff claims to be a representative of a class of public stockholders of Apple Computer, Inc. Named as defendants are Apple Computer, Inc., the members of the Apple Board of Directors, and the Company. The plaintiff alleges that Apple's Board and top management have frustrated overtures from various companies to acquire Apple at a premium in order to maintain "their lucrative jobs and their positions of power, prestige and profits." It is further alleged that Apple and the Company "are on the verge" of an acquisition agreement with terms that are "intrinsically unfair" to Apple shareholders. The plaintiff claims that such actions amount to a breach of fiduciary duty by the Apple Board of Directors. The Company is alleged to incur liability by "aiding and abetting" the Apple Board's actions. The complaint seeks an injunction against any combination by Apple with the Company, and an award of unspecified compensatory and punitive damages. The Company's response to the Complaint is due by February 29, 1996. To the Company's knowledge, no formal request for an injunction has yet been filed by the plaintiff. 7 <PAGE> ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth items from the Condensed Consolidated Statements of Income as a percentage of net revenues: Three Months Ended Six Months Ended ------------------------- ------------------------ December 31, January 1, December 31, January 1, 1995 1995 1995 1995 ---- ---- ---- ---- Net Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 56.2 58.4 56.0 59.1 ---- ---- ---- ---- Gross margin 43.8 41.6 44.0 40.9 Research and development 9.6 9.7 9.6 9.9 Selling, general and administrative 24.0 24.0 25.3 24.8 ---- ---- ---- ---- Operating income 10.2 7.9 9.1 6.2 Interest income, net 0.4 0.2 0.6 0.2 ---- ---- ---- ---- Income before income taxes 10.6 8.1 9.7 6.4 Provision for income taxes 3.4 2.6 3.1 2.0 ---- ---- ---- ---- Net income 7.2% 5.5% 6.6% 4.4% ==== ==== ==== ==== RESULTS OF OPERATIONS Net revenues Net revenues were $1.751 billion for the second quarter and $3.237 billion for the first six months of fiscal 1996, representing increases of 18.7 % and 17.7%, respectively, over the comparable periods of fiscal 1995. Approximately two-thirds of the growth in revenues resulted from strong demand for richly configured servers, high-end desktop systems, and from memory, storage options, and accessories shipped as part of system sales. The remaining increase reflects growth in revenues from memory, storage options, and accessories shipped as separate orders and an increase in revenues from other Sun businesses, including service, aftermarketing, microprocessors, and software, in total as compared with the corresponding periods of fiscal 1995. Domestic net revenues increased by 11.6% and 14.0% while international net revenues (including United States exports) grew 26.0% and 21.7% in the second quarter and first six months of fiscal 1996, respectively, compared with the corresponding periods of fiscal 1995. Europe net revenues increased 23.6% and 19.3% while net revenues in Rest of World increased 28.9% and 24.5% in the second quarter and first six months of fiscal 1996, respectively, when compared with the same periods of fiscal 1995. These increases are due primarily to continued strengthening of the markets in Europe and the expanding markets in Asia. 8 <PAGE> Compared with the second quarter of fiscal 1995, the dollar has weakened against most major European currencies and remained relatively consistent against the Japanese yen. For the six month period, the dollar has strengthened against the Japanese Yen and remained relatively consistent against most major European currencies, compared with the corresponding period in fiscal 1995. Management has estimated that the net impact of currency fluctuations on operating results, while slightly favorable, was not significant in the second quarter or the first six months of fiscal 1996. Gross margin Gross margin was 43.8% for the second quarter and 44.0% for the first six months of fiscal 1996, compared with 41.6% and 40.9%, respectively, for the corresponding periods of fiscal 1995. The increase in the gross margin for the periods compared reflects the effects of increased revenue generated from richly configured, higher margin servers and memory storage options and accessories. The factors described above resulted in a favorable impact on gross margin for the second quarter and first six months of fiscal 1996. Systems repricing actions may be initiated in the future, which could result in downward pressure on gross margins. Sun's future operating results would be adversely affected if such repricing actions were to occur and the Company is unable to mitigate the margin pressure by maintaining a favorable mix of systems, software, service, and other revenues and by achieving component cost reductions and operating efficiencies. Research and development Research and development (R&D) expenses were $167.5 million in the second quarter and $312.2 million for the first six months of fiscal 1996, compared with $142.9 and $272.1 million for the same periods of fiscal 1995. As a percentage of net revenues, R&D expenses decreased to 9.6% for both the second quarter and first six months of fiscal 1996, from 9.7% and 9.9% in the comparable periods of fiscal 1995. The decrease as a percentage of net revenues is primarily due to the increase in revenues in both the second quarter and first six months of fiscal 1996 over the comparable periods of fiscal 1995. Slightly more than a quarter of the dollar increase in the second quarter and more than a third of the dollar increase for the first six months of fiscal 1996 over the comparable periods in fiscal 1995 reflect increases in compensation as a result of increased staffing and achievement of specified performance goals. The remaining increase in absolute dollars is due to Sun's development of UltraSPARC and the Company's continuing emphasis on technological advancement for both hardware and software products, as well as microprocessor technologies. To maintain its competitive position in the industry, the Company expects to continue to invest significant resources in new hardware, software and microprocessor product development, as well as in enhancements to existing products. Selling, general and administrative Selling, general and administrative (SG&A) expenses were $421.3 million in the second quarter and $819.9 million in the first six months of fiscal 1996, compared with $353.4 and $682.4 million for the same periods of fiscal 1995. As a percentage of net revenues, SG&A expenses were 24.0% and 25.3% in the second quarter and first six months of fiscal 1996, respectively, and 24.0% and 24.8%, respectively in the comparable periods of fiscal 1995. Approximately half of the dollar increases are attributable to increased marketing costs related to new product introductions and other promotional programs, and increases related to compensation resulting from increased headcount and achievement of specified performance goals. The remaining increases reflect costs incurred in connection with the Company's ongoing efforts to improve business processes and cycle times. The Company expects to continue to invest in efforts to achieve additional operating efficiencies through continual review and improvement of business processes . In addition, the Company expects to continue to hire personnel to drive its demand creation programs and service support organizations. 9 <PAGE> Interest income, net Net interest income was $7.4 million for the second quarter and $19.0 million for the first six months of fiscal 1996, compared with $3.1 million and $5.8 million, respectively, in net interest income for the corresponding periods in fiscal 1995. The increase is primarily the result of interest savings from reduced debt levels in fiscal 1996 as compared to the corresponding periods in fiscal 1995. Income taxes The Company's effective income tax rate for the second quarter and the first six months of both fiscal 1996 and 1995 was 32%. FUTURE OPERATING RESULTS This following section of the report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties so that actual results may vary materially. The future operating results discussed below represent specific risks which could impact the financial condition and results over the next few quarters. This information below should be read in conjunction with the 1995 Annual Report to Stockholders which is incorporated by reference in the Company's 1995 Form 10-K. Sun introduced and began shipments of its new enhanced desktop systems based upon the UltraSPARC processors in the second quarter of this fiscal year. In addition, Sun's enhanced server systems based upon the UltraSPARC processor are intended to be introduced in the second half of fiscal 1996. Future operating results will depend to a considerable extent on the Company's ability to closely manage the introduction of products based upon UltraSPARC processors. In addition, the timing of introductions of new products and services by Sun's competitors may negatively affect the future operating results of the Company, particularly when occurring in periods leading up to the Company's introduction of its own new or enhanced products, such as the UltraSPARC products. These new UltraSPARC products include advanced components manufactured internally and by third party suppliers. The manufacture and timely delivery of the Company's UltraSPARC products depends on the ability of certain suppliers to manufacture and deliver advanced components in sufficient quantity and quality to build these products. Furthermore, in order to secure components for production and introduction of these new products, the Company frequently makes advanced payments to certain suppliers and often enters into noncancelable purchase commitments with vendors with respect to the purchase of components. Due to the variability of material requirement specifications during development and production, the Company must closely manage material purchase commitments and respective delivery schedules. The inability of the Company to secure enough components to build the new products in the quantities and configurations required or to produce, test and deliver sufficient products to meet demand in a timely manner, and any delays in production or variability of customer demand in light of the Company's noncancelable purchase commitments would adversely affect the Company's net revenues and operating results. The introduction of the UltraSPARC products requires that the Company must rapidly bring such products to volume manufacturing, a process that requires accurate forecasting of volumes, mix of products and configurations, among other things in order to achieve acceptable yields and costs. The Company must manage the transition from older, displaced products to minimize disruptions in customer ordering patterns, reduce levels of older product inventory, and ensure that adequate volumes of the new products can be delivered to meet customer demand. The ability of the Company to match supply and demand is further complicated by the Company's need to adjust prices to reflect changing competitive and market conditions and the variability and timing of customer orders taken with respect to its older products. As a result, the Company's operating results could be adversely affected if the Company is not able to correctly anticipate the level of demand and the mix 10 <PAGE> of products. Because the Company is continuously engaged in this product development, introduction and transition process, its operating results may be subject to considerable fluctuations particularly when measured on a quarterly basis. Generally, the computer systems sold by Sun, such as the UltraSPARC products, are the result of both adopting hardware and software development, such that delays in the software development can delay the ability of the Company to ship new hardware products. In addition, adoption of a new release of an operating system may require effort on the part of the customer and porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays by customers in of a new release of an operating system can limit the acceptability of hardware products tied to that release. Such delays could adversely affect the future operating results of the Company. Sun's systems based on the UltraSPARC processors operate using the Company's recently released version of its operating system, Solaris 2.5. In attempts to minimize the aforementioned risks, the Company has expended significant effort toward making Solaris 2.5 binary compatible with the applications currently running on Solaris 2.x, so customers should not need to modify these applications to run on UltraSPARC- based systems. The Company's operating results would be adversely affected if Solaris 2.5 does not achieve market acceptance in a timely manner. The Company's order backlog at December 31, 1995 was approximately $378 million, an increase of $55 million from the backlog level of approximately $323 million at June 30, 1995 due in part to the introduction of the UltraSPARC - based systems. Backlog includes only orders for which a delivery schedule within six months has been specified by the customer. Backlog levels vary with demand, product availability and the Company's delivery lead times and are subject to decreases as a result of customer order delays, changes or cancellations. As such, backlog levels are not a reliable indicator of future operating results. The Company receives questions from time to time from stockholders regarding the fluctuation of operating results. The Company's future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including volume, mix, and timing of orders received during the period, the ability to develop, manufacture and introduce new products, the timing of new product introductions, the availability of components, price erosion, conditions in the computer hardware and software industries generally and the general economy, such as recessionary periods, political instability, changes in trade policies, fluctuations in interest or currency exchange rates and other competitive factors. Seasonality also affects the Company's operating results, particularly in the first quarter of each fiscal year. In addition, the Company's operating expenses are increasing as the Company continues to expand its operations, and future operating results will be adversely affected if revenues do not increase accordingly. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could results in significant volatility in the Company's future performance and stock price. LIQUIDITY AND CAPITAL RESOURCES Total assets at December 31, 1995 decreased by approximately $276 million from June 30, 1995, due principally to a decrease in cash, cash equivalents and short-term investments ($452 million) offset by increases in inventories ($60 million), other current assets ($49 million), property, plant and equipment- net ($33 million) and accounts receivable ($31 million). Cash and short-term investments decreased primarily due to the repurchase of 17.2 million shares of common stock for $455 million during the first quarter of fiscal 1996 and due to scheduled debt repayments. The increase in inventories reflects a build-up of supply to meet anticipated customer demand for new products to be introduced in the second half of fiscal 1996. Other current assets increased principally due to the timing of payments for income and other taxes. Increase in property, plant and equipment reflects additions to the Company's Menlo Park campus and capital additions to support the increased headcount. Accounts receivable increase reflects an increase in quarterly revenues from the fourth quarter of fiscal 1995 to the second quarter of fiscal 1996 of $103 million. 11 <PAGE> Total liabilities decreased $80 million from June 30, 1995, due principally to decreases in income taxes payable ($62 million) and short-term and long term debt obligations ($62 million) offset by an increase in accounts payable ($41 million). Income tax payable decreased due to timing of income tax payments. Short-term and long term debt obligations decreased as a result of scheduled debt repayments. The increase in accounts payable primarily reflects increased inventory receipts in the last two weeks of the quarter as compared to the fourth quarter of fiscal 1995. At December 31, 1995, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $776 million and a revolving credit facility with banks aggregating $150 million, which was available subject to compliance with certain covenants. The Company believes that the liquidity provided by existing cash and short-term investment balances and the borrowing arrangements described above will be sufficient to meet the Company's capital requirements through fiscal 1996. However, the Company believes the level of financial resources is a significant competitive factor in its industry and may choose at any time to raise additional capital through debt or equity financing to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. 12 <PAGE> PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On January 24, 1996, a punitive class action entitled Abraham and Evelyn Kostick Trust v. Peter O. Crisp, et al. No. CV755458, was filed in the Superior Court of the State of California in the County of Santa Clara. The plaintiff claims to be a representative of a class of public stockholders of Apple Computer, Inc. Named as defendants are Apple Computer, Inc., the members of the Apple Board of Directors, and the Company. The plaintiff alleges that Apple's Board and top management have frustrated overtures from various companies to acquire Apple at a premium in order to maintain "their lucrative jobs and their positions of power, prestige and profits." It is further alleged that Apple and the Company "are on the verge" of an acquisition agreement with terms that are "intrinsically unfair" to Apple shareholders. The plaintiff claims that such actions amount to a breach of fiduciary duty by the Apple Board of Directors. The Company is alleged to incur liability by "aiding and abetting" the Apple Board's actions. The complaint seeks an injunction against any combination by Apple with the Company, and an award of unspecified compensatory and punitive damages. The Company's response to the Complaint is due by February 29, 1996. To the Company's knowledge, no formal request for an injunction has yet been filed by the plaintiff. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 1, 1995, the Annual Meeting of Stockholders of the Company was held in Menlo Park, California. An election of directors was held with the following individuals being elected to the Board of Directors of the Company: Share Voted For Votes Withheld --------------- -------------- Scott G. McNealy 81,210,675 362,472 L. John Doerr 81,224,075 249,072 Judith L. Estrin 81,187,563 285,584 Robert J. Fisher 81,212,332 260,815 Robert L. Long 81,213,709 259,438 M. Kenneth Oshman 81,222,174 250,973 A. Michael Spence 73,361,361 8,111,786 The seven nominees who received the highest number of votes (all of the above individuals) were elected to the Board of Directors. Votes withheld from any nominee were counted for purposes of determining the presence or absence of a quorum. The stockholders also approved an amendment to the Company's 1990 Employee Stock Purchase Plan which increased the number of shares of Common Stock reserved for issuance thereunder by 3,900,000 shares, from 7,550,000 shares to 11,450,000 shares. There were 64,363,131 shares voted for the amendment, 6,909,677 shares voted against the amendment, 214,278 abstentions and 9,986,061 broker non-votes. The stockholders also approved am amendment to the Company's 1990 Long-Term Equity Incentive Plan in order to increase the number of shares reserved for issuance thereunder by 12,100,000 shares, from 13,250,000 shares to 25,350,000 shares. There were 43,565,969 shares voted in favor of the amendment, 26,808,787 shares voted against the amendment, 350,460 abstentions and 10,747,931 broker non-votes. Additionally, the stockholders approved the Company's Section 162(m) Performance-Based Executive Bonus Plan (the "Bonus Plan"). There were 70,865,909 shares voted in favor of the Bonus Plan, 7,378,059 shares voted against the Bonus Plan, 291,296 abstentions and 2,937,983 broker non-votes. The affirmative vote of the holders of a majority of the Common Stock represented in person or by proxy and entitled to vote at the Annual Meeting ("Votes Cast") was needed in order to approve the foregoing proposals. Votes cast against the proposals were counted for purposes of determining (i) the presence or absence of a quorum for the transaction of business and (ii) the number of votes cast with respect to each such proposal. An abstention had the same effect as a vote against the proposal. Broker non-votes were counted for purposes of determining the presence or absence of a quorum, but were non counted as Votes Cast. 13 <PAGE> ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of the Company's Common Stock by the Company's executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended December 31, 1995: OFFICER / DATE PRICE NUMBER OF DIRECTOR SHARES SOLD ============================================================================ William Hearst * 11/8/95 $84.375 5,000 Masood Jabbar 11/3/95 $83.00 5,284 *Former director of Sun Microsystems, Inc The amounts above do not reflect the stock dividend which was effected on November 20, 1995. 14 <PAGE> ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 11.0 Statement re: Computation of Earnings Per Share 27.0 Financial data for the period ended December 31, 1995 b) REPORTS ON FORM 8-K A report on Form 8-K was filed on November 7, 1995 reporting that on November 2, 1995, the Company amended its First Amended and Restated Common Shares Rights Agreement between the Company and the First National Bank of Boston dated December 14, 1990, as amended to date, in order to increase the "Purchase Price", as defined therein, from $100 to $200 ( effectively $50 to $100 on a post-split basis reflecting the Company's two-for-one stock split, effected in the form of a stock dividend, the record date and the payment date of which was November 20, 1995 and December 11, 1995, respectively). 15 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman ----------------------------- Michael E. Lehman Vice President and Chief Financial Officer /s/ George Reyes ----------------------------- George Reyes Vice President and Corporate Controller, Chief Accounting Officer Dated: January 31, 1996 16 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>STATEMENT RE: COMPUTATION OF EARN. PER SHARE <TEXT> EXHIBITS TO REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995 17 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) PRIMARY <CAPTION> Three Months Ended Six Months Ended -------------------------- ---------------------------- December 31, January 1, December 31, January 1, 1995 1995 1995 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $126,049 $ 81,624 $210,745 $120,051 Weighted average common shares outstanding 183,391 190,150 186,643 190,104 Common - equivalent shares attributable to stock options and warrants 10,909 5,368 10,156 3,850 -------- -------- -------- -------- Total common and common - equivalent shares outstanding 194,300 195,518 196,799 193,954 ======== ======== ======== ======== Net income per common and common - equivalent share $ 0.65 $ 0.42 $ 1.07 $ 0.62 ======== ======== ======== ======== </TABLE> 18 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) FULLY DILUTED <CAPTION> Three Months Ended Six Months Ended ------------------------------ ------------------------------- December 31, January 1, December 31, January 1, 1995 1995 1995 1995 <S> <C> <C> <C> <C> Net income $126,049 $ 81,624 $210,745 $120,051 Weighted average common shares outstanding 183,391 190,150 186,643 190,104 Common - equivalent shares attributable to stock options and warrants 11,467 5,920 10,625 4,338 -------- -------- -------- -------- Total common and common - equivalent shares outstanding 194,858 196,070 197,268 194,442 ======== ======== ======== ======== Net income per common and common - equivalent share $ 0.65 $ 0.42 $ 1.07 $ 0.62 ======== ======== ======== ======== </TABLE> 19 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-START> OCT-1-1995 <PERIOD-END> DEC-31-1995 <CASH> 470,591 <SECURITIES> 305,540 <RECEIVABLES> 1,072,492 <ALLOWANCES> 102,483 <INVENTORY> 379,936 <CURRENT-ASSETS> 2,622,721 <PP&E> 1,148,614 <DEPRECIATION> 685,841 <TOTAL-ASSETS> 3,268,499 <CURRENT-LIABILITIES> 1,276,777 <BONDS> 41,375 <COMMON> 72 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,925,807 <TOTAL-LIABILITY-AND-EQUITY> 3,268,499 <SALES> 1,751,383 <TOTAL-REVENUES> 1,751,383 <CGS> 984,665 <TOTAL-COSTS> 1,573,412 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 3,879 <INTEREST-EXPENSE> 1,242 <INCOME-PRETAX> 185,366 <INCOME-TAX> 59,317 <INCOME-CONTINUING> 126,049 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 126,049 <EPS-PRIMARY> 0.65 <EPS-DILUTED> 0.65 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

LUB

https://www.sec.gov/Archives/edgar/data/16099/0000016099-96-000002.txt

-----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, O+VKm/wS5WBAOON8Hl+IVA6WK1vtHvqipRe2Y3QKcmrR4VjXzZmrLMm0LN4m/HVB dRcEwEHOIdnOCIary0KZ5Q== <SEC-DOCUMENT>0000016099-96-000002.txt : 19960112 <SEC-HEADER>0000016099-96-000002.hdr.sgml : 19960112 ACCESSION NUMBER: 0000016099-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960111 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBYS CAFETERIAS INC CENTRAL INDEX KEY: 0000016099 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 741335253 STATE OF INCORPORATION: TX FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08308 FILM NUMBER: 96502762 BUSINESS ADDRESS: STREET 1: 2211 NE LOOP 410 STREET 2: P O BOX 33069 CITY: SAN ANTONIO STATE: TX ZIP: 78265-3069 BUSINESS PHONE: 2106549000 FORMER COMPANY: FORMER CONFORMED NAME: CAFETERIAS INC DATE OF NAME CHANGE: 19810126 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>TEXT OF 10-Q <TEXT> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995 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: 1-8308 LUBY'S CAFETERIAS, INC. _________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 74-1335253 ________________________________ ___________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2211 Northeast Loop 410, P. O. Box 33069 San Antonio, Texas 78265-3069 ____________________________________________________________________________ (Address of principal executive offices) (Zip Code) 210/654-9000 ____________________________________________________________________________ (Registrant's telephone number, including area code) ____________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock: 23,334,503 shares outstanding as of November 30, 1995 (exclusive of 4,068,564 treasury shares)<PAGE> Part I - FINANCIAL INFORMATION Item 1. Financial Statements. LUBY'S CAFETERIAS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED) Three Months Ended November 30, 1995 1994 ____ ____ (Amounts in thousands except per share data) Sales $108,337 $101,446 Costs and expenses: Cost of food 27,006 25,272 Payroll and related costs 30,304 27,813 Occupancy and other operating expenses 32,172 29,962 General and administrative expenses 4,973 4,769 _______ ________ 94,455 87,816 _______ ________ Income from operations 13,882 13,630 Interest expense (528) (80) Other income, net 350 343 _______ ________ Income before income taxes 13,704 13,893 Provision for income taxes 5,139 5,210 _______ ________ Net income 8,565 8,683 Retained earnings at beginning of period 248,973 229,014 Cash dividends (4,200) (4,024) Treasury stock transactions (195) (156) _______ ________ Retained earnings at end of period $253,143 $233,517 _______ ________ Net income per share $.37 $.35 _______ ________ Cash dividend per share $.18 $.165 _______ ________ Average number of shares outstanding 23,322 24,776 See accompanying notes.<PAGE> Part I - FINANCIAL INFORMATION (continued) Item 1. Financial Statements (continued). LUBY'S CAFETERIAS, INC. CONDENSED BALANCE SHEETS (UNAUDITED) November 30, August 31, 1995 1995 ____ _____ (Thousands of dollars) ASSETS Current assets: Cash and cash equivalents $ 10,196 $ 12,392 Trade accounts and other receivables 389 311 Food and supply inventories 4,398 4,034 Prepaid expenses 3,259 2,849 Deferred income taxes 648 629 ________ ________ Total current assets 18,890 20,215 Investments and other assets - at cost 14,992 13,008 Property, plant, and equipment - at cost, net 283,815 279,157 ________ ________ $317,697 $312,380 ________ ________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 60,000 $ 57,000 Accounts payable - trade 10,728 10,969 Dividends payable 4,200 4,196 Accrued expenses and other liabilities 18,876 24,895 Income taxes payable 6,690 2,471 ________ ________ Total current liabilities 100,494 99,531 Deferred income taxes and other credits 19,832 20,145 Shareholders' equity: Common stock 8,769 8,769 Paid-in capital 26,945 26,945 Retained earnings 253,143 248,973 Less cost of treasury stock (91,486) (91,983) ________ ________ Total shareholders' equity 197,371 192,704 ________ ________ $317,697 $312,380 ________ ________ See accompanying notes.<PAGE> Part I - FINANCIAL INFORMATION (continued) Item 1. Financial Statements (continued). LUBY'S CAFETERIAS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended November 30, 1995 1994 ____ ____ (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,565 $ 8,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,276 4,008 Decrease in accrued expenses and other liabilities (5,797) (3,241) Other 2,923 2,755 _______ _______ Net cash provided by operating activities 9,967 12,205 _______ _______ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of land held for future use (3,341) (1,916) Purchases of property, plant, and equipment (7,706) (4,893) _______ _______ Net cash used in investing activities (11,047) (6,809) _______ _______ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock under stock option plan 80 158 Net proceeds from short-term borrowings 3,000 13,000 Purchases of treasury stock --- (17,113) Dividends paid (4,196) (4,144) _______ _______ Net cash used in financing activities (1,116) (8,099) _______ _______ Net decrease in cash and cash equivalents (2,196) (2,703) Cash and cash equivalents at beginning of period 12,392 10,909 _______ _______ Cash and cash equivalents at end of period $10,196 $ 8,206 _______ _______ See accompanying notes.<PAGE> Part I - FINANCIAL INFORMATION (continued) Item 1. Financial Statements (continued). LUBY'S CAFETERIAS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1995 (UNAUDITED) Note 1: All adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods have been made. All such adjustments are of a normal recurring nature. The results for the interim period are not necessarily indicative of the results to be expected for the full year. Note 2: Certain reclassifications have been made to prior year amounts to conform to current year presentation. Note 3: Subsequent to November 30, 1995, the Company extended the maturity date of the $100,000,000 line-of-credit agreement from December 1995 to February 1996. <PAGE> Part I - FINANCIAL INFORMATION (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources _______________________________ Cash and cash equivalents decreased by $2,196,000 from the end of the preceding fiscal year to November 30, 1995. All capital expenditures for fiscal 1996 are being funded from cash flows from operations, cash equivalents, and short-term borrowings. Capital expenditures for the three months ended November 30, 1995, were $11,047,000. As of November 30, 1995, the Company owned 18 undeveloped land sites and eight land sites on which cafeterias are under construction. During fiscal 1995 the Company purchased 2,000,000 shares of its common stock at a cost of $45,176,000, which are being held as treasury stock. To complete the treasury stock purchases and fund capital expenditures, the Company required external financing and borrowed funds under a $100,000,000 line-of- credit agreement. As of November 30, 1995, the amount outstanding under this line of credit was $60,000,000. The Company believes that additional financing from external sources can be obtained on terms acceptable to the Company in the event such financing is required. Results of Operations _____________________ Quarter ended November 30, 1995 compared to the quarter ended November 30, 1994. ______________________________________________________________________________ Sales increased $6,891,000, or 6.8%, due to the addition of four new cafeterias in fiscal 1996 and 11 in fiscal 1995 and due to an increase in average sales volume at cafeterias opened over one year. Cost of food increased $1,734,000, or 6.9%, due primarily to the increase in sales. Payroll and related costs increased $2,491,000, or 9.0%, due primarily to the increase in sales, higher wages for hourly employees in existing cafeterias, and higher wage costs associated with increased expansion over the prior year. Occupancy and other operating expenses increased $2,210,000, or 7.4%, due primarily to the increase in sales; the opening of four new cafeterias; higher costs for a new uniform program; higher costs for paper supplies; and higher managers' salaries, which are based on the profitability of the cafeterias. General and administrative expenses increased $204,000, or 4.3%, due primarily to the higher Company contribution to the profit sharing and retirement plan as determined by the plan's provisions. Interest expense for the quarter ended November 30, 1995, increased over the first quarter of fiscal 1995 due to higher borrowings under the line-of-credit agreement. The provision for income taxes decreased $71,000, or 1.4%, due primarily to the decrease in pretax income. The effective income tax rate was 37.5% for both periods. General increases in costs of food, wages, supplies, and services make it necessary for the Company to increase its menu prices from time to time. Effective December 1, 1995, the Company increased the price of the Lu Ann platter, its primary bundled meal, from $4.25 to $4.59 in all markets except Florida. The Company anticipates that the tray average will increase approximately 2% as a result of this price change.<PAGE> Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2 Agreement and Plan of Merger dated November 1, 1991, between Luby's Cafeterias, Inc., a Texas corporation, and Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 3(a) Certificate of Incorporation of Luby's Cafeterias, Inc., a Delaware corporation, as in effect February 28, 1994 (filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 3(b) Bylaws of Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 4(a) Description of Common Stock Purchase Rights of Luby's Cafeterias, Inc., in Form 8-A (filed April 17, 1991, effective April 26, 1991, File No. 1-8308, and incorporated herein by reference). 4(b) Amendment No. 1 dated December 19, 1991, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 4(c) Amendment No. 2 dated February 7, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 4(d) Amendment No. 3 dated May 29, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995, and incorporated herein by reference). 4(e) Promissory Note (Loan Agreement) dated December 31, 1995, in favor of NationsBank of Texas, N.A., in the maximum amount of $100,000,000. 10(a) Form of Deferred Compensation Agreement entered into between Luby's Cafeterias, Inc. and various officers (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1981, and incorporated herein by reference). 10(b) Annual Incentive Plan for Area Vice Presidents of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). <PAGE> Part II - OTHER INFORMATION (continued) Item 6. Exhibits and Reports on Form 8-K (continued). 10(c) Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). 10(d) Performance Unit Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 12, 1984 (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1984, and incorporated herein by reference). 10(e) Employment Contract dated January 8, 1988, between Luby's Cafeterias, Inc. and George H. Wenglein (filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1988, and incorporated herein by reference). 10(f) Management Incentive Stock Plan of Luby's Cafeterias, Inc. (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989, and incorporated herein by reference). 10(g) Nonemployee Director Deferred Compensation Plan of Luby's Cafeteris, Inc. adopted October 27, 1994 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994, and incorporated herein by reference). 10(h) Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 13, 1995 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 11 Statement re computation of per share earnings. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. <PAGE> 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. LUBY'S CAFETERIAS, INC. (Registrant) Ralph Erben By: _____________________________ Ralph Erben President Chief Executive Officer John E. Curtis, Jr. By: _____________________________ John E. Curtis, Jr. Executive Vice President Chief Financial Officer Dated: January 11, 1996<PAGE> EXHIBIT INDEX Number Document 2 Agreement and Plan of Merger dated November 1, 1991, between Luby's Cafeterias, Inc., a Texas corporation, and Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 3(a) Certificate of Incorporation of Luby's Cafeterias, Inc., a Delaware corporation, as in effect February 28, 1994 (filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 3(b) Bylaws of Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 4(a) Description of Common Stock Purchase Rights of Luby's Cafeterias, Inc. in Form 8-A (filed April 17, 1991, effective April 26, 1991, File No. 1-8308, and incorporated herein by reference). 4(b) Amendment No. 1 dated December 19, 1991, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 4(c) Amendment No. 2 dated February 7, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 4(d) Amendment No. 3 dated May 29, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995, and incorporated herein by reference). 4(e) Promissory Note (Loan Agreement) dated December 31, 1995, in favor of NationsBank of Texas, N.A., in the maximum amount of $100,000,000. 10(a) Form of Deferred Compensation Agreement entered into between Luby's Cafeterias, Inc. and various officers (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1981, and incorporated herein by reference). 10(b) Annual Incentive Plan for Area Vice Presidents of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). 10(c) Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). 10(d) Performance Unit Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 12, 1984 (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1984, and incorporated herein by reference). <PAGE> EXHIBIT INDEX (continued) Number Document 10(e) Employment Contract dated January 8, 1988, between Luby's Cafeterias, Inc. and George H. Wenglein (filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1988, and incorporated herein by reference). 10(f) Management Incentive Stock Plan of Luby's Cafeterias, Inc. (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989, and incorporated herein by reference). 10(g) Nonemployee Director Deferred Compensation Plan of Luby's Cafeteris, Inc. adopted October 27, 1994 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994, and incorporated herein by reference). 10(h) Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 13, 1995 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 11 Statement re computation of per share earnings. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4 <SEQUENCE>2 <DESCRIPTION>PROMISSORY NOTE - EX-4E <TEXT> Exhibit 4(e) PROMISSORY NOTE Dallas, Texas December 31, 1995 Borrower: LUBY'S CAFETERIAS, INC. Maximum Amount: $100,000,000.00 Interest Rate Options (check options available): x Agreed Rate ___ x Prime Rate (-) .50 % ___ x CD Rate + .50 % ___ x Eurodollar Rate + .375 % ___ Loan Type (Check only one option): _____ This Note evidences Loans made by Lender to Borrower pursuant to a line of credit in the Maximum Amount. From the date hereof to _________________, 19____ (the "Commitment Termination Date"), Borrower, subject to the terms and conditions of this Note and provided that no Event of Default is then existing, may borrow, repay and reborrow up to the Maximum Amount ("Committed Loans"). x This Note evidences Loans made by Lender to Borrower, which in the _____ aggregate principal amount outstanding shall not exceed the Maximum Amount. Each Loan evidenced hereby shall mature not later than February 28, 1996. Borrower acknowledges and agrees that (i) Lender has no obligation to make any Loans and (ii) each Loan shall be in the sole discretion of Lender ("Uncommitted Loans"). Borrower, for the value received, promises to pay to the order of NATIONSBANK OF TEXAS, N.A. ("Lender"), at its banking house in Dallas, Texas, or at any other place designated to Borrower in writing by Lender, in lawful money of the United States of America and in immediately available funds prior to 11:00 a.m. Dallas time on the date due, the principal amount of each Loan, on the earlier of (i) declaration by Lender pursuant to Section 1.7 hereof, or (ii) the last day of the Interest Period of such Loan, together with interest on the unpaid principal balance of such Loan at the applicable rates herein set forth. This Note is issued upon the following terms and conditions: ARTICLE I. THE LOANS 1.1. Definitions. Defined terms used herein shall have the meanings given to them above and in Article III hereof. 1.2. Making the Loans. Each Fixed Rate Loan shall be in an aggregate amount which is an integral multiple of $100,000.00. Each Loan shall be made by notice to Lender (stating the Type Loan, the amount of the Loan, the date of the Loan and the Interest Period for the Loan) not later than 11:30 a.m., Dallas time, given by Borrower to Lender (i) as to any Eurodollar Rate Loan, at least two (2) Business Days prior to the date of such Type Loan, (ii) as to any CD Rate Loan, at least one (1) Business Day prior to the date of such Type Loan, and (iii) as to any Agreed Rate Loan and any Prime Rate Loan, on the day of such Type Loan. Lender shall on the date of each Loan not later than 1:00 p.m., Dallas time, in immediately available funds, deposit the proceeds of such Loan in the general deposit account of Borrower with Lender. 1.3. Repayment. Borrower shall repay the principal amount of each Loan on the earlier of (i) declaration by Lender pursuant to Section 1.7 hereof, or (ii) the last day of the Interest Period for such Loan. 1.4. Prepayments. Borrower may prepay any Prime Rate Loan, without penalty or premium. No prepayment of any Fixed Rate Loan shall be permitted without the prior written consent of Lender. Notwithstanding such prohibition, if there is a prepayment of any Fixed Rate Loan, whether by consent of Lender or because of acceleration or otherwise, Borrower shall, within fifteen (15) days of any request by Lender, pay to Lender any loss or expense which Lender may incur or sustain as a result of any such prepayment. A statement as to the amount of such loss or expense, prepared in good faith and in reasonable detail by Lender and submitted by Lender to Borrower shall be conclusive and binding for all purposes absent manifest error in computation. Calculation of all amounts payable to Lender under this Section 1.4 shall be made as though Lender shall have actually funded or committed to fund the relevant Fixed Rate Loan through the purchase of an underlying deposit in an amount equal to the amount of such Loan and having a maturity comparable to the related Interest Period; provided, however, that Lender may fund any Fixed Rate Loan in any manner it sees fit and the foregoing assumption shall be utilized only for the purpose of calculation of amounts payable under this Section 1.4. 1.5. Yield Protection and Indemnity. If at any time after the date hereof, and from time to time, Lender determines that the adoption or modification of any applicable law, rule or regulation regarding taxation, Lender's required levels of reserves, deposits, insurance or capital (including any allocation of capital requirements or conditions), or similar requirements, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation, administration or compliance of Lender with any of such requirements, has or would have the effect of (i) increasing Lender's costs relating to the Obligation hereunder, or (ii) reducing the yield or rate of return of Lender on the Obligation hereunder to a level below that which Lender could have achieved but for the adoption or modification of any such requirements, Borrower shall, within fifteen (15) days of any request by Lender, pay to Lender such additional amounts as (in Lender's sole judgment, after good faith and reasonable computation) will compensate Lender for such increase in costs or reduction in yield or rate of return of Lender. No failure by Lender to immediately demand payment of any additional amounts payable hereunder shall constitute a waiver of Lender's right to demand payment of such amounts at any subsequent time. Nothing herein contained shall be construed or so operate as to require Borrower to pay any interest, fees, costs or charges at a rate or in an amount greater than is permitted by Applicable Law. <PAGE> 1.6. Interest. (a) Prime Rate Loans. The unpaid principal balance of each Loan outstanding from time to time as a Prime Rate Loan shall bear interest during each Interest Period at the Prime Rate plus the percentage, if any, set forth in the "Interest Rate Options" section of this Note, which interest rate shall change without notice with each change in such Prime Rate as of the date of any such change; provided that, if at any time the Prime Rate plus the percentage, if any, set forth in the "Interest Rate Options" section of this Note exceeds the Highest Lawful Rate, the rate of interest which each Prime Rate Loan bears shall be limited to the Highest Lawful Rate, but any subsequent reductions in the Prime Rate shall not reduce the rate of interest which each Prime Rate Loan bears below the Highest Lawful Rate until the amount of interest accrued on each Prime Rate Loan equals the amount of interest which would have accrued if the Prime Rate plus the percentage, if any, set forth in the "Interest Rate Options" section of this Note had at all times been in effect. Interest on each Prime Rate Loan for each Interest Period shall be payable on the last day thereof. (b) CD Rate Loans. The unpaid principal balance of each Loan outstanding from time to time as a CD Rate Loan shall bear interest during each Interest Period at the CD Rate for such CD Rate Loan plus the percentage, if any, set forth in the "Interest Rate Options" section of this Note. Interest on each CD Rate Loan for each Interest Period shall be payable on the last day thereof. (c) Eurodollar Rate Loans. The unpaid principal balance of each Loan outstanding from time to time as a Eurodollar Rate Loan shall bear interest during each Interest Period at the Eurodollar Rate for such Eurodollar Rate Loan plus the percentage, if any, set forth in the "Interest Rate Options" section of this Note. Interest on each Eurodollar Rate Loan for each Interest Period shall be payable on the last day thereof. (d) Agreed Rate Loans. The unpaid principal balance of each Loan outstanding from time to time as an Agreed Rate Loan shall bear interest during each Interest Period at the Agreed Rate for such Agreed Rate Loan. Interest on each Agreed Rate Loan for each Interest Period shall be payable on the last day thereof. (e) Computations. Subject to the provisions of Section 2.5 of this Note, interest on each Loan and any commitment fee shall be calculated on the basis of actual days elapsed, but computed as if each year consisted of 360 days. The books and records of Lender shall be prima facie evidence of all sums due Lender. (f) Past Due Principal and Interest. All past due principal of and, to the extent permitted by Applicable Law, all past due interest on any Loan and any other past due amount owing on this Note, shall bear interest from the date due until paid at the Default Rate. 1.7. Events of Default. It shall be an event of default ("Event of Default") under this Note and each of any other documents executed in connection herewith if any one of the following shall occur: (i) Borrower shall fail to make any payment of principal, interest or other amounts under this Note when due; (ii) Borrower or any guarantor of this Note shall fail to make any payment when due on any debt for borrowed money, purchase money debt or contingent debt which Borrower or any guarantor of this Note is obligated to pay as borrower, guarantor or in any other capacity or any default or event of default shall occur under any agreement evidencing or providing for the creation of such debt or under any other document executed in connection with this Note; (iii) any voluntary or involuntary bankruptcy proceeding or any similar action is commenced with respect to Borrower or any guarantor of this Note or any of its assets; (iv) Lender shall in good faith believe that the prospect of payment of amounts due with respect to this Note has been impaired; or (v) any representation or warranty made by Borrower or any guarantor of this Note in connection with this Note shall be false or incorrect in any material respect when made or deemed made. If one or more of the foregoing Events of Default shall occur, all or any part of the outstanding principal of this Note plus accrued unpaid interest on this Note and any other accrued unpaid amount owing under this Note shall at the option of Lender become due and payable immediately without notice to Borrower, which is hereby waived by Borrower, and Lender shall have no further obligation (if any) to make Loans under this Note, and Lender may exercise any and all available rights and remedies under any document or instrument executed in connection with this Note or under Applicable Law. ARTICLE II. MISCELLANEOUS 2.1. Waivers and Consents. Borrower and all endorsers, sureties and guarantors of this Note hereby severally waive demand and notice of demand, presentment for payment, protest, notice of protest, notice of acceleration of the maturity of this Note, notice of intention to accelerate the maturity of this Note, diligence in collecting, the bringing of any suit against any Person, and any notice of or defense on account of any extensions, renewals, partial payments or changes in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security for this Note, or any delay, indulgence or other act of any holder hereof, whether before or after maturity. 2.2 Fees. Borrower agrees to pay to Lender, on the date or dates set forth below, the following fee or fees (check applicable provisions): N/A On the date hereof, a facility fee in the amount of ____ ___________________ Dollars ($______________________). N/A On the last day of each Interest Period for Prime Rate Loans and ____ on the Commitment Termination Date, a commitment fee at the rate of ____________ percent (___ %) per annum on the average daily unborrowed portion of the Maximum Amount. 2.3. Expenses. If this Note is placed in the hands of an attorney for collection after the occurrence of an Event of Default, or if all or any part of the indebtedness evidenced hereby is proved, established or collected in any court or in any bankruptcy, receivership, debtor relief, probate or other court proceedings, Borrower and all endorsers, sureties and guarantors of this Note jointly and severally agree to pay reasonable attorneys' fees and collection costs to the holder hereof in addition to the principal and interest and other amounts payable hereunder. In addition, Borrower agrees to pay Lender all reasonable costs and expenses, including reasonable attorneys' fees, incurred by Lender in connection with the preparation of this Note and any documents or instruments executed in connection herewith, making the Loans hereunder, and all amendments, consents and waivers related to the Loans and requests therefor by Borrower. 2.4. Governing Law. This Note is payable and performable in Dallas County, Texas, and shall be construed and enforced in accordance with and governed by the Laws of the State of Texas and the Federal Laws of the United States of America. Tex. Rev. Civ. Stat. Ann. art. 5069 Ch. 15 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not apply to the Loans evidenced by this Note. Without excluding any other jurisdiction, Borrower agrees that the courts of the State of Texas sitting in Dallas, Dallas County, Texas, and the federal courts sitting in Dallas, Dallas County, Texas, will have jurisdiction over proceedings in connection herewith. 2.5. Controlling Agreement. Interest paid or agreed to be paid in this Note or in any other documents executed in connection herewith shall not exceed the Highest Lawful Rate, and, in any contingency whatsoever, if Lender shall receive anything of value deemed interest under Applicable Law which would exceed the Highest Lawful Rate, the excessive interest shall be applied to the reduction of unpaid principal or refunded to Borrower, if it exceeds unpaid principal. It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, charged, or received by Lender or any holder of this Note that are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate shall be made, to the extent permitted by usury laws applicable to Lender (now or hereafter enacted), by amortizing, prorating, and spreading during the period of the full stated term of the Loans evidenced by this Note all interest at any time contracted for, charged, or received by Lender in connection therewith. 2.6. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, except that Borrower shall not have the right to assign its rights or obligations hereunder or any interest herein without the prior written consent of Lender. Lender may assign to one or more banks, all or any part of, or may grant participations to one or more banks in or to all or part of, any Loan or Loans and this Note, and to the extent of any such assignment or participation (except where otherwise stated) the assignee or participant of such assignment or participation shall have the rights and benefits with respect to each Loan or Loans and this Note, including Section 1.5 hereof, as it would have if it was Lender hereunder. 2.7. Titles. The titles to paragraphs in this Note are inserted for convenience only and do not constitute a part of the text hereof. 2.8. Notices. Notices hereunder must be given in writing to be effective and shall be effective upon receipt by Borrower or Lender at the address set forth below its signature below or at such other address as Borrower or Lender may notify the other. ARTICLE III DEFINITIONS As used in and for all purposes of this Note, the terms defined in this Article III shall have the following meanings, and the singular shall include the plural, and vice versa, unless otherwise specifically required by the context: "Agreed Rate" shall mean a fixed rate per annum mutually agreed upon by Borrower and Lender, to be confirmed in writing by Borrower. "Agreed Rate Loan" shall mean each Loan which bears interest at the Agreed Rate. "Applicable Law" shall mean the Laws of the United States of America applicable to contracts made or performed or to be performed in the State of Texas, including, without limitation, 12 U.S.C. section 85 and 86(a), as heretofore or hereafter amended, and any other statute of the United States of America now or at any time hereafter prescribing maximum rates of interest on loans, advances and extensions of credit, and the Laws of the State of Texas, including, without limitation, Articles 5069-1.04 and 5069-1.07(a), Title 79, Revised Civil Statutes of Texas, 1925, as heretofore or hereafter amended ("Art. 1.04"). "Art. 1.04" has the meaning given to such term in the definition of Applicable Law in this Article III. "Assessment Rate" shall mean, with respect to any CD Rate Loan, the actual (if known) or the estimated (if the actual rate is not known) net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) charged by the Federal Deposit Insurance Corporation (or any successor) for such corporation's (or such successor's) insuring liability for time deposits of Lender, as in effect from time to time. The Assessment Rate shall be a fixed percentage calculated as of and effective with the first day of each Interest Period, taking into consideration changes scheduled to occur during such Interest Period. "Business Day" shall mean a day of the year on which banks are not required or authorized to close in Dallas, Texas, and, if the applicable Business Day relates to any Eurodollar Rate Loans, a day of the year on which dealings are carried on in the London interbank market. "CD Rate" shall mean an interest rate per annum equal to a rate determined pursuant to the following formula: Derivation CD Rate + Assessment Rate _____________________________ 100% - CD Reserve Percentage "CD Rate Loan" shall mean each Loan which bears interest based on the CD Rate. "CD Reserve Percentage" shall mean, for the applicable Interest Period, the then applicable maximum reserve requirement (including, without limitation, any basic, supplemental, marginal and emergency reserves) (expressed as a percentage) under Regulation D of the Board of Governors of the Federal Reserve System, or such additional, substituted or amended reserve requirement, applicable to member banks of the Federal Reserve System, in respect of non-personal time deposits in Dollars in the City of Dallas, Texas, having a maturity comparable to such Interest Period and in an amount of $100,000.00 or more. The CD Reserve Percentage shall be a fixed percentage calculated as of and effective with the first day of such Interest Period, taking into consideration changes scheduled to occur during such Interest Period. "Default Rate" shall mean (i) from the date that any payment is due until ten (10) days thereafter, an interest rate per annum equal to the lesser of (y) two (2) percent above the interest rate otherwise applicable to such payment or, if there is no otherwise applicable interest rate, two (2) percent above the Prime Rate or (z) the Highest Lawful Rate and thereafter (ii) the Highest Lawful Rate. "Derivation CD Rate" shall mean, for the applicable Interest Period, the rate per annum determined by Lender, in accordance with its customary general practice from time to time, to be the rate that is or would be offered or quoted to Lender at its request by one or more primary dealers who make markets in certificates of deposit for the purchase at face value from Lender of certificates of deposit issued by Lender in the amount of Five Million Dollars ($5,000,000.00), having a term comparable to such Interest Period, as of approximately 8:00 a.m. Dallas, Texas time (or as soon thereafter as practicable) on the first day of such Interest Period. If no such offers or quotes are generally available for such amount, then Lender shall be entitled to determine the Derivation CD Rate by estimating in its reasonable judgment the per annum rate (as described above) that would be applicable if such quotes or offers were generally available. "Dollars" and the sign "$" shall mean lawful money of the United States of America. "Eurodollar Rate" shall mean an interest rate per annum equal to a rate determined pursuant to the following formula: London Interbank Rate _____________________________________ 100% - Eurodollar Reserve Percentage "Eurodollar Rate Loan" shall mean each Loan which bears interest based on the Eurodollar Rate. "Eurodollar Reserve Percentage" shall mean the maximum reserve requirement (including, without limitation, any basic, supplemental, marginal and emergency reserves) (expressed as a percentage) applicable to member banks of the Federal Reserve System in respect of "Eurocurrency Liabilities" under Regulation D of the Board of Governors of the Federal Reserve System, or such additional, substituted or amended reserve requirement as may be hereafter applicable to member banks of the Federal Reserve System. "Fixed Rate Loan" shall mean an Agreed Rate Loan, CD Rate Loan, or Eurodollar Rate Loan, as the context requires. "hereof," "hereto," "hereunder" and similar terms shall refer to this Note and not to any particular section or provision of this Note. "Highest Lawful Rate" shall mean at the particular time in question the maximum rate of interest per annum which, under Applicable Law, Lender is then permitted to charge Borrower on the Obligation. If the Highest Lawful Rate shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to Borrower; provided, however, the Highest Lawful Rate shall decrease with respect to the Note only if required by Applicable Law. For purposes of determining the Highest Lawful Rate under the Applicable Law of the State of Texas, the applicable rate ceiling shall be the indicated rate ceiling described in and computed in accordance with the provisions of Section (a)(1) of Art. 1.04, provided, that at any time such indicated rate ceiling shall be less than 18% per annum or more than 24% per annum, the provisions of Section (b)(1) and (2) of Art. 1.04 shall control for purposes of such determination, as applicable. "Interest Period" means, for each Loan, the period commencing on the date of such Loan and ending on the last day of such period as selected by Borrower pursuant to the provisions hereof. The duration of each such Interest Period for (i) each Eurodollar Rate Loan shall be 1, 2 or 3 months, (ii) each CD Rate Loan shall be 30, 60 or 90 days, (iii) each Prime Rate Loan shall be from the date of such Prime Rate Loan to the next succeeding April 1, July 1, October 1 or January 1, and (iv) each Agreed Rate Loan shall be up to 30 days as agreed to by Borrower and Lender and confirmed in writing by Borrower, subject to the other provisions hereof, as Borrower may select: provided however, that: (i) Whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Loan, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (ii) No Interest Period may extend beyond February 28, 1996. "Laws" shall mean all constitutions, treaties, statutes, laws, ordinances, regulations, orders, writs, injunctions, or decrees of the United States, any state or commonwealth, any municipality, any foreign country, any territory or possession or any Tribunal. "Loan" shall mean any Prime Rate Loan, Agreed Rate Loan, CD Rate Loan or Eurodollar Rate Loan, as the context requires. "London Interbank Rate" shall mean, for the applicable Interest Period, the rate of interest per annum (rounded upward, if necessary, to the next higher 1/16 of 1%) determined by Lender, in accordance with its customary general practice from time to time, to be the rate at which deposits in immediately available funds in Dollars are or would be offered or quoted by Lender to major banks in the London interbank market, as of approximately 11:00 a.m. London time, or as soon thereafter as practicable, on the second Business Day immediately preceding the first day of such Interest Period, for a term comparable to such Interest Period and in the amount of Five Million Dollars ($5,000,000.00). If no such offers or quotes are generally available for such amount, then Lender shall be entitled to determine the London Interbank Rate by estimating in its reasonable judgement the per annum rate (as described above) that would be applicable if such quotes or offers were generally available. "Obligation" shall mean (without duplication) the aggregate principal amount of and any interest, fees, and other charges payable by Borrower in respect of the Loans. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department, agency or political subdivision thereof. "Prime Rate" shall mean the prime interest rate charged by Lender as announced or published by Lender from time to time. It is understood that the Prime Rate is set by Lender as a general reference rate of interest and is not necessarily the lowest or best rate actually charged to any customer or a favored rate. "Prime Rate Loan" shall mean each Loan which bears interest based on the Prime Rate. "Taxes" shall mean all taxes, assessments, fees or other charges from time to time or at any time imposed by any Laws or by any Tribunal. "Tribunal" shall mean any state, commonwealth, federal foreign, territorial, or other court or governmental department, commission, board, bureau, district, agency or instrumentality. "Type Loan" shall mean with respect to the Loan, a Prime Rate Loan, Agreed Rate Loan, CD Rate Loan, or a Eurodollar Rate Loan. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. <PAGE> BORROWER: LUBY'S CAFETERIAS, INC. By: Ralph Erben ___________________ Name: Ralph Erben Title: President and CEO By: John E. Curtis, Jr. ___________________ Name: John E. Curtis, Jr. Title: Executive Vice President and CFO Executed by Lender for the purpose of the Notice of Final Agreement set forth above. LENDER: NATIONSBANK OF TEXAS, N.A. By: Doug Hutt __________________ Name: Douglas E. Hutt Title: Senior Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF PER SHARE EARNINGS <TEXT> Exhibit 11 COMPUTATION OF PER SHARE EARNINGS The following is a computation of the weighted average number of shares outstanding which is used in the computation of per share earnings for Luby's Cafeterias, Inc. for the three months ended November 30, 1995 and 1994. Three months ended November 30, 1995: 23,313,132 x shares outstanding for 21 days 489,575,772 23,315,089 x shares outstanding for 21 days 489,616,869 23,320,721 x shares outstanding for 18 days 419,772,978 23,331,311 x shares outstanding for 8 days 186,650,488 23,334,503 x shares outstanding for 23 days 536,693,569 _____________ 2,122,309,676 Divided by number of days in the period 91 _____________ 23,322,084 Three months ended November 30, 1994: 25,074,982 x shares outstanding for 18 days 451,349,676 24,941,910 x shares outstanding for 12 days 299,302,920 24,934,917 x shares outstanding for 16 days 398,958,672 24,713,278 x shares outstanding for 15 days 370,699,170 24,520,641 x shares outstanding for 17 days 416,850,897 24,416,386 x shares outstanding for 13 days 317,413,018 _____________ 2,254,574,353 Divided by number of days in the period 91 _____________ 24,775,542 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> AUG-31-1996 <PERIOD-END> NOV-30-1995 <CASH> 10,196 <SECURITIES> 0 <RECEIVABLES> 389 <ALLOWANCES> 0 <INVENTORY> 4,398 <CURRENT-ASSETS> 18,890 <PP&E> 418,709 <DEPRECIATION> 134,894 <TOTAL-ASSETS> 317,697 <CURRENT-LIABILITIES> 100,494 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 8,769 <OTHER-SE> 188,602<F1> <TOTAL-LIABILITY-AND-EQUITY> 317,697 <SALES> 108,337 <TOTAL-REVENUES> 108,337 <CGS> 57,310 <TOTAL-COSTS> 57,310 <OTHER-EXPENSES> 32,172 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 528 <INCOME-PRETAX> 13,704 <INCOME-TAX> 5,139 <INCOME-CONTINUING> 8,565 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 8,565 <EPS-PRIMARY> 0.37 <EPS-DILUTED> 0.37 <FN> <F1>Other stockholders' equity amount is less cost of treasury stock of $91,486. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

MDP

https://www.sec.gov/Archives/edgar/data/65011/0000065011-96-000002.txt

-----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, A6T9f/k2eFKhrwzERNmZqL0IxqV4fSgJfAJ85lw+tNgEFXyeS+/ApIZS0nRolPEO keET3zk3i8cRDktBLUuZIQ== <SEC-DOCUMENT>0000065011-96-000002.txt : 19960213 <SEC-HEADER>0000065011-96-000002.hdr.sgml : 19960213 ACCESSION NUMBER: 0000065011-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEREDITH CORP CENTRAL INDEX KEY: 0000065011 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 420410230 STATE OF INCORPORATION: IA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05128 FILM NUMBER: 96515715 BUSINESS ADDRESS: STREET 1: 1716 LOCUST ST CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152843000 FORMER COMPANY: FORMER CONFORMED NAME: MEREDITH PUBLISHING CO DATE OF NAME CHANGE: 19710317 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>12-31-95 10-Q FILING <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 Commission file number 1-5128 Meredith Corporation (Exact name of registrant as specified in its charter) Iowa 42-0410230 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1716 Locust Street, Des Moines, Iowa 50309-3023 (Address of principal executive offices) (ZIP Code) 515 - 284-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1996 Common Stock, $1 par value 20,921,769 Class B Stock, $1 par value 6,669,294 - 1 - <PAGE> Part I - FINANCIAL INFORMATION Item 1. Financial Statements Meredith Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) December 31 June 30 Assets 1995 1995* - ----------------------------------------------------------------------------- (in thousands) Current assets: Cash and cash equivalents $ 32,205 $ 11,825 Receivables, net 101,913 98,191 Inventories 34,192 46,781 Supplies and prepayments 12,822 23,774 Subscription acquisition costs 49,301 65,604 Film rental costs 14,806 4,423 ---------- ---------- Total current assets 245,239 250,598 ---------- ---------- Property, plant & equipment(at cost) 179,083 163,947 Less accumulated depreciation (104,924) (101,506) ---------- ---------- Net property, plant and equipment 74,159 62,441 ---------- ---------- Net assets of discontinued operations 87,990 88,097 Deferred subscription acquisition costs 47,046 34,957 Deferred film rental costs 10,255 3,777 Other assets 21,629 21,290 Goodwill and other intangibles (at original cost less accumulated amortization) 277,439 282,636 ---------- ---------- Total assets $763,757 $743,796 ========== ========== *Restated to reflect the cable segment as discontinued operations. See accompanying Notes to Interim Consolidated Financial Statements. - 2 - <PAGE> (Unaudited) December 31 June 30 Liabilities and Stockholders' Equity 1995 1995* - ----------------------------------------------------------------------------- Current liabilities: Current portion of long-term indebtedness $ 15,000 $ 15,000 Current portion of long-term film rental contracts 16,496 7,290 Accounts payable 34,811 48,601 Accrued taxes and expenses 72,360 57,216 Unearned subscription revenues 143,417 150,927 ---------- ---------- Total current liabilities 282,084 279,034 ---------- ---------- Long-term indebtedness 65,000 75,000 Long-term film rental contracts 12,259 4,969 Unearned subscription revenues 91,847 96,381 Deferred income taxes 20,501 18,492 Other deferred items 28,689 28,870 ---------- ---------- Total liabilities 500,380 502,746 ---------- ---------- Stockholders' equity: Series preferred stock, par value $1 per share Authorized 5,000,000 shares; none issued. -- -- Common stock, par value $1 per share Authorized 80,000,000 shares; issued and outstanding 20,895,821 at December 31 and 20,579,565 at June 30 (net of treasury shares, 11,557,540 at December 31 and 11,601,465 at June 30). 20,896 20,580 Class B stock, par value $1 per share, convertible to common stock Authorized 15,000,000; issued and outstanding 6,682,135 at December 31 and 6,905,062 at June 30. 6,682 6,905 Additional paid-in capital 3,098 873 Retained earnings 235,843 216,485 Unearned compensation (3,142) (3,793) ---------- ---------- Total stockholders' equity 263,377 241,050 ---------- ---------- Total liabilities and stockholders' equity $763,757 $ 743,796 ========== ========== *Restated to reflect the cable segment as discontinued operations. See accompanying Notes to Interim Consolidated Financial Statements. - 3 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Earnings (Unaudited) Three Months Six Months Ended December 31 Ended December 31 1995 1994* 1995 1994* - ----------------------------------------------------------------------------- (in thousands, except per share) Revenues (less returns and allowances) Advertising $105,872 $ 92,854 $207,532 $176,834 Circulation 69,557 67,687 136,258 130,638 Consumer books 23,262 20,862 41,253 45,044 All other 18,487 20,208 39,797 36,428 --------- --------- --------- --------- Total revenues 217,178 201,611 424,840 388,944 --------- --------- --------- --------- Operating costs and expenses: Production, distribution & edit 92,776 81,553 181,470 160,388 Selling, general and admin 94,595 97,979 189,719 189,364 Depreciation and amortization 5,620 3,975 11,246 8,012 --------- --------- --------- --------- Total operating costs and expenses 192,991 183,507 382,435 357,764 --------- --------- --------- --------- Income from operations 24,187 18,104 42,405 31,180 Gain on dispositions 5,898 -- 5,898 -- Interest income-IRS settlement -- -- -- 8,554 Interest income 459 823 1,121 1,346 Interest expense (1,711) (48) (3,470) (91) --------- --------- --------- --------- Earnings from continuing operations before income taxes 28,833 18,879 45,954 40,989 Income taxes 12,755 8,397 20,367 18,226 --------- --------- --------- --------- Earnings from continuing operations 16,078 10,482 25,587 22,763 Discontinued operations: Loss from cable operations -- (1,563) (717) (3,172) --------- --------- --------- --------- Earnings before cumulative effect of change in accounting principle 16,078 8,919 24,870 19,591 Cumulative effect of change in accounting principle -- -- -- (46,160) --------- --------- --------- --------- Net earnings (loss) $ 16,078 $ 8,919 $ 24,870 $(26,569) ========= ========= ========= ========= - 4 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Earnings (Unaudited), continued Three Months Six Months Ended December 31 Ended December 31 1995 1994* 1995 1994* - ----------------------------------------------------------------------------- (in thousands, except per share) Net earnings (loss) per share: Earnings from continuing operations $ 0.57 $ 0.38 $ 0.91 $ 0.82 Discontinued operations -- (0.06) (0.03) (0.11) Cumulative effect of change in accounting principle -- -- -- (1.67) --------- --------- --------- --------- Net earnings (loss) per share $ 0.57 $ 0.32 $ 0.88 $ (0.96) ========= ========= ========= ========= Dividends paid per share $ 0.10 $ 0.09 $ 0.20 $ 0.18 ========= ========= ========= ========= Average shares outstanding 28,291 27,725 28,189 27,690 ========= ========= ========= ========= * Restated to reflect the cable segment as discontinued operations. See accompanying Notes to Interim Consolidated Financial Statements. - 5 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended December 31 1995 1994* - ----------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Earnings before cumulative effect of change in accounting principle $24,870 $19,591 Less cumulative effect of change in accounting principle -- (46,160) -------- -------- Net earnings (loss) 24,870 (26,569) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 11,246 8,012 Amortization of film contract rights 8,457 9,613 Gain on dispositions, net of taxes (3,379) -- Loss from discontinued operations 717 3,172 (Increase) in receivables (10,833) (27,872) Decrease (increase) in inventories 7,687 (520) Decrease (increase) in supplies and prepayments 5,076 (2,907) Decrease in subscription acquisition costs 4,214 79,796 (Decrease) increase in accounts payable and accruals (5,859) 3,172 (Decrease) incr in unearned subscription revenues (12,044) 647 Increase (decrease) in deferred income taxes 2,412 (32,728) (Decrease) increase in other deferred items (181) 949 -------- -------- Net cash provided by operating activities 32,383 14,765 -------- -------- Cash flows from investing activities: Redemption of marketable securities -- 9,174 Proceeds from dispositions 27,894 -- Additions to property, plant, and equipment (19,237) (5,694) (Increase) decrease in other assets (212) 6,996 -------- -------- Net cash provided by investing activities 8,445 10,476 -------- -------- - 6 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended December 31 1995 1994* - ----------------------------------------------------------------------- (in thousands) Cash flows from financing activities: Long-term indebtedness retired $(10,000) $ -- Payments for film rental contracts (7,906) (6,841) Proceeds from common stock issued 2,969 1,795 Purchase of company shares -- (3,759) Dividends paid (5,511) (4,936) -------- -------- Net cash (used) by financing activities (20,448) (13,741) -------- -------- Net increase in cash and cash equivalents 20,380 11,500 Cash and cash equivalents at beginning of year 11,825 31,528 -------- -------- Cash and cash equivalents at end of period $32,205 $43,028 ======== ======== *Restated to reflect the cable segment as discontinued operations. See accompanying Notes to Interim Consolidated Financial Statements. - 7 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies The information included in the foregoing interim financial statements is unaudited. In the opinion of management, all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. Fiscal 1995 financial statements reflect the adoption of Practice Bulletin 13, "Direct-Response Advertising and Probable Future Benefits" as of July 1, 1994. Practice Bulletin 13 interpreted Statement of Position 93-7, "Reporting on Advertising Costs." Practice Bulletin 13 requires the Company to expense most direct-response subscription acquisition costs as incurred versus the Company's prior accounting method of deferring most of those costs over the lives of the related subscription revenues. 2. Discontinued Operations The Company formalized plans to sell its remaining cable television systems and therefore classified its cable segment as discontinued operations effective September 30, 1995. Meredith/New Heritage Strategic Partners, L.P. ("Strategic Partners"), of which the Company owns approximately 70 percent, is currently negotiating the sale of these cable television systems located in Minneapolis. (Strategic Partners sold its Bismarck/Mandan, North Dakota system in March 1995.) The Company believes Strategic Partners will complete the sale of its cable operations within 12 months of the measurement date and will recognize a gain from the sale. The amount of the gain is not yet determinable. Prior year financial statements have been restated to reflect the cable segment as discontinued operations. The following table summarizes the results of discontinued operations prior to the measurement date: - 8 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) Three Months Six Months Ended December 31 Ended December 31 ------------------ -------------------- 1995* 1994 1995 1994 ------- ------- ------- ------- (in thousands) Results of operations: Net revenues $ -- $13,273 $12,223 $26,087 ===== ======= ======= ======= Income from operations $ -- $ 840 $ 721 $ 1,351 ===== ======= ======= ======= (Loss) before income taxes $ -- $(1,483) $ (744) $(3,044) Provision for tax expense (benefit) -- 80 (27) 128 ----- ------- ------- ------- Net (loss) from discontinued operations $ -- $(1,563) $ (717) $(3,172) ===== ======= ======= ======= *Since September 30, 1995 the cable operations have reported revenues of $12.8 million, income from operations of $1,263,000, and a net loss of ($349,000) (including income tax expense of $72,000). These losses have been deferred until the disposal date, as a net gain is anticipated. Interest expense is reflected in the loss from discontinued cable operations based on debt that is specifically attributed to the cable segment and is non- recourse to Meredith Corporation. Assets and liabilities of the discontinued operations have been reclassified on the consolidated balance sheet from their historic classification to separately identify them as net assets of discontinued operations. These net assets of discontinued operations at December 31, 1995, consist of goodwill and other intangibles $140.8 million, net property, plant and equipment $71.8 million, net of long-term debt ($87.3) million and other net liabilities ($37.3) million. - 9 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 3. Inventories Major components of inventories are summarized below. Of total inventory values shown, approximately 75 and 55 percent respectively, are under the LIFO method at December 31, 1995 and June 30, 1995. December 31 June 30 1995 1995 -------- -------- (in thousands) Raw materials $32,540 $32,320 Work in process 10,710 13,801 Finished goods 6,410 13,059 -------- -------- 49,660 59,180 Reserve for LIFO cost valuation (15,468) (12,399) -------- -------- Total $34,192 $46,781 ======== ======== The decrease in finished goods inventory and the increase in the percentage of inventory under the LIFO method at December 31, 1995 primarily reflect the sale of book clubs in December 1995. 4. Cable Subsidiary Long-Term Indebtedness Strategic Partners owed $87.3 million as of December 31, 1995, to a group of ten banks under a loan agreement. Interest was payable under interest rate swap agreements until September 1, 1995. On September 1, 1995, interest rates on the total outstanding borrowing of $87.3 million converted to short-term rates based on Eurodollar, prime and/or certificate of deposit rates as provided in the loan agreement. As of December 31, 1995, the weighted-average rate of interest on Strategic Partners' debt was 6.95 percent. - 10 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 5. Sale of Properties In December 1995, Meredith Corporation recorded a gain of $5,898,000 ($3,379,000 post-tax) on the sale of the Better Homes and Gardens Crafts Club, Better Homes and Gardens Cook Book Club and Country Homes and Gardens Book Club. Had this sale occurred on July 1, 1995, the effect on consolidated revenues and net earnings would not have been material. 6. Revenues, operating profit and depreciation and amortization by industry segment are shown below: Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- 1995 1994 1995 1994 -------- -------- -------- -------- (in thousands) Revenues Publishing $171,436 $164,537 $337,999 $319,606 Broadcasting 39,376 31,085 74,599 57,068 Real Estate 6,382 6,008 12,588 12,301 Less: Inter-segment revenues (16) (19) (346) (31) -------- -------- -------- -------- Total revenues $217,178 $201,611 $424,840 $388,944 ======== ======== ======== ======== Operating profit Publishing $ 13,533 $ 9,103 $ 22,603 $ 19,366 Broadcasting 15,526 13,256 28,287 19,525 Real Estate 1,096 644 2,116 1,343 Unallocated corporate expense (5,968) (4,899) (10,601) (9,054) -------- -------- -------- -------- Total operating profit $ 24,187 $ 18,104 $ 42,405 $ 31,180 ======== ======== ======== ======== Depreciation and amortization Publishing $ 2,476 $ 2,485 $ 4,996 $ 5,101 Broadcasting 2,645 992 5,268 1,946 Real Estate 119 119 234 232 Unallocated corporate expense 380 379 748 733 -------- -------- -------- -------- Total depr. and amortization $ 5,620 $ 3,975 $ 11,246 $8,012 ======== ======== ======== ======== - 11 - <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (Note: All per-share amounts are computed on a post-tax basis and reflect a two-for-one stock split in March 1995.) Meredith Corporation net earnings for the quarter ended December 31, 1995 were $16,078,000 (57 cents per share) versus $8,919,000 (32 cents per share) in the prior-year quarter. For the six months ended December 31, 1995, net earnings were $24,870,000 (88 cents per share) compared to a loss of $26,569,000 (96 cents per share) in the prior-year period. Results for the six months ended December 31, 1994 included a non-cash charge for the cumulative effect of a change in accounting principle (related to subscription acquisition costs) of $46,160,000 ($1.67 per share). The six months ended December 31, 1995 and the quarter and six months ended December 31, 1994 also include losses from cable operations which were classified as discontinued operations effective September 30, 1995. Management expects the cable properties to be sold within twelve months of that date and to record a net gain on the sale. Therefore, net losses of the cable operations for the quarter ended December 31, 1995 have been deferred until the disposal date. Earnings from continuing operations were $16,078,000 (57 cents per share) and $10,482,000 (38 cents per share) for the quarters ended December 31, 1995 and 1994, respectively. Earnings from continuing operations for the comparative six-month periods were $25,587,000 (91 cents per share) in fiscal 1996 and $22,763,000 (82 cents per share) in fiscal 1995. Earnings for the quarter and six months ended December 31, 1995 included a post-tax gain of $3,379,000 (12 cents per share) on the disposition of three of the Company's book clubs. Earnings for the six months ended December 31, 1994 included $4,747,000 (17 cents per share) for the post-tax impact of IRS interest income. Excluding these one-time items, comparable quarterly earnings were $12,699,000 (45 cents per share) in fiscal 1996, an 18 percent per-share increase from comparable prior-year second quarter earnings of $10,482,000 (38 cents per share). Comparable earnings for the six-month periods were $22,208,000 (79 cents per share) in fiscal 1996, a 22 percent per-share increase from the prior-year six months' earnings of $18,016,000 (65 cents per share). Improvements in the Company's publishing and broadcasting operations were the biggest factors in these increases. - 12 - <PAGE> In December 1995, a gain of $5,898,000 ($3,379,000 post-tax or 12 cents per share) was recorded on the sale of the Better Homes and Gardens Crafts Club, Better Homes and Gardens Cook Book Club and Country Homes and Gardens Book Club. All other book club operations have been discontinued. In the second half of fiscal 1996, consumer book revenues are expected to decline by more than 50 percent from the prior year due to the sale and the Company's previously announced strategic alliance with The Reader's Digest Association, Inc. which is currently in the testing phase. The effect on operating profits in the fiscal 1996 second half from these events is expected to be immaterial. In addition to the one-time items noted above, comparisons between fiscal 1996 and 1995 are also affected by the acquisition of WSMV-TV in Nashville in January 1995. Fiscal 1996 year-to-date results include six months of WSMV-TV operations. Revenues for the quarter ended December 31 were $217,178,000 in fiscal 1996, or 8 percent higher than fiscal 1995 second quarter revenues of $201,611,000. Revenues for the six months ended December 31 were $424,840,000 in fiscal 1996, or 9 percent higher than comparable fiscal 1995 revenues of $388,944,000. Increased advertising revenues in the magazine and television broadcasting operations were the most significant factors in the increases. Income from operations in the second quarter was $24,187,000, a 34 percent increase from the fiscal 1995 second quarter. Year-to-date income from operations was $42,405,000, a 36 percent increase from the prior-year period. The operating margin rose from 9.0 percent of net revenues in the fiscal 1995 second quarter to 11.1 percent in the current quarter. For the fiscal year-to- date, the operating margin rose from 8.0 percent of net revenues in the fiscal 1995 period to 10.0 percent in the current period. Lower selling, general and administrative expenses, as a percentage of revenues, led to the improvements. In the current periods, a smaller quantity of magazine subscription promotion mailings and lower book administrative expenses, from recent downsizing, were the primary factors in the improvements. Production, distribution and editorial expenses increased as a percentage of revenues in both periods due to rising paper prices and higher postal rates in the publishing businesses. Operating costs and expenses were up 5 percent for the quarter and 7 percent for the six-months compared to the prior-year periods. The primary factors in the increases were higher magazine paper and postage expenses (a result of both volume and price increases) and the addition of operating costs and amortization of intangible assets for WSMV-TV. Earnings from continuing operations (excluding gain on dispositions) before interest, taxes, depreciation and amortization ("EBITDA") were $29,807,000 for the three months ended December 31, 1995, up 35 percent from $22,079,000 in fiscal 1995. EBITDA for the fiscal year-to-date was $53,651,000, a 37 percent - 13 - <PAGE> increase from $39,192,000 in the prior-year period. The increase was primarily due to improvements in publishing and broadcasting operating results. Net interest expense increased for both the quarter and six-month periods due to debt incurred for the purchase of the Nashville television station. Unallocated corporate expenses increased in both current-year periods due to investments in CD-ROM and web site development. Publishing: Revenues in the publishing segment increased 4 percent and 6 percent from the prior-year second-quarter and year-to-date periods, respectively. The increases were primarily due to higher advertising revenues that resulted largely from increased ad pages. The Company's flagship title, Better Homes and Gardens magazine, recorded advertising revenue increases of 7 percent for the quarter and 14 percent for the six months versus the prior-year periods. Run-of-press ad pages increased 6 percent for the quarter and 13 percent for the six months. Ladies' Home Journal magazine, the Company's second largest circulation title, reported advertising revenue increases of 6 percent and 3 percent for the quarter and year-to date, respectively. Ladies' Home Journal results for the quarter benefited from both increased run-of-press ad pages and higher average revenue per page. The year-to-date improvement resulted primarily from higher average revenue per page. Revenues from new titles and custom publications also contributed to the current-year advertising revenue increases in both the quarter and six-month periods. Publishing circulation revenues increased from the prior-year periods primarily due to higher revenues from newer titles. Consumer book revenues were up for the current-year quarter due to a larger volume of retail book sales, including sales of the Home Improvement 1-2-3 book, developed for Home Depot. Consumer book revenues declined for the current-year six months as a result of lower volumes in book direct-response from the alliance with The Reader's Digest Association, Inc. Publishing segment operating profits increased 49 percent from the prior-year quarter and 17 percent from the prior-year six months reflecting improvements in magazine and book operating results. The Company's book business reported its first quarterly operating profit in nearly two years in the fiscal 1996 second quarter. Higher operating profits from retail book sales and lower administrative expenses due to recent downsizing fueled the turn-around. Magazine operating profits increased 5 percent for the quarter and 4 percent for the year-to-date. Higher advertising revenues and lower subscription expenses were the primary factors in the improvement. The decline in subscription expenses reflected fewer promotional mailings. In the prior year, many promotion mailings were moved into December, prior to the January 1995 postal rate increase. In the current year, many similar promotions will mail in January 1996. In addition, the volume of promotion mailings was down at Better Homes and Gardens magazine due to strong response from earlier efforts and at WOOD magazine due to an announced change in rate base. Lower new title start-up and testing costs also contributed to the improvement in magazine operating profits. - 14 - <PAGE> Meredith Corporation began a second licensing agreement with Wal-Mart Stores, Inc., involving Better Homes and Gardens Floral & Nature Crafts-labeled merchandise and signs in January 1996. However, second quarter and year-to- date operating results from licensing agreements were down from the prior-year periods primarily due to expenses associated with the development of prospective licensing agreements. Paper is the major raw material required in the publishing segment. Substantial price increases in the past 18 months have resulted from increased global demand and limited supplies. Paper prices increased nearly 30 percent in fiscal 1995. An additional 9 percent price increase went into effect on July 1, 1995 and a 5 percent price increase (excluding free sheet paper stock which represents approximately one-third of the Company's paper purchases) took effect on October 1, 1995. Additional price increases are possible in the last half of fiscal 1996 or early fiscal 1997. The Company has contractual agreements to ensure adequate supplies of paper for current publishing requirements. LIFO inventory expense for the quarter and six months ended December 31, 1995 was $1,535,000 and $3,070,000, respectively. This represents increases of 60 percent from the prior second quarter and 85 percent from the prior year-to-date. Selected magazine rate base reductions have been announced, largely in response to skyrocketing paper prices. Ladies' Home Journal will reduce its rate base from 5 million to 4.5 million starting with the February 1996 issue. Country America magazine has cut its rate base from 1 million to 900,000 and WOOD magazine's rate base will drop from 650,000 to 600,000. However, advertising page rates have remained the same for these titles. The Company does not plan any across-the-board rate base reductions. In fact, Traditional Home magazine plans to increase its rate base from 750,000 to 775,000 in 1996. Broadcasting: The addition of WSMV-TV led to broadcasting segment revenue increases of 27 percent for the second quarter and 31 percent for the six months ended December 31, 1995. Total advertising revenues increased 25 percent for the quarter and 29 percent for the six-month period. Advertising revenues of comparable stations were down 5 percent for the quarter and 2 percent for the year-to-date. Several factors contributed to the decline including a softer television advertising environment in the second quarter, lower ratings for the CBS network and the absence of political revenues which totaled $2.5 million and $3.5 million in the comparable fiscal 1995 quarter and six-month periods, respectively. Looking ahead, management anticipates that political and Olympic games advertising dollars will counter any possible softness in television advertising sales that may continue in the next calendar year. Broadcasting operating profits increased 17 percent for the quarter and 45 percent for the six months due primarily to the addition of WSMV-TV. Second quarter operating profits of the five comparable stations (all other owned - 15 - <PAGE> television stations excluding WSMV-TV) were down 15 percent from the prior-year quarter reflecting lower ad revenues and increased programming and news expenses. Programming costs, which have declined in recent years, were affected by purchases of replacement programming at higher costs. The increase in news expense reflected expanded news programming, primarily at KPHO-TV in Phoenix. Operating profits of the five comparable stations increased 6 percent for the year-to-date period due to improvements at KPHO-TV related in part to its September 1994 affiliation with CBS. In January 1996, the Company purchased the assets of WOGX-TV, a Fox affiliate serving Ocala-Gainesville, Florida. This station will be jointly managed with WOFL-TV, the Company's Fox affiliate in Orlando. Real Estate: Revenues increased 6 percent for the quarter and 2 percent for the six-month period from the respective prior-year periods due to second quarter revenues from the signing of a master real estate franchise agreement in Thailand and higher transaction fees from member firms. (Revenues from the Thailand franchise agreement are not currently nor expected to be material to consolidated net revenues.) Operating profits increased 70 percent from the prior-year second quarter due to the revenues from the master franchise agreement. Operating profits were up 58 percent for the six-month period reflecting the second quarter increase and the absence of prior-year expenses for the termination of a group marketing contract. Discontinued Operations: In September 1995, plans to sell the cable television systems owned by Meredith/New Heritage Strategic Partners, L.P., were formalized. The Company indirectly owns approximately 70 percent of these systems, which serve 126,000 subscribers in the Minneapolis/St. Paul area. Management expects the cable properties to be sold within the next year and the sale to result in a gain. Accordingly, the second-quarter net losses of the cable segment have been deferred until the disposal date. Liquidity and Capital Resources Cash and cash equivalents increased by $20,380,000 in the six months ended December 31, 1995 to $32,205,000. This compares to a cash increase of $11,500,000 in the first six months of the prior year. The current-year-to- date increase in cash reflects proceeds from the sale of the book clubs and increased cash provided by operating activities versus the prior-year period. Higher operating income and a net decrease in working capital led to the increase in cash provided by operations. The changes in working capital between periods primarily related to amounts owed the Company for taxes and interest related to the IRS settlement of the Ladies' Home Journal tax case, downsizing in book operations and an increase in payables related to planned contributions to Company pension plans in the second half of fiscal 1996. Partially offsetting these additional cash sources were the increased use of cash for capital expenditures in the current period. The cumulative effect of - 16 - <PAGE> a change in accounting principle in the prior-year period, which reduced subscription acquisition costs, deferred income taxes and net earnings, had no cash effect. In the first six months of fiscal 1995, $3.8 million was spent for the repurchase of 168,000 shares of Company common stock. No shares were repurchased in the current period. In January 1996, the board of directors authorized the repurchase from time to time, subject to market conditions, of up to one million shares of common stock. The Company paid dividends of $5.5 million (20 cents per share) in the first six months of fiscal 1996 compared with $4.9 million (18 cents per share) in the prior-year period. In January 1996, the board of directors increased the quarterly dividend by 10 percent (one cent per share) to 11 cents per share effective with the dividend payable on March 15, 1996. On an annual basis, the effect of this quarterly dividend increase would be to increase dividends paid by approximately $1.1 million at the current number of shares outstanding. At December 31, 1995, the Company owed $80 million under a loan agreement with four banks. The debt was incurred in January 1995 for the purchase of WSMV-TV, a television station located in Nashville, Tenn. A $10 million pre-payment of this debt was made in August 1995 and a $15 million pre-payment was made in February 1996. The loan agreement requires annual and/or semi-annual payments through December 31, 1998, the term loan maturity date. Operating cash flows of the Company are expected to provide adequate funds for principal and interest payments. In January 1996 the Company purchased the assets of WOGX-TV, a Fox affiliate serving Ocala-Gainesville, Florida, using available cash. The Company continues to pursue the acquisition of additional television broadcasting stations. Discontinued Operations: Long-term debt was incurred by Meredith/New Heritage Strategic Partners, L.P. ("Strategic Partners"), in conjunction with Strategic Partners' acquisition of North Central Cable Communications Corporation on September 1, 1992. At December 31, 1995, $87.3 million was owed under the term loan agreement Strategic Partners has with ten banks. Required financial ratio tests, as amended, were met at December 31, 1995. All borrowings outstanding under the loan agreement are due on the earlier of March 31, 1996, or the date of sale of Strategic Partners' cable television system. In light of Strategic Partners' intent to sell its assets, the lenders have indicated they would support a request to extend the maturity date. Strategic Partners' debt is non-recourse to Meredith Corporation. Capital expenditures in the six months ended December 31, 1995, were $19.2 million versus prior-year capital spending of $5.7 million. Fiscal 1996 capital spending for continuing operations is expected to exceed fiscal 1995 levels by approximately $20 million, or 150 percent. This increase reflects - 17 - <PAGE> spending for leasehold improvements to new consolidated office space in New York City and for planned construction of a new office building in Des Moines. The New York project is complete and spending totaled approximately $11 million in the first two quarters of fiscal 1996. The new office building and related improvements in Des Moines are expected to cost approximately $36 million. Fiscal 1996 spending for this project is expected to be approximately $8 million, with the balance of the spending in fiscal 1997 and 1998. Funds for capital expenditures are expected to be provided by cash from operating activities. The Company has made no other material commitments for capital expenditures. At this time, management expects that cash on hand, internally-generated cash flow and short-term bank debt under existing bank lines of credit will provide funds for any additional cash needs (e.g., cash dividends, stock repurchases) for foreseeable periods. At December 31, 1995, Meredith Corporation had unused lines of credit totaling $23 million. The Company does not expect the need for any long-term source of cash to meet working capital requirements. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on November 13, 1995, at the Company's headquarters in Des Moines, Iowa. (b) The name of each director elected at the Annual Meeting is shown under Item 4.(c). The other directors whose terms of office continued after the meeting were: Herbert M. Baum, Pierson M. Grieve, Frederick B. Henry, William T. Kerr, Robert E. Lee, Nicholas L. Reding, Jack D. Rehm and Barbara S. Uehling. (c) Four Class III directors for terms expiring in 1998 were elected at the annual meeting. The following directors were elected at that meeting in uncontested elections: Number of shareholder votes* ---------------------------- For Withheld Class III directors ---------- -------- Robert A. Burnett 79,743,190 162,958 Joel W. Johnson 79,740,914 165,234 Richard S. Levitt 79,754,410 151,738 E. T. Meredith III 79,754,410 151,738 *As specified on the proxy card, if no vote For or Withhold was specified, the shares were voted For the election of the named director. - 18 - <PAGE> Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 11) Statement re computation of per share earnings 27) Financial Data Schedule 99) Additional financial information from the Company's second quarter press release dated January 23, 1996 (b) Reports on Form 8-K No Form 8-K was filed during the quarter ended December 31, 1995. SIGNATURE 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. MEREDITH CORPORATION Registrant (Larry D. Hartsook) Larry D. Hartsook Vice President - Finance (Principal Financial and Accounting Officer) Date: February 12, 1996 - 19 - <PAGE> Index to Exhibits Exhibit Number Item ------- ----------------------------------------------------------- 11 Statement re computation of per share earnings 27 Financial Data Schedule 99 Additional financial information from the Company's second quarter press release dated January 23, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 FOR 12-31-95 10-Q <TEXT> Exhibit 11 ---------- MEREDITH CORPORATION Computation of Primary and Fully Diluted Per Common Share Earnings - Treasury Stock Method For the Six Months Ended December 31, 1995 and 1994 (Unaudited) Weighted average number of shares (in thousands) 1995 1994* Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- Weighted average number of shares outstanding in thousands 27,536 27,536 27,392 27,392 Dilutive effect of unexercised stock options in thousands 653 740 298 294 ------ ------ ------ ------ Total 28,189 28,276 27,690 27,686 ====== ====== ====== ====== Primary and fully diluted earnings per common share 1995 1994* Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- Earnings per share from continuing operations $ .91 $ .91 $ .82 $ .82 Discontinued operations ( .03) ( .03) ( .11) ( .11) Cumulative effect of change in accounting principle - - (1.67) (1.67) ----- ----- ----- ----- Net earnings (loss) per share $ .88 $ .88 ($ .96) ($ .96) ===== ===== ===== ===== *Restated to reflect a two-for-one stock split in March 1995. Note: Primary - Based on average market prices for the period. Fully Diluted - Based on the higher of the average market price for the period or the market price at December 31 of each year. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FDS FILING FOR 12-31-95 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Consolidated Balance Sheet at December 31, 1995 and the Consolidated Statement of Earnings for the six months ended December 31, 1995 of Meredith Corporation and Subsidiaries AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000065011 <NAME> MEREDITH CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-END> DEC-31-1996 <CASH> 32,205 <SECURITIES> 0 <RECEIVABLES> 101,913<F1> <ALLOWANCES> 0 <INVENTORY> 34,192 <CURRENT-ASSETS> 245,239 <PP&E> 179,083 <DEPRECIATION> 104,924 <TOTAL-ASSETS> 763,757 <CURRENT-LIABILITIES> 282,084 <BONDS> 65,000 <COMMON> 27,578 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 235,799 <TOTAL-LIABILITY-AND-EQUITY> 763,757 <SALES> 424,840 <TOTAL-REVENUES> 424,840 <CGS> 181,470 <TOTAL-COSTS> 181,470 <OTHER-EXPENSES> 11,246 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 3,470 <INCOME-PRETAX> 45,954 <INCOME-TAX> 20,367 <INCOME-CONTINUING> 25,587 <DISCONTINUED> (717) <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 24,870 <EPS-PRIMARY> .88 <EPS-DILUTED> .88 <FN> <F1>Net of allowances </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 99 FOR 12-31-95 10-Q <TEXT> Exhibit 99 ---------- MEREDITH CORPORATION SECOND QUARTER 1996 EARNINGS PER SHARE AT-A-GLANCE - -- The chart below depicts the comparable quarterly and fiscal-year earnings per share before non-recurring items and discontinued operations: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year -------- -------- -------- -------- ----------- F1993 .12 .18 .21 .19 .70 F1994 .17 .26 .32 .26 1.01 F1995 .27 .38 .38 .39 1.42 F1996 .34 .45 - -- Second-quarter earnings per share from continuing operations before non- recurring items increased 18 percent from 38 cents to 45 cents, marking the 14th consecutive quarter of improved comparable earnings. - -- Fiscal 1996 year-to-date earnings per share from continuing operations before non-recurring items increased 22 percent to 79 cents. Prior year- to-date earnings per share from continuing operations before non-recurring items were 65 cents. - -- Net earnings per share for the second quarter were 57 cents, which included a post-tax gain of 12 cents per share from the December 1995 sale of the Company's Book Clubs. Meredith Corporation deferred current-year second- quarter cable losses since the Company expects to report a gain on the sale of its remaining cable system. - -- Net earnings per share in the prior-year quarter were 32 cents, which included losses in the Company's discontinued cable operations. - -- Net earnings per share for the year-to-date were 88 cents. In the year-to- date 1995 period, the Company reported a net loss of 96 cents per share due to a previously-reported non-cash charge of $l.67 per share from a change in accounting principle. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

MEE

https://www.sec.gov/Archives/edgar/data/37748/0000037748-96-000003.txt

-----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, BAYUlNiAVd4jT4swEQQ+NytZJtK6CygogLy3mpB4IgWCBNfYbYBTDq5VtcZl3+Lg LL2FOw2Tn/hPgmA3gLlPrQ== <SEC-DOCUMENT>0000037748-96-000003.txt : 19960318 <SEC-HEADER>0000037748-96-000003.hdr.sgml : 19960318 ACCESSION NUMBER: 0000037748-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960315 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLUOR CORP/DE/ CENTRAL INDEX KEY: 0000037748 STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600] IRS NUMBER: 950740960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07775 FILM NUMBER: 96535015 BUSINESS ADDRESS: STREET 1: 3333 MICHELSON DR CITY: IRVINE STATE: CA ZIP: 92730 BUSINESS PHONE: 7149752000 FORMER COMPANY: FORMER CONFORMED NAME: FLUOR CORP LTD DATE OF NAME CHANGE: 19710624 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE> 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 January 31, 1996 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: 1-7775 FLUOR CORPORATION ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-0740960 ---------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 3333 Michelson Drive, Irvine, CA 92730 ---------------------------------------------------------------- (Address of principal executive offices) (714)975-2000 ---------------------------------------------------------------- (Registrant's telephone number, including area code) 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 ( ) As of February 29, 1996 there were 83,492,242 shares of common stock outstanding. <PAGE> FLUOR CORPORATION FORM 10-Q January 31, 1996 TABLE OF CONTENTS PAGE ---------------------------------------------------------------- Part I: Financial Information Condensed Consolidated Statement of Earnings for the Three Months Ended January 31, 1996 and 1995.. 2 Condensed Consolidated Balance Sheet at January 31, 1996 and October 31, 1995......................... 3 Condensed Consolidated Statement of Cash Flows for the Three Months Ended January 31, 1996 and 1995.. 5 Notes to Condensed Consolidated Financial Statements........................................ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 8 Changes in Backlog................................. 12 Part II: Other Information........................ 13 Signatures........................................... 14 <PAGE> Part I: Financial Information FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Three Months Ended January 31, 1996 and 1995 UNAUDITED <TABLE> <CAPTION> In thousands, except per share amounts 1996 1995 --------------------------------------------------------------- <S> <C> <C> REVENUES.............................. $2,402,414 $2,059,626 COSTS AND EXPENSES Cost of revenues.................... 2,303,342 1,974,695 Corporate administrative and general expenses................... 13,263 9,606 Interest expense.................... 3,441 3,320 Interest income..................... (7,395) (7,119) ------------------------ Total Costs and Expenses.............. 2,312,651 1,980,502 ------------------------ EARNINGS BEFORE INCOME TAXES.......... 89,763 79,124 INCOME TAX EXPENSE.................... 32,315 28,801 ------------------------ NET EARNINGS.......................... $ 57,448 $ 50,323 ------------------------ ------------------------ NET EARNINGS PER SHARE................ $ 0.68 $ 0.61 ------------------------ ------------------------ DIVIDENDS PER COMMON SHARE............ $ 0.17 $ 0.15 ------------------------ ------------------------ SHARES USED TO CALCULATE EARNINGS PER SHARE............................... 84,407 82,966 ------------------------ ------------------------ </TABLE> See Accompanying Notes. -2- <PAGE> FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1996 and October 31, 1995 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1996 1995* --------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents........... $ 193,972 $ 292,934 Marketable securities............... 149,873 137,758 Accounts and notes receivable....... 596,569 470,104 Contract work in progress........... 376,247 362,910 Deferred taxes...................... 45,817 55,088 Inventory and other current assets.. 110,654 92,877 ------------------------ Total current assets............... 1,473,132 1,411,671 ------------------------ Property, Plant and Equipment (net of accumulated depreciation, depletion and amortization of $663,829 and $630,573, respectively) 1,494,751 1,435,811 Investments and goodwill, net......... 152,647 121,791 Other................................. 277,231 259,633 ------------------------ $3,397,761 $3,228,906 ------------------------ ------------------------ </TABLE> (Continued On Next Page) * Amounts at October 31, 1995 have been derived from audited financial statements. -3- <PAGE> FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1996 and October 31, 1995 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1996 1995* --------------------------------------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts and notes payable.......... $ 333,852 $ 372,301 Commercial paper.................... 29,880 29,937 Advance billings on contracts....... 569,363 393,438 Accrued salaries, wages and benefit plans...................... 223,871 269,812 Other accrued liabilities........... 170,694 148,782 Current portion of long-term debt... 24,113 24,375 ------------------------ Total current liabilities.......... 1,351,773 1,238,645 ------------------------ Long-term debt due after one year..... 2,815 2,873 Deferred taxes........................ 42,717 44,211 Other noncurrent liabilities.......... 516,546 512,363 Commitments and Contingencies Shareholders' Equity Capital stock Preferred - authorized 20,000,000 shares without par value; none issued Common - authorized 150,000,000 shares of $0.625 par value; issued and outstanding - 83,473,940 shares and 83,164,866 shares, respectively............. 52,171 51,978 Additional capital.................. 550,834 538,503 Retained earnings................... 909,577 866,305 Unamortized executive stock plan expense............................ (27,145) (26,865) Cumulative translation adjustments.. (1,527) 893 ------------------------ Total shareholders' equity......... 1,483,910 1,430,814 ------------------------ $3,397,761 $3,228,906 ------------------------ ------------------------ </TABLE> See Accompanying Notes. * Amounts at October 31, 1995 have been derived from audited financial statements. -4- <PAGE> FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended January 31, 1996 and 1995 UNAUDITED <TABLE> <CAPTION> $ in thousands 1996 1995 --------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings........................ $ 57,448 $ 50,323 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization................... 42,412 32,929 Deferred taxes................... 9,818 627 Change in operating assets and liabilities.................... (45,930) (11,936) Other, net....................... (15,439) (6,559) ------------------------ Cash provided by operating activities. 48,309 65,384 ------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................ (107,910) (81,644) (Purchase) sale of marketable securities, net.................... (12,115) 5,725 Proceeds from sale of property, plant and equipment................ 5,956 3,706 Investments......................... (27,168) (1,117) Other, net.......................... (2,248) (5,289) ------------------------ Cash utilized by investing activities. (143,485) (78,619) ------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt.......... (320) (35,052) Cash dividends paid................. (14,176) (12,409) Stock options exercised............. 11,021 439 Other, net.......................... (311) (371) ------------------------ Cash utilized by financing activities. (3,786) (47,393) ------------------------ Decrease in cash and cash equivalents. (98,962) (60,628) Cash and cash equivalents at beginning of period................. 292,934 374,468 ------------------------ Cash and cash equivalents at end of period.............................. $ 193,972 $ 313,840 ------------------------ ------------------------ </TABLE> See Accompanying Notes. -5- <PAGE> FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (1) The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under generally accepted accounting principles and, therefore, should be read in conjunction with the company's October 31, 1995 annual report on Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three months ended January 31, 1996 are not necessarily indicative of results that can be expected for the full year. The condensed consolidated financial statements included herein are unaudited; however, they contain all adjustments (consisting of normal recurring accruals) which, in the opinion of the company, are necessary to present fairly its consolidated financial position at January 31, 1996 and its consolidated results of operations and cash flows for the three months ended January 31, 1996 and 1995. Certain 1995 amounts have been reclassified to conform with the 1996 presentation. (2) Earnings per share is based on the weighted average number of common and, when appropriate, common equivalent shares outstanding in each period. Common equivalent shares are included when the effect of the potential exercise of stock options is dilutive. (3) Inventories comprise the following: <TABLE> <CAPTION> January 31, October 31, $ in thousands 1996 1995 ----------------------------------------------------------- <S> <C> <C> Coal........................... $ 35,010 $ 28,874 Supplies and other............. 35,945 34,410 ------------------------ $ 70,955 $ 63,284 ------------------------ ------------------------ </TABLE> -6- <PAGE> (4) Cash paid for interest was $1.2 million and $1.8 million for the three month periods ended January 31, 1996 and 1995, respectively. Income tax payments, net of refunds, were $4 million and $15 million during the three month periods ended January 31, 1996 and 1995, respectively. (5) Effective November 1, 1995, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" (SFAS No. 121). The adoption of SFAS No. 121 had no impact on the company's consolidated results of operations or financial position. -7- <PAGE> FLUOR CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the condensed consolidated financial statements and accompanying notes. RESULTS OF OPERATIONS Revenues for the three month period ended January 31, 1996 were $2.4 billion compared with $2.1 billion for the same period of 1995. Net earnings for the three month period ended January 31, 1996 were $57.4 million compared with $50.3 million for the same period of 1995. The increase in net earnings is primarily due to higher earnings from both the Engineering and Construction and Coal segments. ENGINEERING AND CONSTRUCTION Revenues and operating profit for the Engineering and Construction segment increased 18 percent and 14 percent, respectively, for the three month period ended January 31, 1996 compared with the same period of 1995, due to an increase in work performed. Reported margins, which may fluctuate from time to time as a result of changes in the mix of engineering and design services and construction related services, declined slightly in the first quarter of 1996 compared with the same period of 1995. New awards for the three months ended January 31, 1996 were $3.0 billion compared with $2.3 billion for the three months ended January 31, 1995. Approximately 60 percent of first quarter 1996 new awards were for projects located outside the United States. New awards in the Process group for the first quarter of 1996 were $1.7 billion and included a $610 million petroleum project to be constructed in Saudi Arabia and a $465 million award for work to be performed on an existing oil refinery located in Indonesia. The large size and uncertain timing of new awards can create variability in the company's award pattern, consequently, future award trends are difficult to predict with certainty. -8- <PAGE> The following table sets forth backlog for each of the company's Engineering and Construction business groups: <TABLE> <CAPTION> January 31, October 31, January 31, $ in millions 1996 1995 1995 ---------------------------------------------------------------- <S> <C> <C> <C> Process $ 7,316 $ 6,671 $ 7,568 Industrial 4,061 4,516 3,969 Power/Government 3,157 3,275 2,253 Diversified Services 574 263 326 -------------------------------------- Total $ 15,108 $ 14,725 $ 14,116 -------------------------------------- -------------------------------------- </TABLE> The increase in the Diversified Services group's backlog at January 31, 1996 compared with October 31, 1995 was due primarily to the award of new facility management services for IBM at six facilities located throughout the Western United States. Approximately 56 percent of backlog at January 31, 1996 relates to projects located outside of the United States compared with 55 percent at October 31, 1995 and 51 percent at January 31, 1995. Backlog is adjusted both upwards and downwards as required to reflect project cancellations, deferrals and revised project scope and cost. COAL Produced coal revenues increased 3 percent for the three month period ended January 31, 1996 compared with the same period of 1995 due primarily to increased metallurgical coal sales. The increase in metallurgical coal revenues is due both to increased prices and higher sales volume as the result of strong demand by steel producers and the capturing of a larger share of the metallurgical coal market. However, both metallurgical and steam coal sales were adversely impacted in the first quarter of 1996 by disruptions at shipping facilities caused by severe weather conditions. Gross margin increased for the three months ended January 31, 1996 compared with the same period of 1995 due primarily to lower coal production costs and higher metallurgical coal sales prices. Operating profit increased 23 percent for the three months ended January 31, 1996 compared with the same period of 1995 due primarily to increased gross margin. -9- <PAGE> OTHER Corporate administrative and general expenses increased $3.7 million for the three months ended January 31, 1996, compared with the same period of 1995 due primarily to higher stock price driven compensation plans expense, partially offset by lower corporate overhead. Net interest income for the three months ended January 31, 1996 was essentially unchanged from the same period of 1995. The effective income tax rate for the three month period ended January 31, 1996 was essentially unchanged from the same period of 1995. The company does not have substantial net assets or liabilities denominated in foreign currencies and, therefore, does not have significant risk to currency fluctuations. Although the Mexican peso has experienced continued volatility in recent months, the company believes that its investment in ICA Fluor Daniel has not been permanently impaired as prospects remain for long-term engineering and construction work in Mexico. Effective November 1, 1995, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" (SFAS No. 121). The adoption of SFAS No. 121 had no impact on the company's consolidated results of operations or financial position. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes financial accounting and reporting standards for stock-based compensation plans and applies to transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. Adoption of the new accounting standards prescribed by SFAS No. 123 is optional. The company does not expect to adopt the new accounting standards and will continue to account for its plans under previous accounting standards, consequently, SFAS No. 123 will not affect the company's consolidated results of operations or financial position. However, in accordance with the provisions of SFAS No. 123, beginning in 1997 pro forma disclosures of net earnings and earnings per share will be made in the footnotes to the company's financial statements as if the SFAS No. 123 accounting standards had been adopted. -10- <PAGE> In December 1995, the company announced an agreement with Groundwater Technology, Inc. ("GTI") wherein the company will acquire an approximate 55 percent ownership interest in GTI. The acquisition, subject to approval by the shareholders of GTI and other customary closing conditions, will broaden the scope of the company's environmental services activities. FINANCIAL POSITION AND LIQUIDITY The change in operating assets and liabilities from period to period is affected by the mix, stage of completion and commercial terms of engineering and construction projects. The decrease in the first quarter of 1996 compared with the same period of 1995 is primarily due to the timing of cash receipts from project receivables and the payment of current payables and accrued liabilities. For the three months ended January 31, 1996, capital expenditures were $107.9 million including $76.0 million related to coal mine development. Dividends paid in the three months ended January 31, 1996 were $14.2 million ($.17 per share) compared with $12.4 million ($.15 per share) for the same period of 1995. The long-term debt to total capital ratio was less than 1 percent at both January 31, 1996 and October 31, 1995. The company expects to have adequate resources available from cash and short-term investments currently on hand, plus available revolving credit facilities, capital market sources, and its commercial paper program to provide for its financing needs for the foreseeable future. -11- <PAGE> FLUOR CORPORATION CHANGES IN BACKLOG Three Months Ended January 31, 1996 and 1995 UNAUDITED <TABLE> <CAPTION> $ in millions 1996 1995 --------------------------------------------------------------- <S> <C> <C> Backlog - beginning of period....... $ 14,724.9 $ 14,021.9 New awards.......................... 2,988.5 2,251.9 Adjustments and cancellations, net.. (434.6) (317.8) Work performed...................... (2,170.6) (1,840.3) ------------------------ Backlog - end of period............. $ 15,108.2 $ 14,115.7 ------------------------ ------------------------ </TABLE> -12- <PAGE> PART II - Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10.1 Fluor Corporation and Subsidiaries Executive Incentive Compensation Plan (as amended and restated November 1, 1995). (b) Reports on Form 8-K. None. -13- <PAGE> 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. FLUOR CORPORATION ------------------------------------- (Registrant) Date: March 15, 1996 /s/ J. Michal Conaway -------------- ------------------------------------- J. Michal Conaway, Vice President and Chief Financial Officer /s/ V.L. Prechtl ------------------------------------ V.L. Prechtl, Vice President and Controller -14- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>2 <TEXT> <PAGE> FLUOR CORPORATION EXECUTIVE INCENTIVE COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1995 I. OBJECTIVE It is the policy of Fluor Corporation ("Fluor") and its subsidiaries (collectively the "Company") to provide its officers and key employees with salary and incentive bonus award opportunities equal to or greater than the average cash payments established with respect to comparable positions within its industry. Management salaries are established and maintained under a formal Company program of salary administration. This plan is intended to provide true performance based incentive bonus awards for those officers and key employees of the Company who can directly and significantly influence its profits. II. ELIGIBILITY Those officers and key employees of the Company approved in writing by the Executive Compensation Committee of Fluor shall be participants in this Plan. III. INCENTIVE COMPENSATION FUND (the "FUND") The fund shall be established as provided herein with reference to the consolidated net earnings of the Company for a fiscal year period. However, the period of service of each participant for which individual Incentive Compensation awards are payable shall be the calendar year within which the applicable fiscal year ends. A. Prior to the end of each fiscal year: 1. The Chairman of the Board of Fluor (the "Chairman") shall establish an interim provisional Fund for such fiscal year in an amount not to exceed twenty percent of the amount by which (a) estimated consolidated net earnings of the Company for such fiscal year before deducting taxes and the fund, and excluding amounts connected with extraordinary, unusual or infrequently occurring events and transactions for such fiscal year, exceed (b) ten percent of the average estimated consolidated shareholders' equity of the Company and the Chairman shall notify the Senior Vice President and Chief Financial Officer of Fluor (the "Chief Financial Officer") of the amount of said interim provisional Fund. 2. The Chief Financial Officer shall make a test calculation to determine whether the estimated consolidated net earnings of the Company for such fiscal year after taxes and said interim provisional Fund are not less than a return on average estimated -1- <PAGE> consolidated shareholders' equity of the Company for such fiscal year calculated on the basis of the average yield for such fiscal year of one-year United States Treasury Bills. 3. The Chief Financial Officer shall confirm to the Chairman that the interim provisional Fund will result in at least the aforesaid return on consolidated shareholders' equity or inform the Chairman of the least amount (the "adjusted interim provisional Fund") which will result in the aforesaid return on consolidated shareholders equity. Once the interim provisional fund or the adjusted interim provisional fund, as applicable, has been determined, then the final provisional Fund or the final adjusted Provisional Fund as applicable, shall be determined by subtracting from the interim amount, the amount of all expense accruals to be made during such year by the Company for cash-based incentive awards under the Company's Special Executive Incentive Plan, the 1988 Executive Stock Plan or any successor stock appreciation rights plans, and the Directors' Achievement Award Program. 4. The Chief Financial Officer shall cause the consolidated financial statement provision for the Fund for such fiscal year to be adjusted to an amount equal to the final provisional Fund, or adjusted final provisional Fund, as appropriate. B. After the close of each fiscal year: 1. The Chairman shall establish a preliminary final Fund for such fiscal year under the principles set forth above but on the basis of audited consolidated financial statement information for such fiscal year, and the Chairman shall notify the Chief Financial Officer of the amount of the preliminary final Fund. 2. The Chief Financial Officer shall make a test calculation under the principles set forth above but on the basis of audited consolidated financial statement information for such fiscal year. 3. The Chief Financial Officer shall notify the Chairman of the amount of the preliminary final Fund, adjusted as required by the test calculation. Upon approval of the Board of Directors of Fluor (the "Board") , the preliminary final Fund as so determined shall become the final Fund for such fiscal year. DETERMINATION OF AWARD AMOUNTS For Designated Executives (as defined below) the amount of each such executive's Incentive Compensation Award to be payable out of the Fund for each fiscal year, shall not exceed an amount determined by reference to objective tests based on (a) one or more of the following financial objectives: growth in earnings per share of the Company, growth in stockholder value relative to the two year moving average of the S&P 500 Index, growth in stockholder value relative to the two year moving average of the Dow Jones Heavy Construction Index, revenue growth, growth in earnings (before interest and taxes), improvement in the Company's credit -2- <PAGE> rating and growth in contract backlog; and (b) one or more of the following non-financial objectives: strategic plan development and implementation, succession plan development and implementation, retention of executive talent, improvement in workforce diversity and improvement in safety records. Any of the foregoing may be measured either in absolute terms, as compared to another company or companies or as compared to a prior period or periods. Use of any other criterion will require ratification by the shareholders of the Company if failure to obtain approval for the fiscal year would jeopardize the tax deductibility of future Incentive Compensation Awards. The performance objectives for the fiscal year and directly related payment schedules for each Designated Executive shall be established not later than 90 days after the beginning of such fiscal year by the Organization and Compensation Committee of Fluor (the "Committee"). The Committee may, in its discretion, elect to award a Designated Executive less than the amount determined in accordance with the payment schedule. The maximum amount of Incentive Compensation Award to any Designated Executive for any fiscal year shall not exceed $2,000,000. This maximum amount may not be increased without stockholder approval if failure to obtain such approval could result in future Incentive Compensation Awards not being tax deductible to the Company. "Designated Executives" shall mean the Chairman and Chief Executive Officer of the Company and such other executive officers of the Company as may from time to time be so designated by the Committee. The determination of the portion of the Fund for each fiscal year applicable to Fluor and to each of its subsidiaries and the amount of Incentive Compensation award to each participant for the calendar year within which such fiscal year ends shall be reviewed and recommended by the Executive Compensation Committee of Fluor to: 1. The Organization and Compensation Committee of Fluor's Board with respect to executive officers of Fluor (other than the Designated Executives). 2. Fluor's Board with respect to all other participants in the Plan who are not executive officers of Fluor. Awards with respect to the executive officers of Fluor (other than the Designated Executives) are recommended to Fluor's Board by the Organization and Compensation Committee. Final approval of the amount of the Fund for each fiscal year and the amount of the award to each participant (other than the Designated Executives) shall be by Fluor's Board. DISTRIBUTION Subject to the deferral provisions of the Fluor Corporation and Subsidiaries Executive Deferred Compensation Program, the Incentive Compensation awards for each calendar year shall be paid either in cash to participants on or before the 31st day of January of the following calendar year or in stock units granted under the terms of the 1982 Fluor Shadow Stock Plan, all as determined by resolution of the Board. -3- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE Condensed Consolidated Balance Sheet at January 31, 1996 and the Condensed Consolidated Statement of Earnings for the three months ended January 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1996 <PERIOD-END> JAN-31-1996 <CASH> 193,972 <SECURITIES> 149,873 <RECEIVABLES> 596,569 <ALLOWANCES> 0 <INVENTORY> 70,955 <CURRENT-ASSETS> 1,473,132 <PP&E> 2,158,580 <DEPRECIATION> 663,829 <TOTAL-ASSETS> 3,397,761 <CURRENT-LIABILITIES> 1,351,773 <BONDS> 2,815 <COMMON> 52,171 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,431,739 <TOTAL-LIABILITY-AND-EQUITY> 3,397,761 <SALES> 0 <TOTAL-REVENUES> 2,402,414 <CGS> 0 <TOTAL-COSTS> 2,303,342 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 3,441 <INCOME-PRETAX> 89,763 <INCOME-TAX> 32,315 <INCOME-CONTINUING> 57,448 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 57,448 <EPS-PRIMARY> .68 <EPS-DILUTED> .68 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

MNR

https://www.sec.gov/Archives/edgar/data/67625/0000067625-96-000001.txt

-----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, CGCs+f+uRgkvBL4hYHj8y+3KliB6Uytj4mnn/5ajhpxTWl86/wmncoCB9HJNB2+Z 6a2m14BQqk+R98/avBRPrg== <SEC-DOCUMENT>0000067625-96-000001.txt : 19960213 <SEC-HEADER>0000067625-96-000001.hdr.sgml : 19960213 ACCESSION NUMBER: 0000067625-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT CORP CENTRAL INDEX KEY: 0000067625 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 221897375 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04258 FILM NUMBER: 96515096 BUSINESS ADDRESS: STREET 1: 125 WYCKOFF RD STREET 2: PO BOX 335 CITY: EATONTOWN STATE: NJ ZIP: 07724 BUSINESS PHONE: 9085424927 MAIL ADDRESS: STREET 1: PO BOX 335 STREET 2: 125 WYCKOFF ROAD CITY: EATONTOWN STATE: NJ ZIP: 07724 FORMER COMPANY: FORMER CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19900403 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ For the Quarter ended Commission File December 31, 1995 No. 2-29442 MONMOUTH REAL ESTATE INVESTMENT CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 22-1897375 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 Wyckoff Road, Eatontown, New Jersey 07724 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code:(908)542-4927 ---------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was re- quired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark whether the financial statements required by instruction H have been reviewed by an independent public ac- countant. Yes ___ No X The number of shares or other units outstanding of each of the issuer's classes of securities as of December 31, 1995 was 3,502,642. Page 1 MONMOUTH REAL ESTATE INVESTMENT CORPORATION FOR THE QUARTER ENDED DECEMBER 31, 1995 C O N T E N T S Page No. Part I - Financial Information Item 1 - Financial Statements (Unaudited): Balance Sheets 3 Statements of Income 4 Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 Part II- Other Information 9 Signatures 10 Page 2 <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION BALANCE SHEETS AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1995 <S> <C> <C> 12/31/95 9/30/95 ASSETS Real Estate Investments: Land $ 4,545,324 $ 4,545,324 Buildings, Improvements and Equipment, Net of Accumulated Depreciation of $3,853,391 and $3,657,061, respectively 23,774,864 23,966,469 Mortgage Loans Receivable 285,712 293,997 ___________ ___________ Total Real Estate Investments 28,605,900 28,805,790 Cash and Cash Equivalents 374,420 144,019 Equity Securities Available for Sale at Fair Value(Cost $104,335 and $214,298 respectively) 106,980 273,038 Interest and Other Receivables 554,044 581,247 Prepaid Expenses 133,468 114,815 Lease Costs - Net of Accumulated Amortization 61,822 59,742 Other Assets 274,648 311,209 ___________ ___________ TOTAL ASSETS $30,111,282 $30,289,860 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage Notes Payable $14,733,618 $15,463,561 Deferred Gain - Installment Sale 202,238 208,238 Other Liabilities 427,968 370,194 ___________ ___________ Total Liabilities 15,363,824 16,041,993 ___________ ___________ Shareholders' Equity: Common Stock-Class A-$.01 Par Value, 8,000,000 Shares Authorized, 3,502,642 and 3,392,045 Shares Issued and Outstanding, respectively 35,026 33,920 Common Stock-Class B-$.01 Par Value, 100,000 Shares Authorized, No shares Issued or Outstanding -0- -0- Additional Paid-in Capital 14,783,545 14,155,207 Unrealized Holding Gain on Equity Securities Available for Sale 2,645 58,740 Undistributed Income (73,758) -0- ___________ ___________ Total Shareholders' Equity 14,747,458 14,247,867 ___________ ___________ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,111,282 $30,289,860 =========== =========== Unaudited See Accompanying Notes to Financial Statements Page 3 </TABLE> <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 <S> <C> <C> 1995 1994 INCOME: Rental and Occupancy Charges $1,054,614 $1,077,200 Interest and Other Income 77,145 21,430 __________ __________ TOTAL INCOME 1,131,759 1,098,630 __________ __________ EXPENSES: Interest Expense 316,384 350,438 Real Estate Taxes 47,684 58,273 Operating Expenses 81,512 80,690 General and Administrative Expenses 138,265 119,570 Depreciation 196,329 175,878 __________ __________ TOTAL EXPENSES 780,174 784,849 __________ __________ INCOME BEFORE GAINS 351,585 313,781 Gain on Sales of Assets 6,000 4,800 __________ __________ NET INCOME $ 357,585 $ 318,581 ========== ========== PER SHARE INFORMATION Weighted Average Shares Outstanding 3,443,273 3,090,327 ========== ========== Net Income Per Share $ .10 $ .10 ========== ========== Unaudited See Notes to Financial Statements Page 4 </TABLE> <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 <S> <C> <C> 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 357,585 $ 318,581 Noncash Items Included in Net Income: Depreciation 196,329 175,878 Amortization 26,653 30,242 Gain on Sale of Investments (72,933) (4,800) Changes In: Interest and Other Receivables 27,203 (47,621) Prepaid Expenses (18,653) 44,493 Other Assets and Lease Costs 7,828 534,527 Other Liabilities 57,774 165,834 __________ __________ NET CASH PROVIDED FROM OPERATING ACTIVITIES 581,786 1,217,134 __________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES Collections on Installment Sales 8,285 4,578 Collections on Loans -0- -0- Additions to Land, Buildings, Improvements and Equipment (4,724) (3,629,287) Purchase of Equity Securities Available for Sale (37,754) -0- Proceeds from Sale of Equity Securities Available for Sale 214,650 -0- __________ ___________ NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 180,457 (3,624,709) __________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Mortgages -0- 2,500,000 Principal Payments of Mortgages (729,943) (1,207,807) Proceeds from Issuance of Class A Common Stock 440,171 335,273 Dividends Paid (242,070) (385,724) ___________ ___________ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (531,842) 1,241,742 ___________ ___________ Net Increase (Decrease)in Cash and Cash Equivalents 230,401 (1,165,833) Cash and Cash Equivalents at Beginning of Period 144,019 1,454,240 ___________ ___________ Cash and Cash Equivalents at End of Period $ 374,420 $ 288,407 =========== =========== Unaudited See Accompanying Notes to Financial Statements Page 5 </TABLE> MONMOUTH REAL ESTATE INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING POLICY The interim financial statements furnished herein reflect all adjust- ments which were, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at December 31, 1995 and for all periods presented. All adjustments made in the interim period were of a normal recurring nature. Certain footnote disclosures which would substantially duplicate the disclosures contained in the audited financial statements and notes thereto included in the Annual Report of Monmouth Real Estate Investment Corporation (the Company) for the year ended September 30, 1995 have been omitted. NOTE 2 - EQUITY SECURITIES AVAILABLE FOR SALE During the quarter ended December 31, 1995, a security held by the Company was liquidated. The Company received $214,650 as a liquidating dividend, resulting in a realized gain of $66,933. This gain has been included in Other Income in the financial statements. NOTE 3 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN On December 15, 1995, the Company paid $431,343 as a dividend of $.125 per share to shareholders of record November 15, 1995. For the quarter ended December 31, 1995, the Company received $629,444 from the Dividend Reinvestment and Stock Purchase Plan (DRIP). There were 110,597 new shares issued resulting in 3,502,642 shares outstanding. NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the quarter ended December 31, 1995 and 1994 for in- terest and taxes are as follows: 1995 1994 Interest $ 316,384 $ 350,438 Taxes (1,465) 18,800 During the quarter ended December 31, 1995 and 1994, the Company had dividend reinvestments of $189,273 and $184,594, respectively, which required no cash transfers. Page 6 MONMOUTH REAL ESTATE INVESTMENT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN FINANCIAL CONDITION The Company generated net cash provided from operating activities of $581,786 for the current three months as compared to $1,217,134 for the prior period. The Company raised $ 629,444 from the issuance of shares of common stock through a Dividend Reinvestment and Stock Pur- chase Plan (DRIP). Current cash dividends paid amounted to $431,343. Equity Securities Available for Sale decreased by $166,058 primarily as the result of the liquidation of one of the Company's security holdings. Mortgage notes payable decreased by $729,943 during the three months ended December 31, 1995. This decrease was the result of principal repayments. MATERIAL CHANGES IN RESULTS OF OPERATIONS Rental and occupany charges remained relatively stable for the three months ended December 31, 1995 as compared to the prior period. Interest and other income increased by $55,715 for the three months ended December 31, 1995 as compared to the three months ended December 31, 1994. This is primarily as a result of the gain on liquidation of equity securities. Interest expense decreased by $34,054 for the three months ended December 31, 1995 as compared to the three months ended December 31, 1994. This was the result of principal repayments. Depreciation expense increased by $20,451 for the three months ended December 31, 1995 as compared to the three months ended December 31, 1994 due to the real estate acquisition in October, 1994. General and administrative expenses increased by $18,685 for the three months ended December 31, 1995 as compared to the three months ended December 31, 1994 due primarily to an increase in professional fees. LIQUIDITY AND CAPITAL RESOURCES Net cash provided from operating activities decreased during the three months ended December 31, 1995 to $581,786, as compared to $1,217,134 generated during the three months ended December 31, 1994. This was primarily the result of the decrease in Other Assets during the three months ended December 31, 1994. Other Assets at September 30, 1994 included deposits of $594,693 for the acquisition of a warehouse facility. The acquisition was completed in October, 1994. The Company has been raising capital through the DRIP and investing in net leased industrial properties. Page 7 The Company owns thirteen properties of which nine carried mortgage loans totaling $14,733,618 at December 31, 1995. The Company believes that funds generated from operations, the Dividend Reinvestment and Stock Purchase Plan, together with the ability to finance and refinance its properties and net receivables will provide sufficient funds to ad- equately meet its obligations over the next several years. Page 8 <PAGE> PART II: OTHER INFORMATION MONMOUTH REAL ESTATE INVESTMENT CORPORATION ITEM 1: LEGAL PROCEEDINGS - None ITEM 2 CHANGES IN SECURITIES - None ITEM 3: DEFAULTS UPON SENIOR SECURITIES - None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5: OTHER INFORMATION - None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS - None (b) REPORTS ON FORM 8-K - None Page 9 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. MONMOUTH REAL ESTATE INVESTMENT CORPORATION Date: February 9, 1995 By: S/Eugene W. Landy _________________________________________ EUGENE W. LANDY, President Date: February 9, 1995 By: S/Anna T. Chew _________________________________________ ANNA T. CHEW Controller Page 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <FLAWED> <TEXT> WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MONMOUTH REAL ESTATE INVESTMENT CORPORATION AS OF AND FOR THE QUARTER ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> QTR-1 <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 374,420 <SECURITIES> 106,980 <RECEIVABLES> 554,044 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 1,168,912 <PP&E> 32,173,579 <DEPRECIATION> 3,853,391 <TOTAL-ASSETS> 30,111,282 <CURRENT-LIABILITIES> 427,968 <BONDS> 14,733,618 <COMMON> 35,026 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 14,712,432 <TOTAL-LIABILITY-AND-EQUITY> 30,111,282 <SALES> 0 <TOTAL-REVENUES> 1,137,759 <CGS> 0 <TOTAL-COSTS> 129,196 <OTHER-EXPENSES> 334,594 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 316,384 <INCOME-PRETAX> 357,585 <INCOME-TAX> 0 <INCOME-CONTINUING> 357,585 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 357,585 <EPS-PRIMARY> .10 <EPS-DILUTED> .10 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

MSFT

https://www.sec.gov/Archives/edgar/data/789019/0000891020-96-000086.txt

-----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, KQ1bq48FXWPyXq6eeioB3zToYi40DFkQX7RAGzvh2DrhUuCgg2PwKAn+BMeltuPm 48XnCmVA5G/KVOHWwbuLqg== <SEC-DOCUMENT>0000891020-96-000086.txt : 19960216 <SEC-HEADER>0000891020-96-000086.hdr.sgml : 19960216 ACCESSION NUMBER: 0000891020-96-000086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROSOFT CORP CENTRAL INDEX KEY: 0000789019 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 911144442 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14278 FILM NUMBER: 96517045 BUSINESS ADDRESS: STREET 1: ONE MICROSOFT WAY #BLDG 8 STREET 2: NORTH OFFICE 2211 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2068828080 MAIL ADDRESS: STREET 1: ONE MICROSOFT WAY - BLDG 8 STREET 2: NORTH OFFICE 2211 CITY: REDMOND STATE: WA ZIP: 98052-6399 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDING 12/31/95 <TEXT> <PAGE> 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1995 / / 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 0-14278 MICROSOFT CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-1144442 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (206) 882-8080 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 / / The number of shares outstanding of the registrant's common stock as of January 31, 1996 was 594,003,653. ================================================================================ <PAGE> 2 MICROSOFT CORPORATION FORM 10-Q For the Quarter Ended December 31, 1995 INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION <S> <C> Item 1. Financial Statements Page ---- a) Income Statements for the Three and Six Months Ended December 31, 1995 and 1994............ 1 b) Balance Sheets as of December 31, 1995 and June 30, 1995................................ 2 c) Cash Flows Statements for the Six Months Ended December 31, 1995 and 1994...................... 3 d) Notes to Financial Statements............................................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 5 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................ 9 Item 6. Exhibits and Reports on Form 8-K............................................. 9 SIGNATURE...................................................................................... 10 </TABLE> <PAGE> 3 Part I. Financial Information ITEM 1. FINANCIAL STATEMENTS MICROSOFT CORPORATION INCOME STATEMENTS (In millions, except earnings per share)(Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1994 1995 1994 1995 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net revenues $1,482 $2,195 $2,729 $4,211 ------------------------------------------------------------------------------------------------- Costs and expenses: Cost of revenues 222 330 408 652 Research and development 199 313 377 615 Sales and marketing 479 690 874 1,311 General and administrative 62 76 113 139 ------------------------------------------------------------------------------------------------- Total costs and expenses 962 1,409 1,772 2,717 ------------------------------------------------------------------------------------------------- Operating income 520 786 957 1,494 Interest income - net 42 76 78 142 Other income (expense) (5) 23 (7) 19 ------------------------------------------------------------------------------------------------- Income before income taxes 557 885 1,028 1,655 Provision for income taxes 184 310 339 581 ------------------------------------------------------------------------------------------------- Net income $ 373 $ 575 $ 689 $1,074 ================================================================================================= Earnings per share $ 0.60 $ 0.90 $ 1.10 $ 1.68 ================================================================================================= Weighted average shares outstanding 625 638 624 639 ================================================================================================= </TABLE> See accompanying notes. - -------------------------------------------------------------------------------- 1 <PAGE> 4 MICROSOFT CORPORATION BALANCE SHEETS (In millions) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> June 30 Dec. 31 1995 1995 (1) ----------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and short-term investments $4,750 $6,017 Accounts receivable - net 581 771 Inventories 88 108 Other 201 207 ---------------------------------------------------------------------------------------------------- Total current assets 5,620 7,103 Property, plant, and equipment - net 1,192 1,297 Other assets 398 706 ---------------------------------------------------------------------------------------------------- Total assets $7,210 $9,106 ---------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 563 $ 651 Accrued compensation 130 148 Income taxes payable 410 680 Unearned revenues 54 495 Other 190 267 ---------------------------------------------------------------------------------------------------- Total current liabilities 1,347 2,241 ---------------------------------------------------------------------------------------------------- Minority interest 125 125 ---------------------------------------------------------------------------------------------------- Put warrants 405 560 ---------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock and paid-in capital -- shares authorized 2,000; shares outstanding 588 and 590 2,005 2,285 Retained earnings 3,328 3,895 ---------------------------------------------------------------------------------------------------- Total stockholders' equity 5,333 6,180 ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $7,210 $9,106 ---------------------------------------------------------------------------------------------------- </TABLE> (1) Unaudited See accompanying notes. - -------------------------------------------------------------------------------- 2 <PAGE> 5 MICROSOFT CORPORATION CASH FLOWS STATEMENTS (In millions)(Unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- Six Months Ended December 31 1994 1995 ------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATIONS Net income $ 689 $ 1,074 Depreciation and amortization 133 147 Current liabilities 194 892 Accounts receivable (134) (187) Inventories (17) (20) Other current assets (30) (5) ------------------------------------------------------------------------------------------------- Net cash from operations 835 1,901 ------------------------------------------------------------------------------------------------- CASH FLOWS USED FOR FINANCING Common stock issued 140 173 Common stock repurchased (560) (472) Stock option income tax benefits 78 71 ------------------------------------------------------------------------------------------------- Net cash used for financing (342) (228) ------------------------------------------------------------------------------------------------- CASH FLOWS USED FOR INVESTMENTS Additions to property, plant, and equipment (170) (204) Other assets (90) (203) Short-term investments (785) (906) ------------------------------------------------------------------------------------------------- Net cash used for investments (1,045) (1,313) ------------------------------------------------------------------------------------------------- Net change in cash and equivalents (552) 360 Effect of exchange rates on cash and equivalents (8) 1 Cash and equivalents, beginning of period 1,477 1,962 ------------------------------------------------------------------------------------------------- Cash and equivalents, end of period 917 2,323 Short-term investments, end of period 2,922 3,694 ------------------------------------------------------------------------------------------------- Cash and short-term investments, end of period $ 3,839 $ 6,017 ------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes. - -------------------------------------------------------------------------------- 3 <PAGE> 6 MICROSOFT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- BASIS OF PRESENTATION In the opinion of management, the accompanying balance sheets and related interim statements of income and cash flows include all adjustments (consisting only of normal recurring items) necessary for their fair presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and financial statements and notes thereto included in the Microsoft Corporation 1995 Annual Report on Form 10-K. EARNINGS PER SHARE Earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options, using the treasury stock method. MERGER During January 1996, Microsoft merged with Vermeer Technologies, Inc., a developer of Web authoring software. The transaction will be accounted for as a pooling of interests. Management does not expect the transaction to have a material financial effect on the Company's financial results. CONTINGENCIES The Antitrust Division of the U.S. Department of Justice has stated that it is conducting an investigation concerning Microsoft's inclusion of client-access software for The Microsoft Network in Microsoft Windows(R) 95. Although there is no assurance that this matter will be resolved favorably and that Microsoft's future financial statements will not be adversely affected, Microsoft currently believes that resolution of this matter will not have a material adverse effect on its financial condition or results of operations. - -------------------------------------------------------------------------------- 4 <PAGE> 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers (PCs), workstations, and servers; business and consumer programs for productivity, reference, education, and entertainment; and development tools. Microsoft also offers an online service, sells personal computer books and input devices, and is engaged in the research and potential development of advanced technology software products. REVENUES Revenues for the second quarter of fiscal 1996 increased 48% over revenues for the second quarter of fiscal 1995. For the first half of the year, revenues increased 54% over the comparable period of the prior year. Software license volume (as opposed to price) increases have been the principal factor in Microsoft's revenue growth. The average selling price per license has decreased, primarily because of general shifts in the sales mix from retail packaged products to licensing programs, from new products to product upgrades, and from stand-alone desktop applications to integrated product suites. Average revenue per license from original equipment manufacturer (OEM) licenses and corporate license programs, such as Microsoft Select, is lower than average revenue per license from retail versions. Likewise, product upgrades have lower prices than new products. Also, prices of integrated suites, e.g., Microsoft Office, are less than the sum of the prices for the individual programs included in these products when such programs are licensed separately. PRODUCT GROUPS Platforms product group revenues were $1.13 billion in the second quarter of 1996, compared to $592 million recorded in the same period of 1995, an increase of 90%. On a year-to-date basis, platforms product group revenues increased to $2.17 billion from $1.10 billion. Platforms product group revenues are primarily from licenses of personal computer operating systems and business systems with client-server architectures. During the first quarter of fiscal 1996, the Company released Microsoft Windows 95, its new personal computer operating system, which experienced strong demand by users of existing PCs. To prevent stock outs in the retail channel, certain distributors and resellers over-ordered Windows 95 product prior to its formal launch on August 24, 1995 and began returning excess inventory in the first two quarters of 1996. The Company provided for management's estimate of additional product that will be returned to Microsoft. The Company's earned retail revenues of Windows 95 were $260 million in the first quarter and $180 million in the second quarter. Additionally, unearned revenues as of December 31, 1995 on the accompanying balance sheet include $200 million attributable to future telephone support and unspecified enhancements to Windows 95 which will be recognized ratably over the product's life cycle as it is earned. The Company also experienced continued revenue growth in Microsoft MS-DOS(R), Microsoft Windows 3.1, Microsoft Windows for Workgroups 3.11, and Windows 95 operating systems licensed through the OEM channel. (Windows 3.1 and Windows for Workgroups 3.11 are hereafter referred to collectively as "Windows 3.x."). Revenues from business systems products (principally the Windows NT(TM) operating system and server applications in the Microsoft's BackOffice(TM) family of products) increased strongly, due to greater corporate demand for Windows NT Workstation and Windows NT Server. Applications and content product group revenues were $1.07 billion in the second quarter of 1996, increasing 20% from $890 million in the second quarter of 1995. For the first two quarters of 1996, applications and content product revenues were $2.05 billion, compared to $1.63 billion in the corresponding period of 1995. Applications product group revenues include primarily licenses of desktop productivity, consumer, and developer programs. Increases in applications and content revenues were led by strong sales of 16-bit and 32-bit versions of Microsoft Office. Microsoft Office Standard includes the Microsoft Word word processor, the Microsoft Excel spreadsheet, and the Microsoft PowerPoint(R) presentation graphics program. The Microsoft Office for Windows 95 (32-bit) version also includes the Microsoft Schedule+ calendar and scheduling program. Microsoft Office Professional includes all of the above plus the Microsoft Access(R) database management program. The accompanying balance sheet also includes $230 million of unearned revenues as of December 31, 1995 in connection with the sale of 16-bit versions of desktop productivity programs that will not be earned and recognized as revenues until related coupons for Windows 95 version upgrades have been fulfilled. - -------------------------------------------------------------------------------- 5 <PAGE> 8 Revenues from consumer products grew 23% in the second quarter of 1996. New titles and new versions of existing titles both contributed to the growth, in spite of across-the-board price decreases. Developer product revenues also grew, reflecting the introduction of Microsoft Visual Basic version 4.0. SALES CHANNELS Microsoft distributes its products primarily through OEM licenses, corporate licenses, and retail packaged products. OEM channel revenues are license fees from original equipment manufacturers. Microsoft has three major geographic sales and marketing organizations: U.S. and Canada, Europe, and elsewhere in the world (Other International). Sales of corporate licenses and packaged products in these channels are primarily to distributors and resellers. OEM revenues (primarily personal computer operating systems) grew 75% to $672 million in the second quarter from the $385 million recorded in the comparable quarter of the prior year. On a year-to-date basis, OEM revenues were $1.22 billion, compared to $733 million in 1995. The percentage of OEMs preinstalling Windows 95 on new PCs increased during the second quarter of 1996. Also, MS-DOS and Microsoft Windows 3.x continued to be preinstalled on many PCs sold by OEMs. Higher levels of PC shipments was the principal driver of increased revenues through the OEM channel. Revenues in the U.S. and Canada were $632 million in the second quarter of 1996 compared to $491 million in 1995. Revenues in the first half of 1996 were $1.38 billion, compared to $914 million recorded last year. The increase in revenues of 51% for the first two quarters primarily reflects the release of new versions of Windows 95 and 32-bit versions of desktop applications, particularly Microsoft Office for Windows 95. Revenues in Europe were $569 million in the second quarter of 1996 compared to $399 million the prior year. European revenues were $995 million in the first half of 1996 compared to $688 million the prior year, an increase of 45%. Revenues in Europe benefited greatly by the release of localized versions of Windows 95 and 32-bit desktop applications. Other International channel revenues increased 56% to $322 million in the second quarter of 1996 from $207 million in the second quarter of 1995, reflecting the release of Kanji versions of Windows 95 and Microsoft Office in Japan. Year-to-date revenues were $619 million in 1996 compared to $394 million in 1995. As in Europe, many localized versions of Windows 95 and 32-bit desktop applications were released through the Other International channel in the first half of 1996. Microsoft's operating results are affected by foreign exchange rates. Had the exchange rates in effect during the second quarter of the prior year been in effect during the second quarter of 1996, translated revenues in Europe would have been $21 million lower and translated Other International revenues would have been $4 million higher. Since much of Microsoft's international manufacturing costs and operating expenses are also incurred in local currencies, the relative translation impact of exchange rates on net income is less than on revenues. COSTS AND EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES Cost of revenues as a percentage of revenues was 15.0% in the second quarters of both 1996 and 1995. For the first two quarters of 1996, cost of revenues was 15.5% of revenues, compared to 15.0% the prior year. The slight increase is principally attributable to a shift in sales mix due to high shipments of retail upgrade versions of Windows 95 and Microsoft Office for Windows 95. The increase in the cost of revenues percentage was somewhat offset by the increased mix of CD-ROM media, which carry lower costs of goods sold than floppy disks. Research and development expenses increased 57% to $313 million, or 14.3% of revenues in the second quarter of 1996 from $199 million, or 13.4% of revenues in the corresponding quarter of 1995. The increase in research and development expenses in both the second quarter and first half of 1996 resulted primarily from planned hiring of software developers and higher levels of third-party development costs. Sales and marketing expenses increased 44% to $690 million from $479 million in the comparable quarter. As a percentage of revenues, sales and marketing expenses were 31.4% and 32.3% in the respective second quarters of 1996 and 1995. The increase in sales and marketing expenses in both the second quarter and first half of 1996 was impacted by marketing costs of Windows 95 and Microsoft Office for Windows 95 and increased product support costs. - -------------------------------------------------------------------------------- 6 <PAGE> 9 General and administrative expenses were $76 million (3.5% of revenues) in the second quarter of 1996 and $62 million (4.2% of revenues) in the second quarter of 1995. The increases in absolute dollars incurred in both the second quarter and first half of 1996 were due to growth in the systems and number of people necessary to support overall increases in the scope of the Company's operations. Net interest income increased as a result of a larger investment portfolio generated by cash from operations combined with higher interest rates. Other income in the second quarter of 1996 included a net gain of $30 million from the disposal of long-term assets. The effective income tax rate was 35% and 33% in the first halves of 1996 and 1995 with the increase due primarily to changes in the U.S. tax law. NET INCOME Net income for the second quarter of 1996 was $575 million. Net income as a percentage of revenues was 26.2% in the second quarter of 1996, compared with 25.2% in the second quarter of 1995. On a year-to-date basis, net income as a percent of revenues was 25.5% compared to 25.2% the prior year. The increase in net income as a percentage of revenues was primarily the result of revenues growing faster than operating expenses other than those for research and development and higher nonoperating income such as interest income and the disposal gain. - -------------------------------------------------------------------------------- 7 <PAGE> 10 FINANCIAL CONDITION Microsoft's cash and short-term investment portfolio totaled $6 billion at December 31, 1995. The portfolio is diversified among security types, industries, and individual issuers. Microsoft's investments are liquid and investment grade. The portfolio is invested predominantly in U.S. dollar denominated securities, but also includes foreign currency positions in anticipation of continued international expansion. The portfolio is invested in short-term securities to minimize interest rate risk and facilitate rapid deployment in the event of immediate cash needs. Microsoft has no material long-term debt and has $70 million of standby multicurrency lines of credit that support foreign currency hedging and international cash management. Stockholders' equity at December 31, 1995 exceeded $6 billion. Cash generated from operations has been sufficient historically to fund Microsoft's investment in research and development activities and facilities expansion. As Microsoft grows, investments will continue in research and development in existing and advanced areas of technology. Microsoft's cash will be used to acquire technology and to fund ventures and other strategic opportunities. Additions to property, plant, and equipment are expected to continue, including new facilities and computer systems for research and development, sales and marketing, product support, and administrative staff. The exercise of stock options by employees provides additional cash. These proceeds have funded Microsoft's open market stock repurchase program through which Microsoft provides shares for stock option and stock purchase plans. This practice is continuing in 1996. To enhance its stock repurchase program, Microsoft sold equity put warrants to independent third parties during 1995 and 1996. These put warrants entitle the holders to sell shares of Microsoft common stock to the Company on certain dates at specified prices. On December 31, 1995, 10 million warrants were outstanding with strike prices ranging between $82 and $91 per share. The warrants expire at various dates between the fourth quarter of 1996 and the fourth quarter of 1997, are exercisable only at maturity, and are settleable in cash at Microsoft's option. The maximum potential repurchase obligation as of December 31, 1995, $560 million, has been reclassified from stockholders' equity to put warrants. A subsidiary of Tele-Communications, Inc. (TCI) owns a 20% minority interest in The Microsoft Network, LLC. TCI contributed $125 million of TCI common stock, and Microsoft contributed the business assets of its online service, The Microsoft Network, which began operation in August 1995. During December 1995, Microsoft and NBC announced the creation of two joint ventures: a 24-hour cable news and information channel and an interactive online news service distributed on The Microsoft Network. Both of these services will be offered worldwide and integrated with the NBC Television Network. Microsoft has agreed to pay $220 million over five years for its interest in the cable venture. Management believes existing cash and short-term investments together with funds generated from operations will be sufficient to meet operating requirements for the next twelve months. Microsoft's cash and short-term investments are also managed to be available for strategic investment opportunities or other potential large-scale cash needs that may arise in pursuit of Microsoft's long-term strategies. Additionally, Microsoft shareholders have authorized the issuance of up to 100 million shares of preferred stock, which may be used by Microsoft for any proper corporate purpose. Microsoft has not paid cash dividends on its common stock. - -------------------------------------------------------------------------------- 8 <PAGE> 11 Part II. Other Information ITEM 1. LEGAL PROCEEDINGS See Notes to Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 11. Computation of Earnings Per Share 27. Financial Data Schedule (B) Reports on Form 8-K No reports on Form 8-K were filed by Microsoft during the quarter ended December 31, 1995. ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. - -------------------------------------------------------------------------------- 9 <PAGE> 12 Signature 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. Microsoft Corporation Date: February 13, 1996 By: /s/ Michael W. Brown ------------------------------------------- Michael W. Brown, Vice President, Finance; Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) - -------------------------------------------------------------------------------- 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> 1 EXHIBIT 11. MICROSOFT CORPORATION Computation of Earnings Per Share (In millions, except earnings per share) (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1994 1995 1994 1995 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Weighted average number of common shares outstanding 581 590 581 590 Common stock equivalents from outstanding stock options 44 48 43 49 - ---------------------------------------------------------------------------------------------------------------- Average common and common stock equivalents outstanding 625 638 624 639 - ---------------------------------------------------------------------------------------------------------------- Net income $ 373 $ 575 $ 689 $1,074 - ---------------------------------------------------------------------------------------------------------------- Earnings per share (1) $0.60 $0.90 $1.10 $ 1.68 - ---------------------------------------------------------------------------------------------------------------- </TABLE> (1) Fully diluted earnings per share have not been presented because the effects are not material. - -------------------------------------------------------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> DEC-31-1995 <PERIOD-END> JUN-30-1996 <CASH> 6017 <SECURITIES> 0 <RECEIVABLES> 771 <ALLOWANCES> 0 <INVENTORY> 108 <CURRENT-ASSETS> 7103 <PP&E> 2080 <DEPRECIATION> 783 <TOTAL-ASSETS> 9106 <CURRENT-LIABILITIES> 2241 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2285 <OTHER-SE> 3895 <TOTAL-LIABILITY-AND-EQUITY> 9106 <SALES> 4211 <TOTAL-REVENUES> 4211 <CGS> 652 <TOTAL-COSTS> 652 <OTHER-EXPENSES> 2065 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 1655 <INCOME-TAX> 581 <INCOME-CONTINUING> 1074 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1074 <EPS-PRIMARY> 1.68 <EPS-DILUTED> 1.68 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

MU

https://www.sec.gov/Archives/edgar/data/723125/0000723125-96-000007.txt

-----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, P/qfCIl2Sh37XvNP+hFL+yFEHwRCx42D7aF7fdQHoHLVU0znzA0SndDSnbiXO8TI rZbFCJWXFWBLevqZITu4SQ== <SEC-DOCUMENT>0000723125-96-000007.txt : 19960327 <SEC-HEADER>0000723125-96-000007.hdr.sgml : 19960327 ACCESSION NUMBER: 0000723125-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRON TECHNOLOGY INC CENTRAL INDEX KEY: 0000723125 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 751618004 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10658 FILM NUMBER: 96538779 BUSINESS ADDRESS: STREET 1: 8000 S FEDERAL WAY STREET 2: PO BOX 6 CITY: BOISE STATE: ID ZIP: 83707 BUSINESS PHONE: 2083684000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 29, 1996 ------------------------------------------ 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: 1-10658 ------------------------------------------------- Micron Technology, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-1618004 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8000 S. Federal Way, P.O. Box 6, Boise, Idaho 83707-0006 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (208) 368-4000 ----------------- 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 ----- ----- The number of outstanding shares of the registrant's Common Stock as of March 19, 1996 was 207,806,486. <PAGE> Part I. FINANCIAL INFORMATION Item 1. Financial Statements MICRON TECHNOLOGY, INC. Consolidated Balance Sheets (Dollars in millions, except for par value amount) <TABLE> <CAPTION> (Unaudited) February 29, August 31, As of 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and equivalents $ 387.2 $ 128.1 Liquid investments 10.5 427.7 Receivables 419.1 455.4 Inventories 294.2 204.8 Prepaid expenses 17.3 9.1 Deferred income taxes 85.0 49.0 -------- -------- Total current assets 1,213.3 1,274.1 Product and process technology, net 46.9 41.6 Property, plant, and equipment, net 2,319.1 1,385.6 Other assets 62.6 73.6 -------- -------- Total assets $3,641.9 $2,774.9 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 497.8 $ 502.3 Short-term debt 200.0 -- Deferred income 20.2 16.4 Equipment purchase contracts 98.7 59.6 Current portion of long-term debt 33.1 26.5 -------- -------- Total current liabilities 849.8 604.8 Long-term debt 143.7 129.4 Deferred income taxes 131.0 93.3 Long-term product and process technology 47.9 3.6 Other liabilities 55.8 47.6 -------- -------- Total liabilities 1,228.2 878.7 -------- -------- Commitments and contingencies Common stock, $0.10 par value, authorized 1.0 billion shares, issued and outstanding 207.7 million and 206.4 million shares, respectively 20.8 20.6 Additional capital 412.8 391.5 Retained earnings 1,980.1 1,484.1 -------- -------- Total shareholders' equity 2,413.7 1,896.2 -------- -------- Total liabilities and shareholders' equity $3,641.9 $2,774.9 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 1 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Operations (Amounts in millions, except for per share data) (Unaudited) <TABLE> <CAPTION> February 29, August 31, For the quarter ended 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Net sales $ 996.5 $ 628.5 -------- -------- Costs and expenses: Cost of goods sold 552.1 267.5 Selling, general, and administrative 70.4 39.0 Research and development 48.0 28.9 Restructuring charge 29.9 -- -------- -------- Total costs and expenses 700.4 335.4 -------- -------- Operating income 296.1 293.1 Interest income, net 4.4 6.5 -------- -------- Income before income taxes 300.5 299.6 Income tax provision 112.3 116.1 -------- -------- Net income $ 188.2 $ 183.5 ======== ======== Earnings per share: Primary $0.87 $0.86 Fully diluted 0.87 0.86 Number of shares used in per share calculations: Primary 215.2 212.8 Fully diluted 215.2 214.3 Cash dividend declared per share $0.05 $0.025 </TABLE> See accompanying notes to consolidated financial statements. 2 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Operations (Amounts in millions, except for per share data) (Unaudited) <TABLE> <CAPTION> February 29, August 31, For the six months ended 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Net sales $2,182.3 $1,163.5 -------- -------- Costs and expenses: Cost of goods sold 1,090.2 492.0 Selling, general, and administrative 146.8 77.2 Research and development 94.6 55.9 Restructuring charge 29.9 -- -------- -------- Total costs and expenses 1,361.5 625.1 -------- -------- Operating income 820.8 538.4 Interest income, net 12.8 10.1 -------- -------- Income before income taxes 833.6 548.5 Income tax provision 316.9 205.7 -------- -------- Net income $ 516.7 $ 342.8 ======== ======== Earnings per share: Primary $2.39 $1.62 Fully diluted 2.39 1.61 Number of shares used in per share calculations: Primary 216.4 211.6 Fully diluted 216.4 213.6 Cash dividend declared per share $0.10 $0.05 </TABLE> See accompanying notes to consolidated financial statements. 3 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited) <TABLE> <CAPTION> February 29, March 2, For the six months ended 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> CASH FLOWS OF OPERATING ACTIVITIES Net income $ 516.7 $ 342.8 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 163.5 86.6 Restructuring charge 29.9 -- Decrease (increase) in receivables 36.0 (30.4) Increase in inventories (103.8) (41.7) Increase in accounts payable and accrued expenses 1.0 38.4 Increase in long-term product and process rights 37.0 0.8 Other 13.2 15.8 -------- -------- Net cash provided by operating activities 693.5 412.3 -------- -------- CASH FLOWS OF INVESTING ACTIVITIES Purchase of held to maturity securities (184.5) (420.6) Proceeds from sales and maturities of securities 603.4 281.8 Expenditures for property, plant, and equipment (950.1) (242.7) Other (3.5) 9.2 -------- -------- Net cash used for investing activities (534.7) (372.3) -------- -------- CASH FLOWS OF FINANCING ACTIVITIES Payments on equipment purchase contracts (112.0) (71.1) Proceeds from issuance of debt 233.1 59.7 Repayments of debt (14.0) (21.0) Proceeds from issuance of common stock 13.3 8.6 Payment of dividends (20.7) (10.2) Other 0.6 (2.9) -------- -------- Net cash provided by (used for) financing activities 100.3 (36.9) -------- -------- Net increase in cash and equivalents 259.1 3.1 Cash and equivalents at beginning of period 128.1 78.4 -------- -------- Cash and equivalents at end of period $ 387.2 $ 81.5 ======== ======== SUPPLEMENTAL DISCLOSURES Income taxes paid, net $ (416.7) $ (214.8) Interest paid (4.1) (4.5) Noncash investing and financing activities: Equipment acquisitions on contracts payable and capital leases 151.2 62.8 </TABLE> See accompanying notes to consolidated financial statements. 4 <PAGE> Notes to Consolidated Financial Statements (All tabular dollar amounts are stated in millions) 1. Unaudited Interim Financial Statements In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of Micron Technology, Inc., and subsidiaries (the "Company"), and their consolidated results of operations and cash flows. The Company recognized a $29.9 million pre-tax restructuring charge resulting from the decisions by its approximately 80% owned subsidiary, Micron Electronics, Inc., to discontinue sales of ZEOS brand PC systems and to close the related PC manufacturing operations in Minneapolis, Minnesota in the second quarter of 1996. The Company reclassified held-to-maturity liquid investment securities with an amortized cost of $151 million to available- for-sale concurrent with the Company's adoption of the Federal Accounting Standards Board's special report on implementing Statement 115 "Accounting for Certain Investments in Debt and Equity Securities". This report on Form 10-Q for the quarter ended February 29, 1996, should be read in conjunction with the Company's Annual Report to Shareholders and/or Form 10-K for the year ended August 31, 1995. <TABLE> <CAPTION> 2. Receivables February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Trade receivables $ 388.9 $ 457.4 Income taxes recoverable 51.3 -- Other 14.1 14.6 Allowance for returns and discounts (26.7) (9.2) Allowance for doubtful accounts (8.5) (7.4) -------- -------- $ 419.1 $ 455.4 ======== ======== </TABLE> <TABLE> <CAPTION> 3. Inventories February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Finished goods $ 63.8 $ 17.8 Work in progress 135.9 99.1 Raw materials and supplies 94.5 87.9 -------- -------- $ 294.2 $ 204.8 ======== ======== </TABLE> <TABLE> <CAPTION> 4. Product and process technology, net February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Product and process technology, at cost $ 163.1 $ 152.3 Less accumulated amortization (116.2) (110.7) -------- -------- $ 46.9 $ 41.6 ======== ======== </TABLE> <TABLE> <CAPTION> 5. Property, plant, and equipment, net February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Land $ 36.2 $ 34.4 Buildings 540.6 392.0 Machinery and equipment 1,798.8 1,338.4 Construction in progress 663.3 259.2 -------- -------- 3,038.9 2,024.0 Less accumulated depreciation and amortization (719.8) (638.4) -------- -------- $2,319.1 $1,385.6 ======== ======== </TABLE> 5 <PAGE> Notes to Consolidated Financial Statements, continued <TABLE> <CAPTION> 6. Accounts payable and accrued expenses February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Accounts payable $ 227.0 $ 193.2 Salaries, wages, and benefits 92.6 103.2 Product and process technology 101.6 91.5 Income taxes payable 10.9 72.7 Other 65.7 41.7 -------- -------- $ 497.8 $ 502.3 ======== ======== </TABLE> 7. Short-term debt The Company has a temporary revolving credit facility expiring on May 12, 1996 that provides for borrowings up to $250 million. The interest rate on borrowed funds is based on various pricing options and was 6.80% on the $200 million outstanding under the facility as of February 29, 1996. <TABLE> <CAPTION> 8. Long-term debt February 29, August 31, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Notes payable in periodic installments through July 2015, weighted average interest rate of 6.65% and 6.82%, respectively $ 107.9 $ 89.3 Noninterest bearing obligations, $19.8 million due June 1997, $3 million due October 1997, and $20.5 million due December 1997, weighted average imputed interest rate of 6.86%, and 6.85%, respectively. 39.1 37.8 Notes payable, due at maturity, ranging from December 1996 to June 1998, weighted average interest rate of 5.01% and 5.49%, respectively 23.0 20.0 Capitalized lease obligations payable in monthly installments through April 1998, weighted average interest rate of 7.83% and 8.94%, respectively 6.8 8.8 -------- -------- 176.8 155.9 Less current portion (33.1) (26.5) -------- -------- $ 143.7 $ 129.4 ======== ======== </TABLE> 9. Earnings per share Earnings per share is computed using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options and affect earnings per share when they have a dilutive effect. Per share amounts for the second quarter of fiscal 1995 have been restated to reflect retroactively a 2 for 1 stock split effected in the form of a stock dividend to shareholders of record on May 4, 1995. 6 <PAGE> Notes to Consolidated Financial Statements, continued 10. Income taxes The estimated effective income tax rate for fiscal year 1996 of 38.0% principally reflects the statutory federal corporate income tax rate and the net effect of state taxation. 11. Commitments As of February 29, 1996, the Company had commitments extending into fiscal 1998 of approximately $505 million for equipment purchases and $44 million for the construction of facilities. Should the Company elect to cancel its outstanding equipment purchase commitments, the Company could be subject to cancellation fees in excess of $100 million. 12. Contingencies Periodically, the Company is made aware that technology used by the Company in the manufacture of some or all of its products may infringe on product or process technology rights held by others. The Company has accrued a liability and charged operations for the estimated costs of settlement or adjudication of asserted and unasserted claims for infringement prior to the balance sheet date. Management can give no assurance that the amounts accrued have been adequate and cannot estimate the range of additional possible loss, if any, from resolution of these uncertainties. Resolution of whether the Company's manufacture of products has infringed on valid rights held by others may have a material adverse effect on the Company's financial position or results of operations, and may require material changes in production processes and products. The Company had various product and process technology agreements expire in calendar 1995 and is not able to predict whether these license agreements can be renewed on terms acceptable to the Company. The Company is a party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on the Company's financial position or results of operations. 7 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains trend information and other forward looking statements that involve a number of risks and uncertainties. The Company's actual results could differ materially from the Company's historical results of operations and those discussed in the forward looking statements. Factors that could cause actual results to differ materially are included, but are not limited to, those identified in "Certain Factors". Overview All period references are to the Company's fiscal periods ended February 29, 1996, November 30, 1995, and March 2, 1995, unless otherwise indicated. Share and per share amounts for the first quarter and first six months of 1995 have been restated to reflect a 2 for 1 stock split effected in the form of a stock dividend to shareholders of record on May 4, 1995. Quarterly financial results may not be indicative of the financial results for any future period. All tabular dollar amounts are stated in millions. Net income for the second quarter of 1996 was $188 million, or $0.87 per fully diluted share, on net sales of $997 million compared to net income of $184 million, or $0.86 per fully- diluted share, on net sales of $629 million for the second quarter of 1995. For the first six months of 1996, net income was $517 million, or $2.39 per fully-diluted share, on net sales of $2,182 million compared to net income of $343 million, or $1.61 per fully-diluted share, on net sales of $1,164 million for the first six months of 1995. The Company previously reported net sales of $1,186 million and net income of $329, or $1.51 per fully diluted share, for its first quarter of 1996. The principal cause of the decline in net sales and net income for the second quarter compared to the first quarter of 1996 was the significantly lower average selling prices of semiconductor memory products, partially offset by the relatively higher level of net sales of the Company's Micron brand PC systems. The volume of semiconductor memory sold in the second quarter dropped approximately 12% compared to the first quarter of 1996 as finished goods inventory increased resulting in part from changes in the Company's major customers' purchasing and inventory management strategies, and due to a slight decrease in production of semiconductor memory. The production decline was principally a result of inefficiencies encountered in the conversion of Fab III to 8-inch wafer processing. The Company has completed the 8-inch wafer start conversion of Fab III and recently began converting wafer starts in Fab I/II. While completion of the conversion of Fab I/II is conditioned upon market conditions for semiconductor memory products, such completion is anticipated prior to the end of calendar 1996. Due to customer demand, the Company has accelerated its transition from the relatively mature 4 Meg DRAM to the 16 Meg DRAM. Results of the second quarter were also adversely affected by a one-time $29.9 million pre-tax restructuring charge resulting from the decisions by its approximately 80% owned subsidiary, Micron Electronics, Inc., to discontinue sales of ZEOS brand PC systems and to close the related PC manufacturing operations in Minneapolis, Minnesota. The restructuring charge reduced second quarter fully diluted earnings per share by $0.09. 8 <PAGE> Results of Operations <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ----------------------------------- 1996 Change 1995 1996 Change 1995 ------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Sales $ 996.5 58.6% $ 628.5 $2,182.3 87.6% $1,163.5 </TABLE> <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ----------------------------------- 1996 1995 1996 1995 -------------- -------------- ---------------- ---------------- Net Sales % Net Sales % Net Sales % Net Sales % -------------- -------------- ---------------- ---------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Semiconductor memory products $646.0 64.8% $523.7 83.3% $1,515.4 69.4% $ 988.0 84.9% Personal computer systems 264.9 26.6% 73.1 11.6% 499.0 22.9% 117.4 10.1% Other 85.6 8.6% 31.7 5.1% 167.9 7.7% 58.1 5.0% ------ ----- ------ ----- -------- ----- -------- ----- Total net sales $996.5 100.0% $628.5 100.0% $2,182.3 100.0% $1,163.5 100.0% ====== ===== ====== ===== ======== ===== ======== ===== </TABLE> The value of the Company's semiconductor memory products included in PC systems and other products is included under "Semiconductor memory products". "Other" includes revenue from contract manufacturing and module assembly services, construction management services, government contracts, and licensing fees. The substantial increase in net sales in the second quarter of 1996 compared to the second quarter of 1995 was principally due to a higher level of net sales of PC systems and the effects of a higher level of production of semiconductor memory products partially offset by generally lower average selling prices for such products. The Company's sales of semiconductor memory products in the second quarter of 1996 decreased approximately 12% compared to the first quarter of 1996. The volume of semiconductor memory produced in the second quarter decreased slightly compared to the first quarter of 1996 principally as a result of inefficiencies encountered in the conversion of Fab III to process 8-inch wafers. The Company has completed the 8-inch wafer start conversion of Fab III and recently began converting wafer starts in Fab I/II. While 8-inch wafers have approximately 84% greater usable surface area compared to 6-inch wafers, the Company's yields on 8-inch wafers were significantly lower in the second quarter of 1996 compared to its 6-inch wafers. In addition, wafer fabrication throughput decreased in the second quarter compared to the first quarter of 1996 principally due to the slightly increased processing time required for 8-inch wafers. The volume of semiconductor memory sold during the second quarter dropped approximately 12% compared to the first quarter of 1996 as finished goods inventory increased. During the second quarter of 1996, certain of the Company's major customers undertook efforts to reduce their component inventories. Such practices resulted in increased downward pressure on pricing for the Company's DRAM products due to the short-term shift in demand relative to supply for such products. The Company's average selling prices for semiconductor memory products during the second quarter decreased approximately 16% compared to the first quarter of 1996. Selling prices for the Company's semiconductor memory products were substantially lower in the latter portion of the second quarter compared to the average for the quarter. See "Certain Factors". The 4 Meg DRAM comprised approximately 91% of sales of semiconductor memory products in the second quarter of 1996. 9 <PAGE> Sales of PC systems, excluding the value of the Company's semiconductor memory included therein, increased to approximately 27% of the Company's total net sales for the second quarter of 1996 from approximately 12% in the second quarter of 1995. Sales of PC systems were higher in 1996 primarily as a result of higher unit sales of Micron brand PC systems and higher sales under government contract, offset in part by a decline in the unit sales of ZEOS brand PC systems. The increase in direct unit sales of Micron brand PC systems was principally a result of enhanced name recognition and market acceptance of such systems, which the Company attributes to the receipt of a number of awards from computer trade magazines relating to price and performance characteristics of such systems and the Company's service and support functions. In the event the Company is not successful in winning such awards in the future, consumer interest in its PC systems could decline materially. Slightly higher overall average selling prices of the Company's PC systems in the second quarter of 1996 compared to the second quarter of 1995 resulted primarily from the increased sales of Pentium microprocessor based PC systems. <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ------------------------------ 1996 Change 1995 1996 Change 1995 ------------------------------- ------------------------------ <S> <C> <C> <C> <C> <C> <C> Cost of goods sold $ 552.1 106.4% $ 267.5 $1,090.2 121.6% $ 492.0 Gross margin % 44.6% 57.4% 50.0% 57.7% </TABLE> The Company's gross margin percentage was lower in the second quarter of 1996 than in the second quarter of 1995 primarily as a result of generally lower average selling prices on sales of semiconductor memory products and the effect of increased sales of PC systems which generally have a lower gross margin percentage compared to the balance of the Company's products. The Company's gross margin percentage on sales of semiconductor memory products for the second quarter of 1996 was approximately 62% compared to approximately 64% in the second quarter of 1995, and 70% in the first quarter of 1996. The lower gross margin percentage on sales of the Company's semiconductor memory products during the second quarter compared to the first quarter of 1996 was principally due to a decrease in average selling prices for such products and inefficiencies encountered in the conversion of Fab III to process 8-inch wafers both partially offset by the effect of the Company's on- going transitions to shrink versions of existing memory products. The Company is accelerating the transition of its primary semiconductor memory products from the relatively mature 4 Meg DRAM to the 16 Meg DRAM. To date, only limited quantities of 16 Meg products have been produced. The Company's transition to the 16 Meg DRAM as its principal memory product could have a negative impact on the Company's results of operations. During prior periods in which the Company transitioned to new generation products, the Company's gross margin percentages were adversely affected. The Company's gross margin percentage on sales of PC systems declined in the second quarter of 1996 compared to both the first quarter of 1996 and the second quarter of 1995, primarily as a result of price reductions for certain PC system products and loss on disposition of certain excess component inventories. To a lesser extent, the decline in the second quarter of 1996 compared to the second quarter of 1995 was partially due to an increase in the number of lower priced units shipped under government contract. The Company continues to experience significant pressure on its gross margin percentage realized for sales of PC systems as a result of intense competition in the PC industry and consumer expectations of more powerful PC systems at lower prices. Many of the Company's competitors have substantial resources and purchasing power relative to those which the Company has dedicated to its PC operations. Although the Company has begun to realize reduction in costs of components for PC systems in recent periods, the Company's gross margin percentage on sales of PC systems continues to be lower than those of the Company's primary products. In the event that sales of PC systems continue to increase as a percentage of total net sales, the Company's overall gross margin percentage will be adversely affected. 10 <PAGE> Cost of goods sold includes estimated costs of settlement or adjudication of asserted and unasserted claims for patent infringement prior to the balance sheet date, and costs of product and process technology licensing arrangements. Charges for product and process technology remained relatively constant as a percentage of net sales in the second quarter of 1996 compared to both the first quarter of 1996 and the second quarter of 1995. Future product and process technology charges may fluctuate in absolute dollars and as a percentage of net sales, however, as a result of claims that may be asserted in the future, and as a result of future license arrangement. See "Certain Factors." <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ------------------------------ 1996 Change 1995 1996 Change 1995 ------------------------------- ------------------------------ <S> <C> <C> <C> <C> <C> <C> Selling, general, and administrative $ 70.4 80.5% $ 39.0 $ 146.8 90.2% $ 77.2 as a % of net sales 7.1% 6.2% 6.7% 6.6% </TABLE> The higher level of selling, general, and administrative expenses during the second quarter and first six months of 1996 as compared to comparable periods of 1995 resulted primarily from personnel costs and depreciation charges associated with the administrative and information systems support for the Company's ongoing expansion plans and the Company's profit sharing programs, a higher level of legal fees, and a higher level of advertising costs incurred in conjunction with the Company's increase in sales of PC systems. <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ------------------------------ 1996 Change 1995 1996 Change 1995 ------------------------------- ------------------------------ <S> <C> <C> <C> <C> <C> <C> Research and development $ 48.0 66.1% $ 28.9 $ 94.6 69.2% $ 55.9 as a % of net sales 4.8% 4.6% 4.3% 4.8% </TABLE> Research and development expenses vary primarily with the number of wafers and personnel dedicated to new product and process development. Research and development efforts in the second quarter of 1996 were focused primarily on further development of 16 Meg and 4 Meg DRAM shrinks, and design and development of non-volatile semiconductor memory devices, the 34K x 36 synchronous SRAM, and next generation DRAM densities. The Company expects research and development expenses in the remainder of 1996 to be higher than comparable periods in 1995 as additional resources are dedicated to the development of 16 Meg and 4 Meg DRAM shrinks, design and development of next generation DRAM densities, and new technologies including radio frequency identification systems, non-volatile semiconductor memory devices, and field emission flat panel displays. <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------------- ------------------------------ 1996 Change 1995 1996 Change 1995 ------------------------------- ------------------------------ <S> <C> <C> <C> <C> <C> <C> Income tax provision $ 112.3 (3.3)% $ 116.1 $ 316.9 54.1% $ 205.7 </TABLE> The effective income tax rate for the first six months of 1996 of 38.0% represents a slight increase compared to the 37.5% rate for the prior fiscal year principally due to a change in the mix of sales among taxing jurisdictions and the decreased effect of state tax credits. Liquidity and Capital Resources The Company had cash and liquid investments of $398 million as of February 29, 1996, representing a decrease of $158 million during the first six months of 1996. The Company's principal sources of liquidity during the first six months of 1996 were cash flows from operations of $694 million, borrowings under the Company's bank credit agreement of $200 million, and equipment financing of $151 million. The principal uses of funds in the first six months of 1996 were $1,101 million for property, plant, and equipment, $126 million for repayments of equipment contracts and long-term debt. 11 <PAGE> During the second quarter of 1996, the Company entered into a temporary revolving credit facility expiring on May 12, 1996 which provides for borrowings up to $250 million. As of February 29, 1996, the Company had borrowings outstanding under the facility of $200 million. The Company is negotiating with a syndicate of banks to provide a credit agreement with aggregate borrowings of $500 million to replace the current $250 million temporary credit facility. There can be no assurance the Company will be able to negotiate terms of the financing agreement acceptable to the Company, or that the Company will be able to borrow the maximum amount available under the agreement due to expected limitations on the borrowing base and certain financial covenants. Depending on overall market conditions, the Company may pursue debt or equity financing. The inability of the Company to obtain financing on acceptable terms could significantly delay or reduce in scope the Company's capacity enhancement program and may necessitate changes in operations which could have the effect of limiting production capacity. The Company's ability to invest in its capacity enhancement program is also largely dependent on the Company's ability to generate cash flows from its operations. Cash flow from operations for the second quarter of 1996 was lower than cash flow from operations for the first quarter of 1996 resulting from a combination of lower volumes of semiconductor memory sold, and lower overall average selling prices for semiconductor memory products. Cash flow from operations is primarily influenced by average selling prices and variable cost per part for the Company's semiconductor memory products. The semiconductor memory industry has recently experienced, and may continue to experience, downward pressure on selling prices for DRAM products. Future declines in selling prices for DRAM products will further erode the Company's ability to fund capital expenditures. Completion of the Company's semiconductor memory manufacturing facility in Lehi, Utah, has been placed on indefinite hold following completion of the exterior of the facility. The Company's conversion of Fab I/II to process 8-inch wafers and expansion of the Boise facility capacity beyond existing levels, while currently proceeding, are conditioned upon future market conditions which the Company cannot predict. The Company expects capital expenditures in the remainder of 1996 to be between $600 million and $800 million. As of February 29, 1996, the Company had contractual commitments and order cancellation fees extending through calendar 1998 of approximately $505 million for equipment purchases and approximately $44 million for the construction of facilities. Should the Company elect to cancel its outstanding equipment purchase commitments, the Company could be subject to cancellation fees in excess of $100 million. The Company believes continuing investments in manufacturing technology, facilities and equipment, research and development, and product and process technology are necessary to support growth, achieve operating efficiencies, and enhance product quality. However, there can be no assurance the Company will have sufficient sources of liquidity to fund additional investments to increase production capacity, enhance or sustain production capacity at its existing facilities, or develop new product and process technologies. Certain Factors The following are important factors which could cause actual results or events to differ materially from those contained in any forward looking statements made by or on behalf of the Company. The semiconductor memory industry is characterized by rapid technological change, frequent product introductions and enhancements, difficult product transitions, relatively short product life cycles, and volatile market conditions. These characteristics historically have made the semiconductor industry highly cyclical, particularly in the market for DRAMs, which are the Company's primary products. The Company's selling price for semiconductor memory products fluctuates significantly with real and perceived changes in the balance of supply and demand for these commodity products. As has occurred in the past in response to favorable market conditions for semiconductor memory products, many of the Company's competitors have recently added, or are in the process of adding, significant capacity for the production of semiconductor memory components. The Company is unable to estimate the amount of production capacity that is in various stages of development world-wide. The amount of capacity to be placed into production and future yield improvements by these competitors could dramatically increase world-wide supply of semiconductor memory. 12 <PAGE> DRAMs are the most widely used semiconductor memory component in most PC systems. Approximately 64% of the Company's sales of semiconductor memory products during the second quarter of 1996 were directly into the personal computer or peripheral markets. Should demand for PC systems decrease, or fail to increase in accordance with industry expectations, demand for semiconductor memory would likely decrease placing downward pressure on selling prices for the Company's semiconductor memory products. The Company is unable to predict changes in industry supply, major customer inventory management strategies, or end user demand, which are primary factors influencing pricing for the Company's semiconductor memory products. Based on discussions with major customers, the Company believes pricing for its memory semiconductor products delivered in the balance of 1996 is likely to be lower than for deliveries of such products made in the second quarter. The manufacture of the Company's semiconductor memory products is a complex process and involves a number of precise steps, including wafer fabrication, assembly in a variety of packages, burn-in, and final test. The Company has substantially completed the conversion of Fab III to process 8-inch wafers and recently began converting Fab I/II. While completion of the conversion of Fab I/II is conditioned upon future market conditions for semiconductor memory products, such completion is anticipated prior to the end of calendar 1996. There can be no assurance that the Company will not experience an interruption of its manufacturing process or experience further decreases in manufacturing yields as a result of the conversion. From time to time, the Company has experienced volatility in its manufacturing yields, as it is not unusual to encounter difficulties in ramping shrink versions of existing devices or new generation devices, such as the 16 Meg DRAM, to commercial volumes. The Company is accelerating the transition of its primary semiconductor memory products from the relatively mature 4 Meg DRAM to the 16 Meg DRAM. The Company's ability to reduce costs per part of its semiconductor memory products is largely dependent on its ability to design and develop new generation products and shrink versions of existing products and its ability to ramp such products at acceptable rates to acceptable yields of which there can be no assurance. Should the Company be unable to decrease costs per part for semiconductor memory products at a rate equal to the rate of decline in selling prices for such products, the Company's results of operations and cash flows will be adversely materially impacted. The Company's cash flow from operations is primarily influenced by average selling prices and costs per part for the Company's semiconductor memory products. Historically, the Company has reinvested substantially all cash flows from operations in capacity expansion and improvement programs. Uncertain market conditions for the Company's semiconductor memory products led to the decision to curtail development of the Lehi, Utah manufacturing complex. Further decreases in average selling prices would likely require further cutbacks in capital expenditures and may necessitate changes to operations which would have the effect of limiting production capacity. Periodically, the Company is made aware that technology used by the Company in the manufacture of some or all of its products may infringe on product or process technology rights held by others. The Company has accrued a liability and charged operations for the estimated costs of settlement or adjudication of asserted and unasserted claims for infringement prior to the balance sheet date. Management can give no assurance that the amounts accrued have been adequate and cannot estimate the range of additional possible loss, if any, from resolution of these uncertainties. Resolution of whether the Company's manufacture of products has infringed on valid rights held by others may have a material adverse effect on the Company's financial position or results of operations, and may require material changes in production processes and products. The Company had various product and process technology license agreements expire in calendar 1995 and is not able to predict whether these license agreements can be renewed on terms acceptable to the Company. 13 <PAGE> Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders The registrant's 1995 Annual Meeting of Shareholders was held on January 29, 1996 at the Boise Centre on the Grove. At the meeting, the following items were submitted to a vote of the shareholders. At the meeting, 206,970,339 shares were entitled to vote. (a) The following nominees for Directors were elected. Each person elected as a Director will serve until the next annual meeting of shareholders or until such person's successor is elected and qualified. <TABLE> <CAPTION> Abstentions/ Votes Votes Broker Name of Nominee Cast For Cast Against Non-Votes --------------------- ----------- ------------ ------------ <S> <C> <C> <C> Steven R. Appleton 186,471,514 44,275 20,454,550 Jerry M. Hess 186,537,040 44,271 20,389,028 Robert A. Lothrop 186,478,833 86,994 20,404,512 Tyler A. Lowrey 186,554,899 34,624 20,380,816 Thomas T. Nicholson 186,503,612 67,748 20,398,979 Allen T. Noble 186,482,457 111,374 20,376,508 Don J. Simplot 186,460,827 156,336 20,353,176 John R. Simplot 186,375,157 156,336 20,438,846 Gordon C. Smith 186,388,732 137,834 20,443,773 Wilbur G. Stover, Jr. 186,523,834 35,606 20,410,899 </TABLE> (b) An amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of Common Stock from 300,000,000 shares to 1,000,000,000 shares was approved with 142,592,773 votes in favor, 45,019,491 votes against, and 19,358,075 representing abstentions and broker non-votes. (c) An amendment to the Company's 1994 Stock Option Plan increasing the number of shares of Common Stock reserved for future grant from 2,000,000 to 7,000,000 shares was approved with 148,951,891 votes in favor, 38,258,205 votes against, and 19,760,243 representing abstentions and broker non-votes. (d) The ratification and appointment of Coopers & Lybrand L.L.P. as independent public accountants of the Company for the fiscal year ending August 29, 1996 was approved with 186,874,176 votes in favor, 1,104,607 votes against, and 18,991,556 representing abstentions and broker non-votes. 14 <PAGE> Item 6. Exhibits and Reports on Form 8-K (a) The following are filed as a part of this report: Exhibit Page Number Description of Exhibit Number ------- --------------------------------------------- ------ 10.112 Forms of SeveranceAgreement 10.113 Revolving Credit Agreement Dated February 12, 1996 among the Registrant and several financial institutions 11 Computation of per share earnings for the quarters and six month periods ended February 29, 1996 and March 2, 1995 17 & 18 (b) The registrant filed Reports on Form 8-K dated January 25, 1996, February 2, 1996, February 8, 1996, each announcing certain changes in the directors and officers of the Company. 15 <PAGE> 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. Micron Technology, Inc. (Registrant) Dated: March 26, 1996 /s/ Wilbur G. Stover, Jr. ------------------------------------ Wilbur G. Stover, Jr. Vice President of Finance, and Chief Financial Officer (Principal Financial and Accounting Officer) 16 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.112 <SEQUENCE>2 <TEXT> EXHIBIT 10.112 SEVERANCE AGREEMENT This Agreement is by and between Micron Technology, Inc., a Delaware corporation ("the Company"), and ___________________, an individual and Officer of the Company, ("the Officer"), and is effective as of the last date signed below. WHEREAS, the parties recognize that it is in the best interest of the Company to provide for a smooth transition when there is a change in management, and wish to recognize the valued contributions of the Officer; and WHEREAS, the Company desires to provide the Officer with benefits in consideration for his execution of this Severance Agreement (the "Agreement"); NOW THEREFORE, the parties agree as follows: 1. TERMINATION OF THE OFFICER. Either the Company or the Officer may at any time terminate the Officer's active employment with the Company for any reason, voluntary or involuntary, with or without cause, by providing notice to that effect in writing. The date such notice is received by the other party shall be deemed "the Termination Date." Upon receipt by the Officer of a notice of termination from the Company, and upon the Company's request, the Officer will resign immediately as an Officer and/or Director. 2. EFFECT OF TERMINATION. Effective on the Termination Date, and for a period defined in Paragraph 2(a) ("the Transition Period"), the Officer shall continue as an employee only for purposes of receiving the benefits specified in Paragraph 3, and while employed in that capacity shall not perform any service or work that conflicts with interests of the Company. During the Transition Period, the Officer may continue in a consulting role with the Company, or continue as a non-officer employee with the Company, if both parties agree. 2(a). TRANSITION PERIOD. For purposes of this agreement, the "Transition Period" shall be six months plus the amount of any TOP time and leave time, if any, which the Officer has accrued as of the Termination Date. 2(b). CHANGE OF OFFICER STATUS. In the event that the Officer or the Company terminates the Officer's status as an Officer of the Company but not as an employee, both parties agree that such change in status will be treated as a termination for purposes of this Agreement, and that the date of such change in status will be deemed the Termination Date. Following the Transition Period, the Officer shall be entitled only to such compensation and benefits for his services as an employee that may be mutually agreed upon between the Company and the Officer. In no circumstance shall benefits under Paragraph 3 be paid to an Officer for a period longer than the first Transition Period created by a change of status or termination. 3. BENEFITS DURING THE TRANSITION PERIOD. Provided the Officer complies with the terms of this Agreement, the Officer will receive during the Transition Period all benefits customarily provided to officers of the Company, including, but not limited to salary, bonuses, executive bonuses, and the continued vesting of any granted stock options, as if the Officer's employment as an officer had continued during that period. "Customarily provided" refers to Company practices and plans with respect to officer benefits and compensation in effect as of the Termination Date. For purposes of this provision, however, it will be understood that the Officer, during the Transition Period, will not be entitled to any new grants of interest in future executive bonus pools, nor to any new grants of stock options. It will be further understood that the Officer will not be entitled to payment of any compensation that is deferred past the Transition Period due to payment criteria of an incentive program, as those criteria existed as of the Termination Date. No action by the Company or the Company's Board of Directors may effect the Officer's receipt of the benefits set forth above, other than as provided herein. 4. CONFIDENTIALITY. The parties agree that throughout the Transition Period no statements regarding the Officer's termination will be made other than to indicate that the reasons for, and circumstances of, the termination are CONFIDENTIAL and that both the Company, the Board of Directors, and the Officer are obligated to make "no comment" regarding the termination. For purposes of this paragraph, "statements" includes, but is not limited to, statements to the press, analysts, and journalists. Nothing in this paragraph is meant to prevent the Company from disclosing any facts required to be disclosed pursuant to statute or regulation. 5. TERMINATION. This Agreement terminates when the Officer turns 60 years of age, and any termination or change of status of the Officer after that date will not entitle the Officer to any of the benefits of this Agreement. 6. RELEASE. Upon receipt of all benefits under this Agreement, the Officer and Company settle, waive, and voluntarily release any and all claims each has or may have against the other, inclusive of any of the Company's affiliates, officers, directors, employees or agents, both individually and in their official capacities, which claims accrued prior to the end of the Transition Period. 7. FINAL AGREEMENT. This Agreement supersedes all prior agreements, and is the entire and final understanding of the parties as to the subject matter hereof. - ----------------------------- ------------------------- MICRON TECHNOLOGY, INC. Officer - -------------- --------------- Date Date <PAGE> SEVERANCE AGREEMENT This Agreement is by and between Micron Technology, Inc., a Delaware corporation ("the Company"), and ____________________, an individual and Officer of the Company, ("the Officer"), and is effective as of the last date signed below. WHEREAS, the parties recognize that it is in the best interest of the Company to provide for a smooth transition when there is a change in management, and wish to recognize the valued contributions of the Officer; and WHEREAS, the Company desires to provide the Officer with benefits in consideration for his execution of this Severance Agreement (the "Agreement"); NOW THEREFORE, the parties agree as follows: 1. TERMINATION OF THE OFFICER. Either the Company or the Officer may at any time terminate the Officer's active employment with the Company for any reason, voluntary or involuntary, with or without cause, by providing notice to that effect in writing. The date such notice is received by the other party shall be deemed "the Termination Date." Upon receipt by the Officer of a notice of termination from the Company, and upon the Company's request, the Officer will resign immediately as an Officer and/or Director. 2. EFFECT OF TERMINATION. Effective on the Termination Date, and for a period defined in Paragraph 2(a) ("the Transition Period"), the Officer shall continue as an employee only for purposes of receiving the benefits specified in Paragraph 3, and while employed in that capacity shall not perform any service or work that conflicts with interests of the Company. During the Transition Period, the Officer may continue in a consulting role with the Company, or continue as a non-officer employee with the Company, if both parties agree. 2(a). TRANSITION PERIOD. For purposes of this agreement, the "Transition Period" shall be two years plus the amount of any TOP time and leave time, if any, which the Officer has accrued as of the Termination Date. 2(b). CHANGE OF OFFICER STATUS. In the event that the Officer or the Company terminates the Officer's status as an Officer of the Company but not as an employee, both parties agree that such change in status will be treated as a termination for purposes of this Agreement, and that the date of such change in status will be deemed the Termination Date. Following the Transition Period, the Officer shall be entitled only to such compensation and benefits for his services as an employee that may be mutually agreed upon between the Company and the Officer. In no circumstance shall benefits under Paragraph 3 be paid to an Officer for a period longer than the first Transition Period created by a change of status or termination. 3. BENEFITS DURING THE TRANSITION PERIOD. Provided the Officer complies with the terms of this Agreement, the Officer will receive during the Transition Period all benefits customarily provided to officers of the Company, including, but not limited to salary, bonuses, executive bonuses, and the continued vesting of any granted stock options, as if the Officer's employment as an officer had continued during that period. "Customarily provided" refers to Company practices and plans with respect to officer benefits and compensation in effect as of the Termination Date. For purposes of this provision, however, it will be understood that the Officer, during the Transition Period, will not be entitled to any new grants of interest in future executive bonus pools, nor to any new grants of stock options. It will be further understood that the Officer will not be entitled to payment of any compensation that is deferred past the Transition Period due to payment criteria of an incentive program, as those criteria existed as of the Termination Date. No action by the Company or the Company's Board of Directors may effect the Officer's receipt of the benefits set forth above, other than as provided herein. 4. CONFIDENTIALITY. The parties agree that throughout the Transition Period no statements regarding the Officer's termination will be made other than to indicate that the reasons for, and circumstances of, the termination are CONFIDENTIAL and that both the Company, the Board of Directors, and the Officer are obligated to make "no comment" regarding the termination. For purposes of this paragraph, "statements" includes, but is not limited to, statements to the press, analysts, and journalists. Nothing in this paragraph is meant to prevent the Company from disclosing any facts required to be disclosed pursuant to statute or regulation. 5. TERMINATION. This Agreement terminates when the Officer turns 60 years of age, and any termination or change of status of the Officer after that date will not entitle the Officer to any of the benefits of this Agreement. 6. RELEASE. Upon receipt of all benefits under this Agreement, the Officer and Company settle, waive, and voluntarily release any and all claims each has or may have against the other, inclusive of any of the Company's affiliates, officers, directors, employees or agents, both individually and in their official capacities, which claims accrued prior to the end of the Transition Period. 7. FINAL AGREEMENT. This Agreement supersedes all prior agreements, and is the entire and final understanding of the parties as to the subject matter hereof. - ------------------------------- -------------------------- MICRON TECHNOLOGY, INC. Officer - ------------------- ---------------- Date Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.113 <SEQUENCE>3 <TEXT> EXHIBIT 10.113 REVOLVING CREDIT AGREEMENT This REVOLVING CREDIT AGREEMENT (the "Agreement") is entered into as of February 12, 1996, among Micron Technology, Inc. a Delaware corporation (the "Company"), the several financial institutions party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks (in such capacity, the "Agent"). WHEREAS, the Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I - DEFINITIONS AND RELATED MATTERS In this Agreement, unless otherwise specified, capitalized terms are used as defined herein and in Annex I hereto. Certain other interpretive provisions and accounting principles applicable to this Agreement are also set forth in Annex I hereto. ARTICLE II - THE REVOLVING CREDIT 2.01 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on the signature pages hereto opposite such Bank's name (such amount, as the same may be reduced under Section 2.05, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay under Section 2.06 and reborrow under this Section 2.01. 2.02 Loan Accounts. The Loans made by the Banks shall be evidenced by Notes executed by the Company in favor of each Bank. Each Bank shall endorse on schedules annexed to its Note the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each Bank is irrevocably authorized by the Company to endorse its Note and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent (i) prior to 9:00 a.m. (San Francisco time) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans, and (ii) either (A) prior to 9:00 a.m. (San Francisco time) one Business Day prior to the requested Borrowing Date, or (B) prior to 8:00 a.m. (San Francisco time) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (I) the amount of the Borrowing, which shall be in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; (II) the requested Borrowing Date, which shall be a Business Day; (III) the Type of Loans comprising the Borrowing; and (IV) the duration of the requested Interest Period (one week or one month), if applicable. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be one week. The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (b) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's payment office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks in like funds as received by the Agent or, if requested by the Company, by wire transfer in accordance with written instructions provided to the Agent by the Company of like funds as received by the Agent. After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than four different Interest Periods in effect. 2.04 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.04(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of Offshore Rate Loans, to convert any such Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Offshore Rate Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment or conversion of part thereof to be less than $5,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than (i) 9:00 a.m. (San Francisco time) at least three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans, and (ii) either (A) 9:00 a.m. (San Francisco time) at least one Business Day in advance of the Conversion/Continuation Date, or (B) 8:00 a.m. (San Francisco time) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (I) the proposed Conversion/Continuation Date; (II) the aggregate amount of Loans to be converted or continued; (III) the Type of Loans resulting from the proposed conversion or continuation; and (IV) the duration of the requested Interest Period, if applicable. (c) During the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, as the case may be, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice of conversion/continuation is provided by the Company, or if the Agent has received a notice of Default or Event of Default pursuant to Section (e) of Annex IX, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans held by each Bank with respect to which the notice was given. After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than four different Interest Periods in effect. 2.05 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000, or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.06 Optional Prepayments. Subject to Section 3.04, the Company may, at any time or from time to time, upon not less than three Business Days' irrevocable notice to the Agent, in the case of Offshore Rate Loans, or one Business Day's irrevocable notice to the Agent, in the case of Base Rate Loans (unless such notice with respect to the prepayment of Base Rate Loans is given prior to 8:00 a.m. (San Francisco time), in which case such prepayment may be made on the same date as such notice), ratably prepay Loans in whole or in part, in minimum amounts of $5,000,000, or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.04. 2.07 Mandatory Payment. The principal amount of the outstanding Loans, together with all interest accrued thereon and amounts required pursuant to Section 3.04, and all accrued and unpaid fees and other amounts outstanding hereunder, shall be immediately due and payable, and the Commitments shall terminate, automatically and without any further action by any party, upon the consummation of any capital raising event by the Company, including the issuance of any capital stock or the incurrence of any indebtedness for borrowed money; provided, however, that none of the following shall require a mandatory payment hereunder: (a) the acquisition of goods, supplies, or merchandise on normal trade credit; (b) the execution of bonds or undertakings in the ordinary course of its business as presently conducted; (c) the endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (d) capital raised through the Company's employee stock purchase plan or stock incentive plans; (e) the receipt of customer deposits in connection with sale and purchase agreements entered into in the ordinary course of business; (f) equipment financings in an aggregate principal amount of up to $200,000,000; or (g) the assumption of any existing indebtedness, or the issuance of any capital stock, in connection with an acquisition permitted pursuant to Section 7.03. 2.08 Repayment. The Company shall repay to the Banks on the Revolving Termination Date the aggregate principal amount of Loans outstanding on such date. 2.09 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to (i) the Offshore Rate plus 1.50% per annum, or (ii) the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04). (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans for the portion of the Loans so prepaid (whether mandatory or optional) and upon payment (including by reason of acceleration) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. (c) Notwithstanding subsection (a) of this Section, if any amount of principal of or interest on any Loan, or any other amount payable hereunder or under any other Loan Document is not paid in full when due (whether at stated maturity, by acceleration, demand or otherwise), the Company agrees to pay interest on such unpaid principal or other amount, from the date such amount becomes due until the date such amount is paid in full, and after as well as before any entry of judgment thereon to the extent permitted by law, payable on demand, at a fluctuating rate per annum equal to the Base Rate plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.10 Fees. (a) Arrangement Fee. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account as required by the letter agreement ("Fee Letter") between the Company and the Arranger, BofA and Seattle First National Bank dated January 31, 1996. (b) Upfront Fee. The Company shall pay to the Agent, for the account of each Bank other than BofA and Seattle First National Bank, a non-refundable upfront fee equal to 0.075% of such Bank's Commitment, which fee shall be payable on the Closing Date. (c) Commitment Fees. The Company shall pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Commitment, based upon the daily utilization as calculated by the Agent, equal to 0.20% per annum. Such commitment fee shall accrue from February 9, 1996 to the Revolving Termination Date and shall be due and payable on the Revolving Termination Date. The commitment fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. 2.11 Computation of Fees and Interest. All computations of interest for Base Rate Loans shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.12 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's payment office, and shall be made in dollars and in immediately available funds, no later than 10:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 10:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.13 Payments by the Banks to the Agent. Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this Section shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.14 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. ARTICLE III - TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes. If any payments to the Agent or any Bank under this Agreement are made from outside the United States, the Company will not deduct any foreign taxes from any such payments it makes to the Agent or Bank. If any such taxes are imposed on any such payments made by the Company (including payments under this Section), the Company will pay the taxes and will also pay to the Agent or such Bank, at the time interest is paid, any additional amount which the Agent or such Bank specifies as necessary to preserve the after-tax yield the Agent or such Bank would have received if such taxes had not been imposed. The Company will confirm that it has paid the taxes by giving the Agent official tax receipts (or notarized copies) within 30 days after the due date. 3.02 Illegality. If any Bank determines that the introduction of any requirement of law, or any change in any requirement of law, or in the interpretation or administration of any requirement of law, has made it unlawful, or that any central bank or other governmental authority has asserted that it is unlawful, for such Bank or any applicable lending office of such Bank to make Offshore Rate Loans, then, on notice thereof by such Bank to the Company (with a copy to the Agent), any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Company that the circumstances giving rise to such determination no longer exist, and (a) if the Bank may lawfully continue to maintain such Offshore Rate Loans to the last day of the Interest Period with respect thereto, the Company shall repay in full such Offshore Rate Loans, together with interest accrued thereon, on the last day of the Interest Period thereof, or (b) if the Bank may not lawfully continue to maintain such Offshore Rate Loans to the last day of the Interest Period with respect thereto, such Offshore Rate Loans shall automatically be converted into Base Rate Loans and the Company shall pay, within five Business Days of such conversion, all interest accrued on such Offshore Rate Loans prior to such conversion and all amounts required under Section 3.04 in connection with such conversion. 3.03 Increased Costs and Reduction of Return. The Company shall pay to each Bank, on demand, any increased costs or losses incurred by such Bank, in connection with its Commitment or any Loan hereunder, arising from any change in law or regulation, or any request or requirement of a regulatory agency, including with respect to any reserve or deposit requirements applicable to the Bank, or any capital requirements relating to such Bank's assets and commitments for credit. 3.04 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which such Bank may sustain or incur as a consequence of (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan, (b) the failure of the Company to borrow, continue or convert an Offshore Rate Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation, (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.06, (d) the prepayment (mandatory or optional) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period, (e) the automatic conversion under Section 2.04 or Section 3.02 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. 3.05 Inability to Determine Rates. Neither the Agent nor any Bank is obligated to accept an election for an Offshore Rate Loan if (a) dollar deposits in the principal amount, and for the period equal to the applicable Interest Period for such Loan are not available in the applicable funding market, or (b) the Offshore Rate does not accurately reflect the cost of such Loan. 3.06 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. ARTICLE IV - CONDITIONS PRECEDENT 4.01 Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) This Agreement and the Notes, executed by each party thereto; (b) Satisfactory evidence of due authorization of the execution, delivery and performance by the Company of this Agreement, including certified board resolutions, officer incumbency certificate, articles of incorporation and bylaws; (c) An opinion of counsel for the Company with respect to such legal matters relating hereto as the Agent and Banks may reasonably request; (d) Certificates of recent date showing that the Company is in good standing under the laws of the state of Delaware and is qualified to conduct business as a foreign corporation under the laws of the state of Idaho; (e) A certificate of an appropriate officer of the Company as to the matters set forth in Section 4.02(b) and (c); (f) Payment of any fee or expense due and payable hereunder or under the Fee Letter; and (h) Such other approvals, opinions, documents or instruments as the Agent or the Banks may reasonably request. 4.02 Conditions to All Borrowings. The obligation of each Bank to make any Loan hereunder (including its initial Loan), or to continue or convert any Loan under Section 2.04, is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/ Continuation Date: (a) The Agent shall have received a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable; (b) The representations and warranties in Article V shall be true and correct on and as of such Borrowing Date or Conversion/Continuation Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date, as applicable; and (c) No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion. Each Notice of Borrowing and Notice of Conversion/Continuation submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date or Conversion/Continuation Date, as applicable, that the conditions in this Section 4.02 are satisfied. ARTICLE V - REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 5.01 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is a corporation duly organized and existing under the laws of the state of its organization; (b) has the power and authority and all governmental licenses, authorizations, consents, and approvals to own its assets and to carry on its business; (c) in the case of the Company, has the power and authority and all governmental licenses, authorizations, consents, and approvals to execute, deliver and perform its obligations hereunder; and (d) is duly qualified and properly licensed and in good standing under the laws of each jurisdiction where its ownership, lease, or operation of property or the conduct of its business requires such license or qualification; except, in each case referred to in clause (b) or clause (d), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.02 Authorization. The execution, delivery, and performance by the Company of this Agreement have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any organizational or charter documents; (b) conflict with or result in any breach or contravention of, or the creation of any lien, security interest, or charge under, any material agreement, contract, indenture, document or instrument to which the Company is a party or by which any property is bound, or any order, injunction, writ, or decree of any governmental authority to which the Company or any property is subject; or (c) violate any law, rule, regulation, or determination of an arbitrator or of a court or other governmental authority, in each case applicable to or binding upon the Company or any property. 5.03 Enforceability. This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.04 Compliance with Laws. The Company and each of its Subsidiaries is in compliance in all material respects with all foreign, federal, state and local laws, rules, regulations and determinations of arbitrators, courts and other governmental authorities materially affecting the business, operations or property of the Company and its Subsidiaries, including environmental laws. 5.05 Permits, Franchises. Except as set forth in the Company's and its Subsidiaries' filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, the Company or its Subsidiaries possess all governmental or regulatory permits and licenses required, and all trademark rights, trade name rights, patent rights and fictitious name rights reasonably necessary, to enable the Company and its Subsidiaries to conduct the businesses in which they are now engaged in all material respects. 5.06 Litigation. There is no litigation, tax claim, proceeding, governmental or administrative action, arbitration proceeding or dispute pending, or, to the best knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries or any of their properties, the adverse determination of which could reasonably be expected to have a Material Adverse Effect. 5.07 No Event of Default; Other Obligations. There exists no Default or Event of Default. As of the Closing Date, the Company is not in default in any material respect under any other material agreement involving the borrowing of money, the extension of credit, or the lease of real or personal property, to which the Company is a party as borrower, guarantor, installment purchaser, or lessee. 5.08 Information; Tax Returns; Material Adverse Effect. All financial and other information that has been submitted by the Company to the Agent and the Banks, including the Company's financial statement delivered most recently prior to the Closing Date: (a) in the case of financial statements, is prepared in accordance with generally accepted accounting principles consistently applied; and (b) is true and correct in all material respects. As of the date of the financial statements most recently delivered to the Banks pursuant to Section 6.01, the Company has no knowledge of any material pending assessments or adjustments not disclosed in such financial statements with respect to its income tax liabilities for any year. Since November 30, 1995, there has been no Material Adverse Effect, other than the material adverse changes, if any, as may have been disclosed in the written projections dated January 15, 1996 delivered to the Agent and the Banks prior to the date hereof. ARTICLE VI - AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless all the Banks waive compliance in writing: 6.01 Financial and Other Information. The Company shall deliver to the Agent, in form and detail satisfactory to the Agent and the Banks, with sufficient copies for each Bank: (a) Within 45 days after February 29, 1996, the Company's consolidated financial statements for the fiscal quarter ending on such date (including, at a minimum, the Company's balance sheet and statements of income, retained earnings, and cash flow), together with a compliance certificate, in form and substance satisfactory to the Agent and the Banks, executed by a responsible officer of the Company; (b) Within 10 days after the date of filing thereof, copies of all financial statements and regular, periodical or special reports (including Form 8K) that the Company may make to, or file with, the Securities and Exchange Commission; and (c) Promptly upon request, such other materials and information relating to the Company or its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. 6.02 Notices of Certain Events. The Company shall promptly give written notice to the Agent and each Bank of: (a) all litigation, proceedings or actions affecting the Company or its Subsidiaries where the amount claimed is $20,000,000 or more; (b) any substantial dispute which may exist between the Company or its Subsidiaries and any governmental regulatory body or law enforcement authority; (c) any Default or Event of Default; (d) any of the representations and warranties in Article V that ceases to be true and correct; and (e) any other matter which has resulted or could reasonably be expected to result in a Material Adverse Effect. 6.03 Financial Books, Records, Audits and Inspections. The Company shall, and shall cause its Subsidiaries to (a) maintain adequate financial books, accounts and records, and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance in all material respects with the regulations of any governmental regulatory body having jurisdiction over the Company or its Subsidiaries, or the Company's or its Subsidiaries' businesses, and (b) permit employees or agents of the Agent or any Bank at any reasonable time with advance written notice to inspect the Company's and its Subsidiaries' properties, and to examine or audit the Company's and its Subsidiaries' financial books, accounts, and records and make copies and memoranda thereof. 6.04 Compliance with Laws. The Company shall at all times comply with, and cause its Subsidiaries to comply in all material respects with, all laws, statutes, rules, regulations, orders, and directions of any governmental authority having jurisdiction over the Company or any of its Subsidiaries or the business of the Company or any of its Subsidiaries, including environmental laws. 6.05 Payment of Obligations. The Company shall, and shall cause its Subsidiaries to, pay and discharge as the same shall either become due and payable or within any applicable grace period, all their respective material obligations and liabilities, including (in the case of the Company) the Obligations. 6.06 Existence and Properties. The Company and each of its Subsidiaries shall maintain and preserve its corporate existence and all rights, privileges, and franchises now enjoyed, conduct its business in an orderly, efficient, and customary manner, keep all the its properties in good working order and condition and fully insured, including self-insurance and self-retention limits, and from time to time make all reasonably needed repairs, renewals, or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved. 6.07 Use of Facility. The Company shall use the credit facility provided herein solely for working capital and other general corporate purposes not in contravention of any requirement of law. 6.08 Ranking. The Company shall take, or cause to be taken, all actions necessary to ensure that the Obligations are and continue to rank at least pari passu in right of payment with all other unsecured indebtedness of the Company. ARTICLE VII - NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless all the Banks waive compliance in writing: 7.01 Liens. (a) The Company shall not, and shall not suffer or permit any of its Subsidiaries to, create, assume or suffer to exist any security interest, deed of trust, mortgage, lien (including the lien of an attachment, judgment or execution) or encumbrance, securing a charge or obligation, on or of any of its or their property, real or personal, whether now owned or hereafter acquired, except: (a) security interests and deeds of trust in favor of the Agent for the benefit of the Banks; (b) liens, security interests, deeds of trust, mortgages and other encumbrances in existence as of the date of this Agreement (including any such lien securing indebtedness that is renewed, extended or refunded, provided that the principal amount of such indebtedness outstanding at the time of such renewal, extension or refunding is not increased and such lien is not extended to any other property) and, in the case of any material lien, security interest, deed of trust, mortgage and other encumbrance, which are disclosed to the Agent and the Banks in writing on or prior to the Closing Date; (c) liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty; (d) liens in connection with workers' compensation, unemployment insurance or other social security obligations; (e) mechanics', worker's, materialmen's, landlords', carriers' or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due; (f) purchase money and other security interests in personal or real property where the security interests do not extend beyond the property, any replacements and accessions thereto, and the proceeds thereof and the amount of indebtedness does not materially exceed the value of the property and, in the aggregate, the amount of all indebtedness so secured does not exceed, at any time, 15% of the Company's consolidated tangible fixed assets; (g) liens on assets of corporations which become Subsidiaries after the date of this Agreement, provided, however, that such liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (h) liens on assets of the Company's Subsidiaries in favor of the Company in connection with extensions of credit made available by the Company to its Subsidiaries as permitted by Section 7.03; (i) liens on assets of the Company granted after the date hereof pursuant existing documentation in favor of United States National Bank of Oregon in connection with letters of credit issued for the Company's account in a maximum aggregate principal amount of $15,000,000; and (j) liens on assets, other than current assets (except for customary rights of set-off and bankers' liens with respect to amounts on deposit), of the Company or its Subsidiaries incurred in the ordinary course of business. (b) The Company will not, and will not permit any of its Subsidiaries to, enter into any contractual obligation which prohibits the creation or assumption of any lien, security interest or encumbrance upon or with respect to any part of its properties or assets (including intangible assets, such as patents and trademarks), whether now owned or hereafter acquired, other than: (i) this Agreement and any other Loan Document; (ii) in connection with extensions of credit by the Company to its Subsidiaries (including Micron Electronics, Inc.) in an aggregate principal amount not to exceed $100,000,000; (iii) in connection with extensions of credit (whether or not guaranteed by the Company) made available by persons other than the Company to the Company's Subsidiaries (including Micron Electronics, Inc.) in an aggregate principal amount not to exceed $100,000,000; and (iv) in connection with equipment financing otherwise permitted by this Agreement, pursuant to which the Company or Subsidiary, as applicable, agrees not to create or assume any lien, security interest or encumbrance (other than in favor of the person providing such financing) upon or with respect to the equipment being financed. 7.02 Sale of Assets; Mergers. Neither the Company nor any of its Subsidiaries shall: (a) sell, lease or otherwise dispose of all or substantially all of the business or assets of the Company and its Subsidiaries taken as a whole; or (b) sell, transfer, lease or dispose of its material assets (greater than $1,000,000 individually) outside the ordinary course of business, provided that the Company and its Subsidiaries may sell, transfer, lease or dispose of assets (other than accounts receivable) with value, in the cumulative aggregate for the Company and its Subsidiaries, of up to 10% of the Company's consolidated tangible assets as of the most recently ended fiscal quarter. The Company shall not liquidate or dissolve or enter into any consolidation, reorganization or merger; except that: (a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation; and (b) the Company or any Subsidiary may enter into a consolidation, reorganization or merger to the extent required in connection with an acquisition permitted pursuant to Section 7.03, provided that the Company or such Subsidiary shall be the continuing or surviving corporation. 7.03 Loans and Investments. Neither the Company nor any of its Subsidiaries shall make any loans, advances or other extensions of credit to, or agree to be liable for the obligations of, or invest in any other person, firm, corporation or other entity, other than: (a) investments in cash equivalents and liquid investments; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by the Company to any of its Subsidiaries or by any of its Subsidiaries to another of its Subsidiaries; (d) incidental loans to employees in the ordinary course of business and as part of their overall compensation package, and (e) equity investments in or loans to another person, firm, corporation or other entity, provided, that (in the case of clause (e) only): (i) the investment or loan is made in the ordinary course of business, (ii) the cumulative aggregate principal amount (in the case of a loan) or the aggregate consideration paid (including the assumption of debt) or assets contributed (in the case of an investment) in all such investements or loans after the Closing Date (including the proposed investment or loan) does not exceed 25% of the consolidated tangible assets of the Company as of the fiscal quarter immediately preceding the proposed investment or loan, (iii) no Default or Event of Default has occurred or would occur as a result of such investment or loan on a pro forma basis, (iv) such investment or loan is undertaken in accordance with all applicable requirements of law, and (v) in connection with any investment or loan that constitutes the acquisition or purchase of control of another person, firm, corporation or other entity, the prior, effective written consent or approval to such acquisition of the board of directors or equivalent governing body of the acquiree is obtained. 7.04 Restricted Payments. Neither the Company nor any of its Subsidiaries shall declare or pay any dividends or distributions on any of its shares now or hereafter existing, or purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto, except that the Company may declare and pay dividends payable from earnings available therefor; provided, that the aggregate amount of such dividends does not exceed 25% of the Company's consolidated net income for the most recently ended fiscal quarter and the three fiscal quarters immediately preceding such quarter. 7.05 Business Activities. The Company shall not engage in any material business activities or operations substantially different from or unrelated to present business activities and operations. 7.06 Regulations G, T, U, and X. The Company shall not, and shall not permit any of its Subsidiaries to, use any portion of the proceeds of any Loans, directly or indirectly, (a) to purchase or carry margin stock (within the meanings of Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System), (b) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry any such margin stock, (c) to extend credit for the purpose of purchasing or carrying any such margin stock, or (d) to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. 7.07 Adjusted Quick Ratio. The Company shall not permit, as of the last day of any fiscal quarter, the ratio of (a) the sum of (i) cash equivalents and liquid investments, and (ii) net trade accounts receivable of the Company and its Subsidiaries on a consolidated basis, to (b) current liabilities of the Company and its Subsidiaries on a consolidated basis (plus long-term liabilities related to customer deposits and any Loans), to be less than 0.50 to 1.00. ARTICLE VIII - EVENTS OF DEFAULT 8.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) any amount of principal of any Loan when due, (ii) any interest or commitment fee payable hereunder within five days after the same becomes due, or (iii) any other amount payable hereunder or under any other Loan Document within 30 days after the same becomes due; or (b) Representation or Warranty. Any representation or warranty made herein or in any other Loan Document is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Sections 6.02, 6.03(b) or 6.08 or in Article VII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 20 days after the earlier of (i) the date upon which a responsible officer knew or reasonably should have known of such failure, and (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Acceleration. Any default occurs under any single agreement involving the borrowing of money or the extension of credit having an aggregate principal amount of more than $10,000,000, or any group of such agreements having an aggregate principal amount of more than $20,000,000, to which the Company or any Subsidiary is a party as borrower, guarantor or installment purchaser, if such default consists of the failure to pay any principal obligation when due at maturity or, as a result of such default, the holder of the obligation concerned accelerates such obligation; or (f) Insolvency. The Company or any Subsidiary (i) ceases to become solvent, (ii) fails to pay the its debts generally as they come due, or (iii) files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors; or an involuntary petition is filed under any bankruptcy or similar statute against the Company or any Subsidiary, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of the Company or any Subsidiary. (g) Judgments. One or more non-interlocutory judgments or arbitration awards are entered against the Company or any of its Subsidiaries, or the Company or any of its Subsidiaries enters into any settlement agreement with respect to any litigation or arbitration, in the aggregate amount of $20,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) Change of Control. If any person or two or more persons acting in concert, other than J.R. Simplot, J.R. Simplot Company, Simplot Canada Limited and any other persons under common control of any of the foregoing, or a member of J.R. Simplot's immediate family, shall either acquire beneficial ownership, directly or indirectly, of, or acquire by contract or otherwise, or enter into a contract or arrangement which upon consummation will result in its or their acquisition of, or control over, securities of the Company (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Company entitled to vote in the election of directors. 8.02 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Banks: (a) declare the commitment of each Bank to make Loans to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection 8.01(f), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 8.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE IX - AGENCY Certain agreements between the Agent and the Banks are set forth in Annex IX hereto. ARTICLE X - MISCELLANEOUS 10.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by all the Banks (or by the Agent at the written request of all the Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to all the Banks, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.02 Notices. All notices, requests, consents, approvals, waivers and other communications shall be in writing and mailed, faxed or delivered to the address or facsimile number designated from time to time by each party in a written notice to the other parties. All such notices, requests and communications shall, when transmitted by overnight delivery or faxed, be effective when delivered for overnight (next-day) delivery or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or Annex IX to the Agent shall not be effective until actually received by the Agent. Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any person purporting to be a person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.04 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA, including in its capacity as Agent, and the Arranger for all reasonable costs and expenses incurred by such persons in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by such person with respect thereto; and (b) pay or reimburse the Agent and each Bank for all costs and expenses (including Attorney Costs) incurred by it in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any insolvency proceeding or appellate proceeding). 10.05 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons and each Bank, and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person"), harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such person in favor of any third-party in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 10.06 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any insolvency proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.07 Successors and Assigns; Participations. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither the Company nor any Bank may assign or transfer (including by participation) any of its rights or obligations under this Agreement without the prior written consent of the Agent. Notwithstanding the foregoing, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve Board or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.08 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.09 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any lending office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.10 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.11 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.12 No Third Parties Benefitted. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.13 Governing Law and Jurisdiction. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 10.14 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.15 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. MICRON TECHNOLOGY, INC. By: W. G. Stover Jr. -------------------------- Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: Wendy M. Young -------------------------- Title: Vice President Commitments: $62,500,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: Michael Mccutchin -------------------------- Title: Vice President $62,500,000 SEATTLE FIRST NATIONAL BANK By: Thomas P. Rook -------------------------- Title: Vice President $62,500,000 BANK OF MONTREAL By: J. Donald Higgins, Managing Director -------------------------- Title: Vice President $62,500,000 UNITED STATES NATIONAL BANK OF OREGON By: Jeff A. Killian -------------------------- Title: Vice President <PAGE> ANNEX I DEFINITIONS; OTHER INTERPRETIVE PROVISIONS; ACCOUNTING PRINCIPLES 1. Definitions. The following terms have the meanings assigned to them: "Agent-Related Persons" means BofA, together with its affiliates (including the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such persons. "Arranger" means BA Securities, Inc., a Delaware corporation. "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel, the reasonable allocated cost of internal legal services and all reasonable disbursements of internal counsel. "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II and, in the case of Offshore Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Closing Date" means the date on which all conditions precedent set forth in Section 4.01 are satisfied or waived by all Banks (or, in the case of subsection 4.01(f), waived by the person entitled to receive such payment). "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Interest Payment Date" means, as to any Offshore Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into an Offshore Rate Loan. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date either one week or one month thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided, that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day, unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (c) no Interest Period for any Loan shall extend beyond the Revolving Termination Date. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, the Notes, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Majority Banks" means at any time Banks then holding at least 75% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having at least 75% of the Commitments. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or condition (financial or otherwise) of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to Section 2.02, in substantially the form of Exhibit C. "Notice of Borrowing" means a notice in substantially the form of Exhibit A hereto. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B hereto. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day in any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day under regulations issued from time to time by the Board of Governors of the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "LIBOR" means, with respect to any Interest Period, the rate of interest per annum determined by the Agent (rounded upward to the next 1/16th of 1%) equal to the rate of interest per annum at which dollar deposits in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan by BofA and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at the Agent's request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Revolving Termination Date" means the earlier to occur of: (a) May 9, 1996, and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Subsidiary" of a person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of persons other than corporations), is owned or controlled directly or indirectly by the person, or one or more of the Subsidiaries of the person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. 2. Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, schedule, exhibit and annex references are to this Agreement unless otherwise specified. The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. The term "including" is not limiting and means "including without limitation." In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (b) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (c) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (d) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 3. Accounting Principles. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared, in accordance with generally accepted accounting principles in effect from time to time in the United States, consistently applied. <PAGE> ANNEX IX AGENCY The Agent and each of the Banks hereby agree among themselves as follows: (a) Appointment and Authorization; "Agent". Each Bank hereby irrevocably (subject to subsection (i) of this Annex IX) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. (c) Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or affiliates. (d) Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. For purposes of determining compliance with the conditions specified in Section 4.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. (e) Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. (f) Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and credit worthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and credit worthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Company which may come into the possession of any of the Agent-Related Persons. (g) Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. (h) Agent in Individual Capacity. BofA and its affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its affiliates may receive information regarding the Company or its affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. (i) Successor Agent. The Agent may, and at the request of the Majority Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent for the Banks, which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Annex IX and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. (j) Withholding Tax. (i) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (A) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (B) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (C) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (ii) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (iii) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (iv) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (v) If the IRS or any other governmental authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. (vi) As used in this Section, "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder, and "IRS" means the Internal Revenue Service, and any governmental authority succeeding to any of its principal functions under the Code. <PAGE> EXHIBIT A NOTICE OF BORROWING Date: _____________, 199__ To: Bank of America National Trust and Savings Association, as Agent for the Banks party to the Revolving Credit Agreement dated as of February 12, 1996 (as amended, the "Credit Agreement") among Micron Technology, Inc., the several financial institutions party thereto (the "Banks"), and Bank of America National Trust and Savings Association, as Agent Ladies and Gentlemen: The undersigned, Micron Technology, Inc. (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.03 of the Credit Agreement, of the Borrowing specified below: 1. The Business Day of the proposed Borrowing is _______________, 199__. 2. The aggregate amount of the proposed Borrowing is $____________. 3. The Borrowing is to be comprised of $___________ of [Base Rate] [Offshore Rate] Loans. [4. The duration of the Interest Period for the Offshore Rate Loans included in the Borrowing shall be one [week] [month].] The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the proposed Borrowing Date, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Company contained in Article V of the Credit Agreement are true and correct as though made on and as of such date; (b) no Default or Event of Default has occurred and is continuing, or would result from such proposed Borrowing; and (c) The proposed Borrowing will not cause the aggregate principal amount of all outstanding Loans to exceed the combined Commitments of the Banks. MICRON TECHNOLOGY, INC. By: ------------------------- Title: <PAGE> EXHIBIT B NOTICE OF CONVERSION/CONTINUATION Date: _____________, 199__ To: Bank of America National Trust and Savings Association, as Agent for the Banks party to the Revolving Credit Agreement dated as of February 12, 1996 (as amended, the "Credit Agreement") among Micron Technology, Inc., the several financial institutions party thereto (the "Banks"), and Bank of America National Trust and Savings Association, as Agent Ladies and Gentlemen: The undersigned, Micron Technology, Inc. (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.04 of the Credit Agreement, of the [conversion] [continuation] of the Loans specified herein, that: 1. The Conversion/Continuation Date is ______________, 199__. 2. The aggregate amount of the Loans to be [converted] [continued] is $_______________. 3. The Loans are to be [converted into] [continued as] [Offshore Rate] [Base Rate] Loans. [4. The duration of the Interest Period for the Offshore Rate Loans included in the [conversion] [continuation] shall be one [week] [month].] The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the proposed Conversion/Continuation Date, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Company contained in Article V of the Credit Agreement are true and correct as though made on and as of such date; and (b) no Default or Event of Default has occurred and is continuing, or would result from such proposed conversion or continuation. MICRON TECHNOLOGY, INC. By: ------------------------ Title: <PAGE> EXHIBIT C FORM OF PROMISSORY NOTE $62,500,000 February 12, 1996 FOR VALUE RECEIVED, the undersigned, Micron Technology, Inc., a Delaware corporation (the "Company"), hereby promises to pay to the order of [Name of Bank] (the "Bank") the principal sum of Sixty-Two Million Five Hundred Thousand Dollars ($62,500,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to the Revolving Credit Agreement, dated as of February 12, 1996 (such Revolving Credit Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Bank, the other banks parties thereto, and Bank of America National Trust and Savings Association, as Agent for the Banks, on the dates and in the amounts provided in the Credit Agreement. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Bank is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on schedules to be annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of California applicable to contracts made and to be performed entirely within such State. MICRON TECHNOLOGY, INC. By: ------------------------- Title: By: ------------------------- Title: </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>4 <TEXT> Exhibit 11 MICRON TECHNOLOGY, INC. Computation of Per Share Earnings (Amounts in millions except for per share amounts) <TABLE> <CAPTION> February 29, March 2, For the quarter ended 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> PRIMARY Weighted average shares outstanding 207.3 204.6 Net effect of dilutive stock options 7.9 8.2 -------- -------- Total shares 215.2 212.8 ======== ======== Net income $ 188.2 $ 183.5 ======== ======== Primary earnings per share $0.87 $0.86 ===== ===== FULLY DILUTED Weighted average shares outstanding 207.3 204.6 Net effect of dilutive stock options 7.9 9.7 -------- -------- Total shares 215.2 214.3 ======== ======== Net income $ 188.2 $ 183.5 ======== ======== Fully diluted earnings per share $0.87 $0.86 ===== ===== </TABLE> 17 <PAGE> Exhibit 11 MICRON TECHNOLOGY, INC. Computation of Per Share Earnings (Amounts in millions except for per share amounts) <TABLE> <CAPTION> February 29, March 2, For the six months ended 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> PRIMARY Weighted average shares outstanding 207.0 204.3 Net effect of dilutive stock options 9.4 7.3 -------- -------- Total shares 216.4 211.6 ======== ======== Net income $ 516.7 $ 342.8 ======== ======== Primary earnings per share $2.39 $1.62 ===== ===== FULLY DILUTED Weighted average shares outstanding 207.0 204.3 Net effect of dilutive stock options 9.4 9.3 -------- -------- Total shares 216.4 213.6 ======== ======== Net income $ 516.7 $ 342.8 ======== ======== Fully diluted earnings per share $2.39 $1.61 ===== ===== </TABLE> 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the accompanying financial statements and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> AUG-29-1996 <PERIOD-END> FEB-29-1996 <CASH> 387 <SECURITIES> 11 <RECEIVABLES> 454 <ALLOWANCES> 35 <INVENTORY> 294 <CURRENT-ASSETS> 1,213 <PP&E> 3,039 <DEPRECIATION> 720 <TOTAL-ASSETS> 3,642 <CURRENT-LIABILITIES> 850 <BONDS> 144 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 21 <OTHER-SE> 2,393 <TOTAL-LIABILITY-AND-EQUITY> 3,642 <SALES> 2,182 <TOTAL-REVENUES> 2,182 <CGS> 1,090 <TOTAL-COSTS> 1,361 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (13) <INCOME-PRETAX> 834 <INCOME-TAX> 317 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 517 <EPS-PRIMARY> 2.39 <EPS-DILUTED> 2.39 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

NAV

https://www.sec.gov/Archives/edgar/data/808450/0000808450-96-000003.txt

-----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, An/j3U6sZVkfKvasptyHFc1gWPFIRJOOAQkYy9TBDWVKMFpDm2FoGnrohIczngP3 nD58axhrXyxalZbGvvCm8w== <SEC-DOCUMENT>0000808450-96-000003.txt : 19960311 <SEC-HEADER>0000808450-96-000003.hdr.sgml : 19960311 ACCESSION NUMBER: 0000808450-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960308 SROS: CSE SROS: NASD SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW CENTRAL INDEX KEY: 0000808450 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 363359573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09618 FILM NUMBER: 96533061 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362032 MAIL ADDRESS: STREET 2: 455 N CITYFRONT PLAZA DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NAVISTAR HOLDING INC DATE OF NAME CHANGE: 19870528 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE 1> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1996 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 1-9618 N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 -------------------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of March 6, 1996, the number of shares outstanding of the registrant's Common Stock was 50,986,025 and the Class B Common Stock was 24,292,206. <PAGE> <PAGE 2> NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES -------------------------- INDEX --------- Page Reference --------- Part I. Financial Information: Item 1. Financial Statements: Statement of Income -- Three Months Ended January 31, 1996 and 1995 .......... 3 Statement of Financial Condition -- January 31, 1996, October 31, 1995 and January 31, 1995 4 Statement of Cash Flow -- Three Months Ended January 31, 1996 and 1995 .......... 5 Notes to Financial Statements ........................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............... 8 Part II. Other Information: Item 1. Legal Proceedings ................................ 11 Item 6. Exhibits and Reports on Form 8-K ................. 11 Signature ........................................ 12 Exhibit 11 ....................................... E-1 <PAGE> <PAGE 3> PART I - FINANCIAL INFORMATION ------------------------------ <TABLE> <CAPTION> ITEM 1. Financial Statements STATEMENT OF INCOME (Unaudited) ----------------------------------------------------------------------------------------------------------------------- Millions of dollars, except per share data ----------------------------------------------------------------------------------------------------------------------- Three Months Ended January 31 ------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries Manufacturing* Financial Services* ------------------------- ------------------ ------------------ 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> Sales and revenues Sales of manufactured products ........... $1,362 $1,367 $1,362 $1,367 $ - $ - Finance and insurance revenue ............ 55 35 - - 67 48 Other income ............................. 15 14 15 11 3 4 ------ ------ ------ ------ ------ ------ Total sales and revenues ............... 1,432 1,416 1,377 1,378 70 52 ------ ------ ------ ------ ------ ------ Costs and expenses Cost of products and services sold ....... 1,199 1,198 1,196 1,197 3 1 Postretirement benefits .................. 57 50 57 49 - 1 Engineering and research expense ......... 29 24 29 24 - - Marketing and administrative expense ..... 73 69 65 62 8 7 Interest expense ......................... 18 20 1 2 20 19 Financing charges on sold receivables .... 9 6 21 19 - - Insurance claims and underwriting expense. 12 13 - - 12 13 ------ ------ ------ ------ ------ ------ Total costs and expenses ............... 1,397 1,380 1,369 1,353 43 41 ------ ------ ------ ------ ------ ------ Income before income taxes Manufacturing .......................... - - 8 25 - - Financial Services ..................... - - 27 11 - - ------ ------ ------ ------ ------ ------ Income before income taxes ........... 35 36 35 36 27 11 Income tax expense ................... (13) (13) (13) (13) (10) (4) ------ ------ ------ ------ ------ ------ Net income ............................... 22 23 $ 22 $ 23 $ 17 $ 7 ====== ====== ====== ====== Less dividends on Series G preferred stock 7 7 ------ ------ Net income applicable to common stock .... $ 15 $ 16 ====== ====== Net income per common share .............. $ .20 $ .21 ====== ====== Average number of common and dilutive common equivalent shares outstanding (millions) ................. 73.8 74.5 <FN> See Notes to Financial Statements. * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly owned subsidiary, Navistar Financial Corporation, and other wholly owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns. The basis of consolidation is described in Note A. </TABLE> <PAGE> <PAGE 4> <TABLE> <CAPTION> STATEMENT OF FINANCIAL CONDITION (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Millions of dollars - ------------------------------------------------------------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries Manufacturing* Financial Services* -------------------------------- -------------------------------- -------------------------------- January 31 October 31 January 31 January 31 October 31 January 31 January 31 October 31 January 31 1996 1995 1995 1996 1995 1995 1996 1995 1995 ------ ------ ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS - ----------------------------------- Cash and cash equivalents ......... $ 186 $ 485 $ 346 $ 162 $ 461 $ 311 $ 24 $ 24 $ 35 Marketable securities ............. 620 555 363 477 415 227 143 140 136 ------ ------ ------ ------ ------ ------ ------ ------ ------ 806 1,040 709 639 876 538 167 164 171 Receivables, net .................. 1,511 1,854 1,347 163 274 241 1,371 1,672 1,192 Inventories ....................... 498 416 475 498 416 475 - - - Property, net of accumulated depreciation and amortization of $783, $764 and $703 .......... 684 683 583 634 642 547 50 41 36 Equity in Financial Services subsidiaries .................... - - - 290 282 257 - - - Investments and other assets ...... 168 166 191 131 122 162 37 44 29 Prepaid and intangible pension assets .................. 320 320 359 319 319 358 1 1 1 Deferred tax asset ................ 1,080 1,087 1,123 1,080 1,087 1,123 - - - ------ ------ ------ ------ ------ ------ ------ ------ ------ Total assets ...................... $5,067 $5,566 $4,787 $3,754 $4,018 $3,701 $1,626 $1,922 $1,429 ====== ====== ====== ====== ====== ====== ====== ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Liabilities Accounts payable .................. $ 822 $ 933 $ 791 $ 759 $ 876 $ 736 $ 77 $ 146 $ 141 Debt .............................. 1,223 1,457 988 127 127 127 1,096 1,330 861 Postretirement benefits liability . 1,272 1,341 1,313 1,264 1,334 1,306 8 7 7 Other liabilities ................. 864 965 855 718 811 692 155 157 163 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total liabilities ............. 4,181 4,696 3,947 2,868 3,148 2,861 1,336 1,640 1,172 ------ ------ ------ ------ ------ ------ ------ ------ ------ Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) .................. 240 240 240 240 240 240 - - - Series D convertible junior preference stock (liquidation preference $4 million) .......... 4 4 4 4 4 4 - - - Common stock (51.0, 50.9 and 50.1 million shares issued) ..... 1,641 1,641 1,628 1,641 1,641 1,628 178 178 178 Class B Common stock (24.3, 24.3 and 25.0 million shares issued) . 491 491 501 491 491 501 - - - Retained earnings (deficit) - balance accumulated after the deficit reclassification ........ (1,460) (1,478) (1,515) (1,460) (1,478) (1,515) 112 104 79 Common stock held in treasury, at cost ........................ (30) (28) (18) (30) (28) (18) - - - ------ ------ ------ ------ ------ ------ ------ ------ ------ Total shareowners' equity ..... 886 870 840 886 870 840 290 282 257 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total liabilities and shareowners' equity ........ $5,067 $5,566 $4,787 $3,754 $4,018 $3,701 $1,626 $1,922 $1,429 ====== ====== ====== ====== ====== ====== ====== ====== ====== <FN> See Notes to Financial Statements. * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly owned subsidiary, Navistar Financial Corporation, and other wholly owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns. The basis of consolidation is described in Note A. </TABLE> <PAGE> <PAGE 5> <TABLE> <CAPTION> STATEMENT OF CASH FLOW (Unaudited) ---------------------------------------------------------------------------------------------------------------------- For the Three Months Ended January 31 (Millions of dollars) ---------------------------------------------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries Manufacturing* Financial Services* ------------------------- ------------------ ------------------ 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> Cash flow from operations Net Income ............................... $ 22 $ 23 $ 22 $ 23 $ 17 $ 7 Adjustments to reconcile net income to cash provided by (used in) operations: Depreciation and amortization .......... 26 21 24 19 2 2 Equity in earnings of Financial Services, net of dividends received ............ - - (7) (7) - - Deferred income taxes .................. 10 11 10 11 - - Change in operating assets and liabilities: Receivables ............................ 87 26 108 15 (1) - Inventories ............................ (84) (49) (84) (49) - - Prepaid and other current assets ....... (13) (13) (13) (13) - - Accounts payable ....................... (107) (39) (114) (38) (69) (15) Other liabilities ...................... (168) 20 (167) 16 1 6 Other, net ............................... (5) (2) 5 1 (10) (3) ------ ------ ------ ------ ------ ------ Cash used in operations .................. (232) (2) (216) (22) (60) (3) ------ ------ ------ ------ ------ ------ Cash flow from investment programs Purchase of retail notes and lease receivables ............................ (265) (216) - - (265) (216) Collections/sales of retail notes and lease receivables .................. 521 338 - - 521 338 Acquisitions in excess of cash collections of wholesale notes and accounts receivable ............................ - - - - 54 23 Purchase of marketable securities ........ (243) (102) (218) (89) (25) (13) Sales or maturities of marketable securities ............................. 184 43 160 28 24 15 Proceeds from property sold under sale/leaseback ................... 8 - 8 - - - Capital expenditures ..................... (23) (18) (23) (18) - - Advance to Navistar Financial ............ - - - (84) - 84 Other investment programs, net ........... (12) (5) (2) 3 (10) (8) ------ ------ ------ ------ ------ ------ Cash provided by (used in) investment programs ............................... 170 40 (75) (160) 299 223 ------ ------ ------ ------ ------ ------ Cash flow from financing activities Principal payments on debt ............... (1) (406) (1) (6) - (400) Net increase (decrease) in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs ........ (229) 164 - 7 (229) 157 Dividends paid ........................... (7) (7) (7) (7) (10) - ------ ------ ------ ------ ------ ------ Cash used in financing activities ........ (237) (249) (8) (6) (239) (243) ------ ------ ------ ------ ------ ------ Cash and cash equivalents Decrease during the period ............. (299) (211) (299) (188) - (23) At beginning of the year ............... 485 557 461 499 24 58 ------ ------ ------ ------ ------ ------ Cash and cash equivalents at end of the period ................... $ 186 $ 346 $ 162 $ 311 $ 24 $ 35 ====== ====== ====== ====== ====== ====== <FN> See Notes to Financial Statements. * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly owned subsidiary, Navistar Financial Corporation, and other wholly owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns. The basis of consolidation is described in Note A. </TABLE> <PAGE> <PAGE 6> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note A. Summary of Accounting Policies Navistar International Corporation is a holding company whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "Company" refers to Navistar International Corporation and its consolidated subsidiaries. The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the 1995 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein. In addition to the consolidated financial statements, the Company has elected to provide financial information in a format that presents the operating results, financial condition and cash flow designated as "Manufacturing" and "Financial Services." As used herein and in the 1995 Annual Report on Form 10-K, Manufacturing includes the consolidated financial results of the Company's manufacturing operations with its wholly owned financial services subsidiaries included on a one-line basis under the equity method of accounting. Financial Services includes the consolidated financial results of Navistar Financial Corporation (Navistar Financial), its domestic insurance subsidiary and foreign finance and insurance subsidiaries. In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flow for the periods presented. Interim results are not necessarily indicative of results for the full year. Certain 1995 amounts have been reclassified to conform with the presentation used in the 1996 financial statements. Note B. Supplemental Cash Flow Information On the Statement of Cash Flow, "Acquisitions in excess of cash collections" relating to Financial Services' wholesale notes and accounts receivable are included on a consolidated basis as a change in operating assets and liabilities under cash flow from operations and in Financial Services as cash flow from investment programs. Consolidated interest payments during the first three months of 1996 and 1995 were $24 million and $18 million, respectively. There were no consolidated tax payments made during the first three months of 1996 or 1995. Note C. Income Taxes The benefit of Net Operating Loss (NOL) carryforwards is recognized as a deferred tax asset in the Statement of Financial Condition, while the Statement of Income includes income taxes calculated at the statutory rate. The amount reported does not represent cash payment of income taxes except for certain state income, foreign withholding and federal alternative minimum taxes which are not material. In the Statement of Financial Condition, the deferred tax asset is reduced by the amount of deferred tax expense or increased by a deferred tax benefit recorded during the year. Until the Company has utilized its significant NOL carryforwards, the cash payment of income taxes will be minimal. <PAGE> <PAGE 7> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note D. Inventories Inventories are as follows: January 31 October 31 January 31 Millions of dollars 1996 1995 1995 - ------------------------------------------------------------------------- Finished products ............. $ 244 $ 167 $ 202 Work in process ............... 106 91 112 Raw materials and supplies .... 148 158 161 -------- -------- -------- Total inventories ............. $ 498 $ 416 $ 475 ======== ======== ======== Note E. Financial Instruments Navistar Financial enters into forward interest rate contracts to manage its exposures to fluctuations in funding costs from the anticipated securitization and sale of retail notes. Gains or losses incurred with the closing of these agreements are included as a component of the gain or loss on the sale of receivables. During the first quarter of 1996, Navistar Financial did not enter into any interest rate contracts. In February 1996, Navistar Financial entered into $200 million of interest rate lock agreements maturing on May 31, 1996, on a Treasury note maturing in 1998 related to the anticipated sale of retail receivables in May or June of 1996. Note F. Legal Proceedings In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equipment, Inc. (Klein Truck) and against Transportation in the amount of $11 million in compensatory damages and $15 million in punitive damages. The Company appealed the verdict and in order to do so was required to post a bond collateralized with $30 million in cash. In November 1994, the Court of Appeals of the State of Oklahoma reversed the verdict and entered judgment in favor of Transportation on virtually all aspects of the case. Klein Truck appealed to the Oklahoma Supreme Court where the case is now pending. The bond and the related collateral will be released when the order of the Oklahoma Supreme Court is filed. Note G. Environmental Matters In the fourth quarter of 1994, Transportation recorded a charge for potential clean-up costs related to two formerly owned businesses, Wisconsin Steel and Solar Turbines, Inc. (Solar), as disclosed in Note 5 to the Company's Annual Report on Form 10-K. During the third quarter of 1995, Transportation and Solar Turbines, Inc. (Solar) entered into an agreement providing for the joint funding of future site studies and necessary corrective action at the facility. The agreement also provides for arbitration to resolve a dispute over past remediation costs incurred by Solar. There has been no change in the Company's estimate of the anticipated clean-up costs of the Wisconsin Steel and Solar sites reported at October 31, 1995. <PAGE> <PAGE 8> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Consolidated The Company reported net income of $22 million, or $0.20 per common share for the first quarter ended January 31, 1996, compared with net income of $23 million, or $0.21 per common share for the same period last year. Consolidated sales and revenues for the first quarter of 1996 totalled $1,432 million, a slight increase from the $1,416 million reported for the comparable quarter in 1995. Manufacturing Manufacturing, excluding Financial Services, reported income before income taxes of $8 million compared with $25 million in the first quarter of 1995. The change reflects lower production caused by severe winter weather and a decline in demand for trucks partially offset by higher demand for mid-range diesel engines and the effect of various cost improvement initiatives. Sales and Revenues. First quarter 1996 industry retail sales of Class 5 through 8 trucks totalled 80,700 units, a decrease of 10% over 1995. Class 8 heavy truck sales of 48,400 units during the first quarter of 1996 were 11% lower than the 1995 level of 54,400 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, declined 8% to 32,200 units. Industry sales of school buses, which accounted for 21% of the medium truck market, increased 4%. Shipments of mid-range diesel engines by the Company to original equipment manufacturers during the first quarter of 1996 totalled 37,900 units, a 15% increase from the same period of 1995. Higher shipments to a major automotive manufacturer to meet consumer demand for the light trucks and vans which use this engine were the primary reason for the increase. Manufacturing's sales of trucks, diesel engines and service parts for the first quarter of 1996 totalled $1,362 million compared with $1,367 million reported for the same period in 1995. The Company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market with a 25.1% market share for the first quarter of 1996, a decline from the 26.3% market share reported in 1995. Service parts sales of $177 million in the first quarter of 1996 declined slightly from the prior year's level. Operating Costs and Expenses. Manufacturing gross margin was 12.2% of sales for the first quarter of 1996 compared with 12.4% for the same period in 1995. The decrease in gross margin is primarily the result of weather related costs and lower sales volumes partially offset by improved operating efficiency. Marketing and administrative expense increased to $65 million in 1996 from $62 million in the first quarter of 1995 primarily as a result of the Company's acquisition of the American Transportation Corporation (AmTran) in August 1995. Engineering and research expense increased to $29 million in the first quarter of 1996 from $24 million in 1995 reflecting investment in the next generation of trucks and diesel engines as well as improvements to existing products. <PAGE> <PAGE 9> Financial Services Financial Services' pretax income for the first three months of 1996 was $27 million, an increase from the $11 million reported in 1995. Navistar Financial was responsible for the change which reflects higher income on sales of retail notes and an increased volume of wholesale financing. During the first quarter of 1996, sales of receivables totalled $525 million with a gain of $12 million compared with $315 million sold a year ago with a small loss. The improved gains on sales resulted from higher margins on retail notes reflecting declining market interest rates. LIQUIDITY AND CAPITAL RESOURCES Consolidated Consolidated cash flow is generated from the manufacture, sale and financing of trucks, diesel engines and service parts. Total cash, cash equivalents and marketable securities of the Company amounted to $806 million at January 31, 1996, $1,040 million at October 31, 1995 and $709 million at January 31, 1995. Manufacturing Cash used in operations during the first quarter of 1996 totalled $216 million, primarily from a net change in operating assets and liabilities of $270 million. The net change in operating assets and liabilities includes a $108 million decrease in receivables offset by a reduction in accounts payable of $114 million resulting from lower production, higher inventories and a $167 million decrease in other liabilities. The decline in other liabilities is the result of the payment to employees as required by the Company's profit sharing agreements as well as the timing of pension funding. Investment programs used $23 million in cash to fund capital expenditures for truck product improvement, to increase diesel engine production capacity and to improve cost performance. Financing programs used cash to pay $7 million in dividends on the Series G Preferred shares. At January 31, 1996, the Company had outstanding capital commitments of $41 million. The commitments include truck and engine product development and ongoing facility maintenance programs. The Company finances capital expenditures principally through internally generated cash. Capital leasing is used to fund selected projects based on economic and operating factors. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements, capital expenditures and anticipated payments of preferred dividends. Financial Services Operations used $60 million in cash in the first quarter of 1996 primarily reflecting a payment to Manufacturing. Investment programs provided $299 million during this period principally as a result of collections, on and sales of, retail notes. Financing activities used cash generated from investment programs to reduce debt by $229 million. Receivable sales were a significant source of funding in 1996 and 1995. During the first quarter of 1996, Navistar Financial sold $525 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), realizing net proceeds from the sale of $495 million. During the same period in 1995, Navistar Financial sold $315 million of retail notes receivable with net proceeds of $295 million. In both years, the net proceeds were used for general working capital purposes. <PAGE> <PAGE 10> On November 14, 1995, NFRRC filed an additional registration statement with the Securities and Exchange Commission providing for the issuance from time to time of an additional $2,000 million of asset-backed securities. At January 31, 1996, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $2,905 million. At January 31, 1996, available funding under Navistar Financial's amended and restated credit facility and the asset-backed commercial paper facility was $384 million, of which $57 million was used to back short-term debt at January 31, 1996. The remaining $327 million, when combined with unrestricted cash and cash equivalents made $333 million available to fund the general business purposes of Navistar Financial at January 31, 1996. Management believes that collections on the outstanding receivables portfolios, as well as funds available from various funding sources, will permit the Financial Services subsidiaries to meet the financing requirements of the Company's dealers and customers. Business Environment Sales of Class 5 through 8 trucks are cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. As a result of a general slowdown in economic activity in the United States, the Class 5 through 8 truck market has experienced a significant decline in the rate of new truck orders. During the latter half of 1995, this slowdown was responsible for an increase in the cancellation of some existing orders which were originally placed during 1994 and early 1995 in anticipation of continued growth in the economy. The decline in the number of new orders, in combination with high retail delivery rates throughout 1995, has reduced the Company's backlog of unfilled truck orders by 52% to 34,400 units at January 31, 1996 from 71,500 units at January 31, 1995. Accordingly, retail deliveries in 1996 will be highly dependent on the rate at which new truck orders are received. The Company will evaluate order receipts and backlog throughout the year and will balance production with demand as appropriate. As a result of a decline in truck orders which reflect a softening of certain key economic indicators in the truck industry, the Company currently projects 1996 United States and Canadian Class 8 heavy truck demand to be 173,000 units, a 24% decrease from 1995. Class 5, 6 and 7 medium truck demand, including school buses, is forecast at 146,500 units, a 4% decrease from 1995. Diesel engine shipments by the Company to original equipment manufacturers in 1996 are expected to be approximately 157,000 units, unchanged from 1995. The Company's service parts sales are expected to grow 5% to $766 million. <PAGE> <PAGE 11> PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings Incorporated herein by reference from Item 3 - "Legal Proceedings" in the Company's definitive Form 10-K dated January 26, 1996, Commission File No. 1-9618. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10-Q Page --------- 11. Computation of Net Income Per Share E-1 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended January 31, 1996. <PAGE> <PAGE 12> SIGNATURE --------- 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. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ---------------------------------- J. Steven Keate Vice President and Controller March 8, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> <PAGE 1> EXHIBIT 11 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- COMPUTATION OF NET INCOME PER COMMON SHARE (UNAUDITED) A. Primary: See the Statement of Income of this Form 10-Q. B. Full Dilution: Net income per common share assuming full dilution is computed by assuming that all options and warrants which are exercisable below market prices are exercised and the proceeds applied to reduce common stock outstanding. The computations assume that convertible preferred and preference stock are converted to common stock. Income is divided by the average number of common shares outstanding and unconditionally issuable at the end of each month during the period, adjusted for the net effects of the exercise of options and warrants and the conversion of convertible preferred and preference stocks. THREE MONTHS ENDED JANUARY 31 ------------------ Millions of Dollars 1996 1995 - ------------------------------------------------------------------- Net income ................................... $ 22 $ 23 ======== ======== Average Common and common equivalent shares (millions): Average common shares outstanding as adjusted per primary calculations ....... 73.8 74.5 Assuming conversion of Series G Preferred Stock ................ .6 .6 -------- -------- Average common and dilutive common equivalent shares as adjusted ....... 74.4 75.1 ======== ======== Net income per common share assuming full dilution (dollars): Net income ................................... $ .29 # $ .31 # ======== ======== - --------------- # This calculation is submitted in accordance with Regulation S-K item 601(b)(11) of the Securities Exchange Act although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1996 <PERIOD-END> JAN-31-1996 <CASH> 186 <SECURITIES> 620 <RECEIVABLES> 1,537 <ALLOWANCES> (26) <INVENTORY> 498 <CURRENT-ASSETS> 0<F1> <PP&E> 1,467 <DEPRECIATION> (783) <TOTAL-ASSETS> 5,067 <CURRENT-LIABILITIES> 0<F1> <BONDS> 1,223 <PREFERRED-MANDATORY> 0 <PREFERRED> 244 <COMMON> 2,132 <OTHER-SE> (1,490) <TOTAL-LIABILITY-AND-EQUITY> 5,067 <SALES> 1,362 <TOTAL-REVENUES> 1,432 <CGS> 1,199 <TOTAL-COSTS> 1,397 <OTHER-EXPENSES> 57 <LOSS-PROVISION> 2 <INTEREST-EXPENSE> 18 <INCOME-PRETAX> 35 <INCOME-TAX> (13) <INCOME-CONTINUING> 22 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 22 <EPS-PRIMARY> .20 <EPS-DILUTED> .20 <FN> <F1>The Company has adopted an unclassified presentation in the Statement of Financial Condition. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

NKE

https://www.sec.gov/Archives/edgar/data/320187/0000320187-96-000001.txt

-----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, Hb+nW+cQJJvfZUJnK60DQddeojKOB8ja9sH5nUHKXx7EmJdM3mQXGvAeZ0BJ6ZjO M63MBHiqcLOQOHwaXjy8/g== <SEC-DOCUMENT>0000320187-96-000001.txt : 19960117 <SEC-HEADER>0000320187-96-000001.hdr.sgml : 19960117 ACCESSION NUMBER: 0000320187-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIKE INC CENTRAL INDEX KEY: 0000320187 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 930584541 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10635 FILM NUMBER: 96503731 BUSINESS ADDRESS: STREET 1: ONE BOWERMAN DR CITY: BEAVERTON STATE: OR ZIP: 97005-6453 BUSINESS PHONE: 5036416453 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter Ended November 30, 1995 Commission file number - 1-10635 NIKE, Inc. (Exact name of registrant as specified in its charter) OREGON 93-0584541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Bowerman Drive, Beaverton, Oregon 97005-6453 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 671-6453 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 . ___ ___ Common Stock shares outstanding as of November 30, 1995 were: _________________ Class A 51,339,669 Class B 91,900,596 _________________ 143,240,265 ========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Nov. 30, May 31, 1995 1995 ________ _______ (in thousands) ASSETS Current assets: Cash and equivalents $ 204,826 $ 216,071 Accounts receivable 1,184,844 1,053,237 Inventories (Note 3) 710,848 629,742 Deferred income taxes 78,760 72,657 Prepaid expenses 97,436 74,221 __________ _________ Total current assets 2,276,714 2,045,928 __________ _________ Property, plant and equipment 964,364 891,213 Less accumulated depreciation 363,875 336,334 __________ __________ 600,489 554,879 Identifiable intangible assets and goodwill 485,725 495,907 Other assets 48,485 46,031 __________ __________ $3,411,413 $3,142,745 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,762 $ 31,943 Notes payable 443,047 397,100 Accounts payable 277,217 297,656 Accrued liabilities 394,805 345,224 Income taxes payable 30,043 35,612 __________ __________ Total current liabilities 1,147,874 1,107,535 Long-term debt 13,728 10,565 Non-current deferred income taxes 17,454 17,789 Other long-term liabilities 34,415 41,867 Commitments and contingencies (Note 4) - - Redeemable Preferred Stock 300 300 Shareholders' equity: Common Stock at stated value (Note 2): Class A convertible-51,340 and 51,790 shares outstanding 153 155 Class B-91,900 and 91,100 shares outstanding 2,701 2,698 Capital in excess of stated value 141,394 122,436 Foreign currency translation adjustment (9,705) 1,585 Retained earnings 2,063,099 1,837,815 ___________ __________ 2,197,642 1,964,689 ___________ __________ $3,411,413 $3,142,745 ========== ========== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, __________________ __________________ 1995 1994 1995 1994 ____ ____ ____ ____ (in thousands, except per share data) <S> <C> <C> <C> <C> Revenues $1,443,027 $1,053,746 $3,057,676 $2,224,101 _________ _________ _________ _________ Costs and expenses: Cost of sales 875,446 640,031 1,842,968 1,340,478 Selling and administrative 358,583 268,873 718,108 561,167 Interest 7,984 3,941 19,361 8,698 Other expense (income) 8,798 1,662 17,142 832 ________ ________ _________ _________ 1,250,811 914,507 2,597,579 1,911,175 ________ ________ _________ _________ Income before income taxes 192,216 139,239 460,097 312,926 Income taxes 74,000 54,300 177,100 122,000 ________ ________ _________ _________ Net income $ 118,216 $ 84,939 $ 282,997 $ 190,926 ========= ========= ========== ========== Net income per common share(Note 2) $ 0.80 $ 0.58 $ 1.93 $ 1.29 ========= ========= ========== ========== Dividends declared per common share $ 0.15 $ 0.13 $ 0.28 $ 0.23 ========= ========= ========== ========== Average number of common and common equivalent shares (Note 2) 146,994 146,738 146,420 147,596 ========= ========= ========== ========== </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended November 30, _________________ 1995 1994 ____ ____ (in thousands) <S> <C> <C> Cash provided (used) by operations: Net income $282,997 $190,926 Income charges (credits) not affecting cash: Depreciation 40,977 31,079 Deferred income taxes and purchased tax benefits (7,388) (698) Other non-current liabilities (7,452) 3,410 Other 18,147 5,111 Changes in other working capital components (215,964) (44,477) ________ _______ Cash provided by operations 111,317 185,351 ________ _______ Cash provided (used) by investing activities: Acquisition of business: Net assets acquired -- (10,264) Goodwill and other intangibles acquired -- (10,347) Additions to property, plant and equipment (94,730) (59,961) Disposals of property, plant and equipment 3,053 5,811 Increase in other assets (2,786) (4,952) _______ _______ Cash used by investing activities (94,463) (79,713) _______ _______ Cash (used) provided by financing activities: Additions to long-term debt 1,012 1,019 Reductions in long-term debt including current portion (27,118) (4,549) Increase in notes payable 45,947 484 Proceeds from exercise of options 12,710 1,810 Repurchase of stock (18,756) (59,995) Dividends paid - common and preferred (35,800) (29,295) _______ _______ Cash used by financing activities (22,005) (90,526) _______ _______ Effect of exchange rate changes on cash (6,094) 12,177 _______ _______ Net (decrease) increase in cash and equivalents (11,245) 27,289 Cash and equivalents, May 31, 1995 and 1994 216,071 518,816 _______ _______ Cash and equivalents, November 30, 1995 and 1994 $204,826 $546,105 ======== ======== </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Summary of significant accounting policies: ___________________________________________ Basis of Presentation: The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period(s). The interim financial information and notes thereto should be read in conjunction with the Company's latest annual report to shareholders. The results of operations for the three and six months ended November 30, 1995 are not necessarily indicative of results to be expected for the entire year. NOTE 2 - Net income per common share: ___________________________ Net income per common share is computed based on the weighted average number of common and common equivalent (stock option) shares outstanding for the period(s). On October 30, 1995, the Company effected a two-for-one split of the outstanding Class A and Class B Common Stock in the form of a 100% stock dividend. The applicable outstanding shares and net income per common share figures for previous periods have been restated to reflect this change. NOTE 3 - Inventories: ___________ Inventories by major classification are as follows: Nov. 30, May 31, 1995 1995 ________ ________ (in thousands) Finished goods $686,725 $618,521 Work-in-process 21,701 9,064 Raw materials 2,422 2,157 ________ ________ $710,848 $629,742 ======== ======== NOTE 4 - Commitments and contingencies: _____________________________ There have been no other significant subsequent developments relating to the commitments and contingencies reported on the Company's most recent Form 10-K. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating Results _________________ Net income increased 39.2% and 48.2% for the second quarter ended and six months ended November 30, 1995, respectively, over the prior year's comparable periods. Net income for the quarter and six months ended November 30, 1995 totaled $118.2 million, or $0.80 per share, and $283.0 million, or $1.93, respectively, compared with $84.9, or $0.58 per share, and $190.9, or $1.29 per share, for the same periods last year. For the quarter ended November 30, 1995, as compared to the prior year revenues increased 37% to a record $1.443 billion, gross margin percentage remained flat at 39.3%, and selling and administrative expenses was reduced 0.7 percentage points as a percentage of revenues, to 24.8%. This was the Company's seventh consecutive quarter of record revenues and fifth consecutive quarter of record net income, comopared to the same period of the prior year. Revenues for the quarter increased $389.3 million over the $1.054 billion reported in the same period of the prior year, reflecting increases in nearly all categories of both footwear and apparel in the U.S. and internationally. U.S. revenues increased $180.9 million, or 33%, lead by apparel which increased $97.9 million, or 100%, to $195.8 million compared with the second quarter last year. U.S. footwear increased $83 million, or 18%, to $538.5 million, resulting from a 12% increase in pairs shipped and a 6% increase in average selling price. Revenues from international (non-U.S.) operations increased $133.3 million, or 30%, to $573.3 million, composed of 29% a nd 34% increases in international footwear and apparel revenues, respectively. Comparisons of units and average selling price is not as meaningful to apparel due to the significant variation of apparel product mix. Other brands, which includes Cole Haan (R), Tetra Plastics, Sports Specialties and Canstar Sports, increased $75.0 million. $67.0 million of this increase relates to Canstar Sports, which was acquired in the third quarter of the prior fiscal year. The breakdown of revenues follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, 1995 1994 % Change 1995 1994 % Change ____ ____ ___ ____ ____ ___ (in thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Footwear $ 538,497 $ 455,459 18% $1,330,065 $1,110,601 20% U.S. Apparel 195,795 97,884 100 378,278 192,619 96 __________ __________ __________ _________ Total United States 734,292 553,343 33 1,708,343 1,303,220 31 __________ __________ __________ _________ International Footwear 394,712 306,828 29 761,390 583,290 31 International Apparel 178,615 133,184 34 304,649 218,318 40 __________ __________ __________ _________ Total International 573,327 440,012 30 1,066,039 801,608 33 __________ __________ __________ _________ Other Brands 135,408 60,391 124 283,294 119,273 138 __________ __________ _________ _________ Total Revenues $1,443,027 $1,053,746 37% $3,057,676 $2,224,101 37% ========== ========== === ========= ========= === </TABLE> Consolidated gross margin percentage remained flat at 39.3% and 39.7% for the quarter and six months ended November 30, 1995, respectively, compared with the same periods last year. Strong demand for NIKE products worldwide combined with sound inventory management resulted in continued stable margins. The Company continues to place strong emphasis on inventory management, minimizing foreign exchange risk and production sourcing in order to maximize gross profit. Gross profit percentages for the remaining six months of fiscal year 1996 are expected to be affected by strong demand for NIKE products offset by continued increased levels of air freight to meet the delivery dates on increasing customer orders. Selling and administrative expenses increased $89.7 million and $156.9 million for the quarter and six months ended November 30, 1995, respectively, compared with same periods last year. For the quarter, U.S. NIKE brand operations accounted for the majority of the increase, up $57 million, primarily in planned marketing and advertising expenses. International expenses increased $20 million for the quarter over last year, with $4 million due to the effect of exchange rate fluctuations. Canstar Sports added $11 million of expenses. The Company expects to continue to invest in growth opportunities and to increase marketing expenses in order to ensure the successful sell-through of the unprecedented volume of customer orders discussed below. As a result, the Company expects that selling and administrative expenses as a percentage of revenues for the remaining six months of the this fiscal year will increase to levels consistent with the prior year. Interest expense increased $4.0 million and $10.7 million for the quarter and six months ended November 30, 1995, respectively, compared with the same periods last year. The increase is due to increased short term borrowings in the U.S. and international operations needed to fund current operations. In the prior year, cash and equivalents were higher through November 30, as available cash was subsequently used to fund the third quarter acquisition of Canstar Sports. Other expense increased $7.1 million and $16.3 million for the quarter and six months ended November 30, 1995, respectively, compared with the same periods last year. The increase is primarily due to increased goodwill amortization resulting from the acquisition of Canstar Sports, and decreased interest income from lower available cash. The Company's effective tax rate for both the quarter and six months ended November 30, 1995 was 38.5%, compared to 39.0% in both of the prior year's comparable periods. The Company anticipates that the tax rate will remain at 38.5% for fiscal year 1996. Worldwide orders for NIKE Brand athletic footwear and apparel scheduled for delivery from December 1995 through April 1996 are approximately $2.7 billion, 34% higher than such orders booked in the comparable period of the prior year. These orders are not necessarily indicative of total revenues over that period because the mix of advance orders and "at once" shipments may vary significantly from quarter to quarter and year to year. Additionally, as international operations continue to account for a greater percentage of total revenues and place greater emphasis on futures orders, this mix again may vary. Finally, exchange rates can cause differences in the comparisons. Liquidity and Capital Resources The Company's financial position remains strong, with working capital rising $190 million since May 31, 1995. In addition, the working capital ratio increased from 1.8:1 at May 31, 1995 to 2.0:1 at November 30, 1995. Cash and equivalents decreased $11.2 million from May 31, 1995. Cash provided by operations was reduced by changes in other working capital components discussed below. Other significant uses of cash included additions to property, plant and equipment, reductions in long-term debt and dividends paid. The most significant source of cash was from an increase in notes payable. The decrease in cash due to other working capital components was due primarily to increases in accounts receivable and inventories, offset by increases in accrued liabilities. The increase in accounts receivable of $131.6 million was due to sales growth in both October and November over last fiscal year's final two months. Overall inventories increased $81.1 million in conjunction with levels of operations. U.S. footwear, U.S. apparel and international footwear and apparel inventories have increased $20.8 million, $18.5 million and $30.1 million, respectively. Increases in accrued liabilities are a result of the increased levels of the Company's operations, most significantly, international operations. The additions to property, plant and equipment were composed of normal operational spending, the continued consolidation of European footwear warehouses, expansion of NIKE Town retail locations and acquisition of land adjacent to the world headquarters. The Company also utilized cash to retire long-term debt acquired in the purchase of Canstar Sports. Notes payable increased in order to fund the high level of operations. During the quarter, the Company announced a 20% increase in the quarterly cash dividend to $0.15 per share from the previous $0.125 per share. For the six months ended November 30, 1995, the Company has purchased 200,000 shares of its own stock under the stock repurchase program announced in July 1993, bringing the total number of shares purchased in the program to approximately 5,149,000. There were no purchases during the second quarter. The debt to equity ratio at November 30, 1995 was .6:1 compared to .6:1 at May 31, 1995 and .4:1 at November 30, 1994. Management believes that funds generated by operations, together with currently available resources, will adequately finance anticipated fiscal 1996 expenditures. At November 30, 1995, the Company had $500 million available in committed unused lines of credit. Part II - Other Information Item 1. Legal Proceedings: There have been no material changes from the information previously reported under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995. Item 6. Exhibits and Reports on Form 8-K: (a) EXHIBITS: 3.1 Restated Articles of Incorporation, as amended (incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the first quarter ended August 31, 1995). 3.2 Third Restated Bylaws, as amended (incorporated by referencec from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the first quarter ended August 31, 1995). 4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1). 4.2 Third Restated Bylaws, as amended (see Exhibit 3.2). 10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc., Bank of America National Trust & Savings Association, individually and as Agent, and the other banks party thereto (in- corporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarte rended August 31, 1995). 10.2 Form of non-employee director Stock Option Agreement (incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993).* 10.3 Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 21, 1987). 10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan (incorporated by reference from Registration Statement No. 33-29262 on Form S-8 filed by the Company on June 16, 1989).* 10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 17, 1990).* 10.6 Collateral Assignment Split-Dollar Agreement between NIKE, Inc. and Philip H. Knight dated March 10, 1994 (incorporated by reference from Exhibit 10.7 to the Company's Annual Report on Form 10-K for he fiscal year ended May 31, 1994).* 10.7 NIKE, Inc. Executive performance Sharing Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 18, 1995).* 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. (b) The following reports on Form 8-K were filed by the Company during the first quarter of fiscal 1996: Form 8-K September 18, 1995 ITEM 5. OTHER EVENTS. Press release announcing first quarter earnings. November 17, 1995 ITEM 5. OTHER EVENTS. Press release announcing $.15 per share dividend. 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. NIKE, Inc. An Oregon Corporation BY: ________________________ Robert S. Falcone Vice President, Chief Financial Officer DATED: January 12, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NOVEMBER 30, 1995 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1996 <PERIOD-END> NOV-30-1995 <CASH> 204,826 <SECURITIES> 0 <RECEIVABLES> 1,184,844 <ALLOWANCES> 36,566 <INVENTORY> 710,848 <CURRENT-ASSETS> 2,276,714 <PP&E> 964,364 <DEPRECIATION> 363,875 <TOTAL-ASSETS> 3,411,413 <CURRENT-LIABILITIES> 1,147,874 <BONDS> 13,728 <COMMON> 2,854 <PREFERRED-MANDATORY> 0 <PREFERRED> 300 <OTHER-SE> 2,194,788 <TOTAL-LIABILITY-AND-EQUITY> 3,411,413 <SALES> 3,057,676 <TOTAL-REVENUES> 3,057,676 <CGS> 1,842,968 <TOTAL-COSTS> 1,842,968 <OTHER-EXPENSES> 725,901 <LOSS-PROVISION> 9,349 <INTEREST-EXPENSE> 19,361 <INCOME-PRETAX> 460,097 <INCOME-TAX> 177,100 <INCOME-CONTINUING> 282,997 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 282,997 <EPS-PRIMARY> 1.93 <EPS-DILUTED> 1.93 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

NOVL

https://www.sec.gov/Archives/edgar/data/758004/0000758004-96-000003.txt

-----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, HDWrpTuLk0UEKoITMTZJBXWqEO3ZoMXznIcnCFF/cGWBWYoJqahw6h0mLlEbr0cF s95crPVQJAEzEPHR7jLkPg== <SEC-DOCUMENT>0000758004-96-000003.txt : 19960314 <SEC-HEADER>0000758004-96-000003.hdr.sgml : 19960314 ACCESSION NUMBER: 0000758004-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960127 FILED AS OF DATE: 19960312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 96534038 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8014297000 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Quarter Ended January 27, 1996 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: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1555 N. Technology Way Orem, Utah 84057 (Address of principal executive offices and zip code) (801) 222-6000 (Registrant's telephone number, including area code) 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 As of February 24, 1996 there were 365,696,078 shares of the registrant's common stock outstanding. </PAGE> <PAGE> <TABLE> Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS <S> <C> <C> Jan. 27, Oct. 28, Dollars in thousands, except per share data 1996 1995 - --------------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $1,247,924 $1,321,231 Receivables, less allowances ($64,833 - January; $74,857 - October) 518,027 470,437 Inventories 25,469 23,025 Prepaid expenses 46,641 50,576 Deferred income taxes 66,749 59,913 - --------------------------------------------------------------------------- Total current assets 1,904,810 1,925,182 Property, plant and equipment, net 379,155 390,452 Other assets 71,299 101,196 - --------------------------------------------------------------------------- Total assets $2,355,264 $2,416,830 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $78,471 $116,305 Accrued compensation 71,099 97,637 Accrued marketing liabilities 76,119 72,339 Other accrued liabilities 108,466 90,623 Income taxes payable 44,867 29,942 Deferred revenue 64,877 54,099 - --------------------------------------------------------------------------- Total current liabilities 443,899 460,945 Minority interests 16,903 17,623 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 365,516,551 shares-January 371,567,158 shares-October 36,552 37,157 Additional paid-in capital 639,622 737,481 Retained earnings 1,218,288 1,163,624 - --------------------------------------------------------------------------- Total shareholders' equity 1,894,462 1,938,262 - --------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,355,264 $2,416,830 =========================================================================== See notes to consolidated unaudited condensed financial statements. </TABLE> </PAGE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------- Fiscal Quarter Ended -------------------- <S> <C> <C> Amounts in thousands, Jan. 27, Jan. 28, except per share data 1996 1995 - --------------------------------------------------------------------------- Net sales $437,919 $493,225 Cost of sales 96,011 116,875 - --------------------------------------------------------------------------- Gross profit 341,908 376,350 Operating expenses Sales and marketing 123,465 139,803 Product development 78,633 89,817 General and administrative 38,538 33,970 Restructuring charges 18,442 -- - --------------------------------------------------------------------------- Total operating expenses 259,078 263,590 Income from operations 82,830 112,760 Other income (expense) Investment income 14,900 9,567 Other, net (2,150) 258 - --------------------------------------------------------------------------- Other income, net 12,750 9,825 - --------------------------------------------------------------------------- Income before taxes 95,580 122,585 Income taxes 32,019 41,066 - --------------------------------------------------------------------------- Net income $ 63,561 $ 81,519 =========================================================================== Weighted average shares outstanding 371,585 372,027 =========================================================================== Net income per share $ 0.17 $ 0.22 =========================================================================== See notes to consolidated unaudited condensed financial statements. </PAGE> </TABLE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------- Fiscal Quarter Ended -------------------- <S> <C> <C> Jan. 27, Jan. 28, Amounts in thousands 1996 1995 - --------------------------------------------------------------------------- Cash flows from operating activities Net income $63,561 $81,519 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 24,919 23,067 Stock plans income tax benefits 2,343 4,734 (Increase) in receivables (47,590) (30,250) (Increase) decrease in inventories (2,444) 5,717 Decrease in prepaid expenses 3,935 11,852 (Increase) in deferred income taxes (1,122) (1,505) (Decrease) in current liabilities, net (17,046) (15,530) - --------------------------------------------------------------------------- Net cash provided from operating activities 26,556 79,604 - --------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 5,597 7,667 Repurchase of common stock (106,117) -- - --------------------------------------------------------------------------- Net cash (used) provided from financing activities (100,520) 7,667 Cash flows from investing activities Expenditures for property, plant and equipment (12,784) (9,372) (Increase) in short-term investments (30,324) (93,021) Other 22,590 8,564 - --------------------------------------------------------------------------- Net cash used by investing activities (20,518) (93,831) - --------------------------------------------------------------------------- Total (decrease) in cash and cash equivalents $(94,482) $(6,560) Cash and cash equivalents - beginning of period 312,164 228,426 - --------------------------------------------------------------------------- Cash and cash equivalents - end of period 217,682 221,866 Short-term investments - end of period 1,030,242 739,404 - --------------------------------------------------------------------------- Cash and short-term investments - end of period $1,247,924 $961,270 =========================================================================== See notes to consolidated unaudited condensed financial statements. </TABLE> </PAGE> <PAGE> NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should therefore, be read in conjunction with the Company's fiscal 1995 Annual Report to Shareholders. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. B. Significant Events In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6 million shares of SCO common stock, resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million in cash. The Company will also be entitled to nominate a candidate for Corel s Board of Directors. The Company expects to report a slight one-time extraordinary gain in its second quarter of fiscal 1996. Additionally, Corel licensed GroupWise Client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of $70 million over the next five years. C. Cash and Short-term Investments All marketable debt and equity securities are included in cash and short-term investments and are considered available-for- sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders equity. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. </PAGE> <PAGE> <TABLE> The following is a summary of cash and short-term investments, all of which are considered available-for-sale. <S> <C> <C> <C> <C> Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Jan. 27, 1996 Gains Losses Jan. 27, 1996 - ------------------------------------------------------------------------------------------- Cash and cash equivalents Cash $128,629 $ -- $ -- $128,629 Repurchase agreements 34,989 -- -- 34,989 Tax exempt money market fund 9,764 -- -- 9,764 Municipal securities 44,300 -- -- 44,300 - ------------------------------------------------------------------------------------------- Cash and cash equivalents $217,682 $ -- $ -- $217,682 - ------------------------------------------------------------------------------------------- Short-term investments Municipal securities $366,221 $5,236 $ -- $371,457 Money market mutual funds 46,383 -- -- 46,383 Money market preferreds 425,300 4 -- 425,304 Mutual funds 87,414 56 -- 87,470 Equity securities 81,677 17,951 -- 99,628 - ------------------------------------------------------------------------------------------- Short-term investments $1,006,995 $23,247 $ -- $1,030,242 - ------------------------------------------------------------------------------------------- Cash and short-term investments $1,224,677 $23,247 $ -- $1,247,924 - ------------------------------------------------------------------------------------------- </TABLE> <TABLE> <S> <C> <C> <C> <C> Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Oct. 28, 1995 Gains Losses Oct. 28, 1995 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents Cash $152,930 $ -- $ -- $152,930 Repurchase agreements 23,794 -- -- 23,794 Tax exempt money market fund 63,065 -- -- 63,065 Municipal securities 72,375 -- -- 72,375 - --------------------------------------------------------------------------------------------- Cash and cash equivalents $312,164 $ -- $ -- $312,164 - --------------------------------------------------------------------------------------------- Short-term investments Municipal securities $375,491 $3,220 $ -- $378,711 Money market mutual funds 38,475 -- -- 38,475 Money market preferreds 442,500 176 -- 442,676 Mutual funds 91,423 30 -- 91,453 Equity securities 23,055 34,697 -- 57,752 - --------------------------------------------------------------------------------------------- Short-term investments $970,944 $38,123 $ -- $1,009,067 - --------------------------------------------------------------------------------------------- Cash and short-term investments $1,283,108 $38,123 $ -- $1,321,231 - --------------------------------------------------------------------------------------------- </TABLE> During the first quarter of fiscal 1996 the Company had realized gains of $4 million on the sale of securities compared to no realized gains in the first quarter of fiscal 1995. </PAGE> <PAGE> D. Income Taxes The Company's estimated effective tax rate for both the first quarter of fiscal 1996 and 1995 was 33.5%. The Company paid cash amounts for income taxes of $2 million and $27 million, in the first quarter of fiscal 1996 and 1995, respectively. E. Commitments and Contingencies The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company s operations. At January 27, 1996 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $10 million credit facility with another bank which is not subject to a loan agreement. At January 27, 1996 standby letters of credit of approximately $300,000 were outstanding under this agreement. The Company is a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. F. International Sales The Company markets internationally both directly to end users and through distributors who sell to dealers and end users. For the fiscal quarters ended January 27, 1996 and January 28, 1995, sales to international customers were approximately $218 million and $222 million, respectively. In the first quarters of fiscal 1996 and fiscal 1995, 63% and 59%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total sales in either period. Except for one multi-national distributor, which accounted for 13% of revenue in the first quarter of 1996 and 18% of revenue in the first quarter of fiscal 1995, no customer accounted for more than 10% of revenue in any period. G. Net Income Per Share Net income per share is computed using the weighted average number of common shares outstanding during the periods, including common stock equivalents (unless antidilutive). Common stock equivalents consist of outstanding stock options. </PAGE> <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the world s leading network software provider. Novell software products provide the infrastructure for a networked world, enabling Novell s customers to connect with other people and the information they need, anytime and anyplace. Novell partners with other technology and market leaders to help customers make networks a part of their everyday lives. Over the past several years, the Company has issued common stock or paid cash to acquire technology companies, and formed strategic alliances with still other technology companies. In December 1995, Novell sold its UNIX and UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6 million shares of SCO common stock, resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million in cash. The Company will also be entitled to nominate a candidate for Corel s Board of Directors. The Company expects to report a slight one- time extraordinary gain in its second quarter of fiscal 1996. Additionally, Corel licensed GroupWise Client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of $70 million over the next five years. <TABLE> <S> <C> <C> <C> Results of Operations - ------------------------------------------------------------------- Net Sales Q1 Q1 1996 Change 1995 - ------------------------------------------------------------------- Net sales (millions) $438 -11% $493 =================================================================== </TABLE> Novell has four product groups, all within the software industry. They are the NetWare Systems Group, the Novell Applications Group, the UNIX Systems Group, and the Information Access and Management Group. While revenue decreased from the first quarter of 1995 to the first quarter of 1996, analysis of the individual product groups characterizes the changes that have occurred. NetWare Systems Group (NSG) revenues declined by 12% or $30 million in the first quarter of 1996 compared to the first quarter of 1995. Growth in the NetWare 4 product family of $58 million or 80% growth from the first quarter of 1995 was more than offset by a decrease in the NetWare 3 product family of $78 million or a 45% decline from the first quarter of 1995. Novell Applications Group (NAG) revenues decreased by 56% or $78 million in the first quarter of 1996 compared to the first quarter of 1995. The decrease is the result of an $84 million or 67% decrease, quarter over quarter, in personal productivity applications products, due to the Windows application market slowdown as customers migrate to the Windows 95 platform and Novell s announced intention to exit this line of business. GroupWise, the Company s electronic messaging workgroup application, contribution $21 million in first quarter 1996 revenue, a 39% increase from the year ago quarter. UNIX Systems Group (USG) revenues increased 98% in the first quarter of 1996 compared to the first quarter of 1995. The increase was attributable to a one-time $19 million paid up royalty recognized in the sale of UNIX and the UnixWare product line to SCO in December 1995. Information Access and Management Group (IAMG) revenues increased by 40% in the first quarter of 1996 compared to the first quarter of 1995. The increase was a result of higher revenues in most product categories, with a particularly strong increase in the network management products as a result of the release of ManageWise in October 1995. </PAGE> <PAGE> International sales represented 50% of total sales in the first quarter of 1996 compared to 45% in the first quarter of 1995. This change is a result of a 19% decrease in domestic revenues compared to a 2% decrease in international revenues in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. <TABLE> <S> <C> <C> <C> Gross Profit Q1 Q1 1996 Change 1995 - ------------------------------------------------------------------- Gross profit (millions) $342 -9% $376 Percentage of net sales 78% 76% =================================================================== </TABLE> The gross margin percentage increased in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995 due to lower material costs and variances somewhat offset by higher royalties, training and education costs and service costs as a percentage of revenues. Future fluctuations in the gross profit margin will be primarily attributable to price changes, changes in sales mix by product or distribution channel, and special product promotions. <TABLE> <S> <C> <C> <C> Operating Expenses Q1 Q1 1996 Change 1995 - ----------------------------------------------------------------------- Sales and marketing (millions) $123 -12% $140 Percentage of net sales 28% 28% - ----------------------------------------------------------------------- Product development (millions) $79 -12% $90 Percentage of net sales 18% 18% - ----------------------------------------------------------------------- General and administrative (millions) $39 -15% $34 Percentage of net sales 9% 7% - ----------------------------------------------------------------------- Restructuring charges (millions) $18 -- -- Percentage of net sales 4% -- - ----------------------------------------------------------------------- Total operating expenses (millions) $259 -2% $264 Percentage of net sales 59% 53% ======================================================================= </TABLE> Sales and marketing expenses remained flat as a percentage of net sales in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. The decrease in absolute dollars is attributable to lower domestic sales expenses and corporate marketing expenses. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses remained flat as a percentage of net sales in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995 but decreased in absolute dollars as a result of lower headcount and third party development costs. General and administrative expenses increased as a percentage of net sales in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. The increase is attributable to higher information services and human resources costs. During the first quarter of 1996, the Company wrote off $18 million of tax deductible restructuring charges for severance and redundant facilities as the Company prepared for the sale of its personal productivity applications business. Overall, operating expenses, excluding nonrecurring charges, have declined more rapidly than revenues in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995 due to company- wide cost controls as the Company took significant actions to refocus Novell to network software. <TABLE> <S> <C> <C> <C> Q1 Q1 1996 Change 1995 - --------------------------------------------------------------------------- Employees 7,137 -6% 7,808 Annualized revenue per employee (000's) $235 -3% $243 =========================================================================== </TABLE> </PAGE> <PAGE> In the first quarter of 1995, Novell reduced its employment by 625 employees as the Company prepared for the sale of its personal productivity applications business. <TABLE> <S> <C> <C> <C> Other Income (Expense) Q1 Q1 1996 Change 1995 - -------------------------------------------------------------------------- Other income (expense), net (millions) $13 30% $10 Percentage of net sales 3% 2% ========================================================================== </TABLE> The primary component of other income (expense) is investment income, which was $15 million in the first quarter of fiscal 1996 compared to $10 million in the first quarter of fiscal 1995. The increase is the result of higher average cash balances as well as higher average yields. In order to achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur some market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. <TABLE> <S> <C> <C> <C> Income Taxes Q1 Q1 1996 Change 1995 - -------------------------------------------------------------------------- Income taxes (millions) $32 -22% $41 Percentage of net sales 7% 8% Effective tax rate 34% 34% ========================================================================== </TABLE> The Company's estimated tax rate for fiscal 1996 is 33.5%, the same as in fiscal 1995. <TABLE> <S> <C> <C> <C> Net Income and Net Income Per Share Q1 Q1 1996 Change 1995 - -------------------------------------------------------------------------- Net income (millions) $64 -22% $82 Percentage of net sales 15% 17% Net income per share $.17 -23% $.22 ========================================================================== </TABLE> <TABLE> <S> <C> <C> <C> Liquidity and Capital Resources Q1 Q4 1996 Change 1994 - ------------------------------------------------------------------------------- Cash and short-term investments (millions) $1,248 -6% $1,321 Percentage of total assets 53% 55% =============================================================================== </TABLE> </PAGE> <PAGE> Cash and short-term investments decreased to $1,248 million at January 27, 1996 from $1,321 million at October 28, 1995. The major reason for this decrease was the $106 million used to repurchase Novell common stock during the quarter, offset by the $27 million of cash provided by operating activities, the $5 million provided by other financing activities, and the $10 million provided by other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. The Company's principal source of liquidity has been from operations. At January 27, 1996, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $20 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, acquisitions and strategic investments and to have flexibility in a dynamic and competitive operating environment. During the first fiscal quarter of 1996, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short-term investments together with internally generated funds. Borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. As the Company grows, investments will continue in product development in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1996 are anticipated to be approximately $60 million, but could be reduced if the growth of the Company is less than presently anticipated. In addition, the Company has announced a share repurchase program whereby the Company is authorized to repurchase up to 37 million shares of its common stock in the open market during fiscal 1996. During the first quarter of 1996, approximately 7 million shares were repurchased and retired at a cost of approximately $106 million. Forward Looking Information Looking forward to its second fiscal quarter, Novell decided to implement a change to its traditional distribution stocking policy that will significantly reduce revenue and earnings in that quarter. Because the Company is experiencing rapid growth in revenue from expanding multi-product network software licensing programs, the Company has decided to reduce and rebalance channel inventories to change the mix of product in the channel and better match evolving purchase patterns. The Company intends to reduce product inventories by up to $225 million across its worldwide distribution channels in its second quarter of 1996. This reduction is expected to decrease second quarter revenue by a corresponding amount and will likely result in a moderate loss in the quarter. The resetting of channel inventories is expected to reduce ongoing cost of sales and lessen costs associated with channel promotions and product rotations, thereby leading to improved earnings in the second half of the year. The above statements relating to Novell s change in distribution stocking policy are forward looking and involve a number of risks and uncertainties. As such, actual results could materially differ from those we are projecting in these forward looking statements. Unanticipated declines in revenue due to competitive, market and general economic factors could limit the Company s ability to gain the benefit of improved earnings resulting from the new channel inventory structure. Novell s projections of increasing licensing revenue are based on historical trends which, should they reverse, would negatively impact growth projections of revenue and earnings. Further uncertainties are associated with any impact to our distribution channel resulting from this change in distribution stocking policy. Novell believes this action is in the best interests of its customers, channel partners and shareholders, but implementing this program may result in some short-term business interruption as the Company, our partners, and customers work through this change. </PAGE> <PAGE> Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote E of the Company s financial statements contained in Part I, Item 1 of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description - ------- ------------- 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended January 27, 1996. - -------------------------- *Filed herewith </PAGE> <PAGE> SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. ------------ (Registrant) Date: March 12, 1996 /s/ Robert J. Frankenberg ------------------------- Robert J. Frankenberg Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 12, 1996 /s/ James R. Tolonen ------------------------- James R. Tolonen Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 12, 1996 /s/ Stephen C. Wise ------------------------- Stephen C. Wise Senior Vice President, Finance (Principal Accounting Officer) </PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-26-1996 <PERIOD-END> JAN-27-1996 <CASH> 217,682 <SECURITIES> 1,030,242 <RECEIVABLES> 518,027 <ALLOWANCES> (64,833) <INVENTORY> 25,469 <CURRENT-ASSETS> 1,904,810 <PP&E> 691,569 <DEPRECIATION> (312,414) <TOTAL-ASSETS> 2,355,264 <CURRENT-LIABILITIES> 443,899 <BONDS> 0 <COMMON> 36,552 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,857,910 <TOTAL-LIABILITY-AND-EQUITY> 2,355,264 <SALES> 437,919 <TOTAL-REVENUES> 437,919 <CGS> 96,011 <TOTAL-COSTS> 96,011 <OTHER-EXPENSES> 259,078 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 95,580 <INCOME-TAX> 32,019 <INCOME-CONTINUING> 63,561 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 63,561 <EPS-PRIMARY> .17 <EPS-DILUTED> .17 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/80424/0000080424-96-000003.txt

-----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, AVUHtrsvAobZKzp6WZQA9EPE/Q9uKS97/one2MH24y4OROoPbGPoTa1oyqQ8GkgU dBNMDm69m/iBsn52Oh9glA== <SEC-DOCUMENT>0000080424-96-000003.txt : 19960216 <SEC-HEADER>0000080424-96-000003.hdr.sgml : 19960216 ACCESSION NUMBER: 0000080424-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCTER & GAMBLE CO CENTRAL INDEX KEY: 0000080424 STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840] IRS NUMBER: 310411980 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00434 FILM NUMBER: 96516526 BUSINESS ADDRESS: STREET 1: ONE PROCTER & GAMBLE PLZ CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5139831100 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1995 Commission file number 1-434 THE PROCTER & GAMBLE COMPANY (Exact name of registrant as specified in its charter) Ohio 31-0411980 (State of incorporation) (I.R.S. Employer Identification No.) One Procter & Gamble Plaza, Cincinnati, Ohio 45202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (513) 983-1100 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 . There were 686,413,929 shares of Common Stock outstanding as of January 19, 1996. -1- <PAGE> PART I. FINANCIAL INFORMATION <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS <CAPTION> Millions of Dollars Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 1995 1994 1995 1994 ------- ------- -------- -------- <S> <C> <C> <C> <C> NET SALES $9,090 $8,485 $18,117 $16,662 Cost of products sold 5,265 4,840 10,476 9,476 Marketing, research, and administrative expenses 2,473 2,437 4,854 4,708 -------- -------- -------- -------- OPERATING INCOME 1,352 1,208 2,787 2,478 Interest expense 123 125 246 244 Other income, net 52 76 114 161 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 1,281 1,159 2,655 2,395 Income taxes 445 409 923 853 -------- -------- -------- -------- NET EARNINGS $ 836 $ 750 $ 1,732 $ 1,542 ======== ======== ======== ======== PER COMMON SHARE: Net earnings $ 1.18 $ 1.06 $ 2.45 $ 2.18 Net earnings assuming full dilution $ 1.11 $ .99 $ 2.29 $ 2.04 Dividends $ .40 $ .35 $ .80 $ .70 AVERAGE COMMON SHARES OUTSTANDING 686.5 685.2 </TABLE> Certain reclassifications of prior year's amounts have been made to conform with the current year presentation. Costs related to research and development are now reported as an element of marketing, research and administrative expenses. Costs related to delivery of finished product are included in cost of products sold. Net sales include revenues from other operating arrangements, such as joint ventures. -2- <PAGE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> Millions of Dollars December 31 June 30 ASSETS 1995 1995 --------- --------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 1,668 $ 2,028 Investment securities 448 150 Accounts receivable 3,899 3,562 Inventories Raw materials and supplies 1,417 1,315 Work in process 271 247 Finished products 1,857 1,891 Deferred income taxes 790 804 Prepaid expenses and other current assets 1,093 845 --------- --------- 11,443 10,842 --------- --------- PROPERTY, PLANT, AND EQUIPMENT 17,913 17,739 LESS ACCUMULATED DEPRECIATION 6,953 6,713 --------- --------- 10,960 11,026 --------- --------- GOODWILL AND OTHER INTANGIBLE ASSETS 4,304 4,572 OTHER ASSETS 1,508 1,685 --------- --------- TOTAL $28,215 $28,125 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> CURRENT LIABILITIES Accounts payable and accruals $ 6,860 $ 7,678 Debt due within one year 1,418 970 --------- --------- 8,278 8,648 --------- --------- LONG-TERM DEBT 4,978 5,161 OTHER LIABILITIES 2,958 3,196 DEFERRED INCOME TAXES 617 531 SHAREHOLDERS' EQUITY Preferred stock 1,901 1,913 Common stock-shares outstanding-Dec. 31 686,027,828 686 687 -June 30 686,574,055 Additional paid-in capital 763 693 Currency translation adjustments (181) 65 Reserve for ESOP debt retirement (1,705) (1,734) Retained earnings 9,920 8,965 --------- --------- 11,384 10,589 --------- --------- TOTAL $28,215 $28,125 ========= ========= </TABLE> -3- <PAGE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS <CAPTION> Millions of Dollars Six Months Ended December 31 1995 1994 -------- -------- <S> <C> <C> Cash and Cash Equivalents, beginning of year $2,028 $2,373 OPERATING ACTIVITIES Net earnings 1,732 1,542 Depreciation, depletion and amortization 651 603 Deferred income taxes 164 155 Increase in accounts receivable (452) (447) Increase in inventories (190) (109) Change in payables and accrued liabilities (549) 36 Decrease in other liabilities (175) (308) Other (56) (202) -------- -------- 1,125 1,270 -------- -------- INVESTING ACTIVITIES Capital expenditures (992) (866) Proceeds from asset sales and retirements 239 158 Acquisitions (147) (616) Change in investment securities (300) 106 -------- -------- (1,200) (1,218) -------- -------- FINANCING ACTIVITIES Dividends to shareholders (601) (531) Additions to short-term debt 848 260 Additions to long-term debt 64 328 Reduction of long-term debt (419) (312) Proceeds from stock options 32 28 Purchase of treasury shares (175) (9) -------- -------- (251) (236) EFFECT OF EXCHANGE RATE CHANGES ON CASH -------- -------- AND CASH EQUIVALENTS (34) (5) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (360) (189) -------- -------- Cash and Cash Equivalents, end of period $1,668 $2,184 ======== ======== SUPPLEMENTAL DISCLOSURE Non-cash transactions: Liabilities assumed in acquisitions 12 449 Reduction in employee stock ownership plan debt, guaranteed by the Company 29 26 Conversion of preferred to common stock 12 16 <FN> The interim financial statements are unaudited, but in the opinion of the Company include all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the data. </TABLE> -4- <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS WORLDWIDE RESULTS OF OPERATIONS Worldwide net earnings for the quarter ending December 31, 1995 were $836 million, an 11% increase over the same quarter of the prior year net earnings of $750 million. Earnings per share for the quarter were $1.18 compared to $1.06 per share in the second quarter of the prior year, also an 11% increase. Worldwide net sales were $9,090 million, representing an increase of 7% over the same quarter of the prior year, on 8% unit volume growth. For the first six months of the fiscal year, worldwide net earnings were $1,732 million or $2.45 per share, an increase of 12% over the same period of the prior year. Worldwide net sales increased 9% to $18,117 million, on comparable unit volume growth. Gross margin was 42.1% for the current quarter versus 43.0% for the same quarter of the prior year. Raw material prices, primarily pulp, continued to affect margin trends. As a comparison, the prior full fiscal year gross margin was 41.5%. Operating margin for the quarter was 14.9%, an improvement over 14.2% for the same quarter of the prior year. The improvement reflects the effect of continued cost control efforts. NORTH AMERICA Net sales and unit volume for the North American region grew 7% over the same quarter of the prior year. Earnings for the region increased 9%. The Laundry & Cleaning business led the region's growth, propelled by a significant unit volume increase. The Paper business also contributed to the unit volume growth, with particular strength in the tissue and towel and diaper categories. Margins continued to be affected by an increase in pulp prices over same quarter prior year. The Beauty Care and Food & Beverage businesses maintained strong unit volume growth, with double-digit growth in the hair care, coffee, juice and personal cleansing categories. The results of the Health Care business were affected by heavy competitive activity in the oral care and gastro-intestinal categories, which has hampered unit volume growth. For the July-December period, the North American region had unit volume and sales growth of 7%. Net earnings increased 8% over the prior year. EUROPE Second quarter sales for the Europe, Middle East and Africa region increased 11% over the same quarter of the prior year. The increase was led by a 7% unit volume growth, complemented by favorable pricing and exchange rates. Central and Eastern Europe achieved volume growth of over 50% with increased expansion into these markets, contributing nearly half of the region's unit volume growth. Net earnings for the region were up 26%, as incremental restructuring savings and on-going cost control benefits were realized. A simplification of trade terms has recently been announced, which could negatively affect growth trends in the short-term. This move to value pricing eliminates inefficient promotion costs by rolling them into lower list prices. When implemented in the United States, this change led to improved results. Europe experienced 9% unit volume growth for the July-December period with a 14% increase in sales. Net earnings increased 23% over the same period of the prior year. -5- <PAGE> ASIA Asia achieved unit volume growth of 16%, led primarily by record shipments in China. Sales for the region increased 6%, with a 7% net earnings increase. Unfavorable exchange rates, lower pricing and product mix limited the sales and earnings growth relative to the increased unit volume. Laundry and Beauty Care continued to lead growth within the region, experiencing double-digit volume increases. For the first six months of the fiscal year, Asia had a 19% increase in unit volume and 9% sales growth. Net earnings increased by 8% over the prior period. LATIN AMERICA Despite continuing economic difficulties in Latin America, the region delivered 8% unit volume growth in the quarter. Exchange effects, combined with higher costs, resulted in a sales and net earnings decline of 4% and 1%, respectively. Significant unit volume growth in Brazil and Venezuela compensated for flat unit volume in Mexico. Excluding Mexico, net earnings for the region increased by 22%. For the July-December period, unit volume for the region grew 7%. Sales and net earnings both declined 4% from the prior year period. RESTRUCTURING RESERVE STATUS In the year ending June 30, 1993, a reserve of $2,402 million was established to cover a worldwide restructuring effort to consolidate manufacturing systems and reduce overhead costs. The primary elements of this reserve were costs related to fixed asset disposals and separation-related costs (86% of the total). The following information relates to the June 1993 reserve (in millions of dollars pre-tax): <TABLE> <CAPTION> Original Balance July-Dec. Balance Reserve 6/30/95 Charges 12/31/95 --------- --------- ---------- --------- <S> <C> <C> <C> <C> Separation-related costs<F1> $ 965 $ 369 $ 57 $ 312 Disposals of Fixed Assets 1,109 597 84 513 Other<F2> 328 194 5 189 -------- -------- ------ -------- $ 2,402 $ 1,160 $ 146 $ 1,014 ======== ======== ====== ======== <FN> <F1>Includes separation allowances and related benefits, out placement services, and personnel relocation costs. <F2>Includes closing, environmental remediation and contract termination costs for sites shut down or divested, offset by proceeds from asset sales. No cost element within this category exceeds 5% of the total reserve. </FN> </TABLE> -6- <PAGE> Execution of the restructuring program continues to be on track, and the cost of completing it is expected to approximate the original estimates. As anticipated, charges for the disposal of fixed assets will lag behind spending for separation-related programs. Over 80% of the sites and production modules to be closed have been announced in order to provide advance notice to employees. Benefits continue to be obtained from the restructuring program. Incremental savings of approximately $25 million after-tax are estimated for the October-December quarter, bringing cumulative restructuring savings near the $500 million after-tax objective established in June 1993. Based on current projections, the Company believes cumulative restructuring savings ultimately may exceed the original estimate by approximately 20%. Restructuring savings are estimated gross savings, which have been offset to some degree by lower pricing and other actions to build the business. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1995. 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. THE PROCTER & GAMBLE COMPANY /S/E. H. EATON - ------------------------------ E. H. Eaton Vice President and Comptroller (Principal Accounting Officer) Date: February 13, 1996 -7- <PAGE> EXHIBIT INDEX Exhibit No. Page No. (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (11) Computation of Earnings per Share 9 (12) Computation of Ratio of Earnings to Fixed Charges 10 (27) Financial Data Schedule 11 -8- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> EXHIBIT (11) <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES ============================================= COMPUTATION OF EARNINGS PER SHARE --------------------------------- Dollars and Share Amounts in Millions <CAPTION> Three Months Ended Six Months Ended December 31 December 31 ---------------------- --------------------- <S> <C> <C> <C> <C> NET EARNINGS PER SHARE 1995 1994 1995 1994 - ---------------------- -------- -------- -------- -------- Net earnings $ 836 $ 750 $1,732 $1,542 Deduct preferred stock dividends 26 26 52 51 -------- -------- -------- -------- Net earnings applicable to common stock $ 810 $ 724 $1,680 $1,491 - --------------------------------------- ======== ======== ======== ======== Average number of common shares outstanding 686.5 685.2 686.5 685.2 Per Share - ------------ Net earnings per share $ 1.18 $ 1.06 $ 2.45 $ 2.18 ======== ======== ======== ======== NET EARNINGS PER SHARE ASSUMING FULL DILUTION - ------------------------------- Net earnings $ 836 $ 750 $1,732 $1,542 Deduct differential -- preferred vs. common dividends 10 11 20 23 -------- -------- -------- -------- Net earnings applicable to common stock $ 826 $ 739 $1,712 $1,519 - --------------------------------------- ======== ======== ======== ======== Average number of common shares outstanding 686.5 685.2 686.5 685.2 Add potential effect of: Exercise of options 9.4 7.4 9.4 7.4 Conversion of preferred stock 52.1 53.0 52.1 53.0 -------- -------- -------- -------- Average number of common shares outstanding, assuming full dilution 748.0 745.6 748.0 745.6 ======== ======== ======== ======== Per share assuming full dilution - -------------------------------- Net earnings per share assuming full dilution 1.11 $ .99 2.29 $ 2.04 ======== ======== ======== ======== </TABLE> -9- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT (12) <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES ============================================= COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ------------------------------------------------- Millions of Dollars <CAPTION> Six Months Years Ended June 30 Ended Dec. 31 -------------------------------------------------- --------------- 1991 1992 1993 1994 1995 1994 1995 ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> EARNINGS AS DEFINED - ------------------- Earnings from operations before income taxes after eliminating undistributed earnings of 20% to 50% owned affiliates $2,652 $2,870 $ 294 $3,307 $4,022 $2,414 $2,663 Fixed charges excluding capitalized interest 435 584 631 569 571 291 268 ------ ------ ------ ------ ------ ------ ------ TOTAL EARNINGS, AS DEFINED $3,087 $3,454 $ 925 $3,876 $4,593 $2,705 $2,931 ====== ====== ====== ====== ====== ====== ====== FIXED CHARGES, AS DEFINED - ------------------------- Interest expense $ 395 $ 510 $ 552 $ 482 $ 488 $ 244 $ 246 1/3 of rental expense 40 74 79 87 83 47 22 ------ ------ ------ ------ ------ ------ ------ 435 584 631 569 571 291 268 Capitalized interest 17 25 25 19 23 5 1 ------ ------ ------ ------ ------ ------ ------ TOTAL FIXED CHARGES, AS DEFINED $ 452 $ 609 $ 656 $ 588 $ 594 $ 296 $ 269 ====== ====== ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES 6.8 5.7 1.4 6.6 7.7 9.1 10.9 </TABLE> -10- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000080424 <NAME> THE PROCTER & GAMBLE COMPANY <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-START> JUL-01-1995 <PERIOD-END> DEC-31-1995 <EXCHANGE-RATE> 1 <CASH> 1,668 <SECURITIES> 448 <RECEIVABLES> 3,899 <ALLOWANCES> 0 <INVENTORY> 3,545 <CURRENT-ASSETS> 11,443 <PP&E> 17,913 <DEPRECIATION> 6,953 <TOTAL-ASSETS> 28,215 <CURRENT-LIABILITIES> 8,278 <BONDS> 4,978 <PREFERRED-MANDATORY> 0 <PREFERRED> 1,901 <COMMON> 686 <OTHER-SE> 8,797 <TOTAL-LIABILITY-AND-EQUITY> 28,215 <SALES> 18,117 <TOTAL-REVENUES> 18,117 <CGS> 10,476 <TOTAL-COSTS> 4,854 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 246 <INCOME-PRETAX> 2,655 <INCOME-TAX> 923 <INCOME-CONTINUING> 1,732 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,732 <EPS-PRIMARY> 2.45 <EPS-DILUTED> 2.29 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

PGL

https://www.sec.gov/Archives/edgar/data/77385/0000077385-96-000004.txt

-----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, TP6KWPcKoc6Y66XUeCfJCJB6LXzmEb6AvQe8bCuwRHnt0nZQpVuEceCDEHsvBkNP MgNY6b0R6mMmGPMDkiONzA== <SEC-DOCUMENT>0000077385-96-000004.txt : 19960216 <SEC-HEADER>0000077385-96-000004.hdr.sgml : 19960216 ACCESSION NUMBER: 0000077385-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES ENERGY CORP CENTRAL INDEX KEY: 0000077385 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 362642766 STATE OF INCORPORATION: IL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05540 FILM NUMBER: 96517293 BUSINESS ADDRESS: STREET 1: 24TH FLOOR STREET 2: 130 EAST RANDOLPH DRIVE CITY: CHICAGO STATE: IL ZIP: 60601-6207 BUSINESS PHONE: (312)240-4000 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLES GAS CO/ DATE OF NAME CHANGE: 19600201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5540 PEOPLES ENERGY CORPORATION (Exact name of registrant as specified in its charter) Illinois 36-2642766 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Address of principal executive offices) (Zip Code) (312) 240-4000 (Registrant's telephone number, including area code) 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 34,938,792 shares of Common Stock, without par value, outstanding at January 31, 1996. <TABLE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Peoples Energy Corporation CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended December 31, December 31, ------------------- ------------------------ 1995 1994 1995 1994 -------- -------- ---------- ---------- (Thousands, except per-share amounts) <S> <C> <C> <C> <C> OPERATING REVENUES: Gas sales $275,173 $266,552 $ 901,659 $1,078,200 Transportation of customer- owned gas 39,270 32,752 129,332 109,481 Other 3,162 7,819 12,892 19,648 -------- -------- ---------- ---------- Total Operating Revenues 317,605 307,123 1,043,883 1,207,329 -------- -------- ---------- ---------- OPERATING EXPENSES: Gas costs 129,871 146,087 441,220 613,424 Operation 54,129 48,724 204,501 215,264 Maintenance 10,055 9,422 42,363 38,967 Depreciation and amortization 16,655 16,518 66,545 65,978 Taxes - Income 22,903 13,890 41,569 28,790 - State & local revenue 33,765 31,246 112,239 124,786 - Other 5,073 5,015 21,759 20,681 -------- -------- ---------- ---------- Total Operating Expenses 272,451 270,902 930,196 1,107,890 -------- -------- ---------- ---------- OPERATING INCOME 45,154 36,221 113,687 99,439 -------- -------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Interest income 2,654 1,359 11,361 7,069 Interest on long-term debt of subsidiaries (10,951) (11,551) (45,812) (46,176) Other interest expense (1,998) (1,375) (8,081) (2,942) Miscellaneous - net 1,257 473 1,988 3,148 -------- -------- ---------- ---------- Total Other Income and Deductions (9,038) (11,094) (40,544) (38,901) -------- -------- ---------- ---------- NET INCOME $ 36,116 $ 25,127 $ 73,143 $ 60,538 ======== ======== ========== ========== Average Shares of Common Stock Outstanding 34,928 34,886 34,913 34,867 Earnings Per Share of Common Stock $ 1.03 $ 0.72 $ 2.10 $ 1.74 ======== ======== ========== ========== Dividends Declared Per Share $ 0.45 $ 0.45 $ 1.80 $ 1.80 ======== ======== ========== ========== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, December 31, 1995 September 30, 1994 (Unaudited) 1995 (Unaudited) ------------ ------------- ------------ (Thousands) <S> <C> <C> <C> PROPERTIES AND OTHER ASSETS CAPITAL INVESTMENTS: Property, plant and equipment, at original cost $1,999,439 $2,088,277 $2,035,774 Less - Accumulated depreciation 635,123 715,208 690,291 Net property, plant and equipment 1,364,316 1,373,069 1,345,483 Other investments 10,391 10,367 15,115 ---------- ---------- ---------- TOTAL CAPITAL INVESTMENTS - NET 1,374,707 1,383,436 1,360,598 ---------- ---------- ---------- CURRENT ASSETS: Cash 5,938 3,328 4,788 Cash equivalents 27,399 172,911 56,898 Other temporary cash investments, at cost that approximates market value 1,100 1,100 1,000 Trust fund - utility construction -- -- 16,440 - bond redemption -- 237 -- Receivables - Customers, net of allowance for uncollectible accounts of $18,447, $19,013, and $20,862, respectively 130,437 56,715 120,591 Other 7,905 1,897 5,959 Accrued unbilled revenues 68,731 21,167 72,280 Materials and supplies, at average cost 16,242 16,466 25,152 Gas in storage, at last-in, first-out cost 105,367 100,547 124,898 Gas costs recoverable through rate adjustments 4,988 6,205 19,203 Prepayments 1,727 2,302 1,646 ---------- ---------- ---------- TOTAL CURRENT ASSETS 369,834 382,875 448,855 ---------- ---------- ---------- OTHER ASSETS: Regulatory assets of subsidiaries 71,449 39,706 36,250 Deferred charges 15,048 16,475 17,569 ---------- ---------- ---------- TOTAL OTHER ASSETS 86,497 56,181 53,819 ---------- ---------- ---------- TOTAL PROPERTIES AND OTHER ASSETS $1,831,038 $1,822,492 $1,863,272 ========== ========== ========== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, December 31, 1995 September 30, 1994 (Unaudited) 1995 (Unaudited) ------------ ------------- ------------ (Thousands of Dollars) <S> <C> <C> <C> CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stockholders' Equity: Common stock, without par value Authorized - 60,000,000 shares Outstanding - 34,937,321, 34,913,426, and 34,898,353 shares, respectively $ 277,629 $ 277,113 $ 276,702 Retained earnings 384,976 364,581 374,681 ---------- ---------- ---------- Total Common Stockholders' Equity 662,605 641,694 651,383 Long-term debt of subsidiaries, exclusive of sinking fund payments and maturities due within one year 527,104 621,874 622,013 ---------- ---------- ---------- TOTAL CAPITALIZATION 1,189,709 1,263,568 1,273,396 ---------- ---------- ---------- CURRENT LIABILITIES: Interim loans of subsidiaries 12,025 900 10,135 Accounts payable 161,827 102,377 114,630 Dividends payable on common stock 15,722 15,711 15,704 Customer gas service and credit deposits 43,897 40,577 57,790 Sinking fund payments and maturities, due within one year - Long-term debt of subsidiaries 8,000 4,000 4,000 Accrued taxes 63,291 28,160 49,672 Gas sales revenue refundable through rate adjustments 52,032 79,502 49,811 Accrued interest 7,303 12,796 9,428 Temporary LIFO liquidation credit 1,389 -- 4,298 ---------- ---------- ---------- TOTAL CURRENT LIABILITIES 365,486 284,023 315,468 ---------- ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes - primarily accelerated depreciation 211,899 208,424 195,535 Investment tax credits being amortized over the average lives of related property 36,638 38,132 39,444 Other 27,306 28,345 39,429 ---------- ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 275,843 274,901 274,408 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES $1,831,038 $1,822,492 $1,863,272 ========== ========== ========== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> Three Months Ended December 31, --------------------- 1995 1994 --------- --------- (Thousands) <S> <C> <C> OPERATING ACTIVITIES: Net Income $ 36,116 $ 25,127 Adjustments to reconcile net income to net cash: Depreciation and amortization 16,655 16,518 Deferred income taxes and investment tax credits - net 280 4,524 Change in deferred credits and other liabilities 662 (3,983) Change in other assets (30,316) 61 Other 19 28 Change in current assets and liabilities: Receivables - net (79,730) (50,367) Accrued unbilled revenues (47,564) (52,358) Materials and supplies 224 (1,297) Gas in storage (4,820) 26,107 Gas costs recoverable 1,217 (4,777) Accounts payable 59,450 5,495 Customer gas service and credit deposits 3,320 12,370 Accrued taxes 35,132 20,736 Gas sales revenue refundable (27,470) (1,131) Accrued interest (5,493) (3,514) Temporary LIFO liquidation credit 1,389 4,298 Other 575 404 --------- --------- NET CASH USED IN OPERATING ACTIVITIES (40,354) (1,759) --------- --------- INVESTING ACTIVITIES: Capital expenditures of subsidiaries - construction (19,783) (19,721) Other assets 11,881 (349) Other long-term cash investments -- 1,424 Other capital investments (43) (278) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (7,945) (18,924) --------- --------- FINANCING ACTIVITIES: Interim loans of subsidiaries - net 11,125 9,235 Trust fund - utility construction -- 15,053 - bond redemption 237 -- Retirement of long-term debt of subsidiaries (90,770) (4,062) Dividends paid on common stock (15,711) (15,691) Proceeds from issuance of common stock 516 583 --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (94,603) 5,118 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (142,902) (15,565) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 176,239 77,251 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,337 $ 61,686 ========= ========= <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> Peoples Energy Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Peoples Energy Corporation (Company) and its wholly owned subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas), North Shore Gas Company (North Shore Gas), Peoples District Energy Corporation (Peoples District Energy), Peoples Energy Services Corporation, and Peoples NGV Corp., and comprise the assets, liabilities, revenues, expenses, and underlying common stockholders' equity of these companies. Income is principally derived from the Company's utility subsidiaries, Peoples Gas and North Shore Gas. The statements have been prepared by the Company in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) and reflect all adjustments that are, in the opinion of management, necessary to present fairly the results for the interim periods herein and to prevent the information from being misleading. Certain footnote disclosures and other information, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted from these interim financial statements, pursuant to SEC rules and regulations. Therefore, the statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The business of the Company's utility subsidiaries is influenced by seasonal weather conditions because a large element of the utilities' customer load consists of gas used for space heating. Weather-related deliveries can, therefore, have a significant positive or negative impact on net income. Accordingly, the results of operations for the interim periods presented are not indicative of the results to be expected for all or any part of the balance of the current fiscal year. 2. SIGNIFICANT ACCOUNTING POLICIES 2A Revenue Recognition Gas sales revenues for retail customers are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month. 2B Regulated Operations Peoples Gas' and North Shore Gas' utility operations are subject to regulation by the Illinois Commerce Commission (Commission). Regulated operations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This standard controls the application of generally accepted accounting principles for companies whose rates are determined by an independent regulator such as the Commission. Regulatory assets represent certain costs that are expected to be recovered from customers through the ratemaking process. When incurred, such costs are deferred as assets in the balance sheet and subsequently recorded as expenses when those same amounts are reflected in rates. 2C Statement of Cash Flows For purposes of the balance sheet and the statement of cash flows, the Company considers all short-term liquid investments with maturities of three months or less to be cash equivalents. <TABLE> Income taxes and interest paid (excluding capitalized interest) were as follows: <CAPTION> For the three months ended December 31, 1995 1994 ----------------------------------------------- (Thousands) <S> <C> <C> Income taxes paid $ 1,451 $ 722 Interest paid 16,946 14,532 </TABLE> 2D Income Taxes The Company follows the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on Peoples Gas and North Shore Gas, certain adjustments made to deferred income taxes are, in turn, debited or credited to regulatory assets or liabilities. 2E Recovery of Gas Costs, Including Charges for Transition Costs Pursuant to Federal Energy Regulatory Commission (FERC) Order 636 and successor orders, pipelines are allowed to recover from their customers so-called transition costs. These costs arise from the restructuring of pipeline service obligations required by the 636 Orders. The utilities are currently recovering pipeline charges for transition costs through the Gas Charge. (See Notes 4A and 4B.) Under the tariffs of Peoples Gas and North Shore Gas, the difference for any fiscal year between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refunded or recovered over a 12-month billing cycle beginning the following January 1. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or as a current asset (with a contra entry to Gas Costs), and the fiscal year-end balance is amortized over the 12-month period beginning the following January 1. The Commission conducts annual proceedings regarding, for each gas utility, the reconciliation of revenues from the Gas Charge and related costs incurred for gas. In such proceedings, costs recovered by a utility through the Gas Charge are subject to challenge. Such proceedings regarding Peoples Gas for fiscal years 1992 through 1995 and North Shore Gas for fiscal years 1991 through 1995 are currently pending before the Commission. 3. COVENANTS REGARDING RETAINED EARNINGS North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At December 31, 1995, such restrictions amounted to $11.6 million out of North Shore Gas' total retained earnings of $64.6 million. 4. RATES AND REGULATION 4A Utility Rate Proceedings Peoples Gas' Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of Peoples Gas that are designed to increase annual revenues by approximately $30.8 million, exclusive of additional charges for revenue taxes. Peoples Gas was allowed a rate of return on original-cost rate base of 9.19 per cent, which reflects an 11.10 per cent cost of common equity. The new rates were implemented on November 14, 1995. Peoples Gas and a group of industrial transportation customers have appealed the Commission's order to the Illinois Appellate Court. Any change made by the Appellate Court would have a prospective effect only. North Shore Gas' Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of North Shore Gas that are designed to increase annual revenues by approximately $5.6 million, exclusive of additional charges for revenue taxes. North Shore Gas was allowed a rate of return on original-cost rate base of 9.75 per cent, which reflects an 11.30 per cent cost of common equity. The new rates were implemented on November 14, 1995. A group of industrial transportation customers has appealed the Commission's order to the Illinois Appellate Court. Any change made by the Appellate Court would have a prospective effect only. Environmental Cost Recovery. In 1992, the Commission issued an order in its consolidated proceedings, initiated in 1991, regarding the appropriate ratemaking treatment of environmental costs incurred by Illinois utilities, including Peoples Gas and North Shore Gas, in connection with the investigation and treatment of residues associated with past manufactured gas operations ("environmental costs"). In its order, the Commission approved rate recovery of environmental costs over a five-year period, but required the utilities to "share" the environmental costs by disallowing rate recovery of carrying charges on unrecovered balances. Reimbursements of environmental costs from insurance carriers or other entities are to be netted against costs and reflected in rates over a five-year period. In April 1995, the Illinois Supreme Court upheld in part and reversed in part the Commission's order. The Supreme Court upheld the Commission in ruling that environmental costs are recoverable through rates. The Supreme Court also ruled that the Commission's approval of a rate recovery method called a "rider" (the method utilized by Peoples Gas and North Shore Gas) as the preferred mechanism for recovery of environmental costs is within the Commission's authority. The Supreme Court reversed the part of the Commission's order that required the utilities to share environmental costs by disallowing recovery of carrying charges on unrecovered balances. The order was remanded to the Commission for further proceedings consistent with the Supreme Court's opinion. On November 21, 1995, the Commission entered its order on remand. Consistent with the Illinois Supreme Court's April 20, 1995 decision, the Commission, in its order on remand, reversed its earlier order to allow utilities to recover carrying charges on such environmental costs incurred on and after April 20, 1995, the date of the Supreme Court's decision. (See Note 5A.) FERC Order 636 Cost Recovery. On September 15, 1993, the Commission entered an order initiating an investigation into the appropriate means of recovery by Illinois gas utilities of pipeline charges for FERC Order 636 transition costs. The Commission issued a final order in this proceeding on March 9, 1994. The order provides for the full recovery of transition costs from Peoples Gas' and North Shore Gas' gas service customers and transportation customers to the extent they contract for firm standby service. The Citizens Utility Board and State's Attorney of Cook County filed an application for rehearing of the March 9 order with the Commission. In its orders on rehearing, the Commission continued to provide for full recovery of transition costs, but directed that, effective November 1, 1994, gas supply realignment (GSR) costs (one of the four categories of transition costs) be recovered on a uniform volumetric basis from all transportation and sales customers. In December 1994, a group of industrial transportation customers of Illinois utilities appealed the Commission's orders on rehearing to the Illinois Appellate Court. The Illinois Appellate Court, on September 21, 1995, affirmed the Commission's order. A group of industrial transportation customers of Illinois utilities gave notice of their intent to appeal the Appellate Court's order to the Illinois Supreme Court. If the Illinois Supreme Court accepts the appeal, any change made by it to the Commission's order would have a prospective effect only. (See Notes 2E and 4B.) 4B FERC Orders 636, 636-A, and 636-B FERC Order 636 and successor orders require pipelines to make separate rate filings to recover transition costs. There are four categories of such costs, the largest of which for Peoples Gas and North Shore Gas is GSR costs. The utilities are subject to charges for transition cost recovery by Natural Gas Pipeline Company of America (Natural). Charges by Natural for transition costs commenced on January 1, 1994. On September 29, 1994, the FERC approved a Stipulation and Agreement (Agreement) filed by Natural. The Agreement places a cap on the amount of GSR costs recoverable by Natural from Peoples Gas and North Shore Gas. For Peoples Gas, that cap is approximately $103 million and for North Shore Gas, that cap is approximately $25 million. However, subject to these caps, the level of costs that Peoples Gas and North Shore Gas will incur is dependent primarily upon the future market price of natural gas and pipeline negotiations with producers. Peoples Gas and North Shore Gas are currently recovering transition costs through the Gas Charge. At December 31, 1995, Peoples Gas and North Shore Gas have made payments of $51 million and $12.5 million, and have accrued an additional $5.2 million and $1.3 million, respectively, toward the caps. The 636 Orders are not expected to have a material adverse effect on financial position or results of operations of the Company or its subsidiaries. (See Notes 2E and 4A.) 5. ENVIRONMENTAL MATTERS 5A Former Manufactured Gas Plant Operations The Company's utility subsidiaries, their predecessors, and certain former affiliates operated facilities in the past for manufacturing gas and storing manufactured gas. In connection with manufacturing and storing gas, various by-products and waste materials were produced, some of which might have been disposed of rather than sold. Under certain laws and regulations relating to the protection of the environment, the subsidiaries might be required to undertake remedial action with respect to some of these materials, if found at the sites. Two sites in Waukegan, Illinois, are the subjects of investigations (discussed below) initiated by the United States Environmental Protection Agency (EPA). In May 1990, North Shore Gas was notified by the EPA that the EPA had documented the release or threatened release of hazardous substances, pollutants, and contaminants at a site located in Waukegan, Illinois, where manufactured gas and coking operations were formerly conducted (Waukegan I Site). Also, North Shore Gas, General Motors Corporation (GMC), and Outboard Marine Corporation were notified that each may be a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) with respect to the Waukegan I Site. A PRP is potentially liable for the cost of any investigative and/or remedial work that the EPA determines is necessary. In September 1990, North Shore Gas entered into an Administrative Order on Consent (AOC) with the EPA and the IEPA to implement and conduct a remedial investigation/feasibility study (RI/FS) of the Waukegan I Site. The RI/FS is comprised of an investigation to determine the nature and extent of contamination at the site and a feasibility study to develop and evaluate possible remedial actions. Other parties identified as PRPs did not enter into the AOC. Under the terms of the AOC, North Shore Gas is responsible for the cost of the RI/FS. North Shore Gas believes, however, that it will recover a significant portion of the costs of the RI/FS from other entities. GMC has agreed to share equally with North Shore Gas in funding of the RI/FS cost, without prejudice to GMC's or North Shore Gas' right to seek a lesser cost responsibility at a later date. In September 1991, North Shore Gas, the Elgin, Joliet and Eastern Railway (EJ&E), and the North Shore Sanitary District (NSSD) each received an administrative order (AO) issued by the EPA. The AO directed all three entities to remove and dispose of all visible free tar in a pit located within a separate site in Waukegan, Illinois (Waukegan II Site) and to conduct a study to determine the extent of contamination of the tar from the pit to the surrounding property. All of the work under the AO has been completed. North Shore Gas has entered into a settlement agreement with NSSD with respect to costs incurred under the AO. In December 1994, North Shore Gas filed suit against EJ&E in the District Court for the Northern District of Illinois, seeking recovery of response costs incurred by North Shore Gas at the Waukegan II Site. The current owner of a site in McCook, Illinois, near Chicago, has advised Peoples Gas that the owner has found what appear to be wastes associated with by-products of the gas manufacturing process under its property. The owner has asserted that these wastes are the responsibility of Peoples Gas. Peoples Gas is currently evaluating this claim. Peoples Gas and North Shore Gas, in cooperation with the IEPA, are conducting investigations of other sites (a total of 32) to determine whether remedial action might be necessary. The investigations were initiated pursuant to an informal request by the IEPA. To the best of the Company's knowledge, similar informal requests have been made by the IEPA to other major Illinois gas and electric utilities. Peoples Gas and North Shore Gas have engaged environmental consulting firms to assist in the utilities' investigations. At this time, except for the Waukegan I Site and the 110th Street Station site (discussed below), it is not known what, if any, remedial action will be necessary at the sites or, if necessary, what the cost of any such action would be. As discussed below, Peoples Gas may conduct an RI/FS at the Division Street site under the supervision of the IEPA. In addition, Peoples Gas is conducting investigations under the supervision of the IEPA at the 110th Street Station and Equitable Distribution Station sites. In August 1988, the IEPA conducted an inspection at Peoples Gas' Division Street property in Chicago. During the inspection, the IEPA and Peoples Gas took several soil samples for laboratory analysis. The analysis of the samples collected by Peoples Gas indicates the presence of certain substances within the soil of the Division Street property that could be attributable to former manufactured gas operations. Peoples Gas may conduct an RI/FS of the property under the supervision of the IEPA. Peoples Gas has been sued by a prior owner and has received demands from the current owner of a site in Chicago formerly called Pitney Court Station. The former owner alleges damages of over $1 million arising from alleged contamination by Peoples Gas resulting from past gas manufacturing activities on the property. The current owner has demanded that Peoples Gas assume responsibility for investigation and remediation of the alleged contamination. Peoples Gas is currently evaluating these claims. Peoples Gas has observed what appear to be gas purification wastes on a site in Chicago, formerly called the 110th Street Station, and property contiguous thereto. Peoples Gas has fenced the site and the contiguous property and is conducting a study under the supervision of the IEPA to determine the feasibility of a limited removal action. The current owners at a site in Chicago, formerly called South Station, have advised Peoples Gas that they have found what appear to be gas manufacturing wastes underneath their property. The owners have demanded monetary compensation from Peoples Gas because of the presence of such wastes. Peoples Gas is currently evaluating this claim. In 1994, Peoples Gas became aware of a planned residential development at a site in Chicago, formerly called the Equitable Distribution Station. Peoples Gas is conducting a preliminary investigation under the supervision of the IEPA to determine whether gas manufacturing wastes are present at the site. The utility subsidiaries are accruing and deferring the costs they incur in connection with all of the sites, including related legal expenses, pending recovery through rates or from insurance carriers or other entities. At December 31, 1995, the total of the costs deferred by the subsidiaries, net of recoveries and amounts billed to other entities, was $18.5 million. This amount includes an estimate of the costs of completing the studies required by the EPA at the Waukegan I Site and the Waukegan II Site and the investigations initiated at the request of the IEPA at the other sites referred to above. The amount also includes an estimate of the costs of remediation at the Waukegan I Site and at the 110th Street Station site in Chicago, at the minimum amount of the current estimated range of such costs. The costs of remediation at the other sites cannot be determined until more is known about the nature and extent of contamination and the remedial action, if any, to be required by the EPA or the IEPA. While each subsidiary intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time. Peoples Gas and North Shore Gas have filed suit against a number of insurance carriers for the recovery of environmental costs relating to the utilities' former manufactured gas operations. The suit asks the court to declare that the insurers are liable under policies in effect between 1938 and 1985 for costs incurred or to be incurred by the utilities in connection with five former manufactured gas sites in Chicago and Waukegan. The utilities are also asking the court to award damages stemming from the insurers' breach of their contractual obligation to defend and indemnify the utilities against these costs. At this time, management cannot determine the timing and extent of the subsidiaries' recovery of costs from their insurance carriers. Accordingly, the costs deferred at December 31, 1995 have not been reduced to reflect recoveries from insurance carriers. Costs incurred by Peoples Gas or North Shore Gas for environmental activities relating to former manufactured gas operations will be recovered from insurance carriers or other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the subsidiaries in connection with the sites will not have a material adverse effect on financial position or results of operations of the subsidiaries. Peoples Gas and North Shore Gas are recovering the costs of environmental activities relating to the utilities' former manufactured gas operations under rate mechanisms approved by the Commission. At December 31, 1995, the subsidiaries had recovered $4.5 million of such costs through rates. (See Note 4A for a discussion of proceedings regarding the recovery of such costs through utility rates.) 5B Former Mineral Processing Site in Denver, Colorado In February 1994, North Shore Gas received a demand from the S.W. Shattuck Chemical Company, Inc. (Shattuck), a responsible party under CERCLA, for reimbursement, indemnification and contribution for response costs incurred at a former mineral processing site in Denver, Colorado. Shattuck is a wholly owned subsidiary of Salomon, Inc. (Salomon). The demand alleges that North Shore Gas is a successor-in-interest to certain companies that were allegedly responsible during the period 1934-1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. The cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million. Salomon has provided financial assurance for the performance of the remediation at the site. North Shore Gas does not believe that it has liability for the response costs, but cannot determine the matter with certainty. At this time, North Shore Gas cannot reasonably estimate what range of loss, if any, may occur. In the event that North Shore Gas incurred liability, it would pursue reimbursement from insurance carriers, other responsible parties, if any, and through its rates for utility service. In November 1994, North Shore Gas filed a declaratory judgment action against Salomon in the District Court for the Northern District of Illinois. The suit asks the court to declare that North Shore Gas is not liable for response costs incurred or to be incurred at the Denver site. Salomon has filed a counterclaim for costs incurred and to be incurred by Salomon and Shattuck with respect to the site. 5C Gasoline Release in Wheeling, Illinois In June 1995, North Shore Gas received a letter from the IEPA informing North Shore Gas that it was not in compliance with certain provisions of the Illinois Environmental Protection Act which prohibit water pollution within the State of Illinois. On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming North Shore Gas and four other parties as defendants. The complaint alleges that the violations are the result of a gasoline release that occurred in Wheeling, Illinois in June 1992 when a contractor who was installing a pipeline for North Shore Gas accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. North Shore Gas is currently evaluating this matter. 6. GAS OVER-PRESSURE CONDITION On January 17, 1992, an over-pressure condition occurred in the gas mains of Peoples Gas serving an approximately one-square-mile area of the Near Northwest Side of the City of Chicago. The over-pressure condition caused a major explosion and numerous fires. A number of lawsuits, some of which included wrongful-death claims, were filed against the Company and Peoples Gas as a result of the over-pressure condition. All of the lawsuits alleging wrongful-death claims have been settled. While property damage cases are still pending, management believes that any liability that may arise from such cases will not have a material adverse effect on financial position or results of operation of the Company or Peoples Gas. 7. DISTRICT ENERGY Peoples District Energy is a 50 per cent participant in a partnership, Trigen-Peoples District Energy Company, that provides heating and cooling services to the McCormick Place exposition and convention center in Chicago, Illinois. The partnership also intends to offer district energy services to other large buildings in Chicago. The services will ultimately be supplied from one or more central plants, a concept known as district energy. The other partner, Trigen-Chicago Energy Corporation (Trigen-Chicago), is a subsidiary of Trigen Energy Corporation (Trigen). Neither the partnership nor its partners are regulated as a public utility. In December 1992, the partnership entered into a 28-year contract with the Metropolitan Pier and Exposition Authority (MPEA) to construct and operate a plant that will provide steam and chilled water to McCormick Place for heating and cooling purposes (MPEA Agreement). In November 1993, the partnership assumed operation of the current space-conditioning system and began providing service to the two existing halls. The partnership also will provide heating and cooling to a planned exhibition hall that is scheduled to be in operation early in 1997. The partnership is obligated to provide services to McCormick Place for the term of the MPEA Agreement at or below the cost (as determined by a contractual formula) that the MPEA would incur to produce heating and cooling for itself. The MPEA Agreement also obligates the partnership to complete and pay for construction of the plant by certain dates specified in the contract. To secure its obligations during the service period under the MPEA Agreement, the partnership is obligated to provide, maintain, and reinstate a letter of credit upon which the MPEA can draw to pay its costs, expenses, and damages, up to $4 million per incident, principally in the event of the partnership's failure to cure timely an interruption of service. The Company and Trigen have provided two joint and several guarantees to the MPEA of the partnership's performance of its obligations under the MPEA Agreement. One of the guarantees covers all obligations of the partnership relating to construction of the project (Construction Obligations), and is limited in the aggregate to $15 million, except for the guarantors' funding obligations described above and costs to the extent incurred by the MPEA in connection with enforcement of obligations of the partnership or the guarantors. The second guarantee covers all obligations of the partnership other than the Construction Obligations, including liabilities arising from an interruption of service to McCormick Place, insolvency of the partnership, or other partnership default. This second guarantee is limited in the aggregate to $11 million, except for an additional $4 million to $8 million in the event of insolvency of the partnership or the installation (pursuant to enforcement of lender or MPEA remedies) of any other operator of the district energy plant in lieu of the partnership, and except for the partnership's obligations relating to the letter of credit in favor of the MPEA described above and costs to the extent incurred by the MPEA in connection with the enforcement of obligations of the partnership or the guarantors. The district energy plant is estimated to cost approximately $38 million. The MPEA has effectively funded $8 million of the construction costs, and the partnership will fund the balance. In August 1995, the partnership obtained a $28 million construction and term loan to finance construction of a major portion of the project. Upon completion of construction of the project, the construction loans will be converted to a term loan with a 20-year maturity. In connection with the financing, the Company pledged its shares of common stock of Peoples District Energy to the lender as security for the loan obligations. Additionally, the Company, Peoples District Energy, Trigen, Trigen-Chicago and the partnership executed a Sponsors Support and Equity Contribution Agreement (Sponsors Support Agreement). Under the Sponsors Support Agreement, the Company and Trigen have certain contractual obligations to the lender that could require payment by each of the Company and Trigen of 50 per cent of the outstanding loan obligations upon the occurrence of certain events relating to material destruction of the project, condemnation of the project, purchase of the project by the MPEA pursuant to provisions of the MPEA Agreement and default by the partnership, the Company or Trigen of certain of its obligations to the MPEA. 8. TAX MATTERS On September 30, 1993, the Company received notification from the Internal Revenue Service (IRS) that settlement of past income tax returns had been reached for fiscal years 1978 through 1990. The IRS settlement resulted in payments of principal and interest to the Company in 1994 in total amount of approximately $28 million, or $21.6 million after income taxes. Both Peoples Gas and North Shore Gas received regulatory authorization to defer the recognition of the settlement amount in income for fiscal year 1993, and to recognize its portion of the settlement amount in income for fiscal years 1994 and 1995. Each utility represented to the Commission that, having received this accounting authorization, it would not file a request for an increase in base rates before December 1994. The regulatory treatment of the IRS settlement having been resolved in November 1993, Peoples Gas and North Shore Gas together included $14 million, or $10.8 million after income taxes, in income in 1994. The amount after income taxes was included in Other Income - Miscellaneous. At September 30, 1994, approximately $14 million was included in Deferred Credits and Other Liabilities - Other. As a result of the Commission's accounting authorization, the fiscal year 1995 portion of the settlement amount for Peoples Gas and North Shore Gas was amortized (credited) to operation expense. The effect was to offset increases in costs that the utilities would incur during the year. In fiscal 1995, the utilities together amortized approximately $14 million, or $10.8 million after income taxes. 9. LONG-TERM DEBT 9A Issuance of Bonds In March 1993, North Shore Gas filed a shelf registration with the SEC for the issuance of $40 million aggregate principal amount of first mortgage bonds. In May 1993, North Shore Gas issued a portion of those first mortgage bonds in an aggregate principal amount of $15 million at 6.37 per cent due May 1, 2003. Proceeds of the offering were used to refund approximately $11 million aggregate principal amount of North Shore Gas' previously issued first mortgage bonds and for general corporate purposes. North Shore Gas may issue all or a portion of the remaining bonds early in fiscal 1997. Proceeds of any future offering will be used for general corporate purposes. 9B Interest-Rate Adjustments The rate of interest on the City of Joliet 1984 Series C Bonds, which are secured by Peoples Gas' Adjustable-Rate First Mortgage Bonds, Series W, is subject to adjustment annually on October 1. Owners of the Series C Bonds have the right to tender such bonds at par during a limited period prior to that date. Peoples Gas is obligated to purchase any such bonds tendered if they cannot be remarketed. All Series C Bonds that were tendered prior to October 1, 1995, have been remarketed. The interest rate on such bonds is 4 per cent for the period October 1, 1995, through September 30, 1996. The rate of interest on the City of Chicago 1993 Series B Bonds, which are secured by Peoples Gas' Adjustable-Rate First Mortgage Bonds, Series EE, is subject to adjustment annually on December 1. Owners of the Series B Bonds have the right to tender such bonds at par during a limited period prior to that date. Peoples Gas is obligated to purchase any such bonds tendered if they cannot be remarketed. All Series B Bonds that were tendered prior to December 1, 1995, have been remarketed. The interest rate on such bonds is 3.85 per cent for the period December 1, 1995, through November 30, 1996. Peoples Gas classifies these adjustable-rate bonds as long-term liabilities since it would refinance them on a long-term basis if they could not be remarketed. In order to ensure its ability to do so, Peoples Gas established a $37.4 million three year line of credit with The Northern Trust Company. The term of this facility has been extended to January 31, 1998. (See Liquidity and Capital Resources - Credit Lines.) 9C Bonds Redeemed On November 14, 1995, Peoples Gas notified the trustee of the City of Joliet 1984 Gas Supply Revenue Refunding Bonds, Series A and B, which were secured by Peoples Gas' Series U and V First Mortgage Bonds, of its intention to redeem approximately $87 million aggregate principal amount of the bonds. The redemption, from general corporate funds, was completed on December 29, 1995. On December 18, 1995, North Shore Gas notified the trustee of its intention to redeem $8 million aggregate principal amount of Series I First Mortgage Bonds. The redemption, using the proceeds of an interim short-term bank loan as well as other monies of North Shore Gas, was completed on February 1, 1996. 10. SNG PLANT CLOSING Peoples Gas has closed its synthetic gas-making plant located near Joliet, Illinois. The decision was effected after a cost-benefit analysis was performed, which showed that, as of December 1, 1995, it would not be cost-effective to use the plant as a source of gas, given new, more economical supply arrangements to become effective on that date. Those supply arrangements were the result of initiatives undertaken by the utilities to restructure their gas supply portfolios in response to FERC Order 636. The rates approved by the Commission in Peoples Gas' most recent rate case reflect the annual effect of a five-year amortization of the undepreciated investment in the plant and decommissioning expenses. The plant closing did not have a material effect on financial position or results of operations of the Company or Peoples Gas. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Net Income Net income increased $11.0 million, to $36.1 million, for the three months ended December 31, 1995, from the results of last year's like quarter, due mainly to increased gas deliveries largely resulting from weather that was 34 per cent colder than last year's period, which was abnormally warm. In addition, net income benefited from rate increases that went into effect for Peoples Gas and North Shore Gas on November 14, 1995. (See Note 4A of the Notes to Consolidated Financial Statements.) Last year's first quarter was helped by a federal income tax settlement (see Note 8 of the Notes to Consolidated Financial Statements) and by the sale of interests in certain oil and gas rights. Net income increased $12.6 million, to $73.1 million, for the current 12-month period, from the results of the similar prior period, due principally to weather that was 5 per cent colder than the previous 12 months. The current 12-month period also benefited from the aforementioned rate increases and increased gas deliveries to large volume customers. In addition, positive impacts on net income resulted from a decrease in the provision for uncollectible accounts, and the timing difference in recognizing a federal income tax settlement. The prior period also benefited from the sale of interest in certain oil and gas rights. <TABLE> A summary of variations affecting income between periods is presented below, with explanations of significant differences following: <CAPTION> Three Months Ended 12 Months Ended December 31, 1995 December 31, 1995 Increase/(Decrease) Increase/(Decrease) from Prior Period from Prior Period ------------------- ------------------- (Thousands of dollars) Amount % Amount % - -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net operating revenues (a) $24,179 18.6 $21,305 4.5 Operation and maintenance expenses 6,038 10.4 (7,367) (2.9) Depreciation and amortization expense 137 0.8 567 0.9 Income taxes 9,013 64.9 12,779 44.4 Other income and deductions (2,056) (18.5) 1,643 4.2 Net Income 10,989 43.7 12,605 20.8 - -------------------------------------------------------------------------- <FN> (a) Operating revenues, net of gas costs and revenue taxes. </TABLE> Net Operating Revenues Gross revenues of Peoples Gas and North Shore Gas are affected by changes in the unit cost of the subsidiaries' gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the subsidiaries. The direct customer purchases have no effect on net income because the utilities provide transportation service for such gas volumes and recover margins similar to those applicable to conventional gas sales. Changes in the unit cost of gas do not significantly affect net income because the utilities' tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 2E of the Notes to Consolidated Financial Statements.) The utilities' tariffs also provide for dollar-for-dollar recovery of the cost of revenue taxes imposed by the state and various municipalities. Since income is not significantly affected by changes in revenue from customers' gas purchases from producers or marketers rather than from the subsidiaries, changes in gas costs, or changes in revenue taxes, the discussion below pertains to "net operating revenues" (operating revenues, net of gas costs and revenue taxes). The Company considers net operating revenues to be a more pertinent measure of operating results than gross revenues. Net operating revenues increased $24.2 million, to $154 million, and $21.3 million, to $490.4 million, for the current three- and 12-month periods, respectively, reflecting increased gas deliveries, mainly caused by colder weather in each of the more recent periods. The aforementioned rate increases for the Company's utility subsidiaries improved net operating revenues in both periods by about $5.8 million, and net income by $3.5 million. In addition, the 12-month period was impacted by increased deliveries to large volume customers. See Other Matters - Operating Statistics for details of selected financial and operating information by gas service classification. Operation and Maintenance Expenses Operation and maintenance expenses increased $6.0 million, to $64.2 million, for the current three-month period, due mainly to the recognition in the prior year's first quarter of $3.7 million from the sale of interests in certain oil and gas rights and $4.3 million for an IRS settlement. (See Note 8 of the Notes to Consolidated Financial Statements.) The effect of these increases was partially offset by reduced pension expenses of $1.8 million, primarily resulting from a change in assumptions. Operation and maintenance expenses decreased $7.4 million, to $246.9 million for the current 12-month period, due principally to a decrease of $8.8 million for the provision for uncollectible accounts, and an increased credit of $5.5 million between periods for the timing difference in recognizing an IRS settlement. In addition, pension and group insurance expenses decreased $2.1 million and $1.8 million, respectively. These decreases were partially offset by increased costs of $3.4 million related to the reengineering program, higher maintenance costs of $3.4 million, and the prior year's benefit of $3.7 million from the sale of interests in certain oil and gas rights. Depreciation and Amortization Expense Depreciation and amortization expense increased $567,000, to $66.5 million, for the current 12-month period, due primarily to depreciable property additions and the amortization of costs associated with the closing of Peoples Gas' SNG Plant (see Note 10 of the Notes to Consolidated Financial Statements). These increases were largely offset by lower net dismantling costs in the current period. Income Taxes Income taxes, exclusive of taxes related to the closing of the SNG Plant included in other income and deductions, increased $9.0 million, to $22.9 million, in the current three-month period, due principally to higher pre-tax income. Income taxes, exclusive of taxes related to the closing of the SNG Plant included in other income and deductions, increased $12.8 million, to $41.6 million, in the current 12-month period, due mainly to higher pre-tax income together with an adjustment made in 1994 to reduce taxes accrued. Other Income and Deductions Other income and deductions decreased $2.1 million, for the current three-month period, due primarily to increased interest income, reduced interest expense on long-term debt, and the accelerated recognition of investment tax credits for Peoples Gas' SNG Plant closing. These amounts were partially offset by increased interest expense on amounts refundable to customers and on budget accounts, and by a charge, after income taxes, reflecting the disallowance of carrying charges associated with the closing of the SNG Plant. (See Note 10 of the Notes to Consolidated Financial Statements.) Other income and deductions increased $1.6 million, for the current 12-month period, due primarily to increased interest expense on amounts refundable to customers and on budget accounts, and the aforementioned charge for the SNG Plant closing. Also, the amortization of the net gain on the sale of the Peoples Gas Building was completed in March 1995 with the expiration of Peoples Gas' lease at its former headquarters. These increases were partially offset by increased interest income and the accelerated recognition of investment tax credits for the SNG Plant closing. Other Matters Effect of Weather. Weather variations affect the volumes of gas delivered for heating purposes and, therefore, can have a significant positive or negative impact on net income and coverage ratios. FERC Order 636 Costs. In 1992, the FERC issued Order 636 and successor orders that required substantial restructuring of the service obligations of interstate pipelines. (See Notes 2E, 4A, and 4B of the Notes to Consolidated Financial Statements.) On September 15, 1993, the Commission entered an order initiating an investigation into the appropriate means of recovery by Illinois gas utilities of pipeline charges for FERC Order 636 transition costs. The Illinois Appellate Court affirmed the Commission's order on rehearing on September 21, 1995. (See Notes 2E, 4A, and 4B of the Notes to Consolidated Financial Statements.) Reengineering Study. Peoples Gas and North Shore Gas have undertaken a major project to reengineer their business processes with the goal of increasing efficiency, responsiveness to customer needs, and cost effectiveness. <TABLE> Operating Statistics. The following table represents gas distribution margin components: <CAPTION> Three Months Ended Twelve Months Ended December 31, December 31, ------------------ ---------------------- 1995 1994 1995 1994 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Operating Revenues (thousands): Gas sales Residential $233,776 $226,508 $ 760,065 $ 891,392 Commercial 33,982 33,468 116,627 149,311 Industrial 7,415 6,576 24,967 37,497 -------- -------- ---------- ---------- 275,173 266,552 901,659 1,078,200 -------- -------- ---------- ---------- Transportation Residential 12,344 10,435 39,758 34,781 Commercial 16,677 13,634 53,362 45,445 Industrial 10,249 8,683 36,212 29,255 -------- -------- ---------- ---------- 39,270 32,752 129,332 109,481 -------- -------- ---------- ---------- Other 3,162 7,819 12,892 19,648 -------- -------- ---------- ---------- Total Operating Revenues 317,605 307,123 1,043,883 1,207,329 Less - Gas Costs 129,871 146,087 441,220 613,424 - Revenues Taxes 33,765 31,246 112,239 124,786 -------- -------- ---------- ---------- Net Operating Revenues $153,969 $129,790 $ 490,424 $ 469,119 ======== ======== ========== ========== Deliveries (MDth): Gas Sales Residential 47,793 36,818 141,546 135,229 Commercial 7,417 5,788 23,708 24,624 Industrial 1,825 1,206 5,678 6,636 -------- -------- ---------- ---------- 57,035 43,812 170,932 166,489 -------- -------- ---------- ---------- Transportation Residential 8,862 7,095 26,578 24,090 Commercial 13,772 11,210 44,210 40,383 Industrial 12,144 10,018 42,019 35,558 -------- -------- ---------- ---------- 34,778 28,323 112,807 100,031 -------- -------- ---------- ---------- Total Gas Sales and Transportation 91,813 72,135 283,739 266,520 ======== ======== ========== ========== Margin per Dth delivered $ 1.68 $ 1.80 $ 1.73 $ 1.76 </TABLE> LIQUIDITY AND CAPITAL RESOURCES Indenture Restrictions. North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At December 31, 1995, such restrictions amounted to $11.6 million out of North Shore Gas' total retained earnings of $64.6 million. (See Note 3 of the Notes to Consolidated Financial Statements.) Regulatory Actions. On November 8, 1995, the Commission issued orders approving changes in rates of Peoples Gas and North Shore Gas. (See Note 4A of the Notes to Consolidated Financial Statements.) In 1992, the Commission issued an order in its consolidated proceedings, initiated in 1991, regarding the appropriate ratemaking treatment of environmental costs relating to past manufactured gas operations incurred by Illinois utilities, including Peoples Gas and North Shore Gas. In its order, the Commission approved rate recovery of such environmental costs but required that the recovery occur over a five-year period without recovery of carrying charges on unrecovered balances. The part of the Commission's order that disallowed recovery of carrying charges on unrecovered balances has been reversed on appeal by the Illinois Supreme Court, which has remanded the case to the Commission. On November 21, 1995, the Commission entered its order on remand. (See Note 4A of the Notes to Consolidated Financial Statements.) On September 29, 1995, Peoples Gas and North Shore Gas filed petitions with the Commission for approval of performance-based rate programs (PBR Programs) for gas costs. The objectives of the PBR Programs are to provide incentives to minimize gas supply and capacity costs in a changing market and to pursue innovative gas supply-related opportunities. Under specified conditions and up to certain limits, Peoples Gas and North Shore Gas would share equally with gas sales customers the savings or costs from these programs. The PBR Programs would be for a pilot period covering fiscal years 1996 through 1998 and were filed pursuant to a new provision of the Illinois Public Utilities Act which allows experiments in performance-based rates. The Commission has commenced hearings on the PBR Program proposals, and orders are expected during the third quarter of fiscal 1996. Environmental Matters. The Company's utility subsidiaries are conducting environmental investigations and work at certain sites that were the location of former manufactured gas operations. (See Note 5A of the Notes to Consolidated Financial Statements.) In February 1994, North Shore Gas received a demand from a responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) for reimbursement, indemnification and contribution for response costs incurred at a former mineral processing site in Denver, Colorado. In November 1994, North Shore Gas filed a declaratory judgment action asking the court to declare that North Shore Gas is not liable for response costs relating to the site. (See Note 5B of the Notes to Consolidated Financial Statements.) On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming North Shore Gas and four other parties as defendants. The complaint alleges violations arising out of a gasoline release that occurred in Wheeling, Illinois in June 1992 when a contractor who was installing a pipeline for North Shore Gas accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. North Shore Gas is currently evaluating this matter. (See Note 5C of the Notes to Consolidated Financial Statements.) District Energy. Peoples District Energy is a 50 per cent participant in a partnership, Trigen-Peoples District Energy Company, that provides district energy services to the McCormick Place exposition and convention center in Chicago, Illinois. The partnership also intends to offer district energy services to other large buildings in Chicago. The other partner is a subsidiary of Trigen Energy Corporation (Trigen), a company whose primary business is constructing and operating district energy facilities. Neither the partnership nor its partners are regulated as a public utility. The Company and Trigen have each provided two joint and several limited guarantees to the owner and operator of McCormick Place and also have certain limited obligations to the partnership's lender under a Sponsors Support and Equity Contribution Agreement. (See Note 7 of the Notes to Consolidated Financial Statements.) Bonds Issued. In March 1993, North Shore Gas filed a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of $40 million aggregate principal amount of first mortgage bonds. In May 1993, North Shore Gas issued a portion of those first mortgage bonds in an aggregate principal amount of $15 million at 6.37 per cent, due May 1, 2003. (See Note 9A of the Notes to Consolidated Financial Statements.) Additional bonds are issuable by the utility subsidiaries, upon approval by the Commission, subject to limitations imposed by certain restrictive provisions of the subsidiaries' open-end mortgages and supplements thereto. These restrictions are not expected to have an impact on the subsidiaries' ability to issue additional debt, as needed. Bonds Redeemed. On November 14, 1995, Peoples Gas notified the trustee of the City of Joliet 1984 Gas Supply Revenue Refunding Bonds, Series A and B, which were secured by Peoples Gas' Series U and V First Mortgage Bonds, of its intention to redeem approximately $87 million aggregate principal amount of the bonds. The redemption, from general corporate funds, was completed on December 29, 1995. (See Note 9C of the Notes to Consolidated Financial Statements.) On December 18, 1995, North Shore Gas notified the trustee of its intention to redeem $8 million aggregate principal amount of Series I First Mortgage Bonds. The redemption, using the proceeds of an interim short-term bank loan as well as other monies of North Shore Gas, was completed on February 1, 1996. (See Note 9C of the Notes to Consolidated Financial Statements.) Credit Lines. The utility subsidiaries have lines of credit of $131.1 million. Agreements covering $93.7 million of the total will expire on June 26, 1996. The agreement covering the remaining $37.4 million will expire on January 31, 1998. Such lines of credit cover projected short-term credit needs of the subsidiaries and support the long-term debt treatment of Peoples Gas' adjustable-rate mortgage bonds. (See Note 9B of the Notes to Consolidated Financial Statements.) Interest Coverage. The fixed charges coverage ratios for Peoples Gas for the 12-months ended December 31, 1995, and fiscal 1995 and 1994 were 3.09, 2.76, and 3.28, respectively. The corresponding coverage ratios for North Shore Gas for the same periods were 3.36, 2.93, and 3.33, respectively. Dividends. On February 7, 1996, the Directors of the Company voted to increase the regular quarterly dividend on the Company's common stock to 46 cents per share from 45 cents per share previously in effect. The annualized dividend rate is now equal to $1.84 per share. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 5 of the Notes to Consolidated Financial Statements for a discussion pertaining to environmental matters. See Note 6 of the Notes to Consolidated Financial Statements for a discussion of an over-pressure condition that occurred on January 17, 1992, in Peoples Gas' gas mains on the Near Northwest Side of the City of Chicago. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number Description of Document ---------- ---------------------------- 27 Financial Data Schedule b. Reports on Form 8-K filed during the quarter ended December 31, 1995 Date of Report - November 15, 1995 Item 5. Other Events Rates and Regulation SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Peoples Energy Corporation --------------------------- (Registrant) February 13, 1996 By: /s/ K. S. BALASKOVITS - ----------------- ---------------------------- (Date) K. S. Balaskovits Vice President and Controller (Same as above) ----------------------------- Principal Accounting Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> UT <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-START> OCT-01-1995 <PERIOD-END> DEC-31-1995 <BOOK-VALUE> PER-BOOK <TOTAL-NET-UTILITY-PLANT> 1,364,316 <OTHER-PROPERTY-AND-INVEST> 10,391 <TOTAL-CURRENT-ASSETS> 369,834 <TOTAL-DEFERRED-CHARGES> 15,048 <OTHER-ASSETS> 71,449 <TOTAL-ASSETS> 1,831,038 <COMMON> 277,629 <CAPITAL-SURPLUS-PAID-IN> 0 <RETAINED-EARNINGS> 384,976 <TOTAL-COMMON-STOCKHOLDERS-EQ> 662,605 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <LONG-TERM-DEBT-NET> 527,104 <SHORT-TERM-NOTES> 900 <LONG-TERM-NOTES-PAYABLE> 0 <COMMERCIAL-PAPER-OBLIGATIONS> 11,125 <LONG-TERM-DEBT-CURRENT-PORT> 8,000 <PREFERRED-STOCK-CURRENT> 0 <CAPITAL-LEASE-OBLIGATIONS> 0 <LEASES-CURRENT> 0 <OTHER-ITEMS-CAPITAL-AND-LIAB> 621,304 <TOT-CAPITALIZATION-AND-LIAB> 1,831,038 <GROSS-OPERATING-REVENUE> 317,605 <INCOME-TAX-EXPENSE> 22,903 <OTHER-OPERATING-EXPENSES> 249,548 <TOTAL-OPERATING-EXPENSES> 272,451 <OPERATING-INCOME-LOSS> 45,154 <OTHER-INCOME-NET> 3,911 <INCOME-BEFORE-INTEREST-EXPEN> 49,065 <TOTAL-INTEREST-EXPENSE> 12,949 <NET-INCOME> 36,116 <PREFERRED-STOCK-DIVIDENDS> 0 <EARNINGS-AVAILABLE-FOR-COMM> 36,116 <COMMON-STOCK-DIVIDENDS> 15,711 <TOTAL-INTEREST-ON-BONDS> 10,763 <CASH-FLOW-OPERATIONS> (40,354) <EPS-PRIMARY> 1.03 <EPS-DILUTED> 1.03 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

PH

https://www.sec.gov/Archives/edgar/data/76334/0000076334-96-000003.txt

-----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, FVxfq6e92b3fd+csQJ5ETzq8sfUPXDrpRQSQZUx4qEAYMDnaHriMFZTfqZQ0Xuh4 fhroY6STaC8uHiwelgeWdQ== <SEC-DOCUMENT>0000076334-96-000003.txt : 19960216 <SEC-HEADER>0000076334-96-000003.hdr.sgml : 19960216 ACCESSION NUMBER: 0000076334-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARKER HANNIFIN CORP CENTRAL INDEX KEY: 0000076334 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 340451060 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04982 FILM NUMBER: 96517341 BUSINESS ADDRESS: STREET 1: 17325 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44112 BUSINESS PHONE: 2165313000 FORMER COMPANY: FORMER CONFORMED NAME: PARKER APPLIANCE CO DATE OF NAME CHANGE: 19670907 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 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 1-4982 PARKER-HANNIFIN CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-0451060 (State or other (IRS Employer jurisdiction of Identification No.) incorporation) 17325 Euclid Avenue, Cleveland, Ohio 44112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 531-3000 Indicate by check mark whether 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Number of Common Shares outstanding at December 31, 1995 74,163,385 <PAGE> PARKER-HANNIFIN CORPORATION INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income - Three Months and Six Months Ended December 31, 1995 and 1994 3 Consolidated Balance Sheet - December 31, 1995 and June 30, 1995 4 Consolidated Statement of Cash Flows - Six Months Ended December 31, 1995 and 1994 5 Business Segment Information by Industry - Three Months and Six Months Ended December 31, 1995 and 1994 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 EXHIBIT 11* - Computation of Earnings per Common Share 13 EXHIBIT 27* - Financial Data Schedule 14 *Numbered in accordance with Item 601 of Regulation S-K. - 2 - <PAGE> PART I - FINANCIAL INFORMATION <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net sales $ 824,376 $ 738,231 $ 1,663,430 $ 1,450,688 Cost of sales 641,481 572,862 1,287,090 1,123,389 _________ _________ ___________ ___________ Gross profit 182,895 165,369 376,340 327,299 Selling, general and administrative expenses 101,189 91,168 198,908 172,703 _________ _________ ___________ ___________ Income from operations 81,706 74,201 177,432 154,596 Other income (deductions): Interest expense (7,241) (7,654) (15,229) (14,878) Interest and other income, net 2,355 148 5,688 336 _________ _________ ___________ ___________ (4,886) (7,506) (9,541) (14,542) _________ _________ ___________ ___________ Income before income taxes 76,820 66,695 167,891 140,054 Income taxes 28,424 25,611 62,120 55,321 _________ _________ ___________ ___________ Net income $ 48,396 $ 41,084 $ 105,771 $ 84,733 ========= ========= =========== =========== Earnings per share (A) $ .66 $ .56 $ 1.43 $ 1.15 Cash dividends per common share (A) $ .180 $ .167 $ .360 $ .334 (A) Fiscal 1995 per share amounts have been adjusted for the 3-shares-for-2 common stock split paid June 2, 1995. See accompanying notes to consolidated financial statements. </TABLE> - 3 - <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands) December 31, June 30, 1995 1995 (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 73,777 $ 63,830 Accounts receivable, net 444,635 484,962 Inventories: Finished products 329,787 314,180 Work in process 220,461 201,386 Raw materials 104,774 110,340 ___________ ___________ 655,022 625,906 Prepaid expenses 13,625 14,994 Deferred income taxes 66,885 56,690 ___________ ___________ Total current assets 1,253,944 1,246,382 Plant and equipment 1,871,354 1,812,667 Less accumulated depreciation 1,029,794 996,896 ___________ ___________ 841,560 815,771 Other assets 244,672 240,056 ___________ ___________ Total assets $ 2,340,176 $ 2,302,209 =========== =========== LIABILITIES Current liabilities: Notes payable $ 127,599 $ 97,372 Accounts payable, trade 185,358 227,482 Accrued liabilities 259,922 280,891 Accrued domestic and foreign taxes 49,704 46,876 ___________ ___________ Total current liabilities 622,583 652,621 Long-term debt 234,644 237,157 Pensions and other postretirement benefits 181,337 188,292 Deferred income taxes 18,570 23,512 Other liabilities 9,493 9,113 ___________ ___________ Total liabilities 1,066,627 1,110,695 SHAREHOLDERS' EQUITY Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued -- -- Common stock, $.50 par value; authorized 300,000,000 shares; issued 74,163,385 shares at December 31 and 74,002,402 shares at June 30 37,082 37,001 Additional capital 160,385 158,454 Retained earnings 1,053,580 974,486 Deferred compensation related to guarantee of ESOP debt (6,895) (13,468) Currency translation adjustment 29,397 35,041 ___________ ___________ Total shareholders' equity 1,273,549 1,191,514 ___________ ___________ Total liabilities and shareholders' equity $ 2,340,176 $ 2,302,209 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> - 4 - <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited) Six Months Ended December 31, 1995 1994 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 105,771 $ 84,733 Adjustments to reconcile net income to net cash provided by operations: Depreciation 63,969 55,516 Amortization 4,731 3,982 Deferred income taxes (8,615) (2,848) Foreign currency transaction loss 751 83 (Gain) loss on sale of plant and equipment (33) 511 Changes in assets and liabilities: Accounts receivable 37,897 9,614 Inventories (28,384) (31,724) Prepaid expenses 1,094 2,806 Other assets (7,292) (6,588) Accounts payable, trade (41,819) (23,050) Accrued payrolls and other compensation (20,919) (8,825) Accrued domestic and foreign taxes 2,894 (7,651) Other accrued liabilities 5,706 (6,508) Pensions and other postretirement benefits (5,489) 7,899 Other liabilities 479 (1,553) __________ _________ Net cash provided by operating activities 110,741 76,397 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions (excluding cash of $68 in 1995 and $5,146 in 1994) (13,030) (105,750) Capital expenditures (100,625) (59,548) Proceeds from sale of plant and equipment 7,649 8,937 Other (3,468) 3,574 __________ _________ Net cash used in investing activities (109,474) (152,787) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common share activity 28 6,998 Proceeds from notes payable, net 39,766 63,275 Proceeds from long-term borrowings 1,016 18,887 Payments of long-term borrowings (5,011) (26,721) Dividends (26,677) (24,560) __________ _________ Net cash provided by financing activities 9,122 37,879 Effect of exchange rate changes on cash (442) 474 __________ _________ Net increase (decrease) in cash and cash equivalents 9,947 (38,037) Cash and cash equivalents at beginning of year 63,830 81,590 __________ _________ Cash and cash equivalents at end of period $ 73,777 $ 43,553 ========== ========= See accompanying notes to consolidated financial statements. </TABLE> - 5 - <PAGE> PARKER-HANNIFIN CORPORATION BUSINESS SEGMENT INFORMATION BY INDUSTRY (Dollars in thousands) (Unaudited) Parker operates in two industry segments: Industrial and Aerospace. The Industrial Segment is the largest and includes the International operations. Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, and agricultural and military machinery and equipment. Sales are direct to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket. Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, military and general-aviation aircraft, missile and spacecraft markets. The Aerospace Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications. <TABLE> <CAPTION> Results by Business Segment: Three Months Ended Six Months Ended December 31, December 31, 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net sales, including intersegment sales Industrial: North America $ 462,576 $ 422,225 $ 936,649 $ 840,059 International 227,405 190,689 457,168 360,840 Aerospace 134,563 125,532 269,894 250,100 Intersegment sales (168) (215) (281) (311) _________ _________ ___________ ___________ Total $ 824,376 $ 738,231 $ 1,663,430 $ 1,450,688 ========= ========= =========== =========== Income from operations before corporate general and administrative expenses Industrial: North America $ 59,848 $ 56,038 $ 126,410 $ 117,706 International 16,549 15,209 38,733 28,129 Aerospace 17,073 13,354 35,452 28,891 _________ _________ ___________ ___________ Total 93,470 84,601 200,595 174,726 Corporate general and administrative expenses 11,764 10,400 23,163 20,130 _________ _________ ___________ ___________ Income from operations $ 81,706 $ 74,201 $ 177,432 $ 154,596 ========= ========= =========== =========== See accompanying notes to consolidated financial statements. - 6 - <PAGE> PARKER-HANNIFIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in thousands, except per share amounts _______________________ 1. Management Representation In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of December 31, 1995, the results of operations for the three and six months ended December 31, 1995 and 1994 and cash flows for the six months then ended. 2. Segment Reclassification Fiscal 1995 results have been restated to reclassify an operating division from the Aerospace Segment to the Industrial Segment (North America) to be consistent with fiscal 1996 reporting. Existing business practices, distribution methods and internal organization more properly align this operating division with the Industrial Segment. The effect on both Segments is immaterial. 3. Earnings per share Fiscal 1995 per share amounts have been adjusted for the 3-shares-for-2 common stock split paid June 2, 1995. Primary earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share are not presented because such dilution is not material. 4. Acquisitions The Company has signed an agreement with Power Control Technologies, Inc. to purchase the aerospace assets of the Abex / NWL Division of Pneumo Abex Corporation for approximately $193 million cash. Abex / NWL, headquartered in Kalamazoo, Michigan, is a major international producer of aerospace hydraulic actuation equipment, engine thrust-reverser actuators, hydraulic pumps, electrohydraulic servovalves, hydraulic systems, and electro- mechanical actuation equipment with annual sales of approximately $200 million. The transaction is expected to be completed in March or April after shareholder approval and governmental review. The Company also announced that it has signed a letter of intent to acquire VOAC Hydraulics of Boras, Sweden, a world leader in the manufacturing of mobile hydraulic equipment with calendar 1995 annual sales of approximately $166 million. The transaction should be completed during the third quarter. On July 31, 1995 the Company purchased the General Valve Corp. of Fairfield, New Jersey, a leading producer of miniature solenoid valves for high-technology applications for approximately 152,000 shares of common stock. Also on August 4, 1995 the Company purchased inventory and machinery from Teledyne Fluid Systems consisting of the Republic Valve product line, the Sprague double-diaphragm pump line and the Sprague airborne accumulator product line for approximately $5.2 million in cash. Sales by these operations for their most recent fiscal year prior to acquisition approximated $16.8 million. These acquisitions were accounted for by the purchase method. - 7 - <PAGE> PARKER-HANNIFIN CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 AND COMPARABLE PERIODS ENDED DECEMBER 31, 1994 CONSOLIDATED STATEMENT OF INCOME Net sales increased 11.7 percent for the second quarter and 14.7 percent for the six-month period ended December 31, 1995. Without the effect of acquisitions the increases would have been 7.3 percent and 8.8 percent, respectively. These increases, although less than were experienced during fiscal 1995, are the result of market-share gains as well as the worldwide growth of the industrial markets. Income from operations was $81.7 million for the current second quarter and $177.4 million for the current six months, an increase of 10.1 percent for the quarter and 14.8 percent for the six months. As a percent of sales, Income from operations decreased to 9.9 percent from 10.1 percent for the quarter and remained at 10.7 percent for the six months. Cost of sales as a percent of sales increased to 77.8 percent from 77.6 percent for the quarter and remained at 77.4 percent for the six-month period. The decline in gross profit for the quarter is primarily due to the mix of products sold. Selling, general and administrative expenses, as a percent of sales, remained fairly steady for both the three and six month periods. The effective income tax rate for the current quarter and first half was 37.0 percent compared to rates of 38.4 percent and 39.5 percent, respectively for fiscal 1995. The lower rate in fiscal 1996 is due to the continuing benefit realized from the use of net operating loss carry-forwards and a change in the geographic mix of earnings. Net income increased 17.8 percent for the quarter and 24.8 percent for the half, as compared to the prior year. As a percent of sales, Net income increased to 5.9 percent from 5.6 percent for the quarter and to 6.4 percent from 5.8 percent for the six months. Backlog increased to $1,023.8 million at December 31, 1995 as compared to $950.2 million the prior year, but was down slightly from $1,025.7 million at June 30, 1995. The increase in backlog over the prior year was partially due to acquisitions, but was primarily due to increased volume for both the Industrial and Aerospace Segments. BUSINESS SEGMENT INFORMATION BY INDUSTRY INDUSTRIAL - The Industrial Segment operations achieved the following Net sales increases in the current year when compared to the equivalent prior-year period: Period ending December 31, Three Months Six Months Industrial North America 9.6 % 11.5 % Industrial International 19.3 % 26.7 % Total Industrial 12.6 % 16.1 % - 8 - <PAGE) Without the effect of currency-rate changes, International sales would have increased 15.4 percent for the quarter and 21.0 percent for the six months. Without the effect of acquisitions, the increases would have been: Period ending December 31, Three Months Six Months Industrial North America 6.6 % 6.7 % Industrial International 8.4 % 13.6 % Total Industrial 7.1 % 8.8 % The total Industrial business continues at a healthy pace, but the rate of sales growth has moderated appreciably in Europe and in some North American markets as compared to the significant growth rate experienced during fiscal 1995. The sales increases were the result of market growth and the market share gains the Company achieved through concentrated efforts towards reaching expanding markets and providing premier customer service. For fiscal 1996, Industrial North America volume is expected to modestly exceed prior year volume (excluding the effect of acquisitions) while Industrial International volume is expected to continue to grow. Sales in Latin America have slowed due to a weakened general economy and are expected to be at lower levels through the remainder of the fiscal year. Operating income for the Industrial Segment was up 7.2 percent for the quarter and 13.2 percent for the six months. Industrial North America Operating income increased 6.8 percent for the quarter and 7.4 percent for the six months while Industrial International results increased 8.8 percent for the quarter and 37.7 percent for the six months. Without the effect of acquisitions the total Industrial Segment Operating income would have increased 4.2 percent for the quarter and 7.0 percent for the six months. As a percent of sales, Industrial North America Operating income decreased to 12.9 percent from 13.3 percent for the quarter and to 13.5 percent from 14.0 percent for the six months. Industrial International Operating income also decreased to 7.3 percent from 8.0 percent for the quarter, but improved to 8.5 percent from 7.8 percent for the six months. The margin percentage declines in North America are the result of a change in product mix. Industrial International margin percentages were affected by the slowing growth during the quarter and in addition were affected by the weakened economy in Latin America. Management expects margin improvements during the second half in both North America and overall International operations, although conditions in Latin America are uncertain. Total Industrial Segment backlog increased 7.0 percent compared to December 31, 1994 and 1.3 percent since June 30, 1995 with a larger portion of the increases occurring within the International operations. AEROSPACE - Aerospace Segment Net sales were up 7.2 percent for the quarter and 7.9 percent for the six months. Increases which were achieved in both original equipment and maintenance, repair, and overhaul markets due primarily to increased market penetration were partially offset by a small reduction in military sales. Increases in repair and maintenance are expected to continue through the fiscal year. Operating income for the Aerospace Segment increased 27.8 percent for the quarter and 22.7 percent for the six-month period. As a percent of sales Operating income improved to 12.7 percent from 10.6 percent for the quarter and to 13.1 percent from 11.6 percent for the six-month period. This margin improvement is due to increased maintenance, repair and overhaul activity and continuing benefits realized from prior years' restructuring activities. Management expects the trend of increasing volume and higher margins to continue during the remainder of the fiscal year. Aerospace Segment backlog increased 8.3 percent from December 31, 1994, but is 1.3 percent lower than at June 30, 1995. - 9 - <PAGE) CONSOLIDATED BALANCE SHEET Working capital increased to $631.4 million at December 31, 1995 from $593.8 million at June 30, 1995 with the ratio of current assets to current liabilities increasing slightly to 2.0 to 1. Accounts receivable were lower on December 31, 1995 than on June 30, 1995 primarily due to the lower level of sales in the month of December as a result of the holidays. Inventory levels were higher at December 31, 1995 due to the slower than expected growth in the Industrial markets. The Company is adjusting its manufacturing schedules to match the slower growth while maintaining the resources available to provide on-time delivery to the customers. Plant and equipment, net increased $25.8 million since June 30, 1995 as the Company continued to invest in its strategy to provide premier customer service. Notes payable increased $30.2 million since June 30, 1995 due to short-term operating cash needs in certain European operations. Long-term debt declined slightly. The debt to debt-equity ratio, excluding the effect of the ESOP loan guarantee on both Long-term debt and Shareholders' equity, increased slightly to 21.7 percent at December 31, 1995 from 21.0 percent at June 30, 1995 as a result of the increase in Notes payable. Decreases in Accounts payable, trade and Accrued liabilities were primarily due to lower production levels in the month of December and the timing of payroll. CONSOLIDATED STATEMENT OF CASH FLOWS Net cash provided by operating activities was $110.7 million for the six months ended December 31, 1995, as compared to $76.4 million for the same six months in 1994 primarily as a result of higher Net income and a lower use of cash for working capital items. Changes in the principal working capital items - Accounts receivable, Inventories, and Accounts payable, trade - resulted in the use of $32.3 million cash in fiscal 1996 as compared to $45.2 million in fiscal 1995. Net cash used in investing activities decreased to $109.5 million from $152.8 million for the six months ended December 31, 1995 and 1994 as a result of less cash spent on acquisitions. This decrease was offset by increased capital expenditures in fiscal 1996 as the Company integrates new equipment into the operations. Financing activities provided cash of $9.1 million for the six months ended December 31, 1995 and $37.9 million for the same period in 1994. Fiscal 1995 acquisition activity caused the need for a higher level of borrowings in that year. - 10 - <PAGE) PARKER-HANNIFIN CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The following documents are furnished as exhibits and numbered pursuant to Item 601 of Regulation S-K: Exhibit 11 - Statement regarding computation of per share earnings. Exhibit 27 - Financial Data Schedule (b) No reports on Form 8-K have been filed during the quarter for which this Report is filed. SIGNATURE 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. PARKER-HANNIFIN CORPORATION (Registrant) Michael J. Hiemstra Michael J. Hiemstra Vice President - Finance and Administration Date: February 13, 1996 - 11 - <PAGE> EXHIBIT INDEX Sequential Exhibit No. Description of Exhibit Page 11 Computation of Earnings Per Common Share 13 27 Financial Data Schedule 14 - 12 - <PAGE> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> EXHIBIT 11 <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION FORM 10-Q COMPUTATION OF EARNINGS PER COMMON SHARE (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, 1995 1994 (A) 1995 1994 (A) <S> <C> <C> <C> <C> Net income applicable to common shares $ 48,396 $ 41,084 $ 105,771 $ 84,733 ============ ============ ============ ============ Weighted average common shares outstanding for the period 74,157,805 73,692,056 74,114,333 73,572,656 Increase in weighted average from dilutive effect of exercise of stock options 488,250 567,329 649,986 536,192 ____________ ____________ ____________ ____________ Weighted average common shares, assuming issuance of the above securities 74,646,055 74,259,385 74,764,319 74,108,848 ============ ============ ============ ============ Earnings per common share: Primary $ .66 $ .56 $ 1.43 $ 1.15 Fully diluted (B) $ .64 $ .55 $ 1.41 $ 1.14 <FN> (A) Weighted average shares and earnings per share have been restated for the 3-shares-for-2 common stock split paid June 2, 1995. (B) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required for income statement presentation because it results in dilution of less than 3 percent. </TABLE> - 13 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-Q FOR ITS QUARTERLY PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1996 <PERIOD-END> DEC-31-1995 <CASH> 73,777 <SECURITIES> 0 <RECEIVABLES> 396,595 <ALLOWANCES> 6,458 <INVENTORY> 655,022 <CURRENT-ASSETS> 1,253,944 <PP&E> 1,871,354 <DEPRECIATION> 1,029,794 <TOTAL-ASSETS> 2,340,176 <CURRENT-LIABILITIES> 622,583 <BONDS> 248,689 <COMMON> 37,082 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,236,467 <TOTAL-LIABILITY-AND-EQUITY> 2,340,176 <SALES> 1,663,430 <TOTAL-REVENUES> 1,663,430 <CGS> 1,287,090 <TOTAL-COSTS> 1,287,090 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 1,194 <INTEREST-EXPENSE> 15,229 <INCOME-PRETAX> 167,891 <INCOME-TAX> 62,120 <INCOME-CONTINUING> 105,771 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 105,771 <EPS-PRIMARY> 1.43 <EPS-DILUTED> 1.41 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

SFA

https://www.sec.gov/Archives/edgar/data/87777/0000950144-96-000379.txt

-----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, N0KTvEMBVZ8b7NiegudQZcDERlYwD+L95zt36Nf6m0ifVpQWJai8NWspbTcIH+zy BM6q2oifvIBFY6XQ6y/BBg== <SEC-DOCUMENT>0000950144-96-000379.txt : 19960213 <SEC-HEADER>0000950144-96-000379.hdr.sgml : 19960213 ACCESSION NUMBER: 0000950144-96-000379 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951229 FILED AS OF DATE: 19960212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC ATLANTA INC CENTRAL INDEX KEY: 0000087777 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 580612397 STATE OF INCORPORATION: GA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05517 FILM NUMBER: 96515910 BUSINESS ADDRESS: STREET 1: ONE TECHNOLOGY PKWY S CITY: NORCROSS STATE: GA ZIP: 30092-2967 BUSINESS PHONE: 7709035000 MAIL ADDRESS: STREET 1: ONE TECHNOLOGY PKWY S CITY: NORCROSS STATE: GA ZIP: 30092-2967 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC ASSOCIATES INC DATE OF NAME CHANGE: 19671024 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>SCIENTIFIC ATLANTA ,INC. FORM 10-Q <TEXT> <PAGE> 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 1995 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------------- ----------------------- COMMISSION FILE NUMBER 1-5517 SCIENTIFIC-ATLANTA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) GEORGIA 58-0612397 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) ONE TECHNOLOGY PARKWAY, SOUTH NORCROSS, GEORGIA 30092-2967 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 770-903-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [ ] AS OF JANUARY 26, 1996, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 76,410,954 SHARES OF COMMON STOCK. 1 of 17 <PAGE> 2 PART I - FINANCIAL INFORMATION SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ ----------------------------- December 29, December 30, December 29, December 30, 1995 1994 1995 1994 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> SALES $261,100 $269,690 $503,293 $494,666 COSTS AND EXPENSES Cost of sales 193,383 195,880 374,499 353,433 Sales and administrative 33,663 32,601 66,389 63,937 Research and development 23,871 20,057 46,638 39,102 Interest expense 220 190 367 418 Interest (income) (223) (617) (974) (1,503) Other (income) expense, net 479 (1,222) 658 (1,188) -------- -------- -------- -------- Total costs and expenses 251,393 246,889 487,577 454,199 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,707 22,801 15,716 40,467 PROVISION (BENEFIT) FOR INCOME TAXES Current 4,331 9,015 4,881 15,433 Deferred (1,225) (1,719) 148 (2,484) -------- -------- -------- -------- NET EARNINGS FROM CONTINUING OPERATIONS 6,601 15,505 10,687 27,518 LOSS FROM DISCONTINUED OPERATIONS NET OF TAX -- (492) (1,038) (396) ESTIMATED LOSS ON SALE OF DISCONTINUED OPERATIONS NET OF TAX -- -- (12,172) -- -------- -------- -------- -------- NET EARNINGS (LOSS) $ 6,601 $ 15,013 $ (2,523) $ 27,122 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE PRIMARY CONTINUING OPERATIONS $ 0.09 $ 0.20 $0.14 $ 0.36 DISCONTINUED OPERATIONS -- (0.01) (0.17) (0.01) -------- -------- -------- -------- NET EARNINGS (LOSS) $ 0.09 $ 0.19 $ (0.03) $ 0.35 ======== ======== ======== ======== FULLY DILUTED $ 0.09 $ 0.19 $ (0.03) $ 0.35 ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING PRIMARY 76,379 78,231 76,699 77,923 ======== ======== ======== ======== FULLY DILUTED 76,379 78,251 76,699 78,032 ======== ======== ======== ======== DIVIDENDS PER SHARE PAID $ 0.015 $ 0.03 $ 0.03 $ 0.03 ======== ======== ======== ======== </TABLE> SEE ACCOMPANYING NOTES 2 of 17 <PAGE> 3 SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) <TABLE> <CAPTION> In Thousands ------------------------------------ December 29, June 30, 1995 1995 ------------ ---------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 22,802 $ 80,311 Receivables, less allowance for doubtful accounts of $3,514,000 at December 29 and $3,823,000 at June 30 215,500 243,420 Inventories 246,348 257,427 Deferred income taxes 38,719 28,271 Other current assets 19,472 5,950 -------- -------- TOTAL CURRENT ASSETS 542,841 615,379 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 7,027 7,005 Buildings and improvements 40,616 36,847 Machinery and equipment 147,442 145,301 -------- -------- 195,085 189,153 Less-Accumulated depreciation and amortization 61,629 64,539 -------- -------- 133,456 124,614 -------- -------- COST IN EXCESS OF NET ASSETS ACQUIRED 6,565 6,940 -------- -------- OTHER ASSETS 38,560 38,331 -------- -------- TOTAL ASSETS $721,422 $785,264 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 11,154 $ 1,071 Current maturities of long-term debt 318 315 Accounts payable 89,253 148,260 Accrued liabilities 101,123 113,947 Income taxes currently payable 17,007 12,121 -------- -------- TOTAL CURRENT LIABILITIES 218,855 275,714 -------- -------- LONG-TERM DEBT, less current maturities 739 773 -------- -------- OTHER LIABILITIES 39,685 34,588 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; no shares issued -- -- Common stock, $0.50 par value, authorized 350,000,000 shares; issued 77,255,528 shares at December 29 and 76,950,029 shares at June 30 38,628 38,475 Additional paid-in capital 163,442 160,206 Retained earnings 270,018 274,840 Accumulated translation adjustments 677 668 -------- -------- 472,765 474,189 -------- -------- Less - Treasury stock, at cost (879,524 shares) 10,622 -- -------- -------- 462,143 474,189 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $721,422 $785,264 ======== ======== </TABLE> SEE ACCOMPANYING NOTES 3 of 17 <PAGE> 4 SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Six Months Ended ---------------- December 29, December 30, 1995 1994 ------------ ------------ <S> <C> <C> NET CASH USED BY OPERATING ACTIVITIES: $(22,661) $(28,884) -------- -------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (29,704) (27,241) Proceeds from sale of investment in joint venture -- 4,214 Other (1,973) (3,909) -------- -------- Net cash used by investing activities (31,677) (26,936) -------- -------- FINANCING ACTIVITIES: Net short-term borrowings 10,083 86 Principal payments on long-term debt (31) (32) Dividends paid (2,299) (2,278) Issuance of common stock 1,487 3,757 Treasury shares acquired (12,411) -- -------- -------- Net cash provided (used) by financing activities (3,171) 1,533 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (57,509) (54,287) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80,311 123,387 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,802 $ 69,100 ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 306 $ 438 ======== ======== Income taxes paid, net $ 3,580 $ 17,082 ======== ======== </TABLE> SEE ACCOMPANYING NOTES 4 of 17 <PAGE> 5 NOTES: (Amounts in thousands except share data). A. The accompanying consolidated financial statements include the accounts of the company and all subsidiaries after elimination of all material intercompany accounts and transactions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 1995 Form 10-K. The financial information presented in the accompanying statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods indicated. All such adjustments are of a normal recurring nature. B. Earnings per share for the three and six months ended December 29,1995 were computed based on the weighted average number of shares of common stock outstanding. Earnings per share for the three and six months ended December 30, 1994, were computed based on the weighted average number of shares outstanding and equivalent shares derived from dilutive stock options. See Exhibit 11. C. Inventories consist of the following: <TABLE> <CAPTION> December 29, June 30, 1995 1995 ------------ ---------- <S> <C> <C> Raw materials and work-in-process $128,632 $142,418 Finished goods 117,716 115,009 -------- -------- Total inventory $246,348 $257,427 ======== ======== </TABLE> D. During the quarter ended September 29, 1995, the company decided to discontinue its defense-related businesses in San Diego, California because these businesses are not aligned with the company's core business strategies. The company anticipates that the sale of the net assets of the defense-related businesses will be completed within one year. A one-time charge of $12,172, net of a tax benefit of $5,728, for the estimated loss on sale of discontinued operations was recorded in the quarter ended September 29, 1995. Sales and losses from discontinued operations were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ----------------------------- December 29, December 30, December 29, December 30, 1995 1994 1995 1994 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Sales $7,495 $7,703 $12,515 $15,028 Loss from discontinued operations, net of tax $ -- $ (492) $(1,038) $ (396) Tax benefit $ -- $ 231 $ 488 $ 185 </TABLE> The net assets of the discontinued operations include inventory, accounts receivable, machinery and equipment, accounts payable, and accrued expenses and are included in other current assets in the Consolidated Statement of Financial Position. E. In October 1995, the company announced that it had adopted a stock buyback program for the purchase of up to 5,000,000 shares of its common stock. During the quarter ended December 29, 1995, the company repurchased 1,010,000 shares at an aggregate cost of $12,411 and re-issued 130,476 shares under the company's stock option plan, voluntary employee retirement and investment plan, and employee stock purchase plan. 5 of 17 <PAGE> 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Scientific-Atlanta had stockholders' equity of $462.1 million and cash on hand was $22.8 million at December 29, 1995. Cash decreased $57.5 million during the six months ended December 29, 1995 as expenditures for inventories, equipment, expansion of manufacturing capacity and the repurchase of 1,010,000 shares of the company's common stock exceeded cash generated from earnings, accounts receivable collections and short-term borrowings under a senior credit facility. The current ratio was 2.5:1 at December 29, 1995, compared to 2.2:1 at June 30, 1995. At December 29, 1995, total debt was $12.2 million or less than 3 percent of total capital invested. Short-term debt consists of a $10.0 million borrowing under a senior credit facility and borrowings by the company's international operations to support their working capital requirements. The company believes that funds generated from operations, existing cash balances and its available senior credit facility will be sufficient to support growth and planned expansion of manufacturing capacity. RESULTS OF OPERATIONS Sales for the quarter ended December 29, 1995 were $261.1 million, down 3 percent from the prior year's sales of $269.7 million. Sales for the six months ended December 29, 1995 were $503.3 million, up 2 percent from the prior year's sales of $494.7 million. Higher sales volume of transmission products, digital set-tops and Sega game adapters were offset by declines in most Broadband product lines. Sales of satellite systems were lower in the quarter and six months ended December 29, 1995 as compared to the prior year due to substantial completion of deliveries of equipment to Orbit Communications Company for its direct to home satellite services in fiscal 1995. Sales in the three and six months ended December 29, 1995 were negatively impacted by reduced levels of spending by domestic cable operators and telephone companies. The company believes that customer uncertainty over the types of communications technology to be deployed in advanced networks, the fact that many of the products to be utilized in these networks are still under development by the industry and not yet ready for commercial production, and delays in the passage of telecommunications reform legislation recently enacted, were significant factors in the reduced spending. Gross margins of 25.9 percent and 25.6 percent for the three and six months ended December 29, 1995 declined 1.5 and 3.0 percentage points, respectively, from the prior year primarily as the result of unfavorable exchange rate changes in Japanese yen. Continued strength of the yen would also adversely affect gross margins. Certain material purchases are denominated in Japanese yen and, accordingly, the purchase price in U.S. dollars is subject to change based on exchange rate fluctuations. The company has forward exchange contracts to purchase yen to hedge a portion of its exposure on purchase commitments for a period of approximately one year. Research and development costs were up $3.8 million, or 19 percent, and $7.5 million, or 19 percent, for the three and six months ended December 29, 1995, respectively, over the comparable periods of the prior year due to increased research and development activity, particularly development of digital products and cable telephony. The company anticipates that spending during the second half of fiscal 1996 will increase over the prior year at a slightly lower rate than the first half of fiscal 1996. Selling and administrative expense increased approximately 4 percent from the prior year. Increased expenses reflect costs associated with ongoing investments to support expansion into international markets and the introduction of new products. Other expense for the three and six months ended December 29, 1995, included net losses from foreign currency transactions and partnership activities and net gains from rental income and other miscellaneous items. There were no significant items in other income and expense in the first six months of fiscal 1996. Other income of $1.2 million for the quarter ended December 30, 1994, included net gains of $0.6 million from partnership activities and net gains of $0.6 million from foreign currency transactions, rental income and other miscellaneous items. Other income of $1.2 million for the six months ended December 30, 1994, included net gains of $0.3 million from foreign currency transactions, $0.3 million of rental income and net gains of $0.6 million from royalty income, partnership activities and other miscellaneous items. 6 of 17 <PAGE> 7 The company's effective income tax rate was 32 percent, unchanged from the prior year. Net earnings from continuing operations were $6.6 million for the quarter ended December 29, 1995, down $8.9 million from the prior year. Net earnings for the six months ended December 29, 1995 was $10.7 million, down $16.8 million from the prior year. Net earnings in the quarter and for the first half were negatively impacted by the exchange rate for the yen, higher spending for research and development and investment in sales and marketing to support the company's international growth. The net loss of $2.5 million for the first half of fiscal 1996 included a charge of $13.2 million, net of tax, for losses related to discontinued operations and the estimated loss on the sale of discontinued operations. 7 of 17 <PAGE> 8 PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders The following information is furnished with respect to matters submitted to a vote of security holders through the solicitation of proxies: (a) The matters described below were submitted to a vote of security holders at the Annual Meeting of Shareholders held on November 8, 1995. (b) Election of directors: <TABLE> <CAPTION> Votes For Withhold Authority ---------- ------------------ <S> <C> <C> Wilbur B. King 65,245,261 1,268,350 Alonzo L. McDonald 66,025,724 487,887 James F. McDonald 65,970,940 542,671 </TABLE> Marion H. Antonini, William E. Kassling, Mylle Bell Mangum, David J. McLaughlin, James V. Napier and Sidney Topol continue as directors. (c) (i) Approval of Stock Plan for Non-Employee Directors <TABLE> <CAPTION> Votes For Votes Against Abstain ---------- ------------- ------- <S> <C> <C> 54,422,754 11,712,740 378,117 </TABLE> (ii) Selection of Arthur Andersen LLP as independent auditors <TABLE> <CAPTION> Votes For Votes Against Abstain ---------- ------------- ------- <S> <C> <C> 66,199,344 201,434 112,833 </TABLE> Item 6 Exhibits and Reports on Form 8-K (a) Exhibits. <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> 10.1 Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit number 4 to the Form S-8 Registration Statement filed on November 8, 1995) 10.2 Amendment Number One to the Non-Employee Directors Stock Option 10.3 Amended and Restated Scientific-Atlanta, Inc. Retirement Plan for Non-Employee Directors 10.4 Amended and Restated Deferred Compensation Plan for Non-Employee Directors of Scientific-Atlanta, Inc. 11 Computation of Earnings Per Share 27 Financial Data Schedule (for SEC use only) </TABLE> (b) No reports on Form 8-K were filed during the quarter ended December 29, 1995. Date: February 12, 1996 /s/Harvey A. Wagner ------------------------ ------------------------------------------ Harvey A. Wagner Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer and duly authorized signatory of the Registrant) 8 of 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>2 <DESCRIPTION>NON- EMPLOYEE STOCK OPTION PLAN <TEXT> <PAGE> 1 EXHIBIT 10.2 AMENDMENT NUMBER ONE TO THE NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN WHEREAS, Section 4(b) of Scientific-Atlanta, Inc.'s (the "Corporation's") Non-Employee Directors Stock Option Plan (the "Option Plan") provides for the grant of an option for 10,000 shares of the Corporation's common stock to a non-employee director upon commencing service on the Corporation's Board of Directors; WHEREAS, Section 4(c) of the Option Plan provides for the grant of options for 2,500 shares of the Corporation's common stock to each non-employee director at each Board meeting held on the date of the annual meeting of shareholders each year; and WHEREAS, pursuant to Section 6 of the Option Plan, as a result of stock splits declared by the Corporation since the adoption of the Option Plan, the initial option grant has increased to 30,000 shares and the annual option grant has increased to 7,500 shares; NOW, THEREFORE, Sections 4(b) and 4(c) of the Stock Option Plan are hereby amended to read in their entirety as follows: (b) INITIAL GRANT. Each Non-Employee Director will receive an initial grant of 20,000 shares upon approval by the Board of this plan or upon the initial appointment or election to the Board. (c) AUTOMATIC GRANTS. An Option to Purchase 5,000 shares of Common Stock shall be granted at the annual meeting of the Board held on the date of the Annual Meeting of Shareholders beginning in 1995 and at each succeeding Board meeting held on that date provided the Non-Employee Director continues in office after the Board meeting date on which the Option is granted. All other sections and provisions of the Option Plan shall remain in full force and effect as written, without amendment. 9 of 17 <PAGE> 2 To record the adoption of this Amendment by the Board on November 8, 1995, the Company has caused its authorized officers to execute this Amendment and affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: ------------------------------------- Name: Brian C. Koenig ----------------------------------- Title: Vice President Human Resources ---------------------------------- By: ------------------------------------- Name: William E. Eason, Jr. ----------------------------------- Title: Secretary ---------------------------------- [Seal] 10 of 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>3 <DESCRIPTION>RETIREMENT PLAN <TEXT> <PAGE> 1 [LOGO SCIENTIFIC- ATLANTA] EXHIBIT 10.3 SCIENTIFIC-ATLANTA, INC. RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS As Amended November 8, 1995 1. PURPOSE The purpose of this plan ("Plan") is to enhance the ability of Scientific-Atlanta, Inc. ("Company") to attract and retain the service of experienced, able and knowledgeable persons to serve as members of the Company's board of directors ("Board") over a substantial period of years during which the full benefit of their capabilities can be realized to further the growth and profitability of the Company and return to the shareholders. 2. ADMINISTRATION The Plan shall be administered by a Plan Administrator, who shall be appointed by the Board. In addition to the duties stated elsewhere in the Plan, the Plan Administrator shall have full authority, consistent with the Plan, to interpret the Plan and to make all determinations necessary or desirable for the administration of the Plan. 3. ELIGIBLE PARTICIPANTS Each person who is or becomes a member of the Board on or after the effective date of this Plan and who has never been a participant in an employee retirement plan of the Company shall be deemed a Participant in this Plan after having been a member of the Board for thirty-six consecutive months. 4. RETIREMENT DATES (a) A Participant's "Normal Retirement Date" is the first day of the calendar month in which a Participant attains the age of sixty-five (65) years and is no longer a member of the Board or any subsequent month designated by a Participant in accordance with paragraph 6 below. (b) A Participant's "Early Retirement Date" is the first day of the calendar month designated by a Participant in accordance with paragraph 6 below, prior to the Normal Retirement Date, on or after the month in which a Participant attains the age of fifty-five (55) years. 5. RETIREMENT BENEFIT (a) The annual retirement benefit payable to any Participant who retires on the Normal Retirement Date, or any date thereafter, will be an amount equal to (i) the regular annual retainer 11 of 17 <PAGE> 2 paid by the Company to each director for the last fiscal year of the Company that the Participant served as a director, plus (ii) the value, as of the date of grant, of the shares of the Company's Common Stock granted to the Participant as a "Stock Award" under the Company's Stock Plan for Non-Employee Directors during the last fiscal year of the Company that the Participant served as a director. The "regular annual retainer" as used in the preceding sentence means the annual retainer received by each director of the Company, excluding any committee chair annual retainer, meeting fees and other fees received by a director; and, if the Participant elects to receive all or a portion of his or her annual retainer in the form of shares of the Company's common stock under the Company's Stock Plan for Non-Employee Directors, any portion of such annual retainer received in shares shall be included in the definition of "regular annual retainer." (b) The annual early retirement benefit payable to any Participant who retires on the Early Retirement Date will be the amount specified in 5(a) above, reduced by the following early retirement factors: <TABLE> <CAPTION> Age at Commencement Factor ------------ ------ <S> <C> 64 .933 63 .867 62 .800 61 .733 60 .667 59 .633 58 .600 57 .567 56 .533 55 .500 </TABLE> If a Participant's age at the Early Retirement Date falls between any two of these ages, these factors shall be adjusted by straight-line interpolation. (c) No retirement benefit will be payable to any person who is a member of the Board for less than thirty-six (36) consecutive months. 6. BENEFIT PAYMENTS A Participant may retire by written notice to the Plan Administrator or the Secretary of the Company, designating a retirement date in accordance with paragraph 4 above. Retirement benefit payments will be payable on the first day of each calendar quarter following retirement or in accordance with such other schedule of payments as may be requested by the Participant and approved by the Board. Benefit payments will continue to be paid to the Participant for the remainder of the Participant's life. Notwithstanding the foregoing, in lieu of the normal form of 12 of 17 <PAGE> 3 payment otherwise provided under this Plan, the Plan Administrator may direct, in its sole and absolute discretion, that benefits shall be paid in a single sum that is the actuarial equivalent of the annual benefit payable to the Participant or, in the event of the Participant's death, to his or her surviving spouse. 7. SPOUSAL BENEFITS Should a Participant die before retirement benefits have begun to be paid to the Participant under this Plan, the Participant shall be deemed to retire on the later of (i) the day before his/her death, or (ii) the first day of the first calendar month thereafter in which the Participant would have attained the age of fifty-five (55), and the Participant's surviving spouse, if any, shall be entitled to a benefit equal to the benefit that would have been paid to the Participant. If the Participant dies after retirement benefits have commenced, the Participant's surviving spouse shall be entitled to annual benefit payments equal to the annual benefit previously payable to the Participant. In each case, the benefit shall continue for the lesser of (i) ten years or (ii) a number of years equal to the number of years that the Participant was a member of the Board; provided, however, that payments shall not continue after the death of the spouse. 8. DISABILITY Should a Participant become totally and permanently disabled prior to retirement for a period of six (6) consecutive months while a member of the Board and the Board determines that such disability will continue, the Participant will be deemed to have retired on the first day of the calendar month following the month in which the Board makes such determination and the age of the Participant on such retirement date shall be deemed the older of (i) fifty-five (55), or (ii) the Participant's actual age on that date. Payments will be made on the same basis as described in Sections 5, 6, and 7 above. 9. CHANGE OF CONTROL Notwithstanding anything contained in this Plan to the contrary, the provisions of this paragraph 9 shall apply to any Participant whose membership on the Board ends before a Change of Control occurs or who is a member of the Board on the date that a Change of Control occurs and who ceases within twenty-four (24) months after a Change of Control to be a member of the Board for any reason. (a) Each such Participant shall be immediately vested in his or her retirement benefit payable under this Plan. (b) The Company shall contribute to the trust maintained pursuant to the Scientific-Atlanta, Inc. Benefits Protection Trust Agreement a lump sum amount equal to the then-present value of the Participant's retirement benefit. This lump sum payment to the trust shall be due on the later of (i) the date when the Change of Control occurs or (ii) the date the Participant ceases to be 13 of 17 <PAGE> 4 a member of the Board. The retirement benefit of a Participant who ceases to be a member of the Board within twenty-four (24) months after a Change of Control shall be computed as if the Participant would retire on the first day that he or she is eligible to retire (whether an Early Retirement Date or a Normal Retirement Date) following the Change of Control and the end of his or her membership on the Board. Any retirement benefits to which the Participant is entitled under the terms of this Plan shall be payable from the trust, except to the extent that the benefits are paid from the general assets of the Company. (c) Notwithstanding the foregoing, in lieu of the form of payment otherwise provided for in this paragraph 9, the Plan Administrator may direct, in its sole and absolute discretion, that upon a Change of Control benefits under this Plan shall be paid in a single lump sum that is the actuarial equivalent of the annual benefits payable to the Participant or, in the event of the Participant's death, to his or her surviving spouse. (d) "Change of Control" means a change of twenty-five percent (25%) or more of the membership of the Board (excluding membership changes resulting from normal retirement of directors) within a twenty-four (24) month period following the acquisition of beneficial ownership by any person or entity, or group of persons or entities and their affiliates acting in concert, of twenty percent (20%) or more of the voting securities of the Company. "Affiliates" and "beneficial ownership" shall be defined in accordance with Rules 12b-2 and 13d-3 of the Securities and Exchange Commission, as the same may from time to time be amended. 10. TERMINATION AND AMENDMENT OF THE PLAN The Board may terminate the Plan at any time and may amend the Plan from time to time but no such termination and amendment shall adversely affect the rights of Participants under the Plan, which shall be deemed fully vested and irrevocable on the date that a director becomes a Participant in accordance with paragraph 3 above. 11. EFFECTIVE DATE The effective date of this Plan is February 15, 1989. 14 of 17 <PAGE> 5 To record the adoption of the Plan (as amended and restated) by the Board on November 8, 1995, the Company has caused its authorized officers to execute this Plan and affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------- Name: Brian C. Koenig ----------------------------------- Title: Vice President Human Resources ---------------------------------- By: /s/ William E. Eason, Jr. ------------------------------------- Name: William E. Eason, Jr. ----------------------------------- Title: Secretary ---------------------------------- [Seal] 15 of 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4 <SEQUENCE>4 <DESCRIPTION>DEFERED COMPENSATION PLAN <TEXT> <PAGE> 1 EXHIBIT 10.4 RESOLUTION AMENDING DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS OF SCIENTIFIC-ATLANTA, INC. WHEREAS, the Board of Directors of the Corporation approved the Stock Plan for Non-Employee Directors (the "Stock Plan") at its August 24, 1995, meeting, subject to shareholder approval of the Stock Plan; WHEREAS, the shareholders of the Corporation approved the Stock Plan on November 8, 1995; WHEREAS, under the Stock Plan, non-employee directors will receive a grant of shares of the Corporation's common stock on an annual basis and will be entitled, at their election, to receive shares of the Corporation's common stock in lieu of receiving cash compensation for their service on the Board and its Committees; WHEREAS, the Board desires to amend the Deferred Compensation Plan for Non-Employee Directors of Scientific-Atlanta, Inc. (the "Plan") to allow non-employee directors to defer the receipt of shares of the Corporation's common stock granted under the Stock Plan; and WHEREAS, under Paragraph 9.1 of the Plan, the Board has the power and authority to amend the Plan; NOW, THEREFORE, BE IT RESOLVED, that the amended and restated "Deferred Compensation Plan for Non-Employee Directors of Scientific-Atlanta, Inc." attached to this resolution is hereby adopted and approved by the Board in its entirety and that such amended and restated Plan replaces the current Plan. 16 of 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>5 <DESCRIPTION>COMPUTATION OF EARNINGS <TEXT> <PAGE> 1 EXHIBIT 11 SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ---------------------------- December 29, December 30, December 29, December 30, 1995 1994 1995 1994 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 76,379 76,019 76,699 75,800 Add - Additional shares of common stock assumed issued upon exercise of options using the "treasury stock" method as it applies to the computation of primary earnings per share 969 2,212 1,297 2,123 ------- ------- ------- ------- NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 77,348 78,231 77,996 77,923 Add - Additional shares of common stock assumed issued upon exercise of options using the "treasury stock" method as it applies to the computation of fully diluted earnings per share 50 20 20 109 ------- ------- ------- ------- NUMBER OF SHARES OUTSTANDING ASSUMING FULL DILUTION 77,398 78,251 78,016 78,032 ======= ======= ======= ======= NET EARNINGS (LOSS) FOR PRIMARY AND FULLY DILUTED COMPUTATION Continuing Operations $ 6,601 $15,505 $10,687 $27,518 Discontinued Operations -- (492) (13,210) (396) ------- ------- ------- ------- Net Earnings (Loss) $ 6,601 $15,013 $(2,523) $27,122 ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE PRIMARY Continuing Operations $ 0.09 $ 0.20 $ 0.14 $ 0.36 Discontinued Operations -- $ (0.01) $ (0.17) $ (0.01) ------- ------- ------- ------- Net Earnings (Loss) $ 0.09 $ 0.19 $ (0.03) $ 0.35 ======= ======= ======= ======= FULLY DILUTED Continuing Operations $ 0.09 $ 0.20 $ 0.14 $ 0.36 Discontinued Operations -- (0.01) (0.17) (0.01) ------- ------- ------- ------- Net Earnings (Loss) $ 0.09 $ 0.19 $ (0.03) $ 0.35 ======= ======= ======= ======= </TABLE> Note: In the three and six months ended December 29, 1995 the dilutive effect of equivalent shares derived from stock options was less than 3 percent and therefore, the equivalent shares were not included in the computation of earnings per share. 17 of 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>6 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED DECEMBER 29, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-28-1996 <PERIOD-START> JUL-01-1995 <PERIOD-END> DEC-29-1995 <CASH> 22,802 <SECURITIES> 0 <RECEIVABLES> 215,500 <ALLOWANCES> 3,514 <INVENTORY> 246,348 <CURRENT-ASSETS> 542,841 <PP&E> 195,085 <DEPRECIATION> 61,629 <TOTAL-ASSETS> 721,422 <CURRENT-LIABILITIES> 207,383 <BONDS> 11,472 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 38,628 <OTHER-SE> 423,515 <TOTAL-LIABILITY-AND-EQUITY> 721,422 <SALES> 503,293 <TOTAL-REVENUES> 503,293 <CGS> 374,499 <TOTAL-COSTS> 374,499 <OTHER-EXPENSES> 46,638 <LOSS-PROVISION> 405 <INTEREST-EXPENSE> 367 <INCOME-PRETAX> 15,716 <INCOME-TAX> 5,029 <INCOME-CONTINUING> 10,687 <DISCONTINUED> (13,210) <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (2,523) <EPS-PRIMARY> (0.03) <EPS-DILUTED> (0.03) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

SVU

https://www.sec.gov/Archives/edgar/data/95521/0000950131-96-000084.txt

-----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, RO1wBwEHwF74+7QvSMG0w5HwVe8OMK6sOm7toyYt2I6cgYKKaPYZHJ+JE2bKuowp WVJsLzOmvKa6kXWy5jYosw== <SEC-DOCUMENT>0000950131-96-000084.txt : 19960117 <SEC-HEADER>0000950131-96-000084.hdr.sgml : 19960117 ACCESSION NUMBER: 0000950131-96-000084 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951202 FILED AS OF DATE: 19960116 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERVALU INC CENTRAL INDEX KEY: 0000095521 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 410617000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0224 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05418 FILM NUMBER: 96503778 BUSINESS ADDRESS: STREET 1: 11840 VALLEY VIEW RD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6128284000 MAIL ADDRESS: STREET 1: 11840 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: SUPER VALU STORES INC DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period (12 weeks) ended December 2, 1995. 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 1-5418 SUPERVALU INC. (Exact name of registrant as specified in its Charter) DELAWARE 41-0617000 .................................... .................................... (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11840 Valley View Road, Eden Prairie, Minnesota 55344 ................................................................................ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 828-4000 ............................ Former name, former address and former fiscal year, if changed since last report: N.A. ................................................................................ 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 ......... .......... The number of shares outstanding of each of the issuer's classes of Common Stock as of December 2, 1995 is as follows: Title of Each Class Shares Outstanding ------------------- ------------------ Common Shares 67,804,122 <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Item 1: Financial Statements - ---------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - ---------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ---------------------------------------------------------------------------------- (In thousands, except per share data) Third Quarter (12 Weeks) Ended -------------------------------------- December 2, 1995 December 3, 1994 - ---------------------------------------------------------------------------------- <S> <C> <C> Net sales $3,886,595 $3,908,194 Costs and expenses: Cost of sales 3,519,750 3,547,301 Selling and administrative expenses 279,502 279,559 Amortization of goodwill 4,060 4,588 Restructuring and other charges - 244,000 Interest Interest expense 31,076 32,563 Interest income 4,750 5,463 ------------------------------- Interest expense, net 26,326 27,100 ------------------------------- Total costs and expenses 3,829,638 4,102,548 ------------------------------- Earnings (loss) before equity in earnings of ShopKo and income taxes 56,957 (194,354) Equity in earnings of ShopKo 4,661 5,194 ------------------------------- Earnings (loss) before income taxes 61,618 (189,160) Provision for income taxes Current 5,333 37,572 Deferred 17,840 (142,609) ------------------------------- Income taxes 23,173 (105,037) ------------------------------- Net earnings (loss) $ 38,445 $ (84,123) =============================== Net earnings (loss) per common share $ 0.57 $ (1.18) Weighted average number of common shares outstanding 67,841 71,487 Dividends declared per common share $ 0.245 $ 0.235 Supplemental information: After-tax LIFO (expense) $ (2,897) $ (2,670) All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 2 <PAGE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF EARNINGS - --------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - --------------------------------------------------------------------------- (In thousands, except per share data) Year-to-Date (40 Weeks) Ended ---------------------------------------------- December 2, 1995 December 3, 1994 - --------------------------------------------------------------------------------------- <S> <C> <C> Net sales $12,639,029 $12,673,034 Costs and expenses: Cost of sales 11,460,135 11,537,736 Selling and administrative expenses 889,448 856,812 Amortization of goodwill 13,570 12,277 Restructuring and other charges - 244,000 Interest Interest expense 107,966 100,518 Interest income 16,345 18,910 ---------------------------------------- Interest expense, net 91,621 81,608 ---------------------------------------- Total costs and expenses 12,454,774 12,732,433 ---------------------------------------- Earnings (loss) before equity in earnings of ShopKo and income taxes 184,255 (59,399) Equity in earnings of ShopKo 7,990 8,769 ---------------------------------------- Earnings (loss) before income taxes 192,245 (50,630) Provision for income taxes Current 36,599 83,568 Deferred 37,972 (134,203) ---------------------------------------- Income taxes 74,571 (50,635) ---------------------------------------- Net earnings $ 117,674 $ 5 ======================================== Net earnings per common share $ 1.72 $ - Weighted average number of common shares outstanding 68,509 71,540 Dividends declared per common share $ 0.725 $ 0.690 Supplemental information: After-tax LIFO (expense) $ (5,214) $ (4,082) All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 3 <PAGE> <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries Third Quarter as of Fiscal Year End - ---------------------------------------------------------------------------------------------------------- (In thousands) December 2, December 3, February 25, Assets 1995 1994 1995 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current Assets Cash and cash equivalents $ 5,396 $ 3,923 $ 4,839 Receivables, less allowance for losses of $25,848 at December 2, 1995, $37,164 at December 3, 1994, and $29,268 at February 25, 1995 419,162 412,789 383,458 Inventories 1,179,209 1,309,453 1,109,791 Other current assets 125,134 128,562 148,252 ----------------------------------------------- Total current assets 1,728,901 1,854,727 1,646,340 Long-term notes receivable 67,816 61,580 73,094 Long-term investment in direct financing leases 71,460 80,689 77,688 Property, plant and equipment Land 163,046 194,577 202,949 Buildings 921,502 868,352 868,379 Property under construction 58,747 68,389 51,640 Leasehold improvements 135,097 128,896 134,094 Equipment 982,428 948,479 970,779 Assets under capital leases 219,103 197,570 205,030 ----------------------------------------------- 2,479,923 2,406,263 2,432,871 Less accumulated depreciation and amortization Owned property, plant and equipment 859,230 820,926 825,546 Assets under capital leases 42,118 38,217 36,027 ----------------------------------------------- Net property, plant and equipment 1,578,575 1,547,120 1,571,298 Investment in ShopKo 185,967 175,875 182,839 Goodwill 503,689 529,071 515,009 Other assets 202,261 250,086 238,881 ----------------------------------------------- Total assets 4,338,669 $ 4,499,148 $ 4,305,149 =============================================== Liabilities and Stockholders' Equity - ---------------------------------------------------------------------------------------------------------- Current Liabilities Notes payable 239,125 $ 365,288 $ 226,168 Accounts payable 1,061,845 1,045,766 1,003,106 Current maturities of long-term debt 10,181 10,451 9,277 Current obligations under capital leases 18,030 18,624 19,060 Other current liabilities 175,856 166,739 189,526 ----------------------------------------------- Total current liabilities 1,505,037 1,606,868 1,447,137 Long-term debt 1,202,572 1,196,340 1,215,184 Long-term obligations under capital leases 251,595 265,566 244,582 Other liabilities 184,224 233,136 205,024 Stockholders' equity Preferred stock 5,908 5,908 5,908 Common stock 75,335 75,335 75,335 Capital in excess of par value 12,704 13,254 12,717 Retained earnings 1,304,853 1,209,792 1,236,507 Treasury stock, at cost (203,559) (107,051) (137,245) ----------------------------------------------- Total stockholders' equity 1,195,241 1,197,238 1,193,222 ----------------------------------------------- Total liabilities and stockholders' equity 4,338,669 $ 4,499,148 $ 4,305,149 =============================================== Quarterly data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 4 <PAGE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Capital in Preferred Common Excess of Treasury Retained Stock Stock Par Value Stock Earnings Total - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balances at February 26, 1994 $5,908 $75,335 $12,966 $ (86,868) $1,268,117 $1,275,458 Net earnings - - - - 43,334 43,334 Sales of common stock under option plans - - (290) 1,435 - 1,145 Cash dividends declared on common stock - $.925 per share - - - - (66,024) (66,024) Compensation under employee incentive plans - - 41 253 - 294 Purchase of shares for treasury - - - (52,065) - (52,065) Other - - - - (8,920) (8,920) - ----------------------------------------------------------------------------------------------------------------------------- Balances at February 25, 1995 5,908 75,335 12,717 (137,245) 1,236,507 1,193,222 Net earnings - - - - 117,674 117,674 Sales of common stock under option plans - - (13) 2,443 - 2,430 Cash dividends declared on common stock - $.725 per share - - - - (49,328) (49,328) Compensation under employee incentive plans - - - (936) - (936) Purchase of shares for treasury - - - (67,821) - (67,821) - ----------------------------------------------------------------------------------------------------------------------------- Balances at December 2, 1995 $5,908 $75,335 $12,704 $(203,559) $1,304,853 $1,195,241 ============================================================================================================================= Interim data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 5 <PAGE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------ SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------------------------------------------ (In thousands) - ------------------------------------------------------------------------------------------------------------------ Year-to-date (40 weeks ended) - ------------------------------------------------------------------------------------------------------------------ December 2, December 3, 1995 1994 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash flows from operating activities Net earnings $ 117,674 $ 5 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in earnings of ShopKo (7,990) (8,769) Dividends received from ShopKo 4,862 4,862 Depreciation and amortization 168,097 155,089 Provision for losses on receivables 1,938 4,212 Restructuring and other charges - 244,000 Gain on sale of property, plant and equipment (13,322) (5,162) Deferred income taxes 37,972 (137,874) Treasury shares contributed to employee incentive plan (64) - Changes in assets and liabilities: Receivables (37,642) (39,160) Inventory (69,418) (140,806) Other current assets (3,176) 4,744 Direct finance leases 6,451 7,371 Accounts payable 54,855 46,213 Other liabilities (34,545) (46,843) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 225,692 87,882 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Additions to long-term notes receivable (23,488) (15,818) Payments received on long-term notes receivable 28,766 21,158 Proceeds from sale of property, plant and equipment 88,255 37,908 Purchase of property, plant and equipment (186,366) (232,576) Business acquisitions, net of cash acquired - (111,083) Other investing activities (3,432) 31,374 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (96,265) (269,037) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Net issuance of short-term notes payable 12,957 338,650 Proceeds from issuance of long-term debt 300,000 150,000 Repayment of long-term debt (311,708) (222,899) Reduction of obligations under capital leases (14,280) (14,160) Proceeds (payments) for purchase of common stock under option plans 1,431 (134) Dividends paid (49,449) (48,532) Payments for purchase of treasury stock (67,821) (20,693) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (128,870) 182,232 - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 557 1,077 Cash and cash equivalents at beginning of year 4,839 2,846 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of third quarter $ 5,396 $ 3,923 ================================================================================================================== All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 6 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting Policies - ------------------- The summary of significant accounting policies is included in the notes to consolidated financial statements in the 1995 annual report of SUPERVALU INC. ("SUPERVALU" or the "company"). Restructuring - ------------- A restructuring charge of $204.8 million was recognized in the third quarter of fiscal 1995. During the third quarter of fiscal 1996, the company utilized $14.0 million of the reserve leaving a balance of $129.7 million. The primary use of the reserve in the third quarter was for the closedown and disposal of assets at underperforming corporate retail stores which resulted in a $10.4 million charge against the reserve. Statement of Registrant - ----------------------- The data presented herein is unaudited but, in the opinion of management, includes all adjustments necessary for a fair presentation of the consolidated financial position of the company and its subsidiaries at December 2, 1995 and December 3, 1994 and the results of the company's operations and cash flows for the periods then ended. These interim results are not necessarily indicative of the results of the fiscal years as a whole. A limited review of this data has been performed by the company's independent certified public accountants, Deloitte & Touche LLP. A copy of their report is attached as an exhibit to this report. -7- <PAGE> Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations In December 1994, the company recorded restructuring and other charges totaling $244 million. The charge was incurred primarily for implementation of the ADVANTAGE project, the sale, closure or restructure of certain retail food businesses and the recognition of certain asset impairment. The aggregate charges included $204.8 million for activities under the ADVANTAGE and retail restructuring plans. Management's objective under the ADVANTAGE project is to fundamentally change its business processes by improving the effectiveness and efficiency of the company's food distribution system, thus lowering the cost of goods to the company's customers, and by enhancing the market driving support to retailer customers. The retail food restructuring objectives are to improve retail performance by eliminating certain operations and assets that do not add shareholder value and to focus on building its successful retail formats. Comparisons of the fiscal 1996 financial information to last year's third quarter and year-to-date periods are difficult because of operational, business process and other changes related to the ADVANTAGE project and the retail food restructuring which are discussed later in greater detail. Expenses related to the ADVANTAGE project are significant and have impacted earnings for the quarter and year-to-date, costing $15.6 million pre-tax this year versus $9.9 million pre-tax last year over the first three quarters. Last year the ADVANTAGE expenses represented the cost of studying the changing fundamentals of our business and the industry and formulating a plan. Accordingly, the expenses were reported in unallocated corporate expenses. This year the company has moved into the implementation phase and the ADVANTAGE expenses have been charged to the appropriate operating segment. The retail restructuring has resulted in the closing of 18 stores during the last four quarters which has reduced sales but has eliminated the losses of these underperforming corporate retail stores. This also has affected the comparison of operating results in the retail segment. RESULTS OF OPERATIONS - --------------------- The following table sets forth items from the company's Consolidated Statements of Earnings as percentages of net sales: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ Third Quarter Year-to-Date (12 weeks) Ended (40 weeks) Ended - ------------------------------------------------------------------------------------------ Fiscal Fiscal Fiscal Fiscal 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales 100.00% 100.00% 100.00% 100.00% Cost of sales (90.56) (90.77) (90.67) (91.04) Selling and administrative expenses (7.29) (7.27) (7.15) (6.86) Restructuring and other charges -- (6.24) -- (1.93) Interest expense (.80) (.83) (.85) (.79) Interest income .12 .14 .13 .15 - ------------------------------------------------------------------------------------------ Earnings before equity in earnings of ShopKo, and income taxes 1.47 (4.97) 1.46 (.47) Equity in earnings of ShopKo .12 .13 .06 .07 Provision for income taxes (.60) 1.65 (.59) .08 ShopKo deferred tax credit -- 1.04 -- .32 - ------------------------------------------------------------------------------------------ Net earnings .99% (2.15)% .93% --% - ------------------------------------------------------------------------------------------ </TABLE> -8- <PAGE> NET SALES Net sales decreased .6% and .3% compared with last year for the third quarter and year-to-date periods, respectively. Food price inflation, as measured by the company, was 1.6% and .8% for the quarter and year-to-date periods, respectively, compared with deflation of .4% and .7% for the same periods last year. Food distribution sales increased slightly over last year for the quarter but decreased 1.0% year-to-date. In both periods, sales were affected by competitive market conditions at the wholesale and retail levels and the continuing but diminishing effect of last year's facility consolidations. This effect was partially mitigated by the addition of new retail customers in food distribution. Sales were also affected by the closing of corporate retail stores under the restructuring plan announced in last year's third quarter. Retail food sales decreased 2.3% for the quarter yet increased 6.9% year-to- date. The sales decline was caused by the closing of underperforming corporate retail stores. Same-store sales increased 2.3% for the quarter and 1.2% year-to- date. The increase in sales year-to-date was the result of the acquisition of Hyper Shoppes, Inc. in August 1994 and the inclusion of its sales for 40 weeks this year compared with 13 weeks last year. The company also opened 4 stores in the quarter and 13 year-to-date. <TABLE> <CAPTION> Sales by Segment - ---------------------------------------------------------------------------------- (In thousands) Third Quarter (12 weeks) - ---------------------------------------------------------------------------------- December 2, 1995 December 3, 1994 Net Sales % of Total Net Sales % of Total - ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Food distribution $ 3,509,225 90.3 % $ 3,502,119 89.6 % Retail food 1,006,001 25.9 % 1,029,474 26.4 % Less: Eliminations (628,631) (16.2)% (623,399) (16.0)% - ---------------------------------------------------------------------------------- Total net sales $ 3,886,595 100.0% $ 3,908,194 100.0 % ================================================================================== Sales by Segment - ---------------------------------------------------------------------------------- (In thousands) Year-to-Date (40 weeks) - ---------------------------------------------------------------------------------- December 2, 1995 December 3, 1994 Net Sales % of Total Net Sales % of Total - ---------------------------------------------------------------------------------- Food distribution $11,317,590 89.6 % $11,437,020 90.2 % Retail food 3,275,281 25.9 % 3,064,648 24.2 % Less: Eliminations (1,953,842) (15.5)% (1,828,634) (14.4)% - ---------------------------------------------------------------------------------- Total net sales $12,639,029 100.0% $12,673,034 100.0 % ================================================================================== </TABLE> -9- <PAGE> GROSS PROFIT Gross profit as a percentage of net sales increased to 9.4% and 9.3% for the quarter and year-to-date periods, respectively, compared with 9.2% and 9.0% for the same periods last year. The increase in the year-to-date percentage was principally caused by the growing proportion within the company's total sales mix of the higher-margined retail food business. The increase in the percentage for the quarter was due to favorable gross profit margins in both food distribution and retail food. Food distribution gross profit margin was positively impacted by favorable warehouse expense, primarily worker's compensation costs. However, this positive trend was partially offset by the competitive retail environment. The retail food gross profit margin increased for the quarter and year-to-date due to the closing of underperforming retail stores and the improved mix from higher gross margin items. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses as a percentage of net sales were 7.3% and 7.2% for the quarter and year-to-date, respectively, compared with 7.3% and 6.9% for the same periods last year. The higher year-to-date percentage was primarily due to the increased proportion of the company's retail food segment which operates at a higher selling and administrative expense percentage than the food distribution segment. Pre-tax expenses of $4.9 and $15.6 million related to the ADVANTAGE project were incurred during the third quarter and year-to-date, respectively, compared with $3.2 and $9.9 million for the same periods last year. The ADVANTAGE expenses incurred relate to implementation costs associated under the project and other activities. These expenses include, but are not limited to, systems development, employee training, relocation, consultants costs and retailer training and promotional programs. Under ADVANTAGE the company has accomplished the following to date: substantially completed the construction of the Anniston, Alabama prototype "upstream" facility; tested its new pricing strategy, Activity Based Sell, which charges retailers on a cost-to-serve basis and is intended to encourage optimum economic behavior at both retail and wholesale; tested a new computerized promotional system; designated and begun staffing marketing regions; and initiated comprehensive business process redesign to support on-going cost reduction. The company is also developing market-driving capabilities to help independent retailers achieve new growth by offering new category management and other programs. Testing of the new category management and shelf management programs is being conducted in Denver, the restructuring and retraining of retail operations field staff has been completed and the company is beginning implementation of the new retail technology initiative. Food distribution selling and administrative expenses as a percent of net sales were higher than last year for the quarter, but lower year-to-date. The higher percentage in the quarter was the result of ADVANTAGE implementation expenses totaling $4.3 million charged to this segment. Last year ADVANTAGE expenses totaling $3.2 million represented the costs of studying the changing fundamentals of our business and the industry and developing a restructuring plan, and accordingly were reported in unallocated corporate expenses. Favorable insurance experience and cost reductions in other administrative areas positively impacted expenses in the quarter and year-to-date. -10- <PAGE> Retail food selling and administrative expenses as a percent of net sales were consistent with last year for the quarter, but higher year-to-date. The higher year-to-date percentage was due to increased advertising expense in response to competitive pressures and higher promotional activity associated with new store openings. Additionally, the company experienced higher supply costs for paper and packaging supplies. The increases in promotion, store opening and supply costs were partially offset by the elimination of underperforming retail stores which reduced expenses in the quarter and year-to-date. OPERATING EARNINGS The company's pre-tax operating earnings (earnings before interest, corporate expenses, equity in earnings of ShopKo Stores, Inc. ("ShopKo") and taxes) were $88.5 million in the third quarter compared with an operating loss of $146.9 million for last year. Year-to-date operating earnings increased to $294.7 million from $59.5 million last year. The increase in operating earnings was principally due to the restructuring and other charges recorded in the third quarter of last year. Excluding the restructuring and other charges, operating earnings increased 4.7% and 1.3% over last year for the quarter and year-to-date periods, respectively. Food distribution operating earnings, before the restructuring and other charges, decreased slightly to $79.7 million from $80.0 million and to $259.6 million from $263.3 million for the third quarter and year-to-date, respectively. Food distribution operating earnings were positively impacted by favorable insurance experience. This positive impact was offset by pre-tax expenses of $4.3 and $9.9 million for the third quarter and year-to-date, respectively, related to ADVANTAGE expenses charged to this segment versus none last year and slightly reduced gross margins due to the competitive environment. Retail food operating earnings, before the restructuring and other charges, increased to $8.7 million from $4.5 million and to $35.0 million from $27.6 million for the third quarter and year-to-date, respectively. Retail food operating earnings increased in the quarter and year-to-date due to the elimination of operating losses from the closing of underperforming corporate retail stores. Year-to-date retail food operating earnings also increased due to the August 1994 acquisition of Hyper Shoppes, Inc. INTEREST EXPENSE AND INCOME Interest expense decreased to $31.1 million for the third quarter compared with $32.6 million last year due to lower short-term debt levels, partially offset by higher short-term rates. Interest expense increased to $108.0 million year-to- date compared with $100.5 million for the same period last year, reflecting higher short-term interest rates. Interest income decreased to $4.8 and $16.3 million for the third quarter and year-to-date, respectively, compared with $5.5 and $18.9 million for the same periods last year. EQUITY IN EARNINGS OF SHOPKO SUPERVALU's share of ShopKo net earnings were $4.7 and $8.0 million in the third quarter and year-to-date, respectively, compared with $5.2 and $8.8 million for the same periods last year. As reported by ShopKo, sales increased 4.3% to $491.0 million and net earnings decreased 10.4% for the third quarter compared with last year. The decrease in net earnings was primarily the result of a lower gross margin -11- <PAGE> percentage due to a shift in the sales mix from regular sales to lower gross margin promotional sales and continued competitive pricing pressures in the discount general merchandise marketplace. Year-to-date net earnings were also affected by increased interest expense due to last year's third quarter sale of long-term debentures. INCOME TAXES The effective tax rate, before the restructuring and other charges last year, increased to 37.61% and 38.79% in the third quarter and year-to-date, respectively, compared with 37.10% and 38.70% for the same periods last year. The increase in the effective tax rate was principally due to the decreased contribution from ShopKo. The year-to-date effective tax rate was also impacted by the increase in goodwill amortization. NET EARNINGS Net earnings were $38.4 for the third quarter compared with a net loss of $84.1 million for last year. Year-to-date net earnings increased to $117.7 million from $5 thousand last year. The increase in net earnings was related principally to last year's third quarter restructuring and other charges which was partially offset by a one-time tax credit related to the partial disposition of ShopKo. After adjusting last years' earnings to exclude these special items, net earnings increased 11.5% for the quarter and decreased .8% year-to-date. Net earnings were positively impacted by the closing of underperforming retail stores and favorable insurance experience. The decrease in the year-to-date net earnings was primarily due to higher net interest expense. In addition, increased expenses related to the ADVANTAGE project adversely impacted earnings for both the quarter and year-to-date. An additional $5 to $7 million after-tax is planned to be expended for ADVANTAGE related costs during the fourth quarter of fiscal 1996. The company is currently assessing the fiscal 1997 financial impact of the plan as a part of its annual budget and planning process. The company had anticipated a slight contribution from this project in fiscal 1997. Although ADVANTAGE initiatives are generating benefits, the company preliminarily anticipates spending under ADVANTAGE to exceed benefits through fiscal 1997 with a net contribution from this project in fiscal 1998. This is the result of the expansion and the acceleration in timing of certain ADVANTAGE programs which will drive expenses higher in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Internally generated funds, principally from the company's food distribution business, continue to be the major source of capital for liquidity and capital growth. Cash provided from operations year-to-date was $225.7 million compared with $87.9 million last year, which was not affected by restructuring and other charges recorded last year. The increase was primarily due to the planned reduction of inventory levels at wholesale distribution centers as well as the reduction of inventory related to the closing of retail stores. Cash provided from operations was primarily used to finance capital expenditures of $186.4 million. -12- <PAGE> In December 1994, the Board of Directors approved a new treasury stock purchase program. The company may repurchase up to 5.0 million shares which may be used for any corporate purpose. The company has repurchased 2.5 million shares at a cost of approximately $67.8 million during the fiscal year and has purchased a total of 3.8 million shares under this program. The company financed the purchase of the treasury stock primarily from the sale of surplus and under- utilized property, plant and equipment. Capital expenditures related to the ADVANTAGE project were $34.5 million year- to-date. The company's budget for fiscal 1996 included $100 million to fund regional facilities, technology and various mechanization systems for the ADVANTAGE project. The company expects that the investment in the ADVANTAGE project will be funded principally by related reductions in inventory levels. SUPERVALU will continue to use short-term and long-term debt as a supplement to internally generated funds to finance its activities. The company has a $400 million "shelf registration" in effect of which $147.5 million of medium term notes were issued during the third quarter. Subsequent to the end of the third quarter, the company issued notes in the amount of $10 million under the shelf registration. The company also has in place a $400 million revolving credit agreement that expires in May, 2000. The company refinanced $300 million of debt due in November, 1995 by utilizing the shelf registration and $152.5 million of short-term commercial paper which has been classified as long-term debt as the company has the ability and intent to renew these obligations past 1996 and into future periods. Maturities of debt issued will depend on management's views with respect to the relative attractiveness of interest rates at the time of issuance. The company's financial position and long-term debt ratings are strong, with an A3 rating from Moody's Investors Services, Inc. and a BBB+ from Standard and Poor's Ratings Group. These strong ratings, the available credit facilities and internally-generated funds provide the company with the financial flexibility to meet unexpected liquidity needs. -13- <PAGE> PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits filed with this Form 10-Q: (15) Letters from Deloitte & Touche regarding unaudited interim financial information. (27) Financial Data Schedule containing a summary of financial information extracted from the Consolidated Balance Sheets as of December 2, 1995. (b) Reports on Form 8-K: As described in the Company's form 10-Q for the quarter ended September 9, 1995, a Form 8-K was filed on October 2, 1995. 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. SUPERVALU INC. (Registrant) By: /s/ Jeffrey C. Girard ------------------------------------- Jeffrey C. Girard Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized officer of Registrant) By: /s/ Isaiah Harris ------------------------------------- Isaiah Harris Vice President & Controller (Chief Accounting Officer and duly authorized officer of Registrant) Date: January 16, 1996 -14- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>2 <DESCRIPTION>LETTERS FROM DELOITTE & TOUCHE LLP <TEXT> <PAGE> EXHIBIT (15) to Quarterly Report on Form 10-Q Page 1 of 2 [DELOITTE & TOUCHE LLP LETTERHEAD] LETTER REGARDING UNAUDITED INFORMATION Stockholders and Board of Directors SUPERVALU INC. Eden Prairie, Minnesota We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim information of SUPERVALU INC. and subsidiaries for the periods ended December 2, 1995 and December 3, 1994, as indicated in our report dated January 11, 1996. Because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended December 2, 1995, is incorporated by reference in the Registration Statements (No. 33-28310, No. 33-16934, No. 2-56896, and No. 33-50071 on Form S-8 and No. 33-56415 on Form S-3.) We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that act. /s/ Deloitte & Touche LLP January 11, 1996 <PAGE> EXHIBIT (15) to Quarterly Report on Form 10-Q Page 2 of 2 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Stockholders and Board of Directors SUPERVALU INC. Eden Prairie, Minnesota We have reviewed the accompanying consolidated balance sheets of SUPERVALU INC. (the Company) and subsidiaries as of December 2, 1995 and December 3, 1994 and the related consolidated statements of earnings and cash flows for the 12-week and 40-week periods then ended and the consolidated statement of stockholders' equity for the interim period ended December 2, 1995. These consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of SUPERVALU INC. and subsidiaries as of February 25, 1995 and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 10, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 25, 1995 and the consolidated statement of stockholders' equity for the year then ended is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ (Signature of DELOITTE & TOUCHE LLP) - ----------------------------------------- DELOITTE & TOUCHE LLP Minneapolis, Minnesota January 11, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the Consolidated Balance Sheets as of December 2, 1995 and the Consolidated Statement of Earnings for the 40 weeks ended December 2, 1995 and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-24-1996 <PERIOD-END> DEC-02-1995 <CASH> 5,396 <SECURITIES> 0 <RECEIVABLES> 445,010 <ALLOWANCES> (25,848) <INVENTORY> 1,179,209 <CURRENT-ASSETS> 1,728,901 <PP&E> 2,479,923 <DEPRECIATION> (901,348) <TOTAL-ASSETS> 4,338,669 <CURRENT-LIABILITIES> 1,505,037 <BONDS> 1,454,167 <COMMON> 75,335 <PREFERRED-MANDATORY> 0 <PREFERRED> 5,908 <OTHER-SE> 1,113,998 <TOTAL-LIABILITY-AND-EQUITY> 4,338,669 <SALES> 12,639,029 <TOTAL-REVENUES> 12,639,029 <CGS> 11,460,135 <TOTAL-COSTS> 11,460,135 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 1,938 <INTEREST-EXPENSE> 107,966 <INCOME-PRETAX> 192,245 <INCOME-TAX> 74,571 <INCOME-CONTINUING> 117,674 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 117,674 <EPS-PRIMARY> 1.72 <EPS-DILUTED> 1.72 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

SYY

https://www.sec.gov/Archives/edgar/data/96021/0000096021-96-000005.txt

-----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, V/fnUQKUPNYelm+raHcvmo+f4iH2YXx6208WNMv5b0pKaMNyOHYtU/YEGmLMZtV5 pF0QHlIBwegga0ScJfJ7vQ== <SEC-DOCUMENT>0000096021-96-000005.txt : 19960213 <SEC-HEADER>0000096021-96-000005.hdr.sgml : 19960213 ACCESSION NUMBER: 0000096021-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSCO CORP CENTRAL INDEX KEY: 0000096021 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 741648137 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06544 FILM NUMBER: 96515770 BUSINESS ADDRESS: STREET 1: 1390 ENCLAVE PKWY CITY: HOUSTON STATE: TX ZIP: 77077 BUSINESS PHONE: 7135841390 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>2ND QUARTER 10-Q <TEXT> <PAGE> Page 1 of 13 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 30, 1995 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 1-6544 SYSCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-1648137 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1390 Enclave Parkway Houston, Texas 77077-2099 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (713) 584-1390 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 [ ] 183,404,837 shares of common stock were outstanding as of February 2, 1996. <PAGE> 2 PART I. FINANCIAL INFORMATION --------------------------------------------------- Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company, without audit, with the exception of the July 1, 1995 consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1995 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented, have been made. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Fiscal 1995 Annual Report on Form 10- K. A review of the financial information herein has been made by Arthur Andersen LLP, independent public accountants, in accordance with established professional standards and procedures for such a review. A letter from Arthur Andersen LLP concerning their review is included as Exhibit 15. <PAGE> 3 <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) <CAPTION> Dec. 30, July 1, Dec. 31, 1995 1995 1994 ----------- --------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- <S> <C> <C> <C> Current assets Cash $ 117,193 $ 133,886 $ 84,224 Accounts and notes receivable, less allowances of $27,521, $16,001 and $29,448 1,018,231 932,533 919,262 Inventories 742,003 667,861 703,318 Deferred taxes 25,109 33,935 35,837 Prepaid expenses 22,809 18,685 22,000 ---------- ---------- ---------- Total current assets 1,925,345 1,786,900 1,764,641 Plant and equipment at cost, less depreciation 971,331 896,079 839,761 Goodwill and intangibles, less amortization 254,339 258,206 262,072 Other assets 160,375 153,506 146,869 ---------- ---------- ---------- Total assets $3,311,390 $3,094,691 $3,013,343 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 52,082 $ 1,181 $ 66,508 Accounts payable 766,744 708,380 688,537 Accrued expenses 196,044 206,131 171,680 Accrued income taxes 13,527 22,462 11,596 Current maturities of long-term debt 7,103 6,569 3,146 ---------- --------- ---------- Total current liabilities 1,035,500 944,723 941,467 Long-term debt 569,370 541,556 561,066 Deferred taxes 208,096 204,809 202,643 Shareholders' equity Preferred stock, par value $1 per share: Authorized 1,500,000 shares; issued none --- --- --- Common stock, par value $1 per share: Authorized 500,000,000 shares; issued 191,293,725 shares 191,294 191,294 191,294 Paid-in capital 36,988 48,674 52,078 Retained earnings 1,476,055 1,379,405 1,289,643 ---------- ---------- ---------- 1,704,337 1,619,373 1,533,015 Less cost of treasury stock, 7,453,996, 8,429,203 and 8,805,905 shares 205,913 215,770 224,848 ---------- ---------- ---------- Total shareholders' equity 1,498,424 1,403,603 1,308,167 ---------- ---------- ---------- Total liabilities and shareholders' equity $3,311,390 $3,094,691 $3,013,343 ========== ========== ========== <FN> Note: The July 1, 1995 balance sheet has been taken from the audited financial statements at that date. </TABLE> <PAGE> 4 <TABLE> SYSCO Corporation and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) <CAPTION> 26-Week Period Ended 13-Week Period Ended ---------------------------- ----------------------------- Dec. 30, Dec. 31, Dec. 30, Dec. 31, 1995 1994 1995 1994 ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> Sales $ 6,593,495 $ 5,989,759 $ 3,301,585 $ 3,006,663 Costs and expenses Cost of sales 5,410,459 4,912,364 2,705,801 2,463,576 Operating expenses 939,741 857,867 469,894 428,276 Interest expense 19,704 18,421 10,332 9,968 Other, net (794) (1,073) (350) (545) ------------ ----------- ------------ ------------ Total costs and expenses 6,369,110 5,787,579 3,185,677 2,901,275 ------------ ----------- ------------ ------------ Earnings before income taxes 224,385 202,180 115,908 105,388 Income taxes 87,510 80,265 45,204 41,839 ------------ ------------ ------------ ------------ Net earnings $ 136,875 $ 121,915 $ 70,704 $ 63,549 ============ ============ ============ ============ Average number of shares outstanding 182,970,451 183,091,860 183,156,420 182,890,596 ============ ============ ============ ============ Earnings per share $ 0.75 $ 0.67 $ 0.39 $ 0.35 ============ ============ ============ ============ Dividends paid per common share $ 0.22 $ 0.18 $ 0.11 $ 0.09 ============ ============ ============ ============ (/Table) <PAGE> 5 </TABLE> <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) <CAPTION> 26-Week Period Ended ------------------------ Dec. 30, Dec. 31, 1995 1994 --------- ---------- <S> <C> <C> Operating activities: Net earnings $ 136,875 $ 121,915 Add non-cash items: Depreciation and amortization 68,650 64,308 Interest on Liquid Yield Option Notes 2,274 2,979 Deferred tax provision 12,113 19,349 Provision for losses on accounts receivable 8,849 10,265 Additional investment in certain assets and liabilities net of effect of business acquired: (Increase) in receivables (94,547) (73,079) (Increase) in inventories (74,142) (101,324) (Increase) in prepaid expenses (4,124) (5,620) Increase in accounts payable 58,364 56,164 (Decrease) in accrued expenses (10,087) (4,363) (Decrease) in accrued income taxes (8,935) (17,572) (Increase) in other assets (11,195) (20,909) -------- -------- Net cash provided by operating activities 84,095 52,113 -------- -------- Investing activities: Additions to plant and equipment (139,538) (82,058) Sales and retirements of plant and equipment 2,171 2,038 -------- -------- Net cash used for investing activities (137,367) (80,020) Financing activities: Bank and commercial paper borrowings 164,608 85,851 Other debt borrowings (repayments) 2,610 (5,799) Common stock reissued from treasury 15,862 16,415 Treasury stock purchases (106,276) (38,064) Dividends paid (40,225) (33,007) -------- -------- Net cash provided by financing activities 36,579 25,396 -------- -------- Net (decrease) in cash (16,693) (2,511) Cash at beginning of period 133,886 86,735 --------- -------- Cash at end of period $ 117,193 $ 84,224 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 19,230 $ 18,542 Income taxes 82,749 78,133 </TABLE> <PAGE> 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The liquidity and capital resources discussion included on page 11 of the Company's Fiscal 1995 Annual Report on Form 10-K remains applicable, other than the common stock repurchase program described below. In Fiscal 1992, the Company began a common stock repurchase program and purchased 8,000,000 shares in Fiscal 1992 and 1993. In September 1993, the Board of Directors authorized an additional 10,000,000 shares to be purchased under this stock repurchase program. Under this program, 3,000,000 shares were purchased in Fiscal 1994, 2,100,000 shares in Fiscal 1995, and 3,484,000 shares in the first half of Fiscal 1996. In November, 1995 the Company determined to redeem all outstanding Liquid Yield Option Notes (LYON's) on December 4, 1995 at a price of $579.92 per $1,000 principal amount at maturity, or approximately $90,400,000 in the aggregate. These zero coupon subordinated notes were outstanding and convertible into common stock at the rate of 24.512 shares per $1,000 principal amount at maturity. During this quarter, in lieu of redemption, bondholders converted 155,685, of the 155,815 outstanding LYON's into common stock, resulting in the issuance of 3,816,133 shares. Results of Operations --------------------- Sales increased 10% during the 26 weeks and 9.8% in the second quarter of Fiscal 1996 over comparable periods of the prior year. Cost of sales increased 10% during the 26 weeks and 9.8% in the second quarter of Fiscal 1996 which is generally in line with the sales increases. Operating expenses for the periods presented remained approximately the same as a percent of sales. Interest expense in the current periods increased over the prior periods due to increased borrowings. Income taxes for the current periods reflect an effective rate of 39% as compared to 39.7% in the prior year. The rate reduction results from the effects of several tax savings initiatives. Increases in pretax earnings, net earnings and earnings per share for the periods shown resulted from a combination of the above factors. <PAGE> 7 PART II. OTHER INFORMATION ------------------------- Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on November 3, 1995 ("1995 Annual Meeting"). At the 1995 Annual Meeting the following persons were elected to serve as directors of the Company for three year terms: Colin T. Campbell, Frank A. Godchaux III, Donald J. Keller, Frank H. Richardson and John F. Woodhouse. The terms of the following persons as directors of the Company continued after the 1995 Annual Meeting: John F. Baugh, John W. Anderson, Charles H. Cotros, Jonathan Golden, Bill M. Lindig, Richard G. Merrill, Donald H. Pegler, Jr., Phyllis S. Sewell, Arthur J. Swenka and Thomas B. Walker, Jr. At the 1995 Annual Meeting, the stockholders voted upon the election of directors, as noted above, and on: (a) Approval of the Sysco Corporation 1995 Management Incentive Plan; (b) Approval of the Sysco Corporation Non-Employee Directors Stock Option Plan; and (c) Approval of the reservation of 8,000,000 additional shares of Sysco Corporation Common Stock under the Sysco Corporation 1991 Stock Option Plan. The results of such vote were as follows: <PAGE> 8 <TABLE> <CAPTION> Number of Votes Cast -------------------- Withheld and Broker Matter Voted Upon For Against Abstained Non-votes ----------------- ----------- ---------- ------------ --------- <S> <C> <C> <C> <C> (a) Approval of the Management Incentive Plan 134,674,843 12,605,590 5,592,584 4,586,394 (b) Approval of the Non- Employee Directors Stock Option Plan 139,215,399 7,736,746 5,448,001 5,059,265 (c) Approval of the reservation of additional shares under the 1991 Stock Option Plan 127,847,907 18,931,506 5,620,732 5,059,265 (d) Election of Director: Colin G. Campbell 156,131,695 1,327,716 -- -- Frank A. Godchaux III 155,580,990 1,878,421 -- -- Donald J. Keller 156,158,967 1,300,444 -- -- Frank H. Richardson 156,155,717 1,303,694 -- -- John F. Woodhouse 155,705,807 1,753,604 -- -- </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 10(e) Sysco Corporation 1995 Management Incentive Plan incorporated by reference to Form 10-K for the year ended July 1, 1995 Exhibit 10(g) Sysco Corporation Non-Employee Directors Stock Option Plan incorporated by reference to Form 10-K for the year ended July 1, 1995 Exhibit 11, Statement re computation of per share earnings. Exhibit 15, Letter from Arthur Andersen LLP dated February 8, 1996, re unaudited financial statements. Exhibit 27, Financial Data Schedule. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. <PAGE> 9 SIGNATURES ------------------ Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYSCO CORPORATION (Registrant) By /s/ JOHN K. STUBBLEFIELD, JR. ----------------------------- John K. Stubblefield, Jr. Senior Vice President & Chief Financial Officer Date: February 8, 1996 <PAGE> 10 <TABLE> EXHIBIT INDEX ---------------------- <CAPTION> SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- <S> <C> <C> 10(e) Sysco Corporation 1995 Management Incentive Plan incorporated by reference to Form 10-K for the year ended July 1, 1995 10(g) Sysco Corporation Non-Employee Directors Stock Option Plan incorporated by reference to Form 10-K for the year ended July 1, 1995 11 Sysco Corporation and its Consolidated Subsidiaries statement re computation of per share earnings 11 15 Letter from Arthur Andersen LLP dated February 8, 1996, re unaudited financial statements 12 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule 13 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 EPS COMP <TEXT> <PAGE> 11 Exhibit 11 SYSCO CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS <TABLE> <CAPTION> 26-Week Period Ended 13-Week Period Ended ----------------------------- ----------------------------- Dec. 30, 1995 Dec. 31, 1994 Dec. 30, 1995 Dec. 31, 1994 ------------- -------------- ------------- -------------- Calculation of Primary Earnings Per Share: - ----------------------------------------- <S> <C> <C> <C> <C> Net earnings applicable to common stock $ 136,875,000 $ 121,915,000 $ 70,704,000 $ 63,549,000 ============= ============= ============= ============= Average number of common shares and common stock equivalents outstanding 182,970,451 183,091,860 183,156,420 182,890,596 Dilutive effect of stock options <F1> --- --- --- --- ------------- ------------- ------------- ------------- 182,970,451 183,091,860 183,156,420 182,890,596 ============= ============= ============= ============= Primary earnings per share $ 0.75 $ 0.67 $ 0.39 $ 0.35 ============= ============= ============= ============= Calculation of Fully Diluted Earnings Per Share: - ---------------------------- Net earnings applicable to common stock $ 136,875,000 $ 121,915,000 $ 70,704,000 $ 63,549,000 ============= ============= ============= ============= Average number of shares outstanding on a fully diluted basis - same as for calculation of primary earnings per share 182,970,451 183,091,860 183,156,420 182,890,596 Dilutive effect of stock options and Liquid Yield Option Notes <F2> --- --- --- --- ------------- ------------- ------------- ------------ 182,970,451 183,091,860 183,156,420 182,890,596 ============= ============= ============= ============ Fully diluted earnings per share $ 0.75 $ 0.67 $ 0.39 $ 0.35 ============= ============= ============= ============ <FN> <F1> Maximum possible dilutive effect of outstanding options in each period is less than 3%. <F2> Maximum possible dilutive effect of outstanding effect of outstanding options and Liquid Yield Option Notes during each period is less than 3%. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>3 <DESCRIPTION>AA LETTER <TEXT> <PAGE> 12 Exhibit 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Sysco Corporation: We have reviewed the consolidated balance sheet of Sysco Corporation (a Delaware corporation) and subsidiaries as of December 30, 1995, and the related consolidated statements of results of operations and cash flows for the twenty-six week and thirteen week periods then ended included in the Company's Quarterly Report on Form 10-Q. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Houston, Texas February 8, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Item 1. Financial Statements and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-29-1996 <PERIOD-END> DEC-30-1995 <CASH> 117,193 <SECURITIES> 0 <RECEIVABLES> 1,045,752 <ALLOWANCES> (27,521) <INVENTORY> 742,003 <CURRENT-ASSETS> 1,925,345 <PP&E> 1,690,577 <DEPRECIATION> (719,246) <TOTAL-ASSETS> 3,311,390 <CURRENT-LIABILITIES> 1,035,500 <BONDS> 569,370 <COMMON> 191,294 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,307,130 <TOTAL-LIABILITY-AND-EQUITY> 3,311,390 <SALES> 6,593,495 <TOTAL-REVENUES> 6,593,495 <CGS> 5,410,459 <TOTAL-COSTS> 6,369,110 <OTHER-EXPENSES> (794) <LOSS-PROVISION> 8,849 <INTEREST-EXPENSE> 19,704 <INCOME-PRETAX> 224,385 <INCOME-TAX> 87,510 <INCOME-CONTINUING> 136,875 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 136,875 <EPS-PRIMARY> 0.75 <EPS-DILUTED> 0.75 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

TEK

https://www.sec.gov/Archives/edgar/data/96879/0000096879-96-000003.txt

-----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, Mff9diTL/ezSlyYF8E7GCONoXJAF0kyPoqXy4ayD6upKKFtiwWy57bnQbI1NJDzM f9jsXrcwPQHm38jffWA6BA== <SEC-DOCUMENT>0000096879-96-000003.txt : 19960111 <SEC-HEADER>0000096879-96-000003.hdr.sgml : 19960111 ACCESSION NUMBER: 0000096879-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951125 FILED AS OF DATE: 19960105 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKTRONIX INC CENTRAL INDEX KEY: 0000096879 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 930343990 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04837 FILM NUMBER: 96501225 BUSINESS ADDRESS: STREET 1: 2660 SW PKWY CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036277111 MAIL ADDRESS: STREET 1: P O BOX 100 CITY: WILSONVILLE STATE: OR ZIP: 97070-1000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>1996 Q2 10-Q REPORT <TEXT> ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the 13 weeks ended November 25, 1995, 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 1-4837 TEKTRONIX, INC. (Exact name of registrant as specified in its charter) OREGON 93-0343990 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26600 S.W. PARKWAY WILSONVILLE, OREGON 97070-1000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 627-7111 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No______ AT DECEMBER 27, 1995 THERE WERE 33,542,906 COMMON SHARES OF TEKTRONIX, INC. OUTSTANDING. (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.) TEKTRONIX, INC. AND SUBSIDIARIES - -------------------------------- INDEX - ----- PAGE NO. -------- Financial Statements: Condensed Consolidated Balance Sheets - 2 November 25, 1995 and May 27, 1995 Condensed Consolidated Statements of Operations - 3 for the Thirteen Weeks Ended November 25, 1995 and the Thirteen Weeks Ended November 26, 1994 for the Twenty-Six Weeks Ended November 25, 1995 and the Twenty-Six Weeks Ended November 26, 1994 Condensed Consolidated Statements of Cash Flows - 4 for the Twenty-Six Weeks Ended November 25, 1995 and the Twenty-Six Weeks Ended November 26, 1994 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial 6 Condition and Results of Operations Part II. Other Information 13 Signatures 14 1 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) Nov. 25, May 27, (In thousands) 1995 1995 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 29,517 $ 31,761 Accounts receivable - net 324,829 315,356 Inventories 276,306 245,766 Other current assets 47,503 65,108 ---------- ---------- Total current assets 678,155 657,991 Property, plant, and equipment 647,061 624,318 Accumulated depreciation and amortization (369,898) (371,238) ---------- ---------- Property, plant, and equipment - net 277,163 253,080 Property held for sale 29,786 35,912 Deferred tax assets 68,097 76,418 Other long-term assets 202,241 194,901 ---------- ---------- Total assets $1,255,442 $1,218,302 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 65,489 $ 87,623 Accounts payable 166,397 173,537 Accrued compensation 81,158 106,660 Deferred revenue 16,075 19,988 ---------- ---------- Total current liabilities 329,119 387,808 Long-term debt 153,334 104,984 Other long-term liabilities 123,087 121,295 Shareholders' equity: Common stock 226,017 216,251 Retained earnings 337,885 298,964 Currency adjustment 61,720 76,948 Unrealized holding gains - net 24,280 12,052 ---------- ---------- Total shareholders' equity 649,902 604,215 ---------- ---------- Total liabilities and shareholders' equity $1,255,442 $1,218,302 ========== ========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 2 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) 13 weeks to 13 weeks to 26 weeks to 26 weeks to Nov. 25, Nov. 26, Nov. 25, Nov. 26, (In thousands except for per share amounts) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 443,598 $ 358,655 $ 844,620 $ 683,507 Cost of sales 257,547 194,842 489,250 362,499 ---------- --------- ---------- --------- Gross profit 186,051 163,813 355,370 321,008 Research and development 40,572 41,228 79,051 83,383 Selling, general, and administrative 108,111 96,338 206,299 186,428 Equity in business ventures' earnings 1,686 1,007 1,093 642 ---------- ---------- ---------- ---------- Operating income 39,054 27,254 71,113 51,839 Other expense - net 1,467 2,186 1,141 3,774 ---------- ---------- ---------- ---------- Earnings before taxes 37,587 25,068 69,972 48,065 Income taxes 11,277 6,451 20,992 12,083 ---------- ---------- ---------- ---------- Net earnings $ 26,310 $ 18,617 $ 48,980 $ 35,982 ========== ========== ========== ========== Earnings per share $ 0.79 $ 0.57 $ 1.47 $ 1.11 Dividends per share 0.15 0.15 0.30 0.30 Average shares outstanding 33,479 32,465 33,363 32,307 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 26 weeks to 26 weeks to Nov. 25, Nov. 26, (In thousands) 1995 1994 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 48,980 $ 35,982 Adjustments to reconcile net earnings to cash from operating activities: Depreciation expense 21,478 20,544 Deferred taxes 8,321 1,847 Accounts receivable (10,188) 21,915 Inventories (30,613) (30,355) Accounts payable (9,907) (17,213) Accrued compensation (25,387) (12,889) Other assets (9,469) (46,412) Other-net 7,536 1,681 ---------- ---------- Net cash provided (used) by operating activities 751 (24,900) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (46,461) (42,933) Proceeds from sale of assets 9,936 32,482 Proceeds from sale of investments 4,704 18,832 ---------- ---------- Net cash provided (used) by investing activities (31,821) 8,381 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term debt (21,957) 7,251 Issuance of long-term debt 50,029 1,218 Repayment of long-term debt (1,674) (566) Issuance of common stock 13,039 19,460 Repurchase of common stock -- (8,382) Dividends (10,059) (9,138) ---------- ---------- Net cash provided by financing activities 29,378 9,843 Effect of exchange rate changes (552) 375 ---------- ---------- Decrease in cash and cash equivalents (2,244) (6,301) Cash and cash equivalents at beginning of year 31,761 43,453 ---------- ---------- Cash and cash equivalents at end of quarter $ 29,517 $ 37,152 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS: Income taxes paid $ 18,493 $ 4,803 Interest paid 7,456 6,367 NON-CASH INVESTING ACTIVITIES: Fair value adjustment to securities available-for-sale $ 20,381 $ 25,502 Income tax effect related to fair value adjustment 8,153 10,201 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4 <PAGE> TEKTRONIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The condensed consolidated financial statements and notes have been prepared by the Company without audit. Certain information and footnote disclosures normally included in annual financial statements, prepared in accordance with generally accepted accounting principles, have been con- densed or omitted. Management believes that the condensed statements include all necessary adjustments which are of a normal and recurring nature and are adequate to present financial position, results of operations and cash flows for the interim periods. The condensed informa- tion should be read in conjunction with the financial statements and notes incorporated by reference in the Company's latest annual report on Form 10-K. INVENTORIES <TABLE> <CAPTION> Inventories consisted of: Nov. 25, May 27, (In thousands) 1995 1995 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> Materials and work in process $ 152,748 $ 144,259 Finished goods 123,558 101,507 ---------- ---------- Inventories $ 276,306 $ 245,766 ========== ========== </TABLE> ACQUISITIONS In the first quarter of fiscal 1996, the Company completed its acquisition of all of the outstanding shares of Lightworks Editing Systems Limited and Lightworks Editing System, Inc.(Lightworks), which designs and develops non-linear editing systems. The Company has issued 1,644,000 common shares to complete the acquisition. The acquisition was accounted for as a pooling of interests and the financial statements have been restated to include the results and financial position of Lightworks for all prior periods. The restatement did not have a material effect on the Company's previously reported 1995 results or financial position except for the impact on earnings per share from the issuance of the shares to complete the acquisition. The restatement reduced the Company's previously reported earnings per share for fiscal year 1995 by $0.13 per share primarily because of the issuance of additional shares to complete the acquisition. The impact of the restatement on earnings per share in each quarter of fiscal 1995 was as follows: an increase of $0.02 in the first quarter; a decrease of $0.02 in the second quarter; a decrease of $0.05 in the third quarter; and a decrease of $0.08 in the fourth quarter. SHORT-TERM AND LONG-TERM DEBT In the first quarter of fiscal 1996, the Company issued $50.0 million of 7.625% Notes due August 15, 2002. 5 <PAGE> INCOME TAXES <TABLE> <CAPTION> The provision for income taxes consisted of: 13 weeks to 13 weeks to 26 weeks to 26 weeks to Nov. 25, Nov. 26, Nov. 25, Nov. 26, (In thousands) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> United States $ 6,553 $ 1,905 $ 8,089 $ 3,864 State 1,639 477 2,029 966 Foreign 3,085 4,069 10,874 7,253 ---------- ---------- ---------- ---------- Income taxes $ 11,277 $ 6,451 $ 20,992 $ 12,083 ========== ========== ========== ========== </TABLE> The provision for income taxes was calculated at estimated annual effective rates of 30% and 26%, respectively, for the quarters ended November 25, 1995 and November 26, 1994. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The Company's financial condition is strong. Cash flow from operating activities and borrowing capacity from existing lines of credit are sufficient to meet current and anticipated future needs. At the end of the second quarter (November 25, 1995), the Company maintained bank credit facilities totaling $300.4 million, of which $236.8 million was unused. The unused facilities include $137.2 million in lines of credit and $99.6 million under a revolving credit agreement from United States and foreign banks. Current assets increased by $20.2 million from the year end balance at May 27, 1995 due to higher accounts receivable and inventories, partly off- 6 <PAGE> set by a decline in other current assets. Accounts receivable were slightly higher due to increased sales in certain geographies which have longer col- lection terms. Increased inventories were due primarily to higher order rates and a buildup of some components caused by longer lead times and changes in the mix of product orders. Other current assets declined primar- ily because of the collection of a portion of a note receivable from the sale of a building, and the reduction of short-term deferred tax assets. Net property, plant and equipment increased by $24.1 million as the Company continued to invest in facilities consolidation and information systems. Current liabilities declined by $58.7 million. Short-term debt was paid down by $22.1 million with proceeds generated by the issuance of $50 million in long-term notes. Accrued compensation declined $25.5 million due to the payment of year-end accruals for incentives and commissions, usage of accrued vacation and the payment of employee severance charged against restructuring reserves. Long-term debt increased as a result of the Company's issuance, in the first quarter, of $50 million in notes due August 15, 2002. Shareholders' equity increased by $45.7 million due primarily to earnings net of dividends, the exercising of stock options and an increase in holding gains on investments in marketable securities available for sale, partly offset by a negative currency adjustment due to a strengthening U.S. dollar against the Japanese Yen and certain major European currencies. 7 <PAGE> Restructuring Charges The Company is completing its consolidation of facilities and reduction of workforce for which restructuring charges were provided, as described in the 1995 Annual Report to shareholders. At the end of the second quarter, substantially all restructuring reserves have been utilized. Results of Operations 26 WEEKS ENDED NOVEMBER 25, 1995 vs. 26 WEEKS ENDED NOVEMBER 26,1994 In the first half of fiscal 1996, net earnings were $49.0 million, or $1.47 per share compared with $36.0 million, or $1.11 per share in the first half of fiscal 1995. Net sales were $844.6 million, an increase of 24% from the prior year's total of $683.5 million. Product orders increased 25% from $649.9 million to $813.1 million. The Company experienced strong sales and order growth in all three businesses and in all geographic regions. Measurement Business Division sales of $385.5 million increased 15% from the prior year, with strong growth in instruments, handheld electronic tools and communications test products. Product orders increased from $324.0 million to $383.2 million, or 18%. 8 <PAGE> Color Printing and Imaging Division sales increased 32% to $261.5 million reflecting continued heavy demand for the current printer lines, especially the Phaser* 340 solid ink printer. Product orders increased 27% from $190.1 million to $242.3 million. *(Phaser is a registered trademark of Tektronix, Inc.). Video and Networking Division experienced a 38% increase in product orders over the prior year, from $135.8 million to $187.6 million. Sales increased 40% to $197.6 million, led by strong sales of the Profile* video disk recorder, Grass Valley Group TV production equipment and X terminals. *(Profile is a trademark of Tektronix, Inc.). Sales to customers in the United States increased 21% from $356.9 million to $431.2 million, and represented 51% of total sales. International sales of $413.5 million were up 30%, with growth in all regions and particular strength in Europe. Product orders from customers in the United States of $393.5 million were up 23% from last year while international product orders of $419.6 million were up 28%. Cost of sales increased as a percentage of net sales from 53.0% to 57.9% as the Company continued to increase the use of alternative distribution channels, experienced the impact of increased systems integration sales from Video and Networking and experienced declines in Color Printing and Imaging margins as a result of changes in product mix and the short-term impact of early shipments of the Phaser 340 color printer. Research and development and selling, general and administrative expenses declined sharply as a percentage of sales, from 12.2% to 9.4% and from 27.3% to 24.4%, respectively, due primarily to the higher sales volume and continued effective cost controls, particularly in administrative functions. 9 <PAGE> Operating income as a percentage of sales increased year over year, rising from 7.6% in the first half of 1995 to 8.4% as lower operating expenses as a percentage of sales more than offset declining gross margins. Other expense declined due primarily to higher gains on sales of stock in other companies, partly offset by higher interest expense. The provision for income taxes increased from $12.1 million to $21.0 million due to increased earnings before taxes and a higher estimated effective annual tax rate of 30% for the current year, compared to 25.1% for the first half of last year. Net earnings were 36% higher than the prior year, due to higher sales and higher operating income, partly offset by higher taxes. 13 WEEKS ENDED NOVEMBER 25, 1995 vs. 13 WEEKS ENDED NOVEMBER 26,1994 In the second quarter of fiscal 1996, net earnings were $26.3 million, or $0.79 per share compared with $18.6 million, or $0.57 per share in the second quarter of fiscal 1995. Net sales were $443.6 million, up 24% from $358.7 million in the prior year. Product orders increased from $343.9 million to $424.0 million, a 23% improvement. The Company experienced strong sales and orders growth in all three businesses and in all geographic regions. 10 <PAGE> Measurement Business sales of $200.2 million were up 11% from $180.3 million in the prior year due to acceptance of new products, particularly in instruments, handheld electronic tools and communications test products. The sales increase came despite constraints resulting from parts shortages during the current quarter. Product orders for Measurement increased from $175.3 million to $208.2 million, or 19%. Color Printing and Imaging sales increased 29% from $108.8 million to $139.9 million, with strong sales of the Phaser 340 solid ink color printer. Product orders increased by 26% over the prior year, improving from $101.4 million to $127.9 million. Video and Networking experienced product orders of $87.9 million, a 31% increase over the $67.2 million reported for the prior year. Sales for the division grew 52% from $68.2 million to $103.5 million, led by strong sales of the Profile video disk recorder, Grass Valley Group TV production equipment and X terminals. Sales to customers in the United States increased by 19% from $184.6 million to $220.2 million, representing 50% of total sales. International sales of $223.4 million were up 29% from $172.7 million in the prior year, with strong growth in all regions particularly in Europe. Product orders in both U.S. and international operations increased by 23% over the prior year. U.S. orders increased from $166.3 million to $205.2 million; internationally, the increase was from $177.6 million to $218.8 million. Cost of sales increased as a percentage of net sales from 54.3% to 58.1% as the Company continued to increase the percentage of sales through alternative distribution channels, experienced inefficiencies associated with parts shortages in some businesses, and continued to be impacted by increased systems integration sales in Video and Networking. Additionally, Color Printing and Imaging experienced lower margins in the second 11 <PAGE> quarter of this year compared to the same quarter last year as a result of changes in product mix, but the margins improved slightly in the second quarter compared to the first quarter of this year. Research and development and selling, general and administrative expenses declined as a percentage of sales, from 11.5% to 9.1% and from 26.9% to 24.4%, respectively, due primarily to the higher sales volume and continued effective cost controls, particularly in administrative functions. Operating income as a percentage of sales increased year over year, rising from 7.6% in the second quarter of 1995 to 8.8% this year as lower operating expenses as a percentage of sales more than offset declining gross margins. Income taxes increased from $6.5 million to $11.3 million due to higher earnings before taxes in the current quarter and a higher estimated effective annual tax rate of 30% for the current year compared to 26% last year. Net earnings of $26.3 million were 41% higher than the prior year due to higher sales and higher operating income, partly offset by higher taxes. 12 <PAGE> PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10) (.1) Executive Severance Agreement, as amended. (.2) Supplemental Executive Retirement Agreement. (27) Financial Data Schedule for the twenty-six weeks ending November 25, 1995. (.1) Restated Financial Data Schedule for the twenty-six weeks ending November 26, 1994. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 13 <PAGE> 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. January 4, 1996 TEKTRONIX, INC. By /s/ CARL W. NEUN ----------------- Carl W. Neun Senior Vice President and Chief Financial Officer 14 <PAGE> EXHIBIT LIST (10) (.1) Executive Severance Agreement, as amended. (.2) Supplemental Executive Retirement Agreement. (27) Financial Data Schedule for the twenty-six weeks ending November 25, 1995. (.1) Restated Financial Data Schedule for the twenty-six weeks ending November 26, 1994. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>EXECUTIVE SEVERANCE AGREEMENT, AS AMENDED. <TEXT> Executive Severance Agreement September 22, 1993 Carl W. Neun 350 Lakeview Boulevard Lake Oswego, OR 97034 Executive Tektronix, Inc., an Oregon corporation P.O. Box 1000 Wilsonville, Oregon Tektronix Tektronix considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of Tektronix and its shareholders. In order to induce Executive to remain employed by Tektronix in the face of uncertainties about the long-term strategies of Tektronix and their potential impact on the scope and nature of Executive's position with Tektronix, this Agreement, which has been approved by the Organization and Compensation Committee of the Board of Directors of Tektronix, sets forth the severance benefits that Tektronix will provide to Executive in the event Executive's employment by Tektronix is terminated under the circumstances described in this Agreement. 1. Employment Relationship. Executive is currently employed by Tektronix as Vice President and Chief Financial Officer. Executive and Tektronix acknowledge that either party may terminate this employment relationship at any time and for any reason, subject to the obligation of Tektronix to provide the benefits specified in this Agreement in accordance with the terms hereof. 2. Release of Claims. In consideration for the severance benefits outlined in this Agreement, Executive agrees to execute a Release of Claims in the form attached as Exhibit A ("Release of Claims"). Executive promises to execute and deliver the Release of Claims to Tektronix within the later of forty-five (45) days from the date Executive receives the Release of Claims or on the last day of Executive's active employment. 3. Compensation Upon Termination. In the event that Executive's employment is terminated at any time by Tektronix other than for Cause (as defined in Section 6.1 of this Agreement), death, or Disability (as defined in Section 6.2 of this Agreement), subject to Executive's execution of a Release of Claims, Executive shall be entitled to the following benefits: 3.1 As severance pay and in lieu of any further pay for periods subsequent to the date of termination, Tektronix shall pay Executive, in a single payment within the later of forty-five (45) days after termination of employment or eight days after execution of the Release of Claims, an amount in cash equal to Executive's annual base pay at the rate in effect immediately prior to the date of termination, or, if greater, an amount in cash equal to Executive's average annual base pay for the three years ending with Executive's last pay change preceding termination. 3.2 Executive is entitled to extend coverage under any group health plan in which Executive and Executive's dependents are enrolled at the time of termination of employment under the COBRA continuation laws for the 18-month statutory period, or so long as Executive remains eligible under COBRA. Tektronix will pay Executive a lump sum payment in an amount equivalent to the reasonably estimated cost Executive may incur to extend for a period of eighteen (18) months under the COBRA continuation laws Executive's group health and dental plan coverage in effect at the time of termination. Executive may use this payment, as well as any payment made under 3.1, for such COBRA continuation coverage or for any other purpose. 3.3 Except as provided in Section 5.2, Executive shall be entitled to a portion of the benefits under any incentive plans in effect at the time of termination (including the Results Sharing Plan and the Annual Performance Improve ment Plan), prorated for the portion of the plan year during which Executive was a participant. For purposes of this Agreement, Executive's participation in the Annual Performance Improvement Plan will be considered to have ended on Executive's last day of active employment. Prorated awards shall not be due and payable by Tektronix to Executive until the date that all awards are paid after the close of the incentive period. Unless the applicable plan provides for a greater payment for a participant whose employment terminates prior to the end of an incentive period (in which case the applicable plan payment shall be made), the proration shall be calculated pursuant to this Section 3.3. The payment, if any, that would have been made under Executive's award had Execu- tive been made a participant for the full incentive period shall be calculated at the end of the incentive period. Such amount shall be divided by the total number of days in the incentive period and the result multiplied by the actual number of days Executive participated in the plan. 3.4 Tektronix will pay up to $12,500 to a third party outplacement firm selected by Executive to provide career counseling assistance to Executive for a period of one (1) year following Executive's termination date. 3.5 Tektronix will permit Executive to continue to partici- pate in its Executive Financial Counseling Program through the remainder of the term of Executive's current participation (which shall in no case be longer than one (1) year after the effective date of Executive's termina- tion). 4. Subsequent Employment. The amount of any payment provided for in this Agreement shall not be reduced, offset or subject to recovery by Tektronix by reason of any compensation earned by Executive as the result of employment by another employer after termination. 5. Other Agreements. 5.1 In the event that severance benefits are payable to Executive under any other agreement with Tektronix in effect at the time of termination (including but not limited to any change of control, "golden parachute" or employment agreement, but excluding for this purpose any stock option agreement or stock bonus agreement or stock appreciation right agreement that may provide for accelerated vesting or related benefits upon the occur rence of a change in control), the benefits provided in this Agreement shall not be payable to Executive. Executive may, however, elect to receive all of the benefits provided for in this Agreement in lieu of all of the benefits provided in all such other agreements. Any such election shall be made with respect to the agree ments as a whole, and Executive cannot select some bene- fits from one agreement and other benefits from this Agreement. 5.2 The vesting or accrual of stock options, restricted stock, stock bonuses, or any other stock awards shall not continue following termination. Any agreements between Executive and Tektronix that relate to stock awards (including but not limited to stock options, long term incentive program, stock bonuses and restricted stock) shall be governed by such agreements and shall not be affected by this Agreement. 6. Definitions. 6.1 Cause. Termination by Tektronix of Executive's employ ment for "Cause" shall mean termination upon (a) the willful and continued failure by Executive to perform substantially Executive's reasonably assigned duties with Tektronix (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a demand for substantial performance is delivered to Executive by the Chairman of the Board of Directors or the President of Tektronix which specifically identifies the manner in which such executive believes that Executive has not substantially performed Executive's duties, or (b) the willful engaging by Executive in illegal conduct which is materially and demonstrably injurious to Tektronix. For purposes of this Section 6.1, no act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive in knowing bad faith and without reasonable belief that Executive's action or omission was in, or not opposed to, the best interests of Tektronix. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for Tektronix shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of Tektronix. 6.2 Disability. Termination by Tektronix of Executive's employment based on "Disability" shall mean termination because of Executive's absence from Executive's duties with Tektronix on a full-time basis for one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness, unless within thirty (30) days after notice of termination by Tektronix following such absence Executive shall have returned to the full-time performance of Executive's duties. 7. Successors; Binding Agreement. 7.1 This Agreement shall be binding on and inure to the benefit of Tektronix and its successors and assigns. 7.2 This Agreement shall inure to the benefit of and be enforceable by Executive and Executive's legal representatives, executors, administrators and heirs. 8. Resignation of Corporate Offices. Executive will resign Executive's office, if any, as a director, officer or trustee of Tektronix, its subsidiaries or affiliates, effective as of the date of termination of employment. Executive agrees to provide Tektronix such written resignation(s) upon request. 9. Governing Law, Arbitration. This Agreement shall be construed in accordance with and governed by the laws of the State of Oregon. Any dispute or controversy arising under or in connection with this Agreement or the breach thereof, shall be settled exclusively by arbitration in Portland, Oregon in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator may be entered in any Court having jurisdiction thereof. 10. Fees and Expenses. In the event that Executive initiates arbitration under the circumstances described in this Agree- ment to obtain or enforce any right or benefit provided by this Agreement and the arbitrator determines that Executive is the prevailing party, Executive shall be permitted to recover Executive's reasonable attorneys' fees and costs incurred in connection with such proceeding. In the event that the arbitrator determines that Tektronix is the prevailing party, each party shall bear its own attorneys' fees and costs incurred in connection with such proceeding. 11. Amendment. No provision of this Agreement may be modified unless such modification is agreed to in a writing signed by Executive and Tektronix. Tektronix, Inc. CARL W. NEUN ______________ Carl W. Neun By: JEROME J. MEYER __________________ Title: Chairman and CEO <PAGE> Exhibit A RELEASE OF CLAIMS This Release of Claims (the "Release") is made and executed by _________________________________ in connection with the termina- tion of my employment with Tektronix, Inc. ("Tektronix") and in consideration of my receiving valuable severance pay and benefits as provided for in the Executive Severance Agreement ("Agreement"). These benefits are substantial consideration to which I am not otherwise entitled. On behalf of myself and my spouse, heirs, administrators and assigns, I hereby release Tektronix, its parent and related corporations, affiliates, or joint venturers and all officers, directors, employees, agents, and insurers of the aforementioned (collectively the "Company") from any and all liability, damages or causes of action, whether known or unknown relating to my employ ment with the Company or the termination of that employment, including but not limited to any claims for additional compensation in any form, or damages. This specifically includes, but is not limited to, all claims for relief or remedy under any state or federal laws, including but not limited to Title VII of the Civil Rights Act of 1964, the Post-Civil War Civil Rights Acts (42 USC Sections 1981-1988), the Civil Rights Act of 1991, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, the Older Workers Benefit Protection Act, the Worker Adjustment and Retraining Notification Act, the Rehabilita- tion Act of 1973, the Vietnam Era Veterans' Readjustment Assistance Act, the Fair Labor Standards Act, Executive Order 11246, all as amended, and the civil rights, employment and labor laws of the state of any state or the United States. This Release shall not affect any rights which I may have under any medical insurance, disability, workers' compensation, unemployment compensation or retirement plans maintained by the Company. I acknowledge that I have been given at least 45 days to consider whether to execute this Release of Claims and accept benefits under the Program; that I have been advised of my right to consult with an attorney or financial advisor of my choice and at my own expense; that the Agreement gives me severance pay and benefits which the Company would otherwise have no obligation to give me; and that I voluntarily enter into the Release of Claims. I understand that the Release of Claims is to be signed within 45 days from the date I received it or on my last day of employment, whichever is later, and that I may revoke the Release of Claims, provided I do so in writing within seven (7) days of signing the Release. I understand and agree that the Company will have no obligation to pay me any benefits under the Agreement until the expiration of the revocation period, provided I have not revoked the Release of Claims. I understand that if I revoke the Release of Claims my termination will nonetheless remain in full force and effect and I will not be entitled to any benefits under the Agreement. I acknowledge that I have had time to consider the alternatives and consequences of my election to receive benefits under the Agreement and of signing the Release; that I am aware of my right to consult an attorney or financial advisor at my own expense; and that, in consideration for executing this Release and my election to receive benefits under the Agreement, I have received additional benefits and compensation of value to which I would not otherwise be entitled. I HAVE READ THE FOREGOING RELEASE. I UNDERSTAND THE EFFECT OF THIS RELEASE AND I VOLUNTARILY ENTER INTO IT AT THIS TIME. Every provision of this Release is intended to be severable. In the event any term or provision contained in this Release is determined to be illegal, invalid or unenforceable, such illegal ity, invalidity or unenforceability shall not affect the other terms and provisions of this Release which shall continue in full force and effect. Dated: __________________, 1993 ____________________________ Employee Name ____________________________ Employee Signature <PAGE> AMENDMENT NO. 1 to EXECUTIVE SEVERANCE AGREEMENT June 23, 1994 Carl W. Neun 3530 Lakeview Boulevard Lake Oswego, Oregon 97035 Executive Tektronix, Inc. an Oregon corporation PO Box 1000, M/S 63-LAW 26600 SW Parkway Wilsonville, Oregon 97070-1000 Tektronix The Executive Severance Agreement dated September 22, 1993 is amended as follows to reflect the Split Dollar Insurance Agreement between the parties dated as of June 23, 1994 (the Split Dollar Agreement). 1. Split Dollar Insurance Benefits. New Sections 4 and 5 are added as follows, existing Sections 4 through 11 are renumbered 6 through 13 respectively, and cross-references are adjusted accordingly: 4. Split Dollar Insurance Adjustments Before Five Years of Service. If Executive terminates employment before completing five years of service (i.e., before becoming entitled to benefits under the Supplemental Executive Retirement Agreement with Tektronix dated March 17, 1993) the following shall apply: 4.1 Any amount payable under Section 3 shall be reduced by the net value of the Split Dollar Insurance issued on Executive's life under the Split Dollar Insurance Agreement between the parties dated as of June 23, 1994. 4.2 The net value of the insurance under 4.1 is the cash surrender value of the Insurance less the amount recoverable by Tektronix under the Collateral Assignment. 5. Split Dollar Insurance Adjustments After Five Years of Service. If Executive terminates employment voluntarily or involuntarily for any reason other than death after completing five years of service and before the Full Funding Date under 5.4 below, the following shall apply: 5.1 Tektronix shall not, before the Full Funding Date, exercise its rights under the Split Dollar Agreement or the related Collateral Assignment to withdraw the cash surrender value of the Split Dollar Policy on termination of the Split Dollar Agreement because of Executive's termination of employment. 5.2 Except as provided below, Tektronix shall pay Executive $54,722 as of each June 23 after the date of termination up to the Full Funding Date. The last payment shall be made as of the Full Funding Date. The amount for the last payment shall be pro-rated on a daily basis to the Full Funding Date. 5.3 Tektronix shall take no action that would interfere with Executive's payment of scheduled employee premiums under the Split Dollar Policy up to the Full Funding Date. Executive shall have no obligation to pay such premiums. Tektronix's obligation to pay under 5.2 above is not conditioned upon Executive's payment of such premiums. 5.4 "Full Funding Date" means the first date on which any of the following occurs: (a) Executive dies. (b) The net value of the Split Dollar Insurance described in 4.1 and 4.2 equals or exceeds the present value of Executive's Base Pay Retirement Supplement. Present value for this purpose shall be determined under the actuarial assumptions for calculating equivalent benefits under the Tektronix Pension Plan, as in effect when the determination is made or, if that plan no longer exists, under a successor defined benefit pension plan. If Executive receives an make any scheduled premium payment from the Split Dollar Policy or if Executive fails to make any scheduled premium payment under the Split Dollar Policy, the net value of the Split Dollar Policy for purposes of this Section shall be increased to the net value that would have resulted if such distribution, loan or other payment had not been received, or such scheduled premium had been paid. (c) Executive surrenders the policy or causes it to lapse. (d) Two years elapse from the date of Executive's retirement. 5.5 "Base Pay Retirement Supplement" means the portion of the retirement benefit provided to Executive under his Supplemental Executive Retirement Agreement with Tektronix dated March 17, 1993, that is attributable to base pay and not to other types of pay included in "Final Average Compensation" as defined in such Agreement. 2. Conforming Amendment. Section 5.1 (to be renumbered 7.1) is revised by inserting "except for benefits under Section 5" so the last phrase of the first sentence of Section 5.1 will read as follows: * * *, the benefits provided in this Agreement shall not be payable to Executive except for benefits under Section 5. 3. Effective Date. This Amendment shall be effective as of June 23, 1994. Executive CARL W. NEUN _____________ Carl W. Neun Tektronix TEKTRONIX, INC. By JEROME J. MEYER ________________ Jerome J. Meyer Chairman and Chief Executive Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>3 <DESCRIPTION>SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT <TEXT> SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT March 17, 1993 Tektronix, Inc. an Oregon corporation 26600 SW Parkway PO Box 1000, M/S 63-LAW Wilsonville, Oregon 97070-1000 Tektronix Carl W. Neun 3530 Lakeview Boulevard Lake Oswego, Oregon 97035 Neun <PAGE> TABLE OF CONTENTS Page Index of Terms ii 1. Administration .......................................... 1 2. Retirement Benefits ..................................... 1 3. Time and Manner of Payment .............................. 5 4. Preretirement Death Benefit ............................. 5 5. Disability Benefit ...................................... 5 6. Preretirement Termination of Employment ................. 6 7. Absence of Funding ...................................... 6 8. General Provisions ...................................... 6 9. Effective Date .......................................... 7 <PAGE> INDEX OF TERMS Term Section Page Actuarial Equivalent 2.6(d) 3 Affiliate 2.2(a) 2 Committee 1 1 Compensation 2.5 3 Effective Date 9 8 Final Average Compensation 2.5 3 Notice 8.4 7 Pension Plan Preamble 1 Retirement 2.1 1 Retirement Benefit 2.3 2 Retirement Equalization Plan Preamble 1 Retirement Plan Offsets 2.6 3 Retirement Plans Preamble 1 Split Dollar Offset 2.7 4 Split Dollar Policy 2.7 4 Termination of Employment 6.2 6 Year of Service 2.2 1 <PAGE> SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT March 17, 1993 Tektronix, Inc. an Oregon corporation 26600 SW Parkway PO Box 1000, M/S 63-LAW Wilsonville, Oregon 97070-1000 Tektronix Carl W. Neun 3530 Lakeview Boulevard Lake Oswego, Oregon 97035 Neun Tektronix provides retirement benefits for its employees through the Tektronix Pension Plan (the Pension Plan). In addition, Tektronix provides supplemental benefits for officers through the Tektronix, Inc. Retirement Equalization Plan (the Retirement Equalization Plan) to make up for Pension Plan benefits lost because of limits imposed by law. Tektronix and Neun have entered into a Split Dollar Life Insurance Agreement dated as of June 23, 1994. Neun is Vice President and Chief Financial Officer of Tektronix. Tektronix wishes to supplement benefits provided for Neun under the Pension Plan and the Retirement Equalization Plan (collectively, the Retirement Plans; individually, a Retirement Plan). 1. Administration This Agreement shall be administered by the Organization and Compensation Committee of the Board of Directors of Tektronix (the Committee). The Committee shall interpret the Agreement and shall make determinations about eligibility and benefits. During any period in which there shall be no such committee, the Board of Directors shall administer this Agreement. 2. Retirement Benefits 2.1 Neun shall be entitled to retirement benefits under this Agreement upon Retirement. "Retirement" means a termination of employment after age 55 and 5 Years of Service. 2.2 A "Year of Service" means a 12-month period in which an employee is continuously employed by Tektronix or an affiliate as follows: (a) Continuous employment shall not be interrupted by an authorized leave of absence, by disability under 5.1 or by transfers among Tektronix and its Affiliates, so long as continuity of service within the group is maintained. "Affiliate" means a corporation that is a member of a controlled group with Tektronix as defined in Section 1563(a) of the Internal Revenue Code. (b) All whole or fractional Years of Service shall be counted. Fractional years shall be rounded to the nearest whole month and aggregated. 2.3 Neun's RETIREMENT BENEFIT under this Agreement (RB) shall be a monthly life annuity equal to Final Average Compensation (FAC) multiplied by a percentage equal to 35 percent plus twenty-sevenths multiplied by Years of Service (YS) in excess of five, but no more than 55 percent, minus the Retirement Plan Offsets (RPO) and the Split Dollar Offset (SDO) and divided by twelve as follows: RB = (FACxlesser of {35%+[20/7x(YS in excess of 5)]} or 55%)-(RPO+SDO) ______________________________________________________________________ 12 2.4 The retirement benefit formula under 2.3 provides the following benefit at the ages and Years of Service shown: (a) (b) (c) Minimum Completed Percent of Pay Age Years of Service Before Offsets 51 1 0% 52 2 0% 53 3 0% 54 4 0% 55 5 35.00% 56 6 37.86% 57 7 40.71% 58 8 43.57% 59 9 46.43% 60 10 49.29% 61 11 52.14% 62 & After 12 or more 55.00% To receive each increment in column (c), Neun must both attain the age indicated in column (a) and complete the Years of Service indicated in column (b). Attainment of a higher age before completion of a lesser number of Years of Service shall not provide him with any greater amount in column (c) than the amount indicated for such Years of Service. 2.5 "Final Average Compensation" (FAC) means Neun's average Compensation during the five consecutive years immediately preceding termination of Neun's employment. "Compensation" means Neun's base salary, payments under the Results Share or any successor program, and payments under the Annual Performance Improvement Plan or any successor program. The Company's Board of Directors shall have discretion to include additional items of cash compensation. In determining FAC the following shall apply: (a) Years separated by a period for which Neun is not credited with Service shall be treated as consecutive. (b) A year for this purpose shall be the 12 calendar months ending before the Retirement date. (c) During periods of reduced compensation because of such things as leave of absence or disability under 5.1, compensation shall be credited at the rate being paid at the start of the period. 2.6 "Retirement Plan Offsets" (RPO) means the sum of Neun's benefits under the Retirement Plans, in the form of an annual annuity for life, determined as follows: (a) The RPO shall be calculated at the time Neun starts to receive benefits under this Agreement. (b) If Neun has not started to receive benefits under a Retirement Plan, Neun's benefits under such Retirement Plan shall be determined as though Neun had retired and started to receive benefits under such Retirement Plan on the date Neun starts to receive benefits under this Agreement. (c) If Neun has already started to receive benefits under a Retirement Plan, benefits under such Retirement Plan shall be based on Neun's accrued benefit at the time benefits started under such Retirement Plan. (d) The annual life annuity to be offset shall be the combined Actuarial Equivalents of Neun's accrued benefits under the Pension Plan and the Retirement Equalization Plan. "Actuarial Equivalent" shall be determined on the basis of the procedures and actuarial assumptions of the Pension Plan. (e) If Neun's benefit under a Retirement Plan commences at the same time and in the same form as the retirement benefit under this Agreement, the offset shall be the amount of such benefit, without adjustment under (d). 2.7 "Split Dollar Offset" means the amount accumulated or provided under the life insurance policy maintained under the Split Dollar Life Insurance Agreement dated June 23, 1994 between Neun and Tektronix (the "Split Dollar Policy"). The Split Dollar Offset shall be applied as follows: (a) If Neun dies before Retirement and a benefit is provided to the surviving spouse under Section 4, such benefit will be calculated without the Split Dollar Offset. The resulting annuity for the surviving spouse shall then be offset by an annuity amount that is equal in value to the proceeds payable to Neun's beneficiaries upon his death under the Split Dollar Policy, determined as follows: (1) If the spouse receives a life annuity payment of such proceeds under rates for conversion to a life annuity provided in the Split Dollar Policy, the calculation of an equal value annuity shall be based on the Split Dollar Policy conversion rates. (2) If (1) does not apply, the equal value annuity shall be an Actuarial Equivalent benefit based on the factors referenced in 2.6(d). (b) Upon Neun's Retirement, the Split Dollar Offset shall be applied to the retirement benefit as provided below: (1) The offset shall be applied at the time of Retirement, except as follows. The offset shall be deferred for the period in which Tektronix continues to make payments to Neun under Section 5 of Neun's Executive Severance Agreement with Tektronix dated September 22, 1993 as amended by Amendment No. 1 dated June 23, 1994 to that Agreement. (2) The retirement benefit shall be offset by an annuity amount that is equal in value to the remaining cash surrender value of the Split Dollar Policy less the amount recoverable by Tektronix under the collateral assignment of such policy. If Neun has received any distribution, loan or other payment from the Split Dollar Policy prior to the date of the offset, the amount of such payment plus interest determined under the factors reference in 2.6(d) shall be included in the offsetting cash surrender value. If Neun fails to make any scheduled premium payment under the Split Dollar Policy, including any payment that would have been scheduled after the Policy is surrendered or lapses due to action or inaction of Neun, the offsetting cash surrender value shall be increased as though the payment had been made. An equal value annuity shall be determined as follows: (i) If Neun receives a life annuity payment from the Split Dollar Policy commencing at the time of offset under rates for conversion to a life annuity provided in the Split Dollar Policy, the calculation of an equal value annuity shall be based on the Split Dollar conversion rates. (ii) If (i) does not apply, the equal value annuity shall be an Actuarial Equivalent benefit based on the factors referenced in 2.6(d). (c) If the amount of the Split Dollar Offset under (a) or (b) exceeds the amount of the benefit that is subject to the offset, no benefit shall be paid pursuant to this Agreement and the amounts provided to Neun or his beneficiary under the Split Dollar Policy shall not be affected. 3. Time and Manner of Payment 3.1 Retirement benefits under this Agreement shall start as of the first day of the month after Retirement. If the Split Dollar Offset is delayed pursuant to 2.7(b)(1), the retirement benefit shall start at a level determined without the Split Dollar Offset and shall be reduced by the amount of such offset at the time payments to Neun cease under Section 5 of the Executive Severance Agreement. 3.2 Neun may elect the form of retirement benefit as follows: (a) Regardless of the form, the value of the benefit shall be the Actuarial Equivalent of the retirement benefit described in 2.3. (b) The available forms of benefit shall be the following: (1) A monthly annuity for Neun's life; or (2) If Neun is married at the benefit starting date, a contingent annuity for Neun's life with fifty percent payments continuing to the surviving spouse after Neun's death. 4. Preretirement Death Benefit 4.1 A benefit shall be paid to the surviving spouse if Neun dies when the following conditions are met: (a) Neun is employed by Tektronix or an Affiliate and is eligible for Retirement. (b) Neun was legally married to the surviving spouse at death and was throughout the 12 months before death. 4.2 The spouse's death benefit shall be as follows: (a) The amount shall be an annuity equal to the amount that would have been payable under this Agreement as the spouse's survivor annuity if Neun had commenced benefits under this Agreement in the form of a 50 percent joint and survivor annuity with his spouse the day before death and then died. (b) The benefit shall be a single life annuity for the life of the spouse starting with the month following the date of Neun's death. 5. Disability Benefit 5.1 If disabled as defined in the Pension Plan, Neun shall be treated as employed and continue to accrue Years of Service under this Agreement so long as Benefit Service is accrued under the Pension Plan, subject to 5.2. 5.2 If Neun, while disabled, retires or dies, benefits shall be determined under 2, or 4, above, as appropriate. 6. Preretirement Termination of Employment 6.1 Subject to 5, Neun shall receive no benefit under this Agreement if a termination of his employment occurs before he meets the conditions for Retirement described in 2.1. 6.2 "Termination of employment" means interruption of continuous service as defined in 2.2. If service is interrupted and Neun resumes service, all service before and after the interruption shall be aggregated. 7. Absence of Funding This Agreement and any benefits payable under it shall be unfunded and shall be payable only from the general assets of Tektronix. Neun and his spouse shall have no interest in any assets of Tektronix and shall have no rights greater than the rights of any unsecured general creditor of Tektronix. 8. General Provisions 8.1 No interest of Neun or his spouse under this Agreement may be directly or indirectly assigned, transferred, seized by legal process or subjected to the claims of creditors in any way (an "Assignment"). Any attempted or purported Assignment of any such interest shall be void and ineffective. 8.2 Nothing in this Agreement shall give Neun the right to continue employment. This Agreement shall not prevent discharge of Neun at any time for any reason. 8.3 This Agreement shall be construed according to the laws of Oregon. 8.4 Any notice under this Agreement shall be in writing and shall be effective when actually delivered or, if mailed, when deposited postpaid as first-class mail. Mail shall be directed to the address shown on this Agreement or such other address as a party may specify by notice to the other party. 8.5 Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Portland, Oregon in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator may be entered in any Court having jurisdiction thereof. 8.6 Tektronix may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the person's best interest to make payments to others for the benefit of the person entitled to payment. In that event, Tektronix may in its discretion direct that payments be made to one or more of the following: (a) To a parent or spouse or a child of legal age. (b) To a legal guardian. (c) To one furnishing maintenance, support, or hospitalization. 9. Effective Date This Agreement shall be effective as of March 17, 1993. TEKTRONIX Tektronix, Inc. By JEROME J. MEYER _________________ Jerome J. Meyer Executed: November 3, 1995 NEUN CARL W. NEUN ____________ Carl W. Neun Executed: November 3, 1995 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-25-1996 <PERIOD-END> NOV-25-1995 <CASH> 29,517 <SECURITIES> 0 <RECEIVABLES> 331,238 <ALLOWANCES> 6,409 <INVENTORY> 276,306 <CURRENT-ASSETS> 678,155 <PP&E> 647,061 <DEPRECIATION> 369,898 <TOTAL-ASSETS> 1,255,442 <CURRENT-LIABILITIES> 329,119 <BONDS> 153,334 <COMMON> 226,017 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 423,885 <TOTAL-LIABILITY-AND-EQUITY> 1,255,442 <SALES> 0 <TOTAL-REVENUES> 844,620 <CGS> 0 <TOTAL-COSTS> 489,250 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 6,989 <INCOME-PRETAX> 69,972 <INCOME-TAX> 20,992 <INCOME-CONTINUING> 48,980 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 48,980 <EPS-PRIMARY> 1.47 <EPS-DILUTED> 1.47 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>5 <DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <RESTATED> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-27-1995 <PERIOD-END> NOV-26-1994 <CASH> 37,152 <SECURITIES> 0 <RECEIVABLES> 258,953 <ALLOWANCES> 4,597 <INVENTORY> 207,278 <CURRENT-ASSETS> 556,912 <PP&E> 604,748 <DEPRECIATION> 380,633 <TOTAL-ASSETS> 1,052,317 <CURRENT-LIABILITIES> 265,584 <BONDS> 105,638 <COMMON> 199,523 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 336,212 <TOTAL-LIABILITY-AND-EQUITY> 1,052,317 <SALES> 0 <TOTAL-REVENUES> 683,507 <CGS> 0 <TOTAL-COSTS> 362,499 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 4,380 <INCOME-PRETAX> 48,065 <INCOME-TAX> 12,083 <INCOME-CONTINUING> 35,982 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 35,982 <EPS-PRIMARY> 1.11 <EPS-DILUTED> 1.11 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

THC

https://www.sec.gov/Archives/edgar/data/70318/0000912057-96-000539.txt

-----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, WqPfwqLjLdOxGdhlYgj3x36+y6EWwdaHKadOarWDPFxQ+TP2sQxZn0Bbrcnvc2VB tmTy6b1oTqsFNbvKNCSHMg== <SEC-DOCUMENT>0000912057-96-000539.txt : 19960117 <SEC-HEADER>0000912057-96-000539.hdr.sgml : 19960117 ACCESSION NUMBER: 0000912057-96-000539 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENET HEALTHCARE CORP CENTRAL INDEX KEY: 0000070318 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 952557091 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07293 FILM NUMBER: 96504029 BUSINESS ADDRESS: STREET 1: 2700 COLORADO AVE CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103158000 MAIL ADDRESS: STREET 1: P O BOX 4070 CITY: SANTA MONICA STATE: CA ZIP: 90404 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL MEDICAL ENTERPRISES INC /NV/ DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1995 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 I-7293 - -------------------------------------------------------------------------------- TENET HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- NEVADA 95-2557091 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2700 COLORADO AVENUE SANTA MONICA, CA 90404 (Address of principal executive offices) (310) 998-8000 (Registrant's telephone number, including area code) ------------------------------------------ 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 AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO --- --- AS OF JANUARY 10, 1996 THERE WERE 209,084,808 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TENET HEALTHCARE CORPORATION INDEX <TABLE> <CAPTION> Page -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: <S> <C> Condensed Consolidated Balance Sheets - May 31, 1995 and November 30, 1995 . . . . . . . . . . . . . . . . . . 2 Condensed Consolidated Statements of Income - Three Months and Six Months Ended November 30, 1994 and 1995 . . . . 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1994 and 1995 . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 19 Item 4. Submission of Matters to a Vote of Security Holders . . . . 19 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 20 Signature . . . . . . . . . . . . . . . . . . . . . . . . . 22 </TABLE> - ------------------ Note: Items 2, 3 and 5 of Part II are omitted because they are not applicable. 1 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> May 31, November 30, 1995 1995 ----------- -------------- (In millions) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 155.0 $ 98.8 Short-term investments, at cost which approximates market . . . . . . . 138.5 135.2 Accounts and notes receivable, less allowance for doubtful accounts ($184.0 at May 31 and $161.1 at November 30). . . . . . . . 564.5 731.2 Inventories of supplies, at cost. . . . . . . . . . . . . . . . . . . . 116.4 125.1 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 410.3 268.1 Assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . 184.1 37.7 Prepaid expenses and other current assets . . . . . . . . . . . . . . . 54.8 58.5 ---------- ---------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . 1,623.6 1,454.6 ---------- ---------- Investments and other assets . . . . . . . . . . . . . . . . . . . . . . . 362.8 510.2 Property, plant and equipment, at cost . . . . . . . . . . . . . . . . . . 4,142.9 4,464.7 Less accumulated depreciation and amortization. . . . . . . . . . . . . 824.4 901.2 ---------- ---------- Net property, plant and equipment . . . . . . . . . . . . . . . . . . . 3,318.5 3,563.5 ---------- ---------- Intangible assets, at cost less accumulated amortization ($58.4 at May 31 and $99.2 at November 30). . . . . . . . . . . . . . . 2,613.5 2,612.2 ---------- ---------- $ 7,918.4 $ 8,140.5 ---------- ---------- ---------- ---------- </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 2 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> May 31, November 30, 1995 1995 ---------- ------------ (In millions) LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current liabilities: Current portion of long-term debt . . . . . . . . . . . . . . . . . $ 252.3 $ 273.4 Short-term borrowings and notes . . . . . . . . . . . . . . . . . . 34.9 2.1 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 358.8 268.1 Employee compensation and benefits. . . . . . . . . . . . . . . . . 162.5 160.8 Reserves related to discontinued operations . . . . . . . . . . . . 76.6 25.4 Other current liabilities . . . . . . . . . . . . . . . . . . . . . 471.4 448.9 ---------- ---------- Total current liabilities . . . . . . . . . . . . . . . . . . 1,356.5 1,178.7 ---------- ---------- Long-term debt, net of current portion . . . . . . . . . . . . . . . . 3,273.4 3,254.9 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 300.9 384.1 Other long-term liabilities and minority interests . . . . . . . . . . 1,001.5 967.8 Shareholders' equity: Common stock, $0.075 par value; authorized 450,000,000 shares; 218,713,406 shares issued at May 31, 1995 and at November 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . 16.4 16.4 Other shareholders' equity. . . . . . . . . . . . . . . . . . . . . 2,241.3 2,557.9 Less common stock in treasury, at cost, 18,775,274 shares at May 31, 1995 and 15,159,055 at November 30, 1995 . . . . . . . . (271.6) (219.3) ---------- ---------- Total shareholders' equity. . . . . . . . . . . . . . . . . . 1,986.1 2,355.0 ---------- ---------- $ 7,918.4 $ 8,140.5 ---------- ---------- ---------- ---------- </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 3 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995 <TABLE> <CAPTION> Three Months Six Months ----------------------- ----------------------- 1994 1995 1994 1995 -------- -------- -------- -------- (In millions, except per share and share amounts) <S> <C> <C> <C> <C> Net operating revenues . . . . . . . . . . . . . . . . . . . $ 638.8 $1,370.9 $1,301.6 $2,654.8 -------- -------- -------- -------- Operating expenses: Salaries and benefits . . . . . . . . . . . . . . . . . . 273.0 544.7 556.2 1,046.9 Supplies. . . . . . . . . . . . . . . . . . . . . . . . . 78.5 186.0 159.1 364.7 Provision for doubtful accounts . . . . . . . . . . . . . 20.7 69.7 46.8 137.0 Other operating expenses. . . . . . . . . . . . . . . . . 144.6 296.7 294.7 578.3 Depreciation . . . . . . . . . . . . . . . . . . . . . . 33.1 61.3 67.4 122.7 Amortization. . . . . . . . . . . . . . . . . . . . . . . 4.1 21.2 7.7 40.0 -------- -------- -------- -------- Operating income . . . . . . . . . . . . . . . . . . . . . . 84.8 191.3 169.7 365.2 -------- -------- -------- -------- Interest expense, net of capitalized portion . . . . . . . . (17.3) (81.3) (35.0) (158.4) Investment earnings . . . . . . . . . . . . . . . . . . . . 4.4 5.4 10.4 12.7 Equity in earnings of unconsolidated affiliates. . . . . . . 6.1 7.1 12.4 14.0 Minority interests . . . . . . . . . . . . . . . . . . . . . (1.8) (5.0) (3.8) (10.6) Net gain (loss) on disposals of facilities and long-term investments . . . . . . . . . . . . . . . . . . -- 171.1 (2.5) 294.6 Gain on affiliate's sale of common stock. . . . . . . . . . . . . . . . . . . . . . . -- 17.3 32.0 17.3 -------- -------- -------- -------- Income before income taxes . . . . . . . . . . . . . . . . . 76.2 305.9 183.2 534.8 Taxes on income . . . . . . . . . . . . . . . . . . . . . . (30.0) (123.1) (73.0) (233.7) -------- -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 46.2 $ 182.8 $ 110.2 $ 301.1 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share: Primary . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.90 $ 0.65 $ 1.48 Fully diluted . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.85 $ 0.63 $ 1.41 Weighted average shares and share equivalents outstanding primary (in thousands). . . . . . . . . . . . 168,319 203,845 168,390 202,865 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 4 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995 <TABLE> <CAPTION> 1994 1995 ---------- ---------- (IN MILLIONS) <S> <C> <C> Net cash provided by (used in) operating activities, including net expenditures for discontinued operations and restructuring charges of $411.8 in 1994 and $73.4 in 1995 . . . . . . . . . . . . . . $ (320.5) $ 11.1 ---------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment. . . . . . . . . . . . . . . (59.6) (160.5) Purchases of new businesses, net of cash acquired . . . . . . . . . . . (9.0) (367.3) Proceeds from sales of facilities and other assets. . . . . . . . . . . 154.4 402.8 Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.1) (9.9) ---------- ---------- Net cash provided by (used in) investing activities. . . . . . . . . 77.7 (134.9) ---------- ---------- Cash flows from financing activities: Proceeds from sale of 8-5/8% Senior Notes . . . . . . . . . . . . . . . - 487.4 Proceeds from other borrowings. . . . . . . . . . . . . . . . . . . . . 129.3 591.8 Payments of borrowings. . . . . . . . . . . . . . . . . . . . . . . . . (72.4) (1,065.9) Proceeds from stock options exercised . . . . . . . . . . . . . . . . . 3.9 9.4 Proceeds from exercises of performance investment options . . . . . . . - 44.9 Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 - ---------- ---------- Net cash provided by financing activities. . . . . . . . . . . . . . 61.4 67.6 ---------- ---------- Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . (181.4) (56.2) Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . 313.2 155.0 ---------- ---------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 131.8 $ 98.8 ---------- ---------- ---------- ---------- Supplemental disclosures: Interest paid, net of amounts capitalized . . . . . . . . . . . . . . . $45.9 $150.4 Income taxes paid, net of refunds received . . . . . . . . . . . . . . 38.9 19.7 Major effects of acquiring new businesses: Assets acquired, primarily property, plant and equipment . . . . . . . $59.1 $329.1 Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 34.9 31.6 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 5 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited financial information furnished herein, in the opinion of management, reflects all adjustments that are necessary to fairly state the financial position of Tenet Healthcare Corporation, its cash flows and the results of its operations for the periods indicated. All the adjustments affecting net income are of a normal recurring nature. Readers of this interim financial information should refer to the Company's audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year and the adequacy of additional disclosure needed for a fair presentation should be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in the Company's most recent annual report to security holders have been omitted. The patient volumes and net operating revenues of the Company's hospitals are subject to seasonal variations caused by a number of factors, including but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Net income also is not necessarily representative of operations for a full year for various reasons, including interest rates, acquisitions and disposals of facilities and long-term assets, revenue allowances and discount fluctuations, the timing of price changes and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons. 2. On March 1, 1995, the Company, in a transaction accounted for as a purchase, acquired all of the outstanding common stock of American Medical Holdings, Inc. ("AMH") for $1.5 billion in cash and 33,156,614 shares of the Company's common stock valued at approximately $488.0 million. Accordingly, the results of operations of AMH and its subsidiaries are included in the accompanying consolidated financial statements of the Company since the date of acquisition. The following supplemental pro forma information for the three months and six months ended November 30, 1994 is unaudited and assumes that the merger occurred as of the beginning of the period. The amounts reflect pro forma adjustments for interest on new and refinanced debt, depreciation on revalued property, plant and equipment, and the amortization of goodwill. <TABLE> <CAPTION> Three Months Six Months ------------------- -------------- (in millions, except per share amounts) <S> <C> <C> Net operating revenues $1,271.0 $2,572.0 Net income $ 50.8 $ 123.3 Fully diluted earnings per share $ 0.24 $ 0.59 </TABLE> The pro forma information shown above does not purport to present the results of operations of the Company had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. In addition, such information does not reflect certain cost savings that management believes may be realized following the merger. 6 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. The Company's net operating revenues consist primarily of net patient service revenues, which are based on established billing rates less applicable allowances and discounts. These allowances and discounts, primarily for patients covered by Medicare, Medicaid and other contractual programs, amounted to $661.5 million and $1,462.7 million for the three- month periods ended November 30, 1994 and 1995, and $1,327.9 million and $2,850.7 million for the six-month periods, respectively. 4. During the three-month and six-month periods ended November 30, 1995, actual costs incurred and charged against the Company's reserves for discontinued operations were approximately $44.8 million and $55.1 million, respectively. Costs incurred and charged against the restructuring reserves established during the last three years were approximately $12.0 million for the three months ended November 30, 1995 and $18.4 million for the six months then ended. The restructuring reserves are included in other current liabilities or other long-term liabilities in the Company's balance sheets at May 31, 1995 and November 30, 1995. 5. On September 28, 1995, Vencor, Inc. ("Vencor") acquired all of the outstanding common stock of The Hillhaven Corporation ("Hillhaven") pursuant to a transaction approved by the shareholders of each of Vencor and Hillhaven. As a result of the transaction, the 8,878,147 shares of Hillhaven common stock that had been owned by the Company were exchanged for 8,301,067 shares of Vencor common stock (at an exchange ratio of 0.935 Vencor shares for each Hillhaven share). In addition, the Company received approximately $91.8 million for its Hillhaven Series C preferred stock and Hillhaven Series D preferred stock. The exchange resulted in a pre-tax gain, net of costs and expenses, of approximately $171.1 million. The proceeds from the redemption of the Hillhaven preferred stock were applied to repay secured bank loans under the Company's credit agreement. The Company's investment in Hillhaven previously was accounted for under the equity method. Following the exchange, the Company owns approximately 11.8% of Vencor's common stock and accounts for its investment in Vencor common stock in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company has classified such securities as "available for sale" whereby their carrying value will be adjusted to market value at the end of each accounting period through a credit or charge to shareholders' equity. 6. In October 1995, the Company sold $500 million of new Senior Notes due December 2003. The notes have a coupon of 8-5/8% and were priced at 99.666% of par to yield 8.68%. In January 1996, the Company issued $320 million of 6% Exchangeable Subordinated Notes due 2005 that will be exchangeable at the option of the holder for shares of common stock of Vencor at any time on or after November 6, 1997 at an exchange rate of 25.9403 shares per $1,000 principal amount of the notes, subject to the Company's right to pay an amount in cash equal to the market price of the shares of Vencor common stock in lieu of delivery of such shares. The notes will be redeemable at the option of the Company at any time on or after January 15, 1999 at the redemption prices set forth in the indenture, plus accrued and unpaid interest. The net proceeds from the notes were applied to repay secured bank loans under the Company's credit agreement. 7 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company is looking to the Emerging Issues Task Force of the Financial Accounting Standards Board at its next scheduled meeting for guidance as to the appropriate accounting for the exchangeable notes and the Company's investment in Vencor if the fair market value of such investment ever exceeds the carrying value of the notes. At November 30, 1995 the fair market value of the investment was approximately $259.0 million. Management does not believe that any adjustments, if any, to the carrying value of the notes would have a material effect on the consolidated financial condition of the Company. 7. In October 1995, the Company sold its interest in Australian Medical Enterprises, Limited ("AME") for a net cash consideration of approximately $68.3 million, and the Company sold its interest in the Subang Jaya Medical Centre in Malaysia for net cash consideration of approximately $12.0 million. The net proceeds from these sales were used to repay secured bank loans under the Company's credit agreement. The Company also has reached an agreement to sell its 40% interest in the Bumrungrad Medical Center in Thailand. The Company expects to receive net cash consideration of approximately $20.8 million from this sale during the third quarter of fiscal 1996. 8. In August 1995, the Company acquired for approximately $222.6 million in cash the Mercy+Baptist Medical Center, a not-for-profit system of two general hospitals with an aggregate of 759 licensed beds located in New Orleans, Louisiana and a related physician practice. In September 1995, the Company acquired the Providence Memorial Hospital, a not-for-profit general hospital located in El Paso, Texas for approximately $80.3 million in cash. Providence is licensed for 471 general hospital beds (34 of which may be used as skilled nursing beds) and is licensed for 30 additional rehabilitation and sub-acute care beds. In October 1995, the Company entered into a long-term lease of the 49-bed Medical Center of Manchester in central Tennessee. In November 1995, the Company acquired for approximately $32.6 million in cash the 104-bed not-for-profit Methodist Hospital of Jonesboro, a general hospital located in Jonesboro, Arkansas. These acquisitions were financed by borrowings under the Company's bank credit agreement. 9. On October 30, 1995, Total Renal Care Holdings, Inc. ("TRC"), an operator of outpatient renal dialysis centers in which the Company owned an approximate 23% interest at May 31, 1995, completed a public offering of 6,000,000 shares of its common stock. This transaction resulted in a reduction of the Company's ownership interest in TRC to approximately 13.6% and a gain to the Company of approximately $17.3 million. Because the Company now owns less than 20% of the common shares and does not exercise significant influence over TRC, the Company no longer accounts for its investment in TRC by the equity method, but will account for it in accordance with SFAS No. 115. 10. SFAS No. 121, titled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective for fiscal years 8 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) beginning after December 15, 1995, requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In addition, this statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The Company intends to adopt this statement in fiscal 1997 and the adoption of SFAS No. 121 is not expected to have a material impact on the consolidated financial condition of the Company. 11. There have been no material changes to the description of Professional and General Liability Insurance set forth in Note 8A of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1995. Except as described below, there have been no material changes to the description of Significant Legal Proceedings - Psychiatric Business set forth in Note 8B of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1995 ("Note 8B"). The settlement of the shareholder derivative action referred to in Note 8B, received preliminary court approval in November 1995 and final approval in January 1996. The Company has reached an agreement to settle one of the class action lawsuits referred to in Note 8B, In re National Medical Enterprises, Inc. Securities Litigation I, which settlement was approved by the court and paid by the Company in September 1995. The Company has continued to receive additional lawsuits of the type referred to under Psychiatric Malpractice Cases in Note 8B, and expects that additional lawsuits with similar allegations will be filed from time to time. There have been no material changes to the description of the litigation relating to the AMH Merger set forth in Note 8C of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1995. Although, based upon information currently available to it, management believes that the amount of damages in excess of the reserves for unusual litigation costs that may be awarded in any of the unresolved legal proceedings cannot reasonably be estimated, management does not believe it is likely that any damages awarded in such legal proceedings will have a material adverse effect on the Company's results of operations, liquidity or capital resources. 12. During the quarter ended November 30, 1995, $47.3 million of the Company's Convertible Floating Rate Debentures due in April 1996 were converted into 2,985,679 shares of the Company's common stock through the exercise of 449 performance investment plan options by employees and former employees of the Company. The proceeds from these conversions aggregated $44.9 million and were used to repay secured bank loans under the Company's credit agreement. From December 1, 1995 through January 10, 1996, an additional $76.2 million in debentures were converted into 4,814,331 shares of common stock through the exercise of 724 performance investment plan options by employees and former employees of the Company. The proceeds from these conversions aggregated $72.4 million and were used to repay secured bank loans under the Company's credit agreement. The remaining 857 performance investment plan options, which expire in April 1996 are convertible into 5,698,750 shares of common stock at an exercise price equivalent to $15.83 per share. 9 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the six months ended November 30, 1995 has been derived principally from the cash proceeds from operating activities, disposals of assets and investments, realization of tax benefits associated with losses from its discontinued psychiatric business and borrowings under its bank credit agreement. During the six months ended November 30,1995, net cash provided by operating activities was $84.5 million before expenditures of $73.4 million related to restructuring reserves and discontinued operations. Cash flows from operating activities in the six months ended November 30, 1995 were adversely affected by an increase in net accounts receivable of approximately $66.4 million related to hospitals acquired in the six months ended November 30, 1995, primarily as a result of a temporary increase in Medicare receivables due to changes in fiscal intermediaries at these hospitals. For the prior year's six-month period cash provided by operating activities was $91.3 million before expenditures of $411.8 million for restructuring charges and discontinued operations. Management believes that cash flows from operations in the future will continue to be positive. The Company's cash and cash equivalents at November 30, 1995 were $98.8 million, a decrease of $56.2 million over May 31, 1995. Working capital at November 30, 1995 was $279.9 million, compared to $267.1 million at May 31, 1995. Management believes that this liquidity, along with the availability of credit under the Company's bank credit agreement, will be adequate to finance planned capital expenditures, acquisitions and other known operating needs over the short-term (1 to 18 months) and the long-term (18 months to 3 years), including resolution of the unusual legal proceedings referred to herein as well as to meet debt service requirements, including the increased debt service requirements resulting from the March 1, 1995 acquisition of American Medical Holdings, Inc. The only significant remaining obligations related to discontinued operations are the unresolved legal proceedings discussed in the Company's Annual Report to Shareholders on Form 10-K and Form 10-K/A for the year ended May 31, 1995, and herein. The Company has reserves for the remaining legal proceedings not yet settled as of November 30, 1995 and an estimate of the legal fees related to these matters to be incurred in the future totaling approximately $39.7 million, of which $25.4 million is expected to be paid within one year. These reserves represent management's estimate of the net costs of the ultimate disposition of these matters. There can be no assurance, however, that the ultimate liability will not exceed such estimates. (See Note 11.) The Company's strategy includes the pursuit of growth through the development of integrated healthcare systems in certain strategic markets, including joint ventures, hospital acquisitions and physician practice acquisitions. All or portions of this growth may be financed through available credit under the Company's revolving credit agreement or, depending on capital market conditions, the sale of additional debt or equity securities or other bank borrowings. The Company's unused borrowing capacity under its revolving credit agreement was $461.4 million as of November 30, 1995. On October 11, 1995, the Company sold $500 million of Senior Notes due 2003 and on January 5, 1996, the Company sold $320 million of Exchangeable Subordinated Notes due 2005. The net proceeds of both offerings were used to repay secured loans under the Company's bank credit agreement. Proceeds from the sales of facilities and other assets were $402.8 million in the six months ended November 30, 1995, substantially all of which was derived from (1) the sale of the Company's two hospitals and related healthcare businesses in Singapore; (2) the redemption of the Company's Hillhaven Series C and Series D preferred stock; (3) the sale of the Company's interest in the Subang Jaya Medical Centre in Malaysia; and (4) the sale of the Company's interest in Australian Medical Enterprises, Limited. The Company used the net proceeds from these transactions to repay secured bank loans under its credit agreement. In addition, the Company expects to receive aggregate net cash consideration of approximately $20.8 million from the sale of its holdings in Thailand, which transaction is expected to close before February 29, 1996. In addition, the Company is continuing to evaluate opportunities to monetize certain other 10 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) investments and non-core assets. In August 1995, the Company acquired two hospitals and a related physician practice in New Orleans, Louisiana and in September 1995, acquired a hospital in El Paso, Texas. The aggregate purchase price for both transactions was approximately $302.9 million (including the purchase of current assets and the assumption of current liabilities). In November 1995, the Company acquired a 104-bed not-for-profit general hospital in Jonesboro, Arkansas for $32.6 million. The above acquisitions were financed by borrowings under the Company's bank credit agreement. Cash payments for property and equipment were $160.5 million in the six months ended November 30, 1995, compared to $59.6 million in the six months ended November 30, 1994. Capital expenditures for the Company, before any significant acquisitions of facilities, are expected to be approximately $385.0 million for the current fiscal year ending May 31, 1996 and approximately $400.0 million for each of the following two years. Such capital expenditures relate to the development of healthcare services networks in selected geographic areas and hospital facility construction projects. These expenditures will be funded by cash flows from operations and available borrowings under the Company's existing bank credit agreement. Gross proceeds from borrowings amounted to $1.1 billion during the six months ended November 30, 1995, including $487.4 million of net proceeds from the sale of the 8-5/8% Senior Notes due 2003 and borrowings of $566.0 million under the Company's bank credit agreement. Borrowings in the prior year six-month period amounted to $129.3 million. The increase is due primarily to the purchases of new businesses noted above and repayments of secured bank loans under the Company's credit agreement. Repayments of borrowings also were significantly higher in 1995 than in 1994 due to the application of proceeds received from sales of facilities and other assets discussed above. Debt service requirements have increased significantly with the addition of the financing incurred to fund the acquisition of American Medical Holdings, Inc. on March 1, 1995. These additional interest and debt repayment obligations are expected to be funded from operations. In addition to proceeds from borrowings, cash flows from financing activities were enhanced during the six-months ended November 30, 1995 by $44.9 million in proceeds from the exercise of performance investment plan options and the corresponding conversion of Convertible Floating Rate Debentures due April 1996 into 2,985,679 shares of the Company's common stock. The proceeds from these transactions were used to repay secured bank loans under the Company's credit agreement. Continuing exercises of performance investment plan options from December 1, 1995 through January 10, 1996 have resulted in additional cash proceeds of $72.4 million and the issuance of an additional 4,814,331 shares of common stock. The remaining 857 options, all of which expire in April 1996, are convertible into 5,698,750 shares of common stock at an exercise price of $15.83 per share. These options, if converted, will yield additional cash proceeds of $85.7 million between January 10, 1996 and April 1996, which proceeds will be used to reduce secured bank loans under the Company's credit agreement. 11 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's bank credit agreement and debt securities have affirmative, negative and financial covenants with which the Company must comply. These covenants include, among other requirements, limitations on borrowings, liens, investments, and assets sales, a prohibition on the payment of dividends, and covenants regarding maintenance of specified levels of net worth, debt ratios and fixed-charge ratios. 12 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following is a summary of operations for the quarters and six months ended November 30, 1994 and 1995: <TABLE> <CAPTION> Quarter Ended November 30 ---------------------------------------------------- 1994 1995 1994 1995 ------------ ------------ ------------ ------------ (dollars in millions) (% of net operating revenues) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals . . . . . $ 516.1 $ 1,264.8 80.8% 92.3% Other domestic operations (1). . . . 69.4 89.5 10.9% 6.5% International operations . . . . . . 53.3 16.6 8.3% 1.2% ------------ ------------ ------------ ------------ Net operating revenues . . . . . . . . 638.8 1,370.9 100.0% 100.0% ------------ ------------ ------------ ------------ Operating expenses: Salaries and benefits . . . . . . . (273.0) (544.7) 42.7% 39.7% Supplies . . . . . . . . . . . . . . (78.5) (186.0) 12.3% 13.6% Provision for doubtful accounts . . (20.7) (69.7) 3.2% 5.1% Other operating expenses . . . . . . (144.6) (296.7) 22.7% 21.6% Depreciation . . . . . . . . . . . . (33.1) (61.3) 5.2% 4.5% Amortization . . . . . . . . . . . . (4.1) (21.2) 0.6% 1.5% ------------ ------------ ------------ ------------ Operating income . . . . . . . . . . . $ 84.8 $ 191.3 13.3% 14.0% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> <TABLE> <CAPTION> Six Months Ended November 30 ------------------------------------------------------ 1994 1995 1994 1995 ------------ ------------ ------------ ------------ (dollars in millions) (% of net operating revenues) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals . . . . . $ 1,042.4 $ 2,440.0 80.0% 91.9% Other domestic operations (1). . . . 138.2 164.3 10.6% 6.2% International operations . . . . . . 104.4 50.5 8.1% 1.9% Other (2). . . . . . . . . . . . . . 16.6 - 1.3% - ------------ ------------ ------------ ------------ Net operating revenues . . . . . . . . 1,301.6 2,654.8 100.0% 100.0% ------------ ------------ ------------ ------------ Operating expenses: Salaries and benefits . . . . . . . (556.2) (1,046.9) 42.7% 39.4% Supplies . . . . . . . . . . . . . . (159.1) (364.7) 12.2% 13.7% Provision for doubtful accounts . . (46.8) (137.0) 3.6% 5.2% Other operating expenses . . . . . . (294.7) (578.3) 22.7% 21.8% Depreciation . . . . . . . . . . . . (67.4) (122.7) 5.2% 4.6% Amortization . . . . . . . . . . . . (7.7) (40.0) 0.6% 1.5% ------------ ------------ ------------ ------------ Operating income . . . . . . . . . . . $ 169.7 $ 365.2 13.0% 13.8% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> 13 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (1) NET OPERATING REVENUES OF OTHER DOMESTIC OPERATIONS CONSIST PRIMARILY OF REVENUES FROM (I) THE COMPANY'S REHABILITATION HOSPITALS, LONG-TERM CARE FACILITIES AND PSYCHIATRIC HOSPITALS THAT ARE LOCATED ON OR NEAR THE SAME CAMPUSES AS THE COMPANY'S GENERAL HOSPITALS; (II) HEALTHCARE JOINT VENTURES OPERATED BY THE COMPANY; (III) SUBSIDIARIES OF THE COMPANY OFFERING HEALTH MAINTENANCE ORGANIZATIONS, PREFERRED PROVIDER ORGANIZATIONS AND INDEMNITY PRODUCTS; AND (IV) REVENUES EARNED BY THE COMPANY IN CONSIDERATION OF THE GUARANTEES OF CERTAIN INDEBTEDNESS AND LEASES OF HILLHAVEN AND OTHER THIRD PARTIES. (2) CONSISTS OF REVENUES FROM TOTAL RENAL CARE, INC., ACCOUNTED FOR AS A CONSOLIDATED SUBSIDIARY PRIOR TO THE AUGUST 1994 SALE OF APPROXIMATELY 75% OF THE COMPANY'S EQUITY INTEREST. Income before income taxes was $305.9 million for the quarter ended November 30, 1995, compared with $76.2 million for the prior year quarter. These results include pre-tax net gains on disposals of assets of $188.4 million (approximately $.54 per share net of taxes, on a fully diluted basis) in the quarter ended November 30, 1995. Income before income taxes was $534.8 million for the six months ended November 30, 1995, compared with $183.2 million for the prior year period. These results include pre-tax net gains on disposals of assets of $311.9 million (approximately $.82 per share net of taxes, on a fully diluted basis) in 1995 and $29.5 million (approximately $.09 per share net of taxes, on a fully diluted basis) in 1994. Net operating revenues for the quarter and six months ended November 30, 1995 were $1,370.9 million and $2,654.8 million, respectively, compared with $638.8 million and $1,301.6 million in the prior year periods. The current quarter and six-month periods include revenues attributable to facilities acquired in the March 1, 1995 acquisition of AMH. Operating income increased by $106.5 million from the prior year quarter and by $195.5 million for the six months ended November 30, 1995 from the prior year six-month period primarily due to the acquisition of AMH referred to above. The operating income margin for the current quarter increased to 14.0% from 13.3% a year ago and for the current six month period it increased to 13.8% from 13.0% a year ago. The increase in the operating margin is due primarily to effective cost control programs in the hospitals and the benefits of overhead reduction plans implemented during the first quarter of fiscal 1995 and following the AMH merger. The table below sets forth certain selected operating statistics for the Company's domestic general hospitals. <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, --------------------------------------- ----------------------------------------- Increase Increase 1994 1995 (Decrease) 1994 1995 (Decrease) ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period) . 33 75 42 33 75 42 Licensed beds (at end of period) . . . . 6,622 16,827 154.1% 6,622 16,827 154.1% Net inpatient revenues (in millions) . . $ 366.8 $ 839.4 128.8% $ 740.2 $ 1,626.7 119.8% Net outpatient revenues (in millions) . . $ 138.4 $ 390.0 181.8% $ 282.5 $ 755.3 167.4% Admissions . . . . . . . . . . . . . . . 48,663 120,363 147.3% 97,741 231,866 137.2% Equivalent admissions . . . . . . . . . . 64,496 166,564 158.3% 129,662 323,251 149.3% Average length of stay (days) . . . . . . 5.5 5.5 - 5.5 5.5 - </TABLE> 14 <PAGE> <TABLE> <CAPTION> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) <S> <C> <C> <C> <C> <C> <C> Patient days . . . . . . . . . . . . . . 266,541 661,141 148.0% 535,480 1,280,367 139.1% Equivalent patient days . . . . . . . . . 350,812 894,989 155.1% 704,624 1,755,944 149.2% Net inpatient revenues per patient day . $ 1,376 $ 1,270 (7.7)% $ 1,382 $ 1,270 (8.1)% Utilization of licensed beds . . . . . . 44.2% 43.4% (0.8)% * 43.7% 43.1% (0.6)% * Outpatient visits . . . . . . . . . . . . 369,211 1,387,899 275.9% 746,750 2,666,656 257.1% </TABLE> *The % change is the difference between 1995 and 1994 percentages shown. Net operating revenues from the Company's domestic general hospital operations increased 145.1% to $1,264.8 million for the three months ended November 30, 1995, compared with $516.1 million for the prior year period. Net operating revenues for the six-month period ended November 30, 1995 and 1994 were $2,440.0 million and $1,042.4 million, respectively. Net operating revenues on a same facility basis increased 4.4% for the three months ended November 30, 1995, compared with the prior year quarter and increased 2.9% for the comparable six-month period. Same facility net inpatient revenue per patient day increased 3.8% for the three months ended November 30, 1995, compared with the prior year quarter and increased 2.1% for the comparable six-month period. Same facility admissions increased 3.2% for the three months ended November 30, 1995 compared with the prior year quarter and increased 2.2% for the comparable six-month period. The same facilities consists of 33 facilities owned and operated by the Company on June 1, 1994 and November 30, 1995 and 36 facilities owned by AMH on June 1, 1994 and now owned and operated by the Company. These increases have occurred in spite of continued pressures by payors to reduce admissions and lengths of stay and a continuing shift of less intensive services from an inpatient to an outpatient basis or to alternative healthcare delivery services because of technological improvements. Medicare revenues as a percentage of total patient revenues were 38.4% for the three months and six months ended November 30, 1995, compared with 37.3% and 36.2% for the prior year periods, respectively. Historically, rates paid under Medicare's prospective payment system for inpatient services have increased, but such increases have been less than cost increases. Payments for Medicare outpatient services are presently cost reimbursed, but there are pending certain proposed regulations that would convert Medicare reimbursement for outpatient services to a prospective payment system. Medicaid programs in certain states in which the Company operates also are undergoing changes that will result in reduced payments to hospitals. The Company has implemented hospital cost control programs and overhead reductions and is forming integrated health delivery systems to address the reduced payments. Pressures to control healthcare costs have resulted in an increase in the percentage of revenues attributable to managed care payors. The Company anticipates that its managed care business will increase in the future. The patient volumes and net operating revenues of the Company's domestic general hospitals are subject to seasonal variations caused by a number of factors, including but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Net operating revenues from the Company's other domestic operations increased 29.0% to $89.5 million for the three months ended November 30, 1995 compared to $69.4 million for the prior year period, representing an increase of $20.1 million. Net operating revenues for the six month period increased 18.9% to $164.3 million compared with the prior year six-month period. This increase primarily reflects continued growth of National Health Plans, the Company's HMO and insurance subsidiary and growth of joint ventures and physician practices. 15 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net operating revenues from the Company's international operations decreased 68.9% to $16.6 million for the three months ended November 30, 1995, compared to $53.3 million for the prior year period, representing a decrease of $36.7 million. This decrease is attributable principally to the sales of the Company's hospitals and related healthcare businesses in Singapore and Australia. The Company expects to conclude the previously announced sale of its 40% interest in the Bumrungrad Medical Center in Thailand before the end of the third quarter of fiscal 1996. Net operating revenues and operating profits of the sold international facilities for the period from June 1, 1995 through the dates of sale (all of which occurred prior to Novemer 30, 1995) were $50.5 million and $6.7 million, respectively. Net operating revenues and operating profits for the prior year six month period were $99.9 million and $20.2 million, respectively. Operating expenses, which include salaries and benefits, supplies, provision for doubtful accounts, depreciation and amortization, and other operating expenses, were $1,179.6 million for the quarter ended November 30, 1995 and $554.0 million for the prior year quarter. Operating expenses for the current year periods include operating expenses from the facilities acquired in the March 1, 1995 AMH merger. Operating expenses for the current and prior year six month periods were $2,289.6 million and $1,131.9 million, respectively. Salaries and benefits expense as a percentage of net operating revenues was 39.7% in the quarter ended November 30, 1995 and 42.7% in the prior year quarter. Salaries and benefits expense as a percentage of net operating revenues for the current and prior year six month periods were 39.4% and 42.7%, respectively. The improvement is primarily attributable to a reduction in staffing levels implemented during the first quarter of fiscal 1995 and following the AMH merger. Supplies expense as a percentage of net operating revenues was 13.6% in the quarter ended November 30, 1995, and 12.3% in the prior year quarter. Supplies expense as a percentage of net operating revenues for the current and prior year six month periods were 13.7% and 12.2%, respectively. The increase over the prior year periods is primarily attributable to higher supplies expense in the facilities acquired in the AMH merger. The Company expects to reduce supplies expense through the incorporation of the acquired facilities into the Company's existing group purchasing program. The provision for doubtful accounts as a percentage of net operating revenues was 5.1% for the quarter ended November 30, 1995, and 3.2% in the prior year quarter. The provision for doubtful accounts as a percentage of net operating revenues for the current and prior year six month periods were 5.2% and 3.6%, respectively. The increase over the prior year periods is primarily attributable to higher bad debt experience at the facilities acquired in the AMH merger. The Company has been establishing improved follow-up collection systems through investment in its electronic claims processing network and through the continued consolidation of hospital business office functions. Other operating expenses as a percentage of net operating revenues improved from 22.7% for the quarter ended November 30, 1994 to 21.6% in the quarter ended November 30, 1995. The comparison is similar for the six-month periods. This improvement reflects the effects of the cost control programs and 16 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) overhead reduction plans mentioned earlier. Depreciation and amortization expense as a percentage of net operating revenues were 6.0% in the quarter ended November 30, 1995, and 5.8% in the prior year quarter. Depreciation and amortization expense as a percentage of net operating revenues for the current and prior year six month periods were 6.1% and 5.8%, respectively. The increase from $75.1 million in the six months ended November 30, 1994 to $162.7 million for the six months ended November 30, 1995 is due primarily to depreciation expense at the facilities acquired in the AMH merger and to the increase in goodwill amortization resulting from the AMH merger and current year hospital acquisitions. Goodwill amortization associated with the AMH merger will be approximately $62.5 million annually. Interest expense, net of capitalized interest, was $81.3 million in the quarter ended November 30, 1995, and $17.3 million in the prior year quarter. Interest expense, net of capitalized interest for the current and prior year six-month periods was $158.4 million and $35.0 million, respectively. The increase in interest expense was due primarily to the acquisition of AMH; the senior notes and bank loans used to finance the acquisition and to retire debt in connection with the merger. Taxes on income as a percentage of income before income taxes was 43.7% in the six months ended November 30, 1995 compared with 39.8% in the prior year period. The difference between the Company's effective income tax rate and the statutory federal income tax rate is shown below: <TABLE> <CAPTION> November 30, ------------------------------------------------------ (in millions of dollars and as a percent of pretax income) 1994 1995 ------------------------ ------------------------ Amount Percent Amount Percent ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> Tax provision at statutory federal rate. . . . . . $ 64.1 35.0% $ 187.2 35.0% State income taxes, net of federal income tax benefit . . . . . . . . . . . . . . . . . $ 8.4 4.6% $ 19.7 3.7% Goodwill amortization. . . . . . . . . . . . . . . - - $ 10.9 2.0% Gain on sale of foreign subsidiary's assets. . . . - - $ 16.3 3.1% Other. . . . . . . . . . . . . . . . . . . . . . . $ 0.5 0.2% $ (0.4) (0.1)% ---------- --------- ---------- --------- Taxes on income and effective tax rates. . . . . . $ 73.0 39.8% $ 233.7 43.7% </TABLE> Amortization of the goodwill resulting from the AMH merger is a noncash charge, but provides no income tax benefits. BUSINESS OUTLOOK Since the end of the Company's last fiscal year, Congress passed, and the President vetoed, legislation which, if implemented, would have had an adverse impact on the Company's current Medicare 17 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) payment rates. The President subsequently proposed alternative Medicare legislation which also would adversely affect the Company if it becomes law. The Company is unable to predict whether any presently proposed healthcare legislation will be passed in the future, but it continues to monitor such matters and analyzes their potential impacts in order to formulate its future business strategies. 18 <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings MATERIAL DEVELOPMENTS IN PREVIOUSLY REPORTED LEGAL PROCEEDINGS: With respect to the shareholders derivative actions filed in the Los Angeles Superior Court in October and November of 1991 and previously reported in the Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended May 31, 1995, a stipulation of settlement was executed by the parties as of September 8, 1995. The Court issued an order approving the settlement in January 1996. The Company has continued to receive additional lawsuits relating to its former psychiatric operations of the type referred to in the fifth paragraph under Item 3 Legal Proceedings in its Annual Report on Form 10-K for its fiscal year ended May 31, 1995, and expects that additional lawsuits with similar allegations will be filed from time to time. Although, based upon information currently available to it, management believes that the amount of damages in excess of the reserves for unusual litigation costs recorded as of November 30, 1995 that may be awarded in any of the unresolved legal proceedings cannot reasonably be estimated, management does not believe it is likely that any damages awarded in such legal proceedings will have a material adverse effect on the Company's results of operations, liquidity or capital resources. Items 2, 3 and 5 are not applicable. Item 4. Submissions of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on September 27, 1995. The shareholders elected all of the Company's nominees for director, approved the 1995 Stock Incentive Plan, approved the 1995 Employee Stock Purchase Plan and ratified the selection of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ended May 31, 1996. The votes were as follows: 1. Election of Directors For Withheld --- -------- Maurice J. DeWald 175,109,437 1,802,588 Edward Egbert, M.D. 175,076,847 1,835,178 Raymond A. Hay 175,084,594 1,827,431 Thomas J. Pritzker 172,043,408 4,868,577 2. Approval of the 1995 Stock Incentive Plan: For: 97,500,879 Against: 64,151,923 Abstaining: 859,136 Broker Non-Votes: 14,400,087 19 <PAGE> PART II. OTHER INFORMATION (CONTINUED) 3. Approval of the 1995 Employee Stock Purchase Plan: For: 152,802,648 Against: 8,932,992 Abstaining: 775,436 Broker Non-Votes: 14,400,949 4. Ratification of selection of KPMG Peat Marwick LLP: For: 174,923,821 Against: 1,702,487 Abstaining: 285,614 On October 27, 1995, pursuant to a solicitation by the Company for written consents from the holders (the "Holders") of its $300,000,000 principal amount of 9 5/8% Senior Notes due 2002 (the "9 5/8% Notes"), its $900,000,000 principal amount of 10 1/8% Senior Subordinated Notes due 2005 (the "10 1/8% Notes") and its $500,000,000 principal amount of 8 5/8% Senior Notes due 2003 (the " 8 5/8% Notes," and together with the 9 5/8% Notes and the 10 1/8% Notes, the "Existing Notes"), a majority of the Holders of each of the issues of Existing Notes approved an amendment to the restricted payment covenant in the Indentures governing each of the Existing Notes. The effect of the amendment was to permit the Company to offer its 6% Exchangeable Subordinated Notes due 2005, which are exchangeable for shares of the common stock of Vencor, Inc. held by the Company, on a subordinated basis, and to permit the Company to offer in the future additional subordinated notes exchangeable into other equity securities the Company owned as of October 11, 1995. The votes, based on the principal amounts of notes outstanding, were as follows: 1. 9 5/8% Notes: Consents: $241,537,000 Did Not Consent: $0 2. 10 1/8% Notes: Consents: $833,936,000 Did Not Consent: $0 3. 8 5/8% Notes: Consents: $385,715,000 Did Not Consent: $0 Item 6. Exhibits and Reports on Form 8-K 20 <PAGE> PART II. OTHER INFORMATION (CONTINUED) (a) Exhibits. (4) Instruments Defining the Rights of Security Holders, Including Indentures (a) Indenture between the Company and The Bank of New York, as Trustee, relating to 6% Exchangeable Subordinated Notes due 2005. (b) Escrow Agreement, dated as of January 10, 1996, among Tenet Healthcare Corporation, NME Properties, Inc., NME Property Holding Co., Inc. and The Bank of New York, as Escrow Agent. (10) Material Contracts (a) Amendment No. 2 to Credit Agreement, dated as of December 20, 1995, among Tenet Healthcare Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, Bank of America National Trust and Savings Association, The Bank of New York and Bankers Trust Company, as Arranging Agents, and Morgan Guaranty Trust Company of New York, as Administrative Agent. (b) Reports on Form 8-K (1) During the fiscal quarter ended November 30, 1995, the Company filed with the Securities and Exchange Commission on October 3, 1995, a Current Report on Form 8-K, dated September 29, 1995, for Item 5, Other Events. The Form 8-K was filed to report the release of a press release reporting the Company's earnings for the fiscal quarter ended August 31, 1995, and the release of a Financial Update for the fiscal quarter ended August 31, 1995. (11) (Page 23) Statement Re: Computation of Per Share Earnings for the three months and six months ended November 30, 1994 and 1995. (27) Financial Data Schedule (included only in the EDGAR filing). 21 <PAGE> PART II. OTHER INFORMATION (CONTINUED) SIGNATURE 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. TENET HEALTHCARE CORPORATION (Registrant) Date: January 15, 1996 /s/ RAYMOND L. MATHIASEN -------------------------------- Raymond L. Mathiasen Senior Vice President, Chief Financial Officer 22 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.1 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 4.1 <TEXT> <PAGE> [CONFORMED COPY] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TENET HEALTHCARE CORPORATION _____________________________ $320,000,000 6% EXCHANGEABLE SUBORDINATED NOTES due 2005 _____________________________ _____________________________ INDENTURE Dated as of January 10, 1996 _____________________________ _____________________________ THE BANK OF NEW YORK _____________________________ as Trustee - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- <PAGE> TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions............................................ 1 Section 1.02. Other Definitions...................................... 8 Section 1.03. Incorporation by Reference of TIA...................... 9 Section 1.04. Rules of Construction.................................. 9 ARTICLE 2 THE SECURITIES; OFFER TO PURCHASE PROCEDURES Section 2.01. Form and Dating........................................ 10 Section 2.02. Execution and Authentication........................... 10 Section 2.03. Registrar and Paying Agent............................. 11 Section 2.04. Paying Agent to Hold Money in Trust.................... 11 Section 2.05. Holder Lists........................................... 12 Section 2.06. Transfer and Exchange.................................. 12 Section 2.07. Replacement Securities................................. 13 Section 2.08. Outstanding Securities................................. 13 Section 2.09. Treasury Securities.................................... 13 Section 2.10. Temporary Securities................................... 14 Section 2.11. Cancellation........................................... 14 Section 2.12. Defaulted Interest..................................... 14 Section 2.13. Record Date............................................ 15 Section 2.14. CUSIP Number........................................... 15 ARTICLE 3 COVENANTS Section 3.01. Payment of Securities.................................. 15 Section 3.02. Maintenance of Office or Agency........................ 16 Section 3.03. Commission Reports..................................... 16 Section 3.04. Compliance Certificate................................. 18 Section 3.05. Taxes.................................................. 19 Section 3.06. Stay, Extension and Usury Laws......................... 19 Section 3.07. Change of Control...................................... 19 Section 3.08. Corporate Existence.................................... 21 <PAGE> ARTICLE 4 SUCCESSORS Section 4.01. Limitations On Mergers, Consolidations or Sales of Assets........................................ 22 Section 4.02. Successor Corporation Substituted...................... 23 ARTICLE 5 DEFAULTS AND REMEDIES Section 5.01. Events of Default...................................... 23 Section 5.02. Acceleration........................................... 26 Section 5.03. Other Remedies......................................... 27 Section 5.04. Waiver of Past Defaults................................ 27 Section 5.05. Control by Majority.................................... 27 Section 5.06. Limitation on Suits.................................... 28 Section 5.07. Rights of Holders to Receive Payment................... 28 Section 5.08. Collection Suit by Trustee............................. 28 Section 5.09. Trustee May File Proofs of Claim....................... 29 Section 5.10. Priorities............................................. 29 Section 5.11. Undertaking for Costs.................................. 30 ARTICLE 6 TRUSTEE Section 6.01. Duties of Trustee...................................... 30 Section 6.02. Rights of Trustee...................................... 32 Section 6.03. Individual Rights of Trustee........................... 32 Section 6.04. Trustee's Disclaimer................................... 32 Section 6.05. Notice of Defaults..................................... 33 Section 6.06. Reports by Trustee to Holders.......................... 33 Section 6.07. Compensation and Indemnity............................. 33 Section 6.08. Replacement of Trustee................................. 34 Section 6.09. Successor Trustee or Agent by Merger, etc.............. 35 Section 6.10. Eligibility; Disqualification.......................... 36 Section 6.11. Preferential Collection of Claims Against Company...... 36 ARTICLE 7 AMENDMENT, SUPPLEMENT AND WAIVER Section 7.01. Without Consent of Holders............................. 36 Section 7.02. With Consent of Holders................................ 37 Section 7.03. Compliance with TIA.................................... 38 Section 7.04. Revocation and Effect of Consents...................... 38 Section 7.05. Notation on or Exchange of Securities.................. 39 Section 7.06. Trustee to Sign Amendments, etc........................ 39 ii <PAGE> ARTICLE 8 Page MISCELLANEOUS Section 8.01. TIA Controls........................................... 40 Section 8.02. Notices................................................ 40 Section 8.03. Communication by Holders with Other Holders............ 41 Section 8.04. Certificate and Opinion as to Conditions Precedent..... 41 Section 8.05. Statements Required in Certificate or Opinion.......... 42 Section 8.06. Rules by Trustee and Agents............................ 42 Section 8.07. Legal Holidays......................................... 42 Section 8.08. No Personal Liability of Directors, Officers, Employees and Shareholders............................. 43 Section 8.09. Duplicate Originals.................................... 43 Section 8.10. Governing Law.......................................... 43 Section 8.11. No Adverse Interpretation of Other Agreements.......... 43 Section 8.12. Successors............................................. 43 Section 8.13. Severability........................................... 43 Section 8.14. Counterpart Originals.................................. 44 Section 8.15. Table of Contents, Headings, etc....................... 44 ARTICLE 9 REDEMPTION OF SECURITIES Section 9.01. Notices to Trustee..................................... 44 Section 9.02. Selection of Securities to Be Redeemed................. 44 Section 9.03. Notice of Redemption................................... 45 Section 9.04. Effect of Notice of Redemption......................... 46 Section 9.05. Deposit of Redemption Price............................ 46 Section 9.06. Securities Redeemed in Part............................ 46 Section 9.07. Optional Redemption................................... 46 Section 9.08. Mandatory Redemption................................... 47 ARTICLE 10 EXCHANGE OF SECURITIES Section 10.01.Right of Exchange...................................... 48 Section 10.02.Method of Exchange..................................... 48 Section 10.03.Fractional Interests................................... 50 Section 10.04.Adjustment of Exchange Rate............................ 51 Section 10.05.Escrow Agreement....................................... 52 Section 10.06.Notice of Certain Events............................... 57 Section 10.07.Transfer Taxes......................................... 57 Section 10.08.Shares Free and Clear.................................. 58 Section 10.09.Cancellation of Securities............................. 58 Section 10.10.Consolidation, etc., of Vencor......................... 58 iii <PAGE> Section 10.11.Certain Tender or Exchange Offers for Vencor Common Stock.................................... 59 Section 10.12.Obligations of Trustee and Escrow Agent................ 60 Section 10.13.Cash Equivalent........................................ 61 Section 10.14.Registration of Vencor Common Shares................... 61 ARTICLE 11 SUBORDINATION Section 11.01.Agreement to Subordinate............................... 61 Section 11.02.Certain Definitions.................................... 62 Section 11.03.Liquidation; Dissolution; Bankruptcy................... 62 Section 11.04.Default on Designated Senior and Senior Subordinated Debt...................................... 63 Section 11.05.Acceleration of Securities............................. 63 Section 11.06.When Distribution Must Be Paid Over.................... 64 Section 11.07.Notice by Company...................................... 64 Section 11.08.Subrogation............................................ 64 Section 11.09.Relative Rights........................................ 65 Section 11.10.Subordination May Not Be Impaired by Company........... 65 Section 11.11.Distribution or Notice to Representative............... 65 Section 11.12.Rights of Trustee and Paying Agent..................... 66 Section 11.13.Authorization to Effect Subordination.................. 66 Section 11.14.Amendments............................................. 66 EXHIBITS Exhibit A FORM OF SECURITY iv <PAGE> CROSS-REFERENCE TABLE* TRUST INDENTURE ACT SECTION INDENTURE SECTION - --------------- ----------------- 310 (a)(1)............................................ 6.10 (a)(2)............................................. 6.10 (a)(3)............................................. N.A. (a)(4)............................................. N.A. (a)(5)............................................. 6.10 (b) ............................................... 6.08; 6.10 (c) ............................................... N.A. 311 (a) .............................................. 6.11 (b) ............................................... 6.11 (c) ............................................... N.A. 312 (a)............................................... 2.05 (b)................................................ 8.03 (c) ............................................... 8.03 313 (a) .............................................. 6.06 (b)(1) ............................................ N.A. (b)(2) ............................................ 6.06 (c) ............................................... 6.06; 8.02 (d)................................................ 6.06 314 (a) .............................................. 3.03; 8.02 (b) ............................................... N.A. (c)(1)............................................. 8.04 (c)(2)............................................. 8.04 (c)(3)............................................. N.A. (d)................................................ N.A. (e) .............................................. 8.05 (f)................................................ N.A. 315 (a)............................................... 6.01(iii)(b) (b)................................................ 6.05; 8.02 (c) .............................................. 6.01(i) (d)................................................ 6.01(iii) (e)................................................ 5.11 316 (a)(last sentence) ............................... 2.09 (a)(1)(A).......................................... 5.05 (a)(1)(B) ......................................... 5.04 (a)(2)............................................. N.A. (b) ............................................... 5.07 (c) ............................................... 2.13; 7.04 317 (a)(1) ........................................... 5.08 (a)(2)............................................. 5.09 (b) ............................................... 2.04 318 (a)............................................... 8.01 (b)................................................ N.A. (c)................................................ 8.01 N.A. means not applicable. ____________________________ *THIS CROSS-REFERENCE TABLE IS NOT PART OF THE INDENTURE. 1 <PAGE> INDENTURE dated as of January 10, 1996 between Tenet Healthcare Corporation, a Nevada corporation (the "COMPANY"), and The Bank of New York, as trustee (the "TRUSTEE"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 6% Exchangeable Subordinated Notes due 2005 (the "SECURITIES"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01.DEFINITIONS. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; PROVIDED that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "AGENT" means any Registrar, Paying Agent or co-registrar. "BOARD OF DIRECTORS" means the Board of Directors of the Company or any authorized committee thereof. "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL LEASE" means, at the time any determination thereof is to be made, any lease of property, real or personal, in respect of which the present value of the minimum rental commitment would be capitalized on a balance sheet of the lessee in accordance with GAAP. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a Capital Lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. 1 <PAGE> "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CHANGE OF CONTROL" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than to a Person or group who, prior to such transaction, held a majority of the voting power of the voting stock of the Company, (ii) the acquisition by any Person or group (as defined above) of a direct or indirect interest in more than 50% of the voting power of the voting stock of the Company, by way of merger, consolidation or otherwise, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "CHANGE OF CONTROL TRIGGERING EVENT" means the occurrence of both a Change of Control and a Rating Decline. "COMMISSION" means the Securities and Exchange Commission. "COMPANY" means Tenet Healthcare Corporation, as obligor under the Securities, unless and until a successor replaces Tenet Healthcare Corporation, in accordance with Article 4 hereof and thereafter includes such successor. "CONSOLIDATED NET WORTH" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date PLUS (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock), LESS all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made in accordance with GAAP as a result of the acquisition of such business) subsequent to the date hereof in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, and excluding the cumulative effect of a change in accounting principles, all as determined in accordance with GAAP. "CONTINUING DIRECTORS" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date hereof or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing 2 <PAGE> Directors who were members of such Board at the time of such nomination or election. "CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the Trustee specified in Section 8.02 hereof or such other address as to which the Trustee may give notice to the Company. "CREDIT FACILITY" means that certain Credit Agreement, dated as of February 28, 1995, by and among the Company and Morgan Guaranty Trust Company of New York and the other banks that are party thereto, providing for $1.8 billion in aggregate principal amount of senior term debt and up to $500.0 million in aggregate principal amount of senior revolving debt, including any related notes, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended as of August 31, 1995, and as amended, modified, extended, renewed, refunded, replaced or refinanced, in whole or in part, from time to time. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to December, 1 2005. "ESCROW AGENT" means The Bank of New York, as Escrow Agent, under the Escrow Agreement until a successor replaces it in accordance with the applicable provisions of the Escrow Agreement. "ESCROW AGREEMENT" means that certain Escrow Agreement, dated as of January 10, 1996, by and among the Company, NMEPI and NMEPHC and The Bank of New York, as Escrow Agent. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCHANGE SECURITY" means any security, including Vencor Common Stock, deliverable upon the surrender of the Securities for exchange in accordance with the provisions of Article Ten. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and 3 <PAGE> pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, as in effect from time to time. "GOVERNMENT SECURITIES" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "GUARANTEE" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, (ii) foreign exchange contracts or currency swap agreements and (iii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency values. "HOLDER" means a Person in whose name a Security is registered. "INDEBTEDNESS" means with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. "INDENTURE" means this Indenture, as amended or supplemented from time to time. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset given to secure Indebtedness, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to 4 <PAGE> give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction with respect to any such lien, pledge, charge or security interest). "MARKET PRICE" means, with respect to any exchange, the average of the Sale Prices of the Vencor Common Stock (or any Exchange Security, as the case may be) for the five Business Day period (appropriately adjusted to take into account the occurrence during such period of certain events that would result in an adjustment of the Exchange Rate with respect to the shares of Vencor Common Stock or any Exchange Security) commencing on the first Business Day after delivery by the Company or the Escrow Agent of notice to the Holders that the Company has elected to pay cash in lieu of delivering shares of Vencor Common Stock or Exchange Security in exchange for any Securities. The period between the date of delivery by a holder of a notice of exchange and the date of determination of the Market Price may not exceed seven Business Days. "MOODY'S" means Moody's Investors Services, Inc. and its successors. "NMEPHC" means NME Property Holding Co., Inc., a Delaware corporation. "NMEPI" means NME Properties, Inc., a Delaware corporation. "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OFFICERS" means the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary and any Vice President of the Company or any Subsidiary, as the case may be. "OFFICERS' CERTIFICATE" means a certificate signed by two Officers, one of whom must be the principal executive officer, principal financial officer or principal accounting officer of the Company. "OPINION OF COUNSEL" means an opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, any Subsidiary or the Trustee. "PAYMENT DEFAULT" means any failure to pay any scheduled installment of interest or principal on any Indebtedness within the grace period provided for such payment in the documentation governing such Indebtedness. 5 <PAGE> "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust or unincorporated organization (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "RATING AGENCIES" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's or both shall not make a rating of the Securities publicly available, a nationally recognized securities rating agency or agencies, as the case may be, selected by the Company, shall be substituted for S&P or Moody's or both, as the case may be. "RATING CATEGORY" means (i) with respect to S&P, any of the following categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii) with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (iii) the equivalent of any such category of S&P or Moody's used by another Rating Agency. In determining whether the rating of the Securities has decreased by one or more gradations, gradations within Rating Categories (+ and - for S&P, 1, 2 and 3 for Moody's; or the equivalent gradations for another Rating Agency) shall be taken into account (E.G., with respect to S&P, a decline in a rating from BB+ to BB, as well as from BB- to B+, shall constitute a decrease of one gradation). "RATING DATE" means the date which is 90 days prior to the earlier of (i) a Change of Control and (ii) the first public notice of the occurrence of a Change of Control or of the intention by the Company to effect a Change of Control. "RATING DECLINE" means the occurrence on or within 90 days after the date of the first public notice of the occurrence of a Change of Control or of the intention by the Company to effect a Change of Control (which period shall be extended so long as the rating of the Securities is under publicly announced consideration for possible downgrade by any of the Rating Agencies) of: (a) in the event the Securities are rated by either Moody's or S&P on the Rating Date as Investment Grade, a decrease in the rating of the Securities by both Rating Agencies to a rating that is below Investment Grade, or (b) in the event the Securities are rated below Investment Grade by both Rating Agencies on the Rating Date, a decrease in the rating of the Securities by either Rating Agency by one or more gradations (including gradations within Rating Categories as well as between Rating Categories). "RESPONSIBLE OFFICER" when used with respect to the Trustee, means any officer within the corporate trust department of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer 6 <PAGE> to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "SALE PRICE" means with respect to the Vencor Common Stock (or any other Exchange Security), for any given day, the closing sale price (or, if no closing sale price is reported, the average of the bid and asked prices or, if more than one bid or asked prices, the average of the average bid and average asked prices) on such day of the Vencor Common Stock (or other Exchange Security), reported on the New York Stock Exchange Composite Tape or, in the event the Vencor Common Stock (or other Exchange Security) is not listed on the New York Stock Exchange, such other national or regional securities exchange upon which the Vencor Common Stock (or other Exchange Security) is listed and principally traded, or, in the event the Vencor Common Stock (or other Exchange Security) is not listed on a national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System, or, if no such price is available, the market value of the Vencor Common Stock (or other Exchange Security) on such day determined in such manner as shall be satisfactory to the Company, which shall be entitled to rely for such purpose on the advice of any firm of investment bankers or securities dealers having familiarity with the Vencor Common Stock (or other Exchange Security). Notwithstanding the foregoing, the Sale Price shall be adjusted to reflect the occurrence of any of the events specified in Section 10.04 that has resulted in an adjustment of the Exchange Rate if the Sale Price as calculated above has not been appropriately adjusted to reflect the occurrence of such event. "SECURITIES" means the securities described above, issued under this Indenture. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "S&P" means Standard & Poor's Corporation and its successors. "SUBSIDIARY" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of 7 <PAGE> which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TIA" means the Trust Indenture Act of 1939, as amended (15 U.S.C. 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA, except as provided in Section 7.03 hereof. "TRUSTEE" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "VENCOR" means Vencor, Inc., a Delaware corporation. "VENCOR COMMON SHARES" means the 8,301,067 shares of Vencor Common Stock to be deposited pursuant to the Escrow Agreement. "VENCOR COMMON STOCK" means shares of common stock, $.25 par value, of Vencor. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. SECTION 1.02.OTHER DEFINITIONS. DEFINED IN TERM SECTION ---- ------- "Bankruptcy Law"...................... 5.01 "Change of Control Offer"............. 3.07 "Change of Control Payment"........... 3.07 "Change of Control Payment Date"...... 3.07 "Commencement Date"................... 2.15 "Custodian"........................... 5.01 "Designated Senior and Senior Subordinated Debt"................... 11.02 "Event of Default".................... 5.01 "Exchange Rate"....................... 10.01 "Legal Holiday"....................... 8.07 8 <PAGE> "Notice of Default"................... 5.01 "Offer Amount"........................ 2.15 "Offer Period"........................ 2.15 "Paying Agent"........................ 2.03 "Permitted Transferee"................ 10.05 "Registrar"........................... 2.03 "Representative"...................... 11.02 "Senior and Senior Subordinated Debt". 11.02 SECTION 1.03.INCORPORATION BY REFERENCE OF TIA. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "INDENTURE SECURITIES" means the Securities; "INDENTURE SECURITY HOLDER" means a Holder; "INDENTURE TO BE QUALIFIED" means this Indenture; "INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee; "OBLIGOR" on the Securities means the Company and any successor obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by the Commission rule under the TIA have the meanings so assigned to them. SECTION 1.04.RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; 9 <PAGE> (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE SECURITIES; OFFER TO PURCHASE PROCEDURES SECTION 2.01.FORM AND DATING. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The Securities may have notations, legends or endorsements approved as to form by the Company and required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Security shall be dated the date of its authentication. The Securities shall be issuable only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. SECTION 2.02.EXECUTION AND AUTHENTICATION. An Officer of the Company shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Securities shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon a written order of the Company signed by two Officers of the Company, authenticate Securities for original issue up to the aggregate principal amount stated in paragraph 4 of the Securities. The aggregate principal amount of Securities outstanding at any time shall not exceed the amount set forth herein except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the 10 <PAGE> Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.03.REGISTRAR AND PAYING AGENT. The Company shall maintain (i) an office or agency where Securities may be presented for registration of transfer or for exchange and where Securities may be surrendered for exchange in accordance with the provisions of Article 10 for Vencor Common Shares (or cash, other securities and other property under certain circumstances) (including any co-registrar, the "REGISTRAR") and (ii) an office or agency where Securities may be presented for payment (the "PAYING AGENT"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Holder. The Company shall notify the Trustee and the Trustee shall notify the Holders of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent, Registrar or co-registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 6.07 hereof. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Securities. SECTION 2.04.PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to the due date of principal of, premium, if any, and interest on any Securities, the Company shall deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and interest becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Securities, and shall notify the Trustee of any Default by the Company in making any such payment. While any such Default continues, the Trustee 11 <PAGE> may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. If the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 2.05.HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Section Holders and shall otherwise comply with TIA Section 312(a). If the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount of the Securities held by each thereof, and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.06.TRANSFER AND EXCHANGE. When Securities are presented to the Registrar with a request to register the transfer or to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; PROVIDED, HOWEVER, that any Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Securities at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Company nor the Registrar shall be required to register the transfer or exchange of a Security between the record date and the next succeeding interest payment date. No service charge shall be made to any Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.10 or 7.05 hereof, which shall be paid by the Company). 12 <PAGE> Prior to due presentment for registration of transfer of any Security, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of, premium, if any, and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. SECTION 2.07.REPLACEMENT SECURITIES. If any mutilated Security is surrendered to the Trustee or the Company, or the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss which any of them may suffer if a Security is replaced. Each of the Company and the Trustee may charge for its expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. SECTION 2.08.OUTSTANDING SECURITIES. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 3.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.09 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. 13 <PAGE> SECTION 2.09.TREASURY SECURITIES. In determining whether the Holders of the required principal amount of Securities then outstanding have concurred in any demand, direction, waiver or consent, Securities owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such demand, direction, waiver or consent, only Securities that a Responsible Officer actually knows to be so owned shall be so considered. Notwithstanding the foregoing, Securities that are to be acquired by the Company or an Affiliate of the Company pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by the Company or an Affiliate of the Company until legal title to such Securities passes to the Company or such Affiliate, as the case may be. SECTION 2.10.TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company and the Trustee consider appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate definitive Securities in exchange for temporary Securities. Until such exchange, temporary Securities shall be entitled to the same rights, benefits and privileges as definitive Securities. SECTION 2.11.CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall return such cancelled Securities to the Company. The Company may not issue new Securities to replace Securities that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12.DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are 14 <PAGE> Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days prior to the related payment date, in each case at the rate provided in the Securities and in Section 3.01 hereof. The Company shall, with the consent of the Trustee, fix or cause to be fixed each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13.RECORD DATE. The record date for purposes of determining the identity of Holders entitled to vote or consent to any action by vote or consent authorized or Trustee is not the permitted under this Indenture shall be determined as provided for in TIQ Section 316(c). SECTION 2.14.CUSIP NUMBER. The Company in issuing the Securities may use a "CUSIP" number, and if it does so, the Trustee shall use the CUSIP number in notices to Holders; PROVIDED that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 COVENANTS SECTION 3.01.PAYMENT OF SECURITIES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Securities on the dates and in the manner provided in this Indenture and the Securities. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary of the Company, holds as of 10:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. Such Paying Agent shall return to the Company, no later than five days following the date of payment, any money (including accrued interest) that exceeds such amount of principal, premium, if any, and interest to be paid on the Securities. 15 <PAGE> The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the interest rate then applicable to the Securities to the extent lawful. In addition, it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 3.02.MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Securities may be surrendered for registration of transfer or exchange and where Securities may be surrendered for exchange in accordance with the provisions of Article 10 for Vencor Common Shares (and cash, other securities and other property under certain circumstances) and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates The Bank of New York, 101 Barclay Street, 21 West, New York, New York 10286 as one such office or agency of the Company in accordance with Section 2.03 hereof. SECTION 3.03.COMMISSION REPORTS. (i) So long as any of the Securities remain outstanding, the Company shall provide to the Trustee within 15 days after the filing thereof with the Commission copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the 16 <PAGE> foregoing as the Commission may by rules and regulations prescribe) that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. All obligors on the Securities shall comply with the provisions of TIA Section 314(a). Notwithstanding to the reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the Commission, the Company shall file with the Commission and provide to the Trustee (a) within 90 days after the end of each fiscal year, annual reports on Form 10-K (or any successor or comparable form) containing the information required to be contained therein (or required in such successor or comparable form), including a "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and a report thereon by the Company's certified public accountants; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, reports on Form 10-Q (or any successor or comparable form) containing the information required to be contained therein (or required in any successor or comparable form), including a "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"; and (c) promptly from time to time after the occurrence of an event required to be therein reported, such other reports on Form 8-K (or any successor or comparable form) containing the information required to be contained therein (or required in any successor or comparable form); PROVIDED, HOWEVER, that the Company shall not be in default of the provisions of this Section 3.03(i) for any failure to file reports with the Commission solely by the refusal of the Commission to accept the same for filing. Each of the financial statements contained in such reports shall be prepared in accordance with GAAP. (ii) The Trustee, at the Company's expense, shall promptly mail copies of all such annual reports, information, documents and other reports provided to the Trustee pursuant to Section 3.03(i) hereof to the Holders at their addresses appearing in the register of Securities maintained by the Registrar. (iii) Whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information and reports with the Commission for public availability and make such information available to securities analysts and prospective investors upon request. (iv) The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information that the Trustee may be required to deliver to the Holders under this Section 3.03. (v) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such 17 <PAGE> shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 3.04.COMPLIANCE CERTIFICATE. (i) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge each entity has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action each is taking or proposes to take with respect thereto), all without regard to periods of grace or notice requirements, and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities is prohibited or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto. (ii) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 3.03 above shall be accompanied by a written statement of the Company's certified independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company or any Subsidiary of the Company has violated any provisions of Article 3 or of Article 4 of this Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (iii) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of (a) any Default or Event of Default or (b) any event of default under any other mortgage, indenture or instrument referred to in Section 5.01(v) hereof, an Officers' Certificate specifying such Default, Event of Default or 18 <PAGE> event of default and what action the Company is taking or proposes to take with respect thereto. SECTION 3.05.TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except (i) as contested in good faith by appropriate proceedings and with respect to which appropriate reserves have been taken in accordance with GAAP or (ii) where the failure to effect such payment is not adverse in any material respect to the Holders. SECTION 3.06.STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 3.07.CHANGE OF CONTROL. Upon the occurrence of a Change of Control Triggering Event, each Holder of Securities shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "CHANGE OF CONTROL PAYMENT") on a date that is not more than 90 days after the occurrence of such Change of Control Triggering Event (the "CHANGE OF CONTROL PAYMENT DATE"). Within 30 days following any Change of Control Triggering Event, the Company shall mail, or at the Company's request the Trustee shall mail, a notice of a Change of Control to each Holder (at its last registered address with a copy to the Trustee and the Paying Agent) offering to repurchase the Securities held by such Holder pursuant to the procedures specified in such notice. The Change of Control Offer shall remain open from the time of mailing until the close of business on the Business Day next preceding the Change of Control Payment Date. The notice, which shall 19 <PAGE> govern the terms of the Change of Control Offer, shall contain all instructions and materials necessary to enable the Holders to tender Securities pursuant to the Change of Control Offer and shall state: (1) that the Change of Control Offer is being made pursuant to this Section 3.07 and that all Securities tendered will be accepted for payment; (2) the Change of Control Payment and the Change of Control Payment Date, which date shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed; (3) that any Security not tendered will continue to accrue interest in accordance with the terms of this Indenture; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all Securities accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have a Security purchased pursuant to any Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice prior to the close of business on the Business Day next preceding the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Company, depositary or Paying Agent, as the case may be, receives, not later than the close of business on the Business Day next preceding the Change of Control Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder delivered for purchase, and a statement that such Holder is withdrawing his election to have such Security purchased; (7) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities 20 <PAGE> surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof; and (8) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to PRO FORMA historical financial information after giving effect to such Change of Control, information regarding the Person or Persons acquiring control and such Person's or Persons' business plans going forward) and any other information that would be material to a decision as to whether to tender a Security pursuant to the Change of Control Offer. On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all Securities or portions thereof properly tendered and not withdrawn pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Securities or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Securities so tendered the Change of Control Payment for such Securities, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered, if any; PROVIDED that each such new Security shall be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities as a result of a Change of Control Triggering Event. SECTION 3.08.CORPORATE EXISTENCE. Subject to Section 3.07 and Article 4 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of each Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of 21 <PAGE> the Company and its Subsidiaries; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. ARTICLE 4 SUCCESSORS SECTION 4.01.LIMITATIONS ON MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. The Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless: (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the Obligations of the Company under this Indenture and the Securities pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee and assumes all of the obligations of the Company under the Escrow Agreement pursuant to a written agreement; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, 22 <PAGE> transfer, lease, conveyance or other disposition shall have been made shall have a Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction. The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel, covering clauses (i) through (iv) above, stating that the proposed transaction and such supplemental indenture comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. SECTION 4.02.SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 4.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation), and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person has been named as the Company, herein. ARTICLE 5 DEFAULTS AND REMEDIES SECTION 5.01.EVENTS OF DEFAULT. Each of the following constitutes an "EVENT OF DEFAULT": (i) default for 30 days in the payment when due of interest on the Securities; (ii) default in payment when due of the principal of or premium, if any, on the Securities at maturity or otherwise; (iii) failure by the Company to comply with the provisions of Section 3.07; 23 <PAGE> (iv) failure by the Company to comply with any other covenant or agreement in the Indenture, the Securities or the Escrow Agreement for the period and after the notice specified below; (v) any default that occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Significant Subsidiaries (or the payment of which is Guaranteed by the Company or any of its Significant Subsidiaries), whether such Indebtedness or Guarantee exists on the date hereof or is created after the date hereof, which default (a) constitutes a Payment Default or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or that has been so accelerated, aggregates $25.0 million or more; (vi) failure by the Company or any of its Significant Subsidiaries to pay a final judgment or final judgments aggregating in excess of $25.0 million entered by a court or courts of competent jurisdiction against the Company or any of its Significant Subsidiaries if such final judgment or judgments remain unpaid or undischarged for a period (during which execution shall not be effectively stayed) of 60 days after their entry; (vii) the Company or any Significant Subsidiary thereof pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor, 24 <PAGE> (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, or (e) admits in writing its inability generally to pay its debts as the same become due; (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any Significant Subsidiary thereof in an involuntary case in which it is the debtor, (b) appoints a Custodian of the Company or any Significant Subsidiary thereof or for all or substantially all of the property of the Company or any Significant Subsidiary thereof, or (c) orders the liquidation of the Company or any Significant Subsidiary thereof, and the order or decree remains unstayed and in effect for 60 days; and (ix) failure by the Company to make any exchange of Vencor Common Shares (or such other securities or property or cash as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in Article 10 hereof) for any Security at the Exchange Rate and upon the terms set forth in Article 10 hereof subject to the Company's right to pay cash in lieu thereof pursuant to Section 10.13. The term "BANKRUPTCY LAW" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. 25 <PAGE> A Default under clause (iv) is not an Event of Default until the Trustee notifies the Company in writing, or the Holders of at least 25% in principal amount of the then outstanding Securities notify the Company and the Trustee in writing, of the Default and the Company does not cure the Default within 60 days after receipt of such notice. The written notice must specify the Default, demand that it be remedied and state that the notice is a "NOTICE OF DEFAULT." SECTION 5.02.ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (vii) or (viii) of Section 5.01 hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the then outstanding Securities by written notice to the Company and the Trustee, may declare the unpaid principal of, premium, if any, and any accrued and unpaid interest on all the Securities to be due and payable immediately. Upon such declaration the principal, premium, if any, and interest shall be due and payable immediately. If an Event of Default specified in clause (vii) or (viii) of Section 5.01 hereof occurs with respect to the Company or any Significant Subsidiary thereof such an amount shall IPSO FACTO become and be immediately due and payable without further action or notice on the part of the Trustee or any Holder. If an Event of Default occurs under this Indenture prior to the maturity of the Securities by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of such Securities prior to the date of maturity, then a premium with respect thereto (expressed as a percentage of the amount that would otherwise be due but for the provisions of this sentence) shall become and be immediately due and payable to the extent permitted by law upon the acceleration of such Securities if such Event of Default occurs during the twelve-month period beginning on January 1 of the years set forth below: YEAR PERCENTAGE ---- ---------- 1996.............................. 106.00% 1997.............................. 105.40% 1998.............................. 104.80% 1999.............................. 104.20% 2000.............................. 103.60% 2001.............................. 103.00% 2002.............................. 102.40% 2003.............................. 101.80% 26 <PAGE> 2004.............................. 101.20% 2005.............................. 100.60% Any determination regarding the primary purpose of any such action or inaction, as the case may be, shall be made by and set forth in a resolution of the Board of Directors (including the concurrence of a majority of the independent directors of the Company then serving) delivered to the Trustee after consideration of the business reasons for such action or inaction, other than the avoidance of payment of such premium or prohibition on redemption. In the absence of fraud, each such determination shall be final and binding upon the Holders of Securities. Subject to Section 6.01 hereof, the Trustee shall be entitled to rely on the determination set forth in any such resolutions delivered to the Trustee. SECTION 5.03.OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 5.04.WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in aggregate principal amount of the Securities then outstanding by written notice to the Trustee may on behalf of the Holders of all of the Securities waive any existing Default or Event of Default and its consequences under this Indenture except a continuing Default or Event of Default in the payment of the principal of, premium, if any, or interest on any Security or in respect of the exchange of Securities pursuant to Article 10 hereof. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. 27 <PAGE> SECTION 5.05.CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders or that may involve the Trustee in personal liability. The Trustee may take any other action which it deems proper which is not inconsistent with any such direction. SECTION 5.06.LIMITATION ON SUITS. A Holder may pursue a remedy with respect to this Indenture or the Securities only if: (i) the Holder gives to the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount of the then outstanding Securities do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 5.07.RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal, premium, if any, and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such 28 <PAGE> respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 5.08.COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 5.01(i) or (ii) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company or any other obligor for the whole amount of principal, premium, if any, and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover amounts due the Trustee under Section 6.07 hereof, including the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 5.09.TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. 29 <PAGE> SECTION 5.10.PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 6.07, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders for amounts due and unpaid on the Securities for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, premium, if any and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 5.10 upon five Business Days prior notice to the Company. SECTION 5.11.UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 5.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE 6 TRUSTEE SECTION 6.01.DUTIES OF TRUSTEE. (i) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a 30 <PAGE> prudent man would exercise or use under the circumstances in the conduct of his own affairs. (ii) Except during the continuance of an Event of Default known to the Trustee: (a) the duties of the Trustee shall be determined solely by the express provisions of this Indenture or the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provisions hereof are required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (iii) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) this paragraph does not limit the effect of paragraph (ii) of this Section; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.05 hereof. (iv) Whether or not therein expressly so provided every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (i), (ii), and (iii) of this Section. 31 <PAGE> (v) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives security and indemnity satisfactory to it against any loss, liability or expense. (vi) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Absent written instruction from the Company, the Trustee shall not be required to invest any such money. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (vii) The Trustee shall not be deemed to have knowledge of any matter unless such matter is actually known to a Responsible Officer. SECTION 6.02.RIGHTS OF TRUSTEE. (i) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (ii) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (iii) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (iv) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. A permissive right granted to the Trustee hereunder shall not be deemed an obligation to act. (v) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. 32 <PAGE> SECTION 6.03.INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 6.10 and 6.11 hereof. SECTION 6.04.TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, nor shall it be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's direction under any provision of this Indenture, nor shall it be responsible for the use or application of any money received by any Paying Agent other than the Trustee, nor shall it be responsible for any statement or recital herein or any statement in the Securities or any other document in connection with the sale of the Securities or pursuant to this Indenture other than its certificate of authentication. SECTION 6.05.NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Security, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders. SECTION 6.06.REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each December 31 beginning with the December 31 following the date hereof, the Trustee shall mail to the Holders a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders shall be mailed to the Company and filed with the Commission and each stock exchange on which the Securities are listed. The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange. 33 <PAGE> SECTION 6.07.COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Company and Trustee shall agree. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities, damages, claims or expenses incurred by it arising out of or in connection with the acceptance of its duties and the administration of the trusts under this Indenture, except as set forth below. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 6.07 shall survive the satisfaction and discharge of this Indenture. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 5.01(vii) or (viii) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. 34 <PAGE> SECTION 6.08.REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 6.10 hereof; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee after written request by any Holder who has been a Holder for at least six months fails to comply with Section 6.10 hereof, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee 35 <PAGE> under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 6.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 6.08, the Company's obligations under Section 6.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 6.09.SUCCESSOR TRUSTEE OR AGENT BY MERGER, ETC. If the Trustee or any Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee or Agent. SECTION 6.10.ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America or of any state thereof authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by federal or state authority and shall have a combined capital and surplus of at least $100.0 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA 313(a) (1),(2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 6.11.PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 7 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 7.01.WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may amend or supplement this Indenture or the Securities without the consent of any Holder: (i) to cure any ambiguity, defect or inconsistency; 36 <PAGE> (ii) to provide for uncertificated Securities in addition to or in place of certificated Securities; (iii) to provide for the assumption of the Company's obligations to the Holders of the Securities in the case of a merger, consolidation or sale of assets pursuant to Article 4 hereof; (iv) to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not adversely affect the legal rights hereunder of any such Holder; or (v) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such supplemental indenture, and upon receipt by the Trustee of the documents described in Section 7.06 hereof, the Trustee shall join with the Company in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into such supplemental indenture which affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 7.02.WITH CONSENT OF HOLDERS. Except as provided in the next succeeding paragraphs, this Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange offer for such Securities), and any existing default or compliance with any provision of this Indenture or the Securities may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities (including consents obtained in connection with a tender offer or exchange offer for such Securities). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.06 hereof, the Trustee shall join with the Company in the execution of such supplemental indenture unless 37 <PAGE> such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Holders under this Section 7.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. Subject to Sections 5.04 and 5.07 hereof, the Holders of a majority in aggregate principal amount of the Securities then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Securities. Without the consent of each Holder affected, however, an amendment or waiver may not (with respect to any Security held by a non-consenting Holder): (i) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Security; (iii) reduce the rate of or change the time for payment of interest on any Security; (iv) make any change regarding the exchange rights set forth in Article 10 other than to increase the Exchange Rate; (v) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Securities (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount thereof and a waiver of the payment default that resulted from such acceleration); (vi) make any Security payable in money other than that stated in the Securities; (vii) make any change in Section 5.04 or 5.07 hereof; or 38 <PAGE> (viii) make any change in this sentence of this Section 7.02. SECTION 7.03.COMPLIANCE WITH TIA. Every amendment to this Indenture or the Securities shall be set forth in a supplemental indenture that complies with the TIA as then in effect. SECTION 7.04.REVOCATION AND EFFECT OF CONSENTS. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to its Security if the Trustee receives written notice of revocation before the date the waiver or amendment becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. The Company may, but shall not be obligated to, fix a record date for determining which Holders must consent to such amendment or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation pursuant to Section 2.05 hereof or (ii) such other date as the Company shall designate. SECTION 7.05.NOTATION ON OR EXCHANGE OF SECURITIES. The Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities that reflect the amendment or waiver. Failure to make the appropriate notation or issue a new Security shall not affect the validity and effect of such amendment or waiver. SECTION 7.06.TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 7 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental indenture, the Trustee shall be entitled to receive and, subject to Section 6.01, shall be fully protected in relying upon, 39 <PAGE> an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or Supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it shall be valid and binding upon the Company in accordance with its terms. The Company may not sign an amendment or supplemental indenture until the Board of Directors approves it. ARTICLE 8 MISCELLANEOUS SECTION 8.01.TIA CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 8.02.NOTICES. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company: Tenet Healthcare Corporation 2700 Colorado Avenue Santa Monica, California 90404 Telecopier No.: (310) 998-6700 Attention: Treasurer With a copy to: Attention: General Counsel With a copy to: Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Telecopier No.: (213) 687-5600 Attention: Brian J. McCarthy 40 <PAGE> If to the Trustee: The Bank of New York 101 Barclay Street, 21 West New York, New York 10286 Telecopier No.: (212) 815-5915 Attention: Corporate Trust Trustee Administration The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Unless otherwise set forth above, any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person desired in TIA Section 313(c) to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 8.03.COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 41 <PAGE> SECTION 8.04.CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate (which shall include the statements set forth in Section 8.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (2) an Opinion of Counsel (which shall include the statements set forth in Section 8.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 8.05.STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been satisfied; PROVIDED, however, that with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 8.06.RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 42 <PAGE> SECTION 8.07.LEGAL HOLIDAYS. A "LEGAL HOLIDAY" is a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 43 <PAGE> SECTION 8.08.NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS. No director, officer, employee, incorporator or shareholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy and is therefore unenforceable. SECTION 8.09.DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. SECTION 8.10.GOVERNING LAW. The internal law of the State of New York, shall govern and be used to construe this Indenture and the Securities, without regard to the conflict of laws provisions thereof. SECTION 8.11.NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 8.12.SUCCESSORS. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 8.13.SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. 44 <PAGE> SECTION 8.14.COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 8.15.TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. ARTICLE 9 REDEMPTION OF SECURITIES SECTION 9.01.NOTICES TO TRUSTEE. If the Company elects to redeem Securities pursuant to the optional redemption provisions of Section 9.07 hereof, it shall furnish to the Trustee, at least 45 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Securities to be redeemed and (iv) the redemption price. SECTION 9.02.SELECTION OF SECURITIES TO BE REDEEMED. If less than all of the Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed among the Holders in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are then listed, or, if the Securities are not so listed, by such method as the Trustee shall deem fair and appropriate; PROVIDED, that Securities with a principal amount of $1,000 shall not be redeemed in part. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. Securities and portions of them selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Securities of a Holder are to be redeemed, the entire outstanding amount of Securities held by such Holder, even if not a multiple of $1,000 shall be redeemed. 45 <PAGE> SECTION 9.03.NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed by first class mail a notice of redemption to each Holder of Securities to be redeemed at its registered address. The notice shall identify the Securities (including CUSIP number) to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) if any Security is being redeemed in part, the porion of the principal amount of such Security to be redeemed and that, after the redemption date upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion shall be issued; (4) the name and address of the Paying Agent; (5) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in making such redemption payment, interest on Securities called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Securities and/or Section of this Indenture pursuant to which the Securities called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; PROVIDED, HOWEVER, that the Company shall have delivered to the Trustee, at least 45 days (or such lesser period of at least 30 days to which the Trustee may agree) prior to the redemption date, an Officers' Certificate requesting that the trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. The notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail 46 <PAGE> or any defect in the notice to the Holder of any Security shall not affect the validity of the proceeding for the redemption of any other Security. SECTION 9.04.EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 9.03 hereof, Securities called for redemption will be due and payable on the redemption date at the redemption price plus accrued and unpaid interest, if any, to such date. SECTION 9.05.DEPOSIT OF REDEMPTION PRICE. One Business Day prior to the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of, and accrued interest on, all Securities to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent of the Company in excess of the amounts necessary to pay the redemption price of (including any applicable premium), and accrued interest on, all Securities to be redeemed. On and after the redemption date, interest ceases to accrue on the Securities or the portions of Securities called for redemption. If a Security is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Security was registered at the close of business on such record date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities and in Section 3.01 hereof. SECTION 9.06.SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Security equal in principal amount to the unredeemed portion of the Security surrendered. SECTION 9.07.OPTIONAL REDEMPTION. On or after January 15, 1999, the Company may redeem all or any portion of the Securities at a redemption price (expressed as a percentage of the principal amount thereof), as set forth in the immediately succeeding 47 <PAGE> paragraph, plus accrued and unpaid interest, if any, to the applicable redemption date (subject to the right of Holders of record on a Record Date to receive interest due on an interest payment date that is on or prior to such Redemption Date). The redemption price as a percentage of the principal amount shall be as follows, if the Securities are redeemed during the following periods: PERIOD PERCENTAGE - ------ ---------- January 15, 1999 through May 31, 1999..................... 103.0% June 1, 1999 through November 30, 1999.................... 102.5% December 1, 1999 through May 31, 2000 .................... 102.0% June 1, 2000 through November 30, 2000 ................... 101.5% December 1, 2000 through May 31, 2001 .................... 101.0% June 1, 2001 through November 30, 2001 ................... 100.5% December 1, 2001 or thereafter ........................... 100.0% SECTION 9.08.MANDATORY REDEMPTION. Subject to the Company's obligation to make an offer to repurchase Securities under certain circumstance pursuant to Section 3.07 hereof, the Company shall have no mandatory redemption or sinking fund payments with respect to the Securities. 48 <PAGE> ARTICLE 10 EXCHANGE OF SECURITIES SECTION 10.01. RIGHT OF EXCHANGE. Subject to and upon compliance with the provisions of this Article 10, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may, at any time or from time on or after November 6, 1997 and before the close of business on December 1, 2005 (or if not a Business Day the next preceding Business Day), or, in case such Security or portion thereof shall have been called for redemption prior to such date, then in respect of such Security or portion thereof until and including, but (unless the Company shall default in payment due upon the redemption thereof) not after, the close of business on the Business Day next preceding the Redemption Date or, in case such Security or portion thereof shall have been called for redemption in accordance with Section 10.11, then in respect of such Security or portion thereof until and including, but (unless the Company shall default in payment due upon the redemption thereof) not after, the close of business on the Business Day next preceding the fifteenth day after the date the notice of redemption is mailed, be exchanged for fully paid and non-assessable Vencor Common Shares (or such other securities or property or cash as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) at the Exchange Rate hereinafter PROVIDED; provided that prior to November 6, 1997, the Securities will be exchangeable only in the event of the consummation of a merger, consolidation or liquidation of Vencor pursuant to which all of the shares of Vencor Common Stock held by the Exchange Agent are converted into or exchanged for cash or other securities registered under the Securities Act. The rate at which Vencor Common Shares shall be delivered upon exchange (herein called the "Exchange Rate") shall be initially 25.9403 Vencor Common Shares for each $1,000 principal amount of Securities exchanged. The Exchange Rate shall be subject to adjustment as provided in Sections 10.04, 10.05 and 10.10 and subject to the Company's right to pay an amount in cash in lieu thereof as provided in Section 10.13. In connection with any exchange, the Company shall promptly determine the Market Price in accordance with the definition therein and deliver to the Trustee and the Escrow Agent an Officers' Certificate setting forth such calculation. The Trustee and the Escrow Agent shall be entitled to conclusively rely upon any such determination. SECTION 10.02. METHOD OF EXCHANGE. 49 <PAGE> In order to exercise the right of exchange, the Holder of any Security to be exchanged shall surrender such Security to the office or agency maintained for that purpose pursuant to Section 2.03, which shall initially be the corporate trust office of the Escrow Agent, accompanied by written notice to the Company and the Escrow Agent that the Holder elects to exchange such Security or, if less than the entire principal amount of a Security is to be exchanged, the portion thereof to be exchanged. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Vencor Common Stock (or such other securities, property or cash as shall be added to the Vencor Common Shares or as such shares of Vencor Common Stock shall have been changed into as provided in this Article 10) which shall be issuable on such exchange shall be issued. Securities surrendered for exchange shall be accompanied (if so required by the Company or Escrow Agent) by proper assignments thereof to the Company or in blank for transfer. If the Company does not elect to deliver cash in lieu of shares of Vencor Common Stock pursuant to Section 10.13 hereof, as promptly as practicable after the receipt of such notice and the proper surrender of such Security as aforesaid (subject, however, to the following paragraph of this Section 10.02 and to Section 10.13), the Company shall deliver or cause the Escrow Agent to deliver at said office or agency to such Holder, or on his written order, a certificate or certificates for the number of full shares of Vencor Common Stock (or such other securities or property as shall be added to the Vencor Common Shares or as such shares of Vencor Common Stock shall have been changed into as provided in this Article 10) deliverable upon the exchange of any such Security (or specified portion thereof), the property and securities (other than cash), if any, apportioned thereto, a check for any cash apportioned thereto and provision shall be made for any fractional interests in shares of Vencor Common Stock or other securities or property as provided in Section 10.03. Such exchange shall be deemed to have been effected immediately prior to the close of business on the date on which such notice shall have been received by the Company and the Escrow Agent and such Security shall have been properly surrendered as aforesaid, and at such time the rights of the Holder of such Security as a Holder shall cease and the person or persons in whose name or names any certificate or certificates for shares of Vencor Common Stock (or such other securities or property as shall be added to the Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) shall be deliverable upon such exchange shall, as between such person or persons and the Company and any Permitted Transferee (as defined below), be deemed to have become the holder or holders of record of the shares or securities represented thereby. Delivery of such certificate or certificates, of property and securities, if any, apportioned thereto and of any check for any cash apportioned thereto and for cash in lieu of fractional interests as aforesaid may 50 <PAGE> be delayed for a reasonable period of time at the request of the Company (which shall be made by an Officer's Certificate) in order to effectuate the calculation of the adjustments to the number of the shares of Vencor Common Stock (or such other securities or property as shall be added to the Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) and cash apportioned thereto pursuant to this Article 10, to obtain any certificate representing securities to be delivered or to complete any reapportionment of the shares of Vencor Common Stock, cash and other property apportioned thereto which is required by this Article 10. If, between any date an exchange under this Section is deemed effected and delivery of the applicable security or securities, such security or securities shall cease to have any or certain rights, or a record date or effective date of a transaction to which Section 10.04, 10.05, or 10.10 applies shall occur, the person entitled to receive such security or securities shall be entitled only to receive such security or securities as so modified and any proceeds received thereon on or after the date and time on which such an exchange is deemed effected, and the Company, any Permitted Transferee (as defined below), the Trustee and the Escrow Agent shall not otherwise be liable with respect to the modification, from the date such an exchange is deemed effected to the date of such delivery, of such security or securities. Except as otherwise expressly provided in this Indenture, no payment or adjustment shall be made upon any exchange on account of any interest accrued on the Securities surrendered for exchange or on account of any dividends on the Vencor Common Shares delivered upon such exchange; PROVIDED that (i) interest accrued on any Securities surrendered for exchange on or after any record date and before the interest payment date relating thereto shall be paid to the holder of record as of such record date and (ii) the Holder of a Security exchanged on or after the record date for any dividend on the shares of Vencor Common Stock (or any other Exchange Security) shall be entitled to receive, promptly after the Trustee's receipt thereof, any such dividend paid on the shares of Vencor Common Stock (or any other Exchange Security) delivered upon such exchange. In the case of any Security which is exchanged in part only, upon such exchange the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company except for transfer taxes in the case that the new Security is to be registered in a name different than that in which the old Security was issued, a new Security or Securities of authorized denominations in principal amount equal to the unexchanged portion of such Security. SECTION 10.03. FRACTIONAL INTERESTS. No fractional shares of Vencor Common Stock or fractional interest in other securities or property shall be delivered upon exchange of Securities. If more than one Security shall be surrendered for exchange at one 51 <PAGE> time by the same Holder, the number of full shares or whole interests in other securities or property which shall be delivered upon exchange shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof to the extent permitted hereby) so surrendered. Instead of any fractional shares of Vencor Common Stock (or other fractional interest) which would otherwise be deliverable upon exchange of any Security or Securities (or specified portions thereof), the Escrow Agent on behalf of the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the Market Price per share of the Vencor Common Stock (or the same fraction of the Market Price of a whole interest in the other securities or property) on the Business Day next preceding the date of exchange. The Escrow Agent shall obtain the funds for payment of such fractional interests by, at the direction of the Company, (i) the sale of shares of Vencor Common Stock held by it, to the extent that after such sale the number of shares of Vencor Common Stock remaining on deposit with the Escrow Agent shall be sufficient to allow the exchange of all outstanding Securities for shares of Vencor Common Stock on the basis of the then applicable Exchange Rate, (ii) the sale of whole interests in the other securities or property held by it, to the extent that after such sale the number of whole interests in the other securities or property remaining on deposit with the Escrow Agent shall be sufficient to allow the exchange of all outstanding Securities on the basis of the then applicable Exchange Rate or (iii) sufficient cash contributions from the Company. The Company agrees to furnish any additional moneys required to permit such payment. SECTION 10.04. ADJUSTMENT OF EXCHANGE RATE. The Exchange Rate shall be subject to adjustment as follows: (a) In the event Vencor shall, (i) pay a dividend on the Vencor Common Stock in Vencor Common Stock, (ii) subdivide outstanding shares of Vencor Common Stock into a greater number of shares of Vencor Common Stock, (iii) combine outstanding shares of Vencor Common Stock into a smaller number of shares of Vencor Common Stock, or (iv) issue, by reclassification of Vencor Common Stock, any shares of its common stock (which in any such case shall apply to the Vencor Common Shares held by the Escrow Agent under the Escrow Agreement), the Exchange Rate in effect immediately prior thereto shall be proportionately adjusted so that the Holder of any Securities thereafter surrendered for exchange shall be entitled (subject to Section 10.13 hereof) to receive the number and kind of shares of Vencor Common Stock (in addition to any cash or other property apportioned thereto) which he would have owned or have been entitled to receive after the happening of any of the events described above had such Securities been exchanged immediately prior to the record date (or if there is no record date, the effective date) of such event. Such adjustments shall be made whenever any of the events listed above shall 52 <PAGE> occur and shall become effective as of immediately after the close of business on the record date in the case of a stock dividend and shall become effective as of immediately after the close of business on the effective date in the case of a subdivision or combination or reclassification. Any Holder surrendering any Securities after such record date or such effective date, as the case may be, shall be entitled to receive shares of Vencor Common Stock at the Exchange Rate as so adjusted pursuant to this Section 10.04(a), in addition to any cash or other property apportioned thereto. (b) Notwithstanding the foregoing provisions, no adjustment in the Exchange Rate shall be required unless such adjustment would require an increase or decrease in such Exchange Rate of more than 1%; PROVIDED that any adjustments which by reason of this paragraph (b) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (c) All calculations under this Section 10.04 shall be made to the nearest one-ten-thousandth (.0001) of a share. (d) Whenever the Exchange Rate is adjusted as herein provided, the Company shall determine the adjusted Exchange Rate in accordance with this Section 10.04 and shall prepare a certificate setting forth such adjusted Exchange Rate and any cash and other property apportioned to the Vencor Common Shares and showing in detail the facts upon which such adjustments are based, and such certificate shall forthwith be filed with the Trustee and the Escrow Agent and a notice stating the Exchange Rate has been adjusted and setting forth the adjusted Exchange Rate and any cash and other property apportioned to the Vencor Common Shares shall as soon as practicable be mailed by or on behalf of the Company to the Holders at their last addresses as they shall appear upon the Security register maintained pursuant to Section 2.05. SECTION 10.05. ESCROW AGREEMENT. (a) Simultaneously with the execution and delivery of this Indenture the Company, NMEPHC and NMEPI are entering into the Escrow Agreement with The Bank of New York, as Escrow Agent, pursuant to which the Vencor Common Shares will be deposited with the Escrow Agent. The Escrow Agent shall be the exchange agent for the exchange of Securities for the Vencor Common Shares (or such other securities or property or cash as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) as the Holders of all outstanding Securities shall from time to time be entitled to receive pursuant to this Article 10 upon exchange thereof. The Company, 53 <PAGE> NMEPHC, NMEPI and its Permitted Transferees (as defined below) may, at any time and from time to time in its sole discretion, sell or transfer all or any part of its right, title and interest in the Vencor Common Shares to one or more wholly owned subsidiary of the Company or one or more partnership all of the general partners and limited partners of which are the Company and/or wholly owned subsidiaries of the Company (any of the foregoing are hereinafter referred to as a "Permitted Transferee"); provided that: (1) such Vencor Common Shares sold or transferred shall remain subject to the terms and conditions of the Escrow Agreement and this Indenture; (2) any such Permitted Transferee must expressly agree in writing to become bound by the terms and conditions of the Escrow Agreement, as such Escrow Agreement, may be amended from time to time, as though such Permitted Transferee were a party thereto; (3) the Company shall notify the Escrow Agent in writing at the time of any such sale or transfer as to the number of shares of Vencor Common Stock so sold or transferred to such Permitted Transferee; and (4) such sale or transfer shall be in compliance with federal and all applicable state and foreign securities laws. Notwithstanding any such sale or transfer, except as otherwise provided in the Escrow Agreement, the Company shall remain liable to perform all of its duties and obligations hereunder and under the Escrow Agreement. (b) The Company, NMEPHC, NMEPI, and any Permitted Transferee, shall each be entitled (based upon their respective ownership of shares of Vencor Common Stock) to all (i) cash dividends paid on the shares of Vencor Common Stock held by the Escrow Agent other than dividends paid pursuant to a plan of liquidation, partial liquidation, recapitalization, restructuring or other extraordinary cash dividends and (ii) interest payments on any debt securities held for exchange by the Escrow Agent which are issued in exchange for or with respect to Vencor Common Stock held by the Escrow Agent, including pursuant to any merger or consolidation of Vencor or in connection with any sale of all or substantially all of the assets of Vencor. The Escrow Agent shall retain and apply as hereinafter provided all other dividends paid on the securities held by the Escrow Agent under the Escrow Agreement. (c) If any distribution of cash, securities, or other property is made with respect to shares of Vencor Common Stock or other property held for exchange by the Escrow Agent under the Escrow Agreement (other than (i) cash dividends payable on the shares of Vencor Common Stock or such other property to which the Company, NMEPHC, NMEPI or any Permitted Transferee is entitled and interest paid on debt securities, as specified in paragraph (b) above, (ii) dividends, subdivisions, combinations and reclassifications for which an adjustment in the Exchange Rate is made pursuant to Section 10.04 and 54 <PAGE> (iii) securities or other property received in a transaction to which Section 10.10 applies) or if transferable subscription rights, options, warrants or other similar rights are granted to the Company, NMEPHC, NMEPI, any Permitted Transferee (with respect to any securities or property held by the Escrow Agent) or the Escrow Agent, as the holder thereof, in respect of the shares of Vencor Common Stock or other property held for exchange by the Escrow Agent, the Company will cause to be deposited with the Escrow Agent any such securities, other property, cash and rights that it, NMEPHC, NMEPI or any Permitted Transferee receives and the Escrow Agent shall, as soon as reasonably practicable after its receipt of any such securities, other property, cash or rights, notify the Company, NMEPHC, NMEPI and any affected Permitted Transferee of such receipt. The Company shall cause the Escrow Agent, to the extent such rights, options, warrants, securities or other property are transferable, to sell all such options, warrants, securities or other property and rights for cash. Any net cash proceeds therefrom shall be apportioned equally among the shares of Vencor Common Stock or such other property for which outstanding Securities are exchangeable as of immediately after the close of business on the record date for the distribution or grant to which this paragraph (c) applies, or if there is no such record date, the effective date of such distribution or grant. Any Holder surrendering any Securities after such record date, or such effective date, as the case may be, and prior to the distribution date shall be entitled to receive, in addition to the shares of Vencor Common Stock or such other property for which such Securities are exchangeable (and any cash or property theretofore apportioned to such shares hereunder), the amount of cash so apportioned to the shares of Vencor Common Stock or such other property. Whenever a transaction occurs to which this paragraph (c) applies, the Company shall determine the Exchange Rate (calculated to the nearest .0001 of a share) and the cash and other property apportioned to the shares of Vencor Common Stock or such other property as adjusted in accordance with this paragraph (c) and shall prepare an Officers' Certificate setting forth the Exchange Rate and the cash and other property apportioned to the Vencor Common Shares or such other property held by the Escrow Agent under the Escrow Agreement as so adjusted and showing in detail the facts upon which such calculation is based, and such Officers' Certificate shall forthwith be filed with the Trustee and Escrow Agent and a notice stating that a transaction to which this paragraph (c) applies has occurred and setting forth the Exchange Rate and the cash and other property apportioned to the shares of Vencor Common Stock or such other property, in accordance with this Section 10.5, shall as soon as practicable be mailed by or on behalf of the Company to the Holders at their last addresses as they shall appear upon the Security register maintained pursuant to Section 2.05. 55 <PAGE> (d) If, at any time any Securities are outstanding, any distribution or grant is made to holders of any shares of Vencor Common Stock or other property held or required to be held by the Escrow Agent under the Escrow Agreement, of any nontransferable subscription rights, options, warrants or other similar nontransferable rights, securities or property, the Company shall elect to do any of the following: (i) to the extent permissible by the terms of said subscription rights, options, warrants or other similar nontransferable rights, securities or property, cause such rights, securities or property to be distributed PRO RATA by the Escrow Agent to the Holders PRO RATA based on the principal amount of the Securities held by such Holders of record of Securities shown on the Security register as of immediately after the close of business on the record date (or if there is no record date, the close of business on the effective date), for such distribution or grant, but subject to the provisions of Section 10.7 hereof, (ii) provide to the Escrow Agent the necessary funds and direct the Escrow Agent to exercise such options, warrants, or rights and to hold the securities or other property received upon such exercise for the benefit of Holders of Securities or (iii) direct the Escrow Agent to retain such options, warrants, or rights and to hold the securities or property for delivery to the Holders of Securities upon the exchange of such Securities. Any options, warrants, rights, securities or property retained pursuant to clause (iii) above and any securities or other property received by the Escrow Agent pursuant to clause (ii) above less any cash, property or securities as determined pursuant to the last three sentences of this paragraph (d) delivered to or sold or segregated for the benefit of the Company, NMEPHC, NMEPI or any Permitted Transferee, shall be apportioned equally among the shares of Vencor Common Stock or such other property for which outstanding Securities are exchangeable as of immediately after the close of business on the record date for the distribution or grant to which this paragraph (d) applies or, if there is no such record date, the effective date of such distribution or grant. Any Holder exchanging any Securities after such record date, or such effective date, as the case may be, shall be entitled to receive the shares of Vencor Common Stock or such other property for which such Securities are exchangeable and the amount of cash, or any such options, warrants, rights, securities or property, so apportioned to such shares of Vencor Common Stock or such other property, but subject to the provisions of the last three sentences of this paragraph and Section 10.7 hereof. Notwithstanding the foregoing, any such options, warrants or rights which may expire prior to the final maturity date of the Securities, may not be retained pursuant to clause (iii) of this paragraph (d) beyond the expiration date thereof, but must be distributed or exercised pursuant to clause (i) or (ii) of this paragraph (d). The Company shall be promptly repaid any amounts supplied by it pursuant to the foregoing clause (ii) of this paragraph (d). If the Company is entitled to any amount because it provided funds to 56 <PAGE> pay for an exercise pursuant to clause (ii) of this paragraph (d), it shall receive such amount in cash held by the Escrow Agent, but if the amount of such cash held by the Escrow Agent shall be less than the amount due the Company, the Escrow Agent shall (i) as soon as reasonably practicable and to the extent legally permissible, sell in accordance with written instructions received from the Company such number of Vencor Common Shares or other property or securities held or required to be held by the Escrow Agent, as may be necessary to realize an amount of proceeds which shall equal the amount of any such insufficiency, or (ii) if in the opinion of the Company such sale is not advisable or legally permissible, segregate for the benefit of the Company or deliver to the Company an amount of property or securities, held or required to be held by the Escrow Agent, having a Market Price, as determined by an Officers' Certificate, equal to the amount of such insufficiency. Following such sale, segregation or delivery, the Vencor Common Shares, cash and other property or securities held by the Escrow Agent shall be proportionately adjusted as of immediately after the close of business on the record date for the distribution or grant to which this paragraph (d) applies or, if there is no record date, the effective date of such distribution or grant. (e) The Company shall be entitled to any net income or gain resulting from investments of cash made by the Escrow Agent pursuant to Section 6 of the Escrow Agreement, in accordance with the provisions thereof, and the Company shall reimburse or cause the reimbursement of the Escrow Agent for any losses realized in respect of such investments. (f) The Company, NMEPHC, NMEPI and any Permitted Transferee shall each have the full and unqualified right and power to exercise any rights to vote, or to give consents to take any other action in respect of, its respective share of the Vencor Common Shares or any other security held in escrow under the Escrow Agreement at any time, and the Escrow Agent shall have no duty to exercise any such rights. (g) The Company, NMEPHC, NMEPI (or any applicable Permitted Transferee) shall be entitled, out of the property held by the Escrow Agent, to such number of shares of Vencor Common Stock and such amount of any cash (investments contemplated by this Section 10.05 being deemed for these purposes to be cash and to be valued at their outstanding principal balance) and other property as shall be in excess of the number of shares of Vencor Common Stock and the amount of cash and other property apportioned thereto, all held by the Escrow Agent, which would be deliverable upon the exchange of all Securities then outstanding, and such excess shall be held by the Escrow Agent for the account of the Company and, subject to the limitations contained in the Escrow Agreement, released to the 57 <PAGE> Company, NMEPHC, NMEPI (or to any applicable Permitted Transferee) upon demand of the Company. With respect to releases of cash, the Escrow Agent shall release cash or such of the investment securities so held as the Company may designate. (h) Upon expiration of the right to surrender Securities for exchange and when all other obligations of the Company, NMEPHC, NMEPI and any Permitted Transferee shall have been satisfied under the Escrow Agreement, any shares of Vencor Common Stock, all cash and investments and other property held by the Escrow Agent under the Escrow Agreement which are not required with respect to Securities previously surrendered for exchange will, subject to the limitations contained in the Escrow Agreement, be delivered by the Escrow Agent to the Company, NMEPHC, NMEPI and any Permitted Transferee based upon their respective shares of the Vencor Common Shares. SECTION 10.06. NOTICE OF CERTAIN EVENTS. In case at any time: (a) Vencor shall declare a dividend (or any other distribution) on Vencor Common Stock that would result in an adjustment to the Exchange Rate; or (b) Vencor shall authorize the granting of subscription rights, options, warrants or other similar rights to holders of Vencor Common Stock; or (c) there shall occur any reclassification of Vencor Common Stock (other than a subdivision or combination of outstanding shares of Vencor Common Stock) or any consolidation or merger to which Vencor is a party and for which approval of any stockholders of Vencor is required, or the sale or transfer of all or substantially all of the assets of Vencor; or (d) there shall occur the voluntary or involuntary dissolution, liquidation or winding up of Vencor; then the Company shall cause to be filed at the office or agency maintained for the purpose of exchange of Securities pursuant to Section 2.03, and shall cause to be mailed to the Holders of Securities at their last addresses as they shall appear upon the Security register, as promptly as practicable after receipt of notice by the Company of any record date or other applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, or grant of rights, or, if a record is not to be taken, the date as of which the holders of Vencor Common Stock of 58 <PAGE> record to be entitled to such dividend, distribution or grant of rights is to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Vencor Common Stock shall be entitled to exchange their shares of Vencor Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. SECTION 10.07. TRANSFER TAXES. The Company will pay any and all documentary, stamp, transfer or similar taxes that may be payable in respect of the transfer and delivery of Vencor Common Shares (or such other securities or property as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) pursuant hereto; provided that the Company shall not be required to pay any such tax which may be payable in respect of any transfer involved in the delivery of shares of Vencor Common Stock (or such other securities or property as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) in a name other than that in which the Securities so exchanged were registered and no such transfer or delivery shall be made unless and until the person requesting such transfer has paid to the Company the amount of any such tax, or has established, to the satisfaction of the Company, that such tax has been paid; and, PROVIDED FURTHER, that the Company shall not be obligated to pay any withholding taxes payable by Holders due to the exchange of any Securities. SECTION 10.08. SHARES FREE AND CLEAR. The Company hereby warrants that, upon exchange of a Security pursuant to this Indenture, the Holder thereof shall receive legal and valid title to the shares of Vencor Common Stock and any cash and other property apportioned thereto for which such Security is at such time exchangeable pursuant to this Indenture free and clear of any and all Liens. Except as provided in Section 10.07, the Company will discharge all Liens and pay all charges with respect to the delivery of Vencor Common Shares (or such other securities or property as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have changed into as provided in this Article 10). SECTION 10.09. CANCELLATION OF SECURITIES. All Securities delivered for exchange shall be delivered by the Escrow Agent to the Trustee for cancellation and the Trustee shall dispose of the same as provided in Section 2.11. 59 <PAGE> SECTION 10.10. CONSOLIDATION, ETC., OF VENCOR. (a) In the case of any consolidation or merger of Vencor with or into any other corporation or of any sale or transfer of all or substantially all of the assets of Vencor or of any voluntary or involuntary dissolution, liquidation or winding up of Vencor, the Company shall execute and deliver to the Trustee a supplemental indenture satisfactory in form to the Trustee, and to the Escrow Agent a supplemental escrow agreement satisfactory in form to the Escrow Agent, providing that the holder of each Security then outstanding shall have the right thereafter to exchange such Security for (i) the kind and amount of securities and other property receivable upon or in connection with such consolidation, merger, sale, transfer, dissolution, liquidation or winding up by a holder of the number of shares of Vencor Common Stock for which such Security was exchangeable immediately prior to such consolidation, merger, sale, transfer, dissolution, liquidation or winding up had such holder of shares of Vencor Common Stock failed to exercise any rights of election as to the kind or amount of securities or other property receivable upon such consolidation, merger, sale, transfer, dissolution, liquidation or winding up, and (ii) the kind and amount of securities (other than Vencor Common Shares) and other property or cash apportioned to the shares of Vencor Common Stock for which such Security was exchangeable immediately prior to such consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 10. (b) The provisions of this Section 10.10 shall similarly apply to any successive consolidation, merger, sale, transfer, dissolution, liquidation or winding up. SECTION 10.11. CERTAIN TENDER OR EXCHANGE OFFERS FOR VENCOR COMMON STOCK. In the event that a tender offer or exchange offer for the Vencor Common Stock (or such other securities as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in this Article 10) is commenced by any person (including the issuer of such security) after the date on which the Securities may be redeemed at the option of the Company pursuant to Section 9.07, the Company has the right to redeem, in each case, in accordance with this Section 10.11 at the optional redemption prices set forth in the form of Security hereinabove recited, together with accrued interest to the date fixed for redemption, all or any part of the Securities so long as (i) the Trustee shall have received notice of such redemption from the Company not later than two days after the later of the date of commencement of such tender or exchange offer or the date on 60 <PAGE> which the Company receives actual notice of the commencement of such tender offer or exchange offer; provided that if the second such day is not a Business Day, the Trustee shall have received such notice not later than the next succeeding Business Day, (ii) any notice of redemption shall be mailed to the Holders of Securities called for redemption not later than ten days after the date of commencement of such tender or exchange offer as determined by Company and (iii) such tender or exchange offer shall not have been terminated by the date that such notice is mailed. If notice of redemption is given in accordance with the preceding sentence, the Company shall thereafter have the right (but not the obligation) to instruct the Escrow Agent to tender, for its own account or for the account of NMEPHC, NMEPI or a Permitted Transferee, Vencor Common Shares (or such other securities, as aforesaid) pursuant to such tender or exchange offer, provided the number of Vencor Common Shares (or such other securities, as aforesaid) so tendered does not include the number of such Vencor Common Shares (or such other securities, as aforesaid) which would be deliverable upon exchange of the aggregate principal amount of the outstanding Securities after giving effect to such redemption in accordance with this Section 10.11. In addition to the information called for by Section 9.03, any notice of redemption given pursuant to this Section 10.11 shall state whether or not the Company has decided by the date of such notice to cause Vencor Common Shares (or such other securities, as aforesaid) held in escrow to be tendered pursuant to such tender or exchange offer and, if tendered, that such Vencor Common Shares (or such other securities, as aforesaid) may be sold, to the extent purchased, to the offeror in accordance with such tender or exchange offer except to the extent that the Holders of Securities called for redemption duly surrender their Securities to the Escrow Agent in exchange for Vencor Common Shares (or such other securities, as aforesaid) by not later than the close of business on the last Business Day preceding the fifteenth day (which date shall be specified) after the date such notice is mailed. The Company shall cause to be withdrawn from the tender or exchange offer, or otherwise to be delivered to the Escrow Agent, a number of Vencor Common Shares (or such other securities, as aforesaid) at least equal to the number of Vencor Common Shares (or such other securities, as aforesaid) deliverable in exchange for Securities which are called for redemption pursuant to this Section 10.11 and are duly surrendered for exchange for Vencor Common Shares (or such other securities, as aforesaid) by not later than the close of business on such last Business Day preceding the fifteenth day in order to permit such Securities so to be exchanged. The proceeds of the sale of Vencor Common Shares (or such other securities, as aforesaid) sold pursuant to the tender or exchange offer and any shares tendered which are returned to the Company or the Escrow Agent following the expiration or termination of such tender or exchange offer, or which are withdrawn, which are no longer deliverable in exchange for Securities called for redemption pursuant to this Section 10.11, shall be the property of the Company, NMEPHC, NMEPI or such Permitted Transferee, as applicable, and not subject to the Escrow Agreement. 61 <PAGE> SECTION 10.12. OBLIGATIONS OF TRUSTEE AND ESCROW AGENT. Neither the Trustee, subject to the provisions of Section 6.01, nor the Escrow Agent, subject to the provisions of the Escrow Agreement, shall at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the Exchange Rate, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed herein, or in any supplemental indenture, in making the same. Neither the Trustee nor the Escrow Agent shall be accountable with respect to the validity or value (or the kind or amount) of any Vencor Common Stock, or of any securities or property, which may at any time be issued or delivered upon the exchange of any Security; and neither the Trustee nor the Escrow Agent makes any representation with respect thereto. Neither the Trustee nor the Escrow Agent shall be responsible for any failure of the Company to transfer or deliver any shares of Vencor Common Stock or stock certificates or other securities or property to the Escrow Agent as provided herein or, subject to the provisions of Section 6.01 and the express obligations assumed under the Escrow Agreement, to comply with any of the covenants of the Company contained in this Article 10. SECTION 10.13. CASH EQUIVALENT. Notwithstanding any other provisions in this Article 10, in lieu of delivering certificates representing shares of Vencor Common Stock or other Exchange Security in exchange for Securities surrendered in accordance with Section 10.02, the Escrow Agent shall, if so directed by the Company, pay to the Holder surrendering such Securities an amount in cash equal to the Market Price of the shares of Vencor Common Stock or other Exchange Security for which such Securities are exchangeable, plus any cash and other property theretofore apportioned to such shares of Vencor Common Stock in accordance with Section 10.05. Prior to or concurrently with so directing the Escrow Agent to make any such cash payment, the Company shall deposit with the Escrow Agent the cash so payable. In the event that the Company elects to direct the Trustee to pay cash upon any exchange in lieu of delivering certificates representing shares of Vencor Common Stock or any other Exchange Security, as the case may be, the Company shall deliver or cause the Escrow Agent to deliver to such Holder written notice of such election not later than the first Business Day after the date of receipt by the Escrow Agent of the notice of exchange delivered by such Holder pursuant to Section 10.02. SECTION 10.14. REGISTRATION OF VENCOR COMMON SHARES. The Company hereby covenants that at any time that a Holder of Securities exchanges such Securities for certificates representing shares of Vencor Common Stock and an effective registration statement of Vencor filed with the Commission (or related qualification under state blue sky or securities 62 <PAGE> law) would be required in order for the Escrow Agent to deliver such shares of Vencor Common Stock in the United States or to a United States Person, the Company will use its reasonable best efforts to ensure that an effective registration statement of Vencor is on file with the Commission covering the delivery of such shares of Vencor Common Stock and any qualification under state blue sky or securities laws required for such delivery is maintained. If such registration statement is not effective or such qualification is not maintained, the Company shall direct the Escrow Agent to pay such Holder cash, in lieu of delivering such shares of Vencor Common Stock in accordance with the provisions of Section 10.13. ARTICLE 11 SUBORDINATION SECTION 11.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder by accepting a Security agrees, that the Indebtedness evidenced by the Security is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior and Senior Subordinated Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or Guaranteed), and that the subordination is for the benefit of the holders of Senior and Senior Subordinated Debt. SECTION 11.02. CERTAIN DEFINITIONS. "Designated Senior and Senior Subordinated Debt" means (i) so long as any Obligations are outstanding under the Credit Facility, such Obligations and (ii) thereafter, any other Senior and Senior Subordinated Debt permitted hereunder the principal amount of which is $100.0 million or more and that has been designated by the Company as "Designated Senior and Senior Subordinated Debt". "Representative" means the indenture trustee or other trustee, agent or representative for any Senior and Senior Subordinated Debt. "Senior and Senior Subordinated Debt" means any Indebtedness of the Company unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Securities and all Obligations with respect to any of the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior and Senior Subordinated Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates or (y) any trade payables . 63 <PAGE> A distribution may consist of cash, securities or other property, by set-off or otherwise. SECTION 11.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, holders of Senior and Senior Subordinated Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior and Senior Subordinated Debt (including interest accruing after the commencement of any such proceeding at the rate specified in the applicable Senior and Senior Subordinated Debt, whether or not allowed or allowable as a claim in such proceeding) before the Holders will be entitled to receive any payment with respect to the Securities and until all Obligations with respect to Senior and Senior Subordinated Debt are paid in full, any distribution to which the Holders would be entitled shall be made to the holders of Senior and Senior Subordinated Debt (except that Holders may receive securities that (i) are subordinated to at least the same extent as the Securities to Senior and Senior Subordinated Debt and any securities issued in exchange for Senior and Senior Subordinated Debt, (ii) are unsecured, (iii) are not Guaranteed by any Subsidiary of the Company (except to the extent the Securities are so Guaranteed), and (iv) have a Weighted Average Life to Maturity and final maturity that are not shorter than the Weighted Average Life to Maturity of the Securities or any securities issued to Holders of Senior and Senior Subordinated Debt under the Credit Facility pursuant to a plan of reorganization or readjustment). SECTION 11.04. DEFAULT ON DESIGNATED SENIOR AND SENIOR SUBORDINATED DEBT. The Company may not make any payment upon or in respect of the Securities (except in securities that are subordinated to at least the same extent as the Securities to Senior and Senior Subordinated Debt and any securities issued in exchange for Senior and Senior Subordinated Debt) if: (i) a default in the payment of the principal of, premium, if any or interest on Designated Senior and Senior Subordinated Debt occurs and is continuing beyond any applicable period of grace in the agreement, indenture or other document governing such Designated Senior and Senior Subordinated Debt; or (ii) any other default occurs and is continuing with respect to Designated Senior and Senior Subordinated Debt that permits holders of the Designated Senior and Senior Subordinated Debt as to which such default relates to accelerate its maturity and the Trustee receives a 64 <PAGE> notice of such default (a "Payment Blockage Notice"), for so long as any Obligations are outstanding under the Credit Facility, from the Representative thereunder and, thereafter, from the holders or Representative of any Designated Senior and Senior Subordinated Debt. No new period of payment blockage may be commenced within 360 days after the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent notice. The Company may and shall resume payments on the Securities: (1) in the case of a payment default, upon the date which the default is cured or waived, and (2) in the case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior and Senior Subordinated Debt has been accelerated. SECTION 11.05. ACCELERATION OF SECURITIES. If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior and Senior Subordinated Debt of the acceleration. SECTION 11.06. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Securities at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 11.04 hereof, such payment shall be held by the Trustee or such Securityholder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior and Senior Subordinated Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which such Senior and Senior Subordinated Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior and Senior Subordinated Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior and Senior Subordinated Debt. With respect to the holders of Senior and Senior Subordinated Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 11, and no implied 65 <PAGE> covenants or obligations with respect to the holders of Senior and Senior Subordinated Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior and Senior Subordinated Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior and Senior Subordinated Debt shall be entitled by virtue of this Article 11, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 11.07. NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Securities to violate this Article, but failure to give such notice shall not affect the subordination of the Securities to the Senior and Senior Subordinated Debt as provided in this Article. SECTION 11.08. SUBROGATION. After all Senior and Senior Subordinated Debt is paid in full and until the Securities are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Securities) to the rights of holders of Senior and Senior Subordinated Debt to receive distributions applicable to Senior and Senior Subordinated Debt to the extent that distributions otherwise payable to the holders have been applied to the payment of Senior and Senior Subordinated Debt. A distribution made under this Article to holders of Senior and Senior Subordinated Debt that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Securities. SECTION 11.09. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Senior and Senior Subordinated Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior and Senior Subordinated Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the 66 <PAGE> rights of holders and owners of Senior and Senior Subordinated Debt to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default or Event of Default. SECTION 11.10. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior and Senior Subordinated Debt to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. SECTION 11.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior and Senior Subordinated Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 11, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior and Senior Subordinated Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 11. SECTION 11.12. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 11 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Securities, unless the Trustee shall have received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Securities to violate this Article 11. Only the Company or a Representative may give the notice. Nothing in this Article 11 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 6.07 hereof. 67 <PAGE> The Trustee in its individual or any other capacity may hold Senior and Senior Subordinated Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 11.13. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a Security by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 11, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. SECTION 11.14. AMENDMENTS. The provisions of this Article 11 shall not be amended or modified without the written consent of the holders of all Senior and Senior Subordinated Debt. 68 <PAGE> SIGNATURES Dated as of January 10, 1996 TENET HEALTHCARE CORPORATION By: /s/ Raymond L. Mathiasen ---------------------------------- Name: Raymond L. Mathiasen Title: Senior Vice President Dated as of January 10, 1996 THE BANK OF NEW YORK, as Trustee By: /s/ Vivian Georges ---------------------------------- Name: Vivian Georges Title: Bank of New York 69 <PAGE> 6% Exchangeable Subordinated Note due December 1, 2005 CUSIP No. 88033G-AD2 $320,000,000 TENET HEALTHCARE CORPORATION promises to pay to CEDE & CO. or its registered assigns, the principal sum of THREE HUNDRED AND TWENTY MILLION Dollars on December 1, 2005. Interest Payment Dates: June 1 and December 1, commencing June 1, 1996 Record Dates: May 15 and November 15 (whether or not a Business Day). TENET HEALTHCARE CORPORATION By: -------------------------- Dated: January 10, 1996 (SEAL) Trustee's Certificate of Authentication: Dated: January 10, 1996 This is one of the Securities referred to in the within-mentioned Indenture: The Bank of New York, as Trustee By: -------------------------- Authorized Signatory A-1 <PAGE> 6% EXCHANGEABLE SUBORDINATED NOTE due December 1, 2005 Capitalized terms used herein have the meanings assigned to them in the Indenture (as defined below) unless otherwise indicated. 1. INTEREST. Tenet Healthcare Corporation, a Nevada corporation (the "COMPANY"), promises to pay interest on the principal amount of this Security at the rate and in the manner specified below. The Company shall pay interest in cash on the principal amount of this Security at the rate per annum of 6%. The Company shall pay interest semiannually in arrears on June 1 and December 1 of each year, commencing June 1, 1996 to Holders of record on the immediately preceding May 15 and November 15, respectively, or if any such date of payment is not a Business Day on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"). Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of the Securities. To the extent lawful, the Company shall pay interest on overdue principal at the rate of 1% per annum in excess of the interest rate then applicable to the Securities; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. 2. METHOD OF PAYMENT. The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the record date next preceding the Interest Payment Date, even if such Securities are cancelled after such record date and on or before such Interest Payment Date. The Holder hereof must surrender this Security to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Principal, premium, if any, and interest shall be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest may be made by check mailed to the Holder's registered address. Notwithstanding the foregoing, all payments with respect to Securities the Holders of which have given wire transfer instructions, on or before the relevant record date, to the Paying Agent shall be made by wire transfer of immediately available funds to the accounts specified by such Holders. 3. PAYING AGENT AND REGISTRAR. Initially, the Trustee shall act as Paying Agent and Registrar. The Company may change any Paying Agent A-2 <PAGE> or Registrar or co-registrar without prior notice to any Holder. The Company and any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Securities under an Indenture, dated as of January 10, 1996 (the "INDENTURE"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA") as in effect on the date of the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and such act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Securities. The Securities are unsecured general obligations of the Company. The Securities are limited to $320,000,000 in aggregate principal amount. 5. OPTIONAL REDEMPTION. On or after January 15, 1999, the Company may redeem all or any portion of the Securities at a redemption price (expressed as a percentage of the principal amount thereof), as set forth in the immediately succeeding paragraph, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of the Holders of record on a Record Date to receive interest due on an Interest Payment Date that is on or prior to such Redemption Date). The redemption price as a percentage of the principal amount shall be as follows, if the Securities are redeemed during the following periods: PERIOD PERCENTAGE - ------ ---------- January 15, 1999 through May 31, 1999....................... 103.0% June 1, 1999 through November 30, 1999...................... 102.5% December 1, 1999 through May 31, 2000 ...................... 102.0% June 1, 2000 through November 30, 2000 ..................... 101.5% December 1, 2000 through May 31, 2001 ...................... 101.0% June 1, 2001 through November 30, 2001 ..................... 100.5% December 1, 2001 or thereafter ............................. 100.0% 6. MANDATORY REDEMPTION. Subject to the Company's obligation to make an offer to repurchase Securities under certain circumstances pursuant to Section 3.07 of the Indenture (as described in paragraph 6 below), the Company shall have no mandatory redemption or sinking fund obligations with respect to the Securities. 7. REPURCHASE AT OPTION OF HOLDER. If there is a Change of Control Triggering Event, the Company shall offer to repurchase on the A-3 <PAGE> Change of Control Payment Date all outstanding Securities at 100% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the Change of Control Payment Date. Holders that are subject to an offer to purchase shall receive a Change of Control Offer from the Company prior to any related Change of Control Payment Date and may elect to have such Securities purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. 8. SUBORDINATION. The Securities are subordinated to Senior and Subordinated Debt (as defined in the Indenture), which includes any Indebtedness of the Company that is not expressly pari passu with or subordinated to the Securities and all Obligations (as defined in the Indenture) of the Company with respect thereto. To the extent provided in the Indenture, Senior and Subordinated Debt must be paid, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of Senior and Subordinated Debt, before the Securities may be paid. The Company agrees, and each Holder by accepting a Security consents and agrees, to the subordination provided in the Indenture and authorizes the Trustee to give it effect. 9. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at its registered address. Securities may be redeemed in part but only in whole multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed. On and after the redemption date, interest ceases to accrue on Securities or portions of them called for redemption. 10. EXCHANGE RIGHTS. Subject to the provisions of the Indenture, the holder of this Security has the right, at his option, at any time or from time to time on or after November 6, 1997 until and including, but not after the close of business on, the date of final maturity of this Security (except that, in case this Security or a portion hereof shall be called for redemption and the Company shall not thereafter default in making due provision for the payment of the redemption price, such right shall terminate with respect to this Security or such portion hereof at the close of business on the last business day preceding the date fixed for redemption or, in case this Security or a portion hereof shall be called for redemption in accordance with Section 10.11 of the Indenture and the Company shall not thereafter default in making due provision for the payment of the redemption price, such right shall terminate with respect to this Security or such portion hereof at the close of business on the last business day preceding the fifteenth day after the mailing of the notice of redemption), to exchange the principal of this Security, or any portion thereof which is $1,000 or a multiple of $1,000, into fully paid and non-assessable shares of Vencor Common Stock, as said shares shall be constituted at the date of exchange (or such other securities or property or cash as shall be added to such Vencor Common Shares or as such Vencor Common Shares shall have been changed into as provided in the Indenture), at the A-4 <PAGE> Exchange Rate of 25.9403 shares of Vencor Common Stock (or such other securities, property or cash) for each $1,000 principal amount of the Securities (the "Exchange Rate") or at the adjusted Exchange Rate in effect at the date of exchange if an adjustment has been made, determined as provided in the Indenture, upon surrender of this Security to the Company at the office or agency of the Company maintained for the purpose in the Borough of Manhattan, The City of New York, together with a fully executed notice substantially in the form entitled "Exchange Notice" appearing below that the holder elects so to exchange this Security (or any portion hereof which is an integral multiple of $1,000); provided that the Company may, in lieu of delivering shares of Vencor Common Stock in exchange for this Security, elect to pay the holder hereof an amount in cash equal to the Market Price (as of the date of receipt at such office or agency of such notice of exchange) as defined in the Indenture of such shares of Vencor Common Stock into which this Security (or any portion hereof which is an integral multiple of $1,000 which the holder elects to exchange) is exchangeable, plus any securities, property or cash theretofore apportioned to such shares of Vencor Common Stock, subject to certain conditions as more fully described in the Indenture. Except as expressly provided in the Indenture, no payment or adjustment shall be made on account of interest accrued on this Security (or portion thereof) so exchanged or on account of any dividend or distribution on any such shares of common stock of Vencor Power Company issued upon exchange. If so required by the Company or the Trustee, this Security, upon surrender for exchange as aforesaid, shall be duly endorsed by, or be accompanied by instruments of transfer, in form satisfactory to the Company, duly executed by, the holder or by his duly authorized attorney. The Exchange Rate from time to time in effect is subject to adjustment as provided in the Indenture. No fractional interest in Vencor Common Shares (or other securities) will be issued on exchange, but an adjustment in cash will be made for any fractional interest as provided in the Indenture. 11. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities are in registered form without coupons, and in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Securities between a record date and the corresponding Interest Payment Date. 12. PERSONS DEEMED OWNERS. Prior to due presentment to the Trustee for registration of the transfer of this Security, the Trustee, any Agent and the Company may deem and treat the Person in whose name this Security is registered as its absolute owner for the purpose of receiving payment of principal of, premium, if any, and interest on this Security and for all other purposes whatsoever, whether or not this Security is overdue, and neither the A-5 <PAGE> Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered Holder of a Security shall be treated as its owner for all purposes. 13. AMENDMENT, SUPPLEMENT AND WAIVERS. Except as provided in the next succeeding paragraphs, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange offer for Securities) and any existing default or compliance with any provision of the Indenture or the Securities may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities (including consents obtained in connection with a tender offer or exchange offer for Securities). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Security held by a non-consenting Holder of Securities): (i) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Security, (iii) reduce the rate of or change the time for payment of interest on any Security, (iv) make any change regarding the exchange rights set forth in Article 10 of the Indenture other than to increase the Exchange Rate, (v) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Securities, (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount thereof and a waiver of the payment default that resulted from such acceleration), (vi) make any Security payable in money other than that stated in the Securities, (vii) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Securities to receive payments of principal of or premium, if any, or interest on the Securities or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Securities, the Company and the Trustee may amend or supplement the Indenture or the Securities to cure any ambiguity, defect or inconsistency, to provide for uncertificated Securities in addition to or in place of certificated Securities, to provide for the assumption of the Company's obligations to Holders of the Securities in the case of a merger, consolidation or sale of assets, to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with requirements of the Securities and Exchange Commission (the "COMMISSION") in order to effect or maintain the qualification of the Indenture under the TIA. 14. DEFAULTS AND REMEDIES. Events of Default under the Indenture include: (i) a default for 30 days in the payment when due of A-6 <PAGE> interest on the Securities; (ii) a default in payment when due of the principal of or premium, if any, on the Securities, at maturity or otherwise; (iii) a failure by the Company to comply with the provisions described under the covenant "Change of Control;" (iv) a failure by the Company for 60 days after notice to comply with any of its other agreements in the Indenture, the Securities or the Escrow Agreement; (v) any default that occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Significant Subsidiaries (or the payment of which is Guaranteed by the Company or any of its Significant Subsidiaries) whether such Indebtedness or Guarantee exists on the date of the Indenture, or is created after the date of the Indenture, which default (a) constitutes a Payment Default or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or that has been so accelerated, aggregates $25.0 million or more; (vi) failure by the Company or any of its Significant Subsidiaries to pay a final judgment or final judgments aggregating in excess of $25.0 million entered by a court or courts or competent jurisdiction against the Company or any of its Significant Subsidiaries if such final judgment or judgments remain unpaid or undischarged for a period (during which execution shall not be effectively stayed) of 60 days after their entry; (vii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries; and (viii) a failure by the Company to make any exchange of Vencor Common Stock for any Security in accordance with the terms of the Indenture. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Securities by written notice to the Company and the Trustee, may declare all the Securities to be due and payable immediately (plus, in the case of an Event of Default that is the result of willful actions (or inactions) by or on behalf of the Company intended to avoid prohibitions on redemptions of the Securities contained in the Indenture or the Securities, an amount of premium applicable pursuant to the Indenture). Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries, all outstanding Securities shall become due and payable without further action or notice. Holders of the Securities may not enforce the Indenture or the Securities except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Securities notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in such Holders' interest. The Holders of not less than a majority in aggregate principal amount of the Securities then outstanding by written notice to the Trustee may A-7 <PAGE> on behalf of the Holders of all of the Securities waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest or premium on, or the principal of, the Securities. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. The above description of Events of Default and remedies is qualified by reference, and subject in its entirety, to the more complete description thereof contained in the Indenture. 15. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Subsidiaries to enter into certain mergers and consolidations. 16. TRUSTEE DEALINGS WITH COMPANY. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee. 17. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND Shareholders. No director, officer, employee, incorporator or shareholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 18. AUTHENTICATION. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 19. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, A-8 <PAGE> the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Request may be made to: Tenet Healthcare Corporation 2700 Colorado Avenue Santa Monica, California 90404 Attention: Treasurer A-9 <PAGE> ASSIGNMENT FORM To assign this Security, fill in the form below: For value received (i) or (we) hereby sell, assign and transfer this Security to - ------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and do hereby irrevocably constitute and appoint _____________________________ Attorney to transfer this Security on the books of the Company with full power of substitution in the premises. - ------------------------------------------------------------------------------- Date: ----------------- Your Signature: ------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee.* __________ *Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-10 <PAGE> OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Security purchased by the Company pursuant to Section 3.07 of the Indenture, check the following box: / / Section 3.07 (Change of Control) If you want to have only part of the Security purchased by the Company pursuant to Section 3.07 of the Indenture, state the amount you elect to have purchased: $ ------------------- Date: --------------- Your Signature: ------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee.* __________ *Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-11 <PAGE> [FORM OF EXCHANGE NOTICE] To: TENET HEALTHCARE CORPORATION The undersigned registered owner of this Security hereby: (i) irrevocably exercises the option to exchange this Security, or the portion hereof below designated, for shares of common stock ($.25 par value per share) of Vencor, Inc. or other securities, other property or cash in accordance with the terms of the Indenture referred to in this Security and (ii) directs that such shares, other securities, other property or cash deliverable upon the exchange, together with any check in payment for fractional shares, and any Security representing any unexchanged principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or other securities are to be delivered registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Principal Amount to be Exchanged: (if less than all) $ -------------------------------------- Dated ------------------- -------------------------------------- Signature Notice: The signature to this Exchange Notice must correspond with the name as it appears upon the face of the written Security in every particular, without alteration, or enlargement or any change whatsoever. Fill in for registration of shares if to be delivered, and of Securities if to be issued, otherwise than to and in the name of the registered holder. ---------------------------------- Social Security or Other Taxpayer Identifying Number - ------------------------------ (Name) - ------------------------------ (Street Address) - ------------------------------ (City, State and Zip Code) (Please print name and address) A-12 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.2 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 4.2 <TEXT> <PAGE> ESCROW AGREEMENT ESCROW AGREEMENT dated as of January 10, 1996 among Tenet Healthcare Corporation, a Nevada corporation (the "Company"), NME Properties, Inc., a Delaware corporation ("NMEPI"), NME Property Holding Co., Inc., a Delaware corporation ("NMEPHC") and The Bank of New York, as Escrow Agent (the "Escrow Agent"). WHEREAS the Company has executed and delivered an Indenture (the "Indenture") dated as of January 10, 1996, to The Bank of New York, trustee (such trustee or such trustee's successor as such, the "Trustee"); WHEREAS under and pursuant to the Indenture the Company may issue up to $320,000,000 principal amount of its 6% Exchangeable Subordinated Notes Due 2005 (the "Notes"); WHEREAS, pursuant and subject to the terms of the Notes and the Indenture, the Notes are exchangeable at the option of the holder thereof for shares of common stock, $.25 par value, of Vencor, Inc. ("Vencor Common Stock") (or such other securities, property or cash as may be deliverable upon exchange pursuant to the Indenture) at any time or from time to time on or after November 6, 1997, and prior to maturity of the Notes, unless previously redeemed, at the exchange rate (the "Exchange Rate") of 25.9403 shares of Vencor Common Stock per $1,000 principal amount of Notes, subject to adjustment as provided in the Indenture and subject to the Company's right to pay cash equal to the Market Price (as defined in the Indenture) of the shares of Vencor Common Stock for which such Notes are exchangeable in lieu of delivery of such shares. The Notes will be exchangeable prior to November 6, 1997 only in the event of the consummation of a merger, consolidation or liquidation of Vencor, Inc. pursuant to which all shares of Vencor Common Stock held by the Escrow Agent are converted into or exchanged for cash or other securities registered under the Securities Act of 1933 as amended; and WHEREAS, pursuant to the Indenture the Company is obligated to cause to be deposited with the Escrow Agent certificates representing up to 8,301,067 shares of Vencor Common Stock (the "Vencor Common Shares"); NOW, THEREFORE, in consideration of the mutual covenants herein contained and in order to set forth the terms upon which the Vencor Common Shares deposited with the Escrow Agent for delivery upon exchange of the Notes and all other property held by the Escrow Agent hereunder shall be held and dealt with by the Escrow Agent and its successors as such, the Company, NMEPI, NMEPHC and the Escrow Agent hereby agree as follows: <PAGE> SECTION 1(a). Deposit The Company, simultaneously with the execution and delivery of this Agreement, is causing NMEPI and NMEPHC to deliver to the Escrow Agent, irrevocably except as provided in Section 7 hereof, to be held by the Escrow Agent hereunder a certificate or certificates, together with assignments in blank, representing 8,301,067 shares of Vencor Common Stock. The Company represents and warrants that NMEPI and NMEPHC have good and lawful title to such shares, that such shares are fully paid and non-assessable, and that such shares are delivered free and clear of any liens, claims, charges and encumbrances. The Escrow Agent hereby acknowledges receipt of such certificate or certificates for 8,301,067 shares of Vencor Common Stock. The Company, NMEPI and NMEPHC and any Permitted Transferee (as defined in Section 1(b)) and the Escrow Agent recognize that the holders of the Notes have an interest in the powers conferred on the Escrow Agent under this Agreement, and, except as provided in Section 8 hereof, such powers may not be revoked or modified without the consent of the holders of at least two-thirds in principal amount of the Notes at the time outstanding; PROVIDED that no revocation or modification shall change the right to exchange any Notes for Vencor Common Shares and other Escrowed Property (as defined below) at the Exchange Rate and upon the terms set forth in Article 10 of the Indenture or reduce the aforesaid percentage of Notes the holders of which are required to consent to any revocation or modification, without the consent of all the holders of all Notes then outstanding. The Vencor Common Shares received by the Escrow Agent together with such additional shares of Vencor Common Stock and such other securities, cash and other property as may be received and retained by the Escrow Agent in accordance with this Agreement, are herein sometimes referred to as the "Escrowed Property". Subject to the provisions of Section 9(c) hereof, the Escrow Agent shall cause any cash dividends on Escrowed Property which the Company, NMEPI, NMEPHC or any Permitted Transferee is entitled to receive under Section 10.05 of the Indenture to be paid to the Company NMEPI, NMEPHC or such Permitted Transferee, as the case may be. SECTION 1(b). Sale and Transfer Each of the Company, NMEPI and NMEPHC may at any time and from time to time in its sole discretion, sell or transfer all or any part of its right, title and interest in the Vencor Common Shares to any wholly-owned subsidiary of the Company or any partnership all of the general partners and limited partners 2 <PAGE> of which are wholly-owned subsidiaries of the Company (any of the foregoing are hereinafter referred to as a "Permitted Transferee"); PROVIDED that (i) such Vencor Common Shares so sold or transferred shall remain subject to the terms and conditions of this Agreement and the Indenture; (2) any such Permitted Transferee must expressly agree in writing to become bound by the terms and conditions of this Agreement as such Agreement may be amended from time to time as though such Permitted Transferee were a party hereto; (3) the Company shall notify the Escrow Agent in writing at the time of any such sale or transfer as to the number of Vencor Common Shares so transferred to such Permitted Transferee; and (4) such sale or transfer shall be in compliance with federal and all applicable state and foreign securities laws. Notwithstanding any such sale or transfer, except as otherwise provided herein, the Company shall remain liable to perform all of its duties and obligations hereunder. SECTION 2. Covenant by Escrow Agent The Escrow Agent shall hold the Vencor Common Shares and all other Escrowed Property received by it pursuant to this Agreement for the purposes and upon the terms and conditions set forth in the Indenture and this Agreement. SECTION 3. Notification of Adjustment of Exchange Rate; Exchange of Notes The Company will notify the Escrow Agent in writing forthwith upon any adjustment of the Exchange Rate, and will, upon request, notify the Escrow Agent in writing of the Market Price of the Vencor Common Shares (or per unit of any other property which is part of the Escrowed Property) as of any relevant date for the purpose of computing cash adjustments in respect of fractional interests. The Escrow Agent shall be under no duty or responsibility with respect to any such notice except to exhibit such notice from time to time to any holder of Notes requesting inspection thereof. Upon surrender to the Escrow Agent of any Note (or a principal portion thereof which is an integral multiple of $1,000) for exchange in accordance with the terms thereof and of the Indenture, the Escrow Agent shall promptly (i) cause to be delivered, to or on the order of the person for whose account such Note (or portion) was so surrendered for exchange, a certificate or certificates representing the number of full shares of Vencor Common Shares or other securities, together with payment of any cash adjustment in respect of any fractional interest in shares or other securities, and such additional cash or other property, which the holder or holders of such Note (or portion thereof) shall be entitled to receive in accordance with 3 <PAGE> the terms hereof and thereof, (ii) deliver to the Trustee the Note so exchanged, and (iii) if only a portion of said Note is exchanged, obtain from the Trustee and deliver to or on the order of the person for whose account the Note was surrendered for exchange a new Note or Notes for the principal amount thereof not exchanged; PROVIDED that if the Company elects to make a cash payment in lieu of exchange of Vencor Common Shares pursuant to Section 10.13 of the Indenture and if sufficient funds are first deposited with the Escrow Agent by the Company, the Escrow Agent shall pay to the holder of the Notes so surrendered an amount in cash equal to the value of Vencor Common Shares for which such Notes are exchangeable (based on the Market Price on the date of receipt by the Escrow Agent of the notice of exchange delivered by the holder of Notes pursuant to Section 10.02 of the Indenture). In any case in which Section 10.04 of the Indenture shall require that an adjustment of the Exchange Rate be made immediately following a record date, the Escrow Agent may defer delivering to the holder of any Note surrendered for exchange after such record date the additional securities and other property deliverable upon such exchange as a result of such adjustment until such additional securities and other property have been delivered to the Escrow Agent; and, in lieu of the additional securities and other property the delivery of which is so deferred, the Escrow Agent shall deliver to such holder appropriate evidence (determined in the sole discretion of the Company) of the right to receive such additional securities and other property. SECTION 4. Division of Certificates; Payment of Taxes, Fees and Charges, and Cash Adjustments; Payment of Fractional Interest The Company, NMEPI, NMEPHC and any Permitted Transferee shall make, execute and deliver or cause to be made, executed and delivered any and all such instruments and assurances, and take all such further action, as may be reasonably necessary or proper to carry out the intention of or to facilitate the performance of the terms of this Agreement or to secure the rights and remedies hereunder of the holders of the Notes. The Company shall pay (i) any and all documentary, stamp, transfer or similar taxes that may be payable in respect of the deposit of the Vencor Common Shares, and the transfer or delivery of the Escrowed Property to holders of Notes upon exchange thereof, PROVIDED that the Company shall not be obligated to pay any withholding taxes payable by holders of such Notes due to the exchange thereof; (ii) any income or other taxes incurred by the Escrow Agent in its capacity as such for any reason (except for payment or accrual of its own fees); (iii) all reasonable, out-of-pocket fees or charges of the Escrow Agent in connection with or arising out of 4 <PAGE> this Agreement, the Indenture or any exchange of Notes in accordance with the terms hereof and thereof; (iv) all cash adjustments in respect of fractions of shares of Vencor Common Stock or other fractional units of property which the holders of Notes may be entitled to receive upon exchange thereof (after giving effect to moneys received by the Escrow Agent from the sale of Escrowed Property for the purpose of paying for such fractional interests); and (v) cash in an amount equal to any losses on investments made pursuant to Section 6 of this Agreement to the extent necessary to maintain on deposit with the Escrow Agent funds (investment securities held pursuant to Section 6 being valued as funds at the outstanding principal balance thereof) equal from time to time to the aggregate amount of cash apportioned to all Vencor Common Shares at each such time deliverable upon exchange of all Notes then outstanding. Notwithstanding the foregoing, the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the delivery, upon an exchange of Notes, of Escrowed Property in a name other than that in which the Notes so exchanged were registered, and no such transfer or delivery shall be made unless and until the person requesting such transfer has paid to the Company or the Escrow Agent the amount of any such tax or has established, to the satisfaction of the Company and the Escrow Agent, that such tax has been paid. The Escrow Agent shall be authorized to, and, at the Company's direction, shall, sell any Vencor Common Shares or other securities which are part of the Escrowed Property held by it in order to obtain the funds necessary, or anticipated by the Company to be necessary, for payment of fractional interests with respect to Notes delivered to it for exchange; PROVIDED that after any such sale, the number of shares of Vencor Common Shares and any such other securities remaining on deposit with the Escrow Agent shall be sufficient to allow the exchange of all the then outstanding Notes for shares of Vencor Common Stock and other Escrowed Property on the basis of the then applicable Exchange Rate. If a sale of Vencor Common Shares to make cash payments for fractional shares is not permitted, then the Company shall furnish additional moneys to permit such payment in accordance with Section 10.03 of the Indenture. SECTION 5. Voting of Escrowed Property The Company, NMEPI, NMEPHC and any Permitted Transferee shall each have the full and unqualified right and power to exercise any right to vote, or give consents or take other action in respect of, its respective share of the Vencor Common Shares or other securities which are part of the Escrowed Property, and the Escrow Agent shall have no such rights. 5 <PAGE> The Escrow Agent or its nominee shall from time to time deliver, or cause to be delivered, to the Company, NMEPI, NMEPHC or any Permitted Transferee, as the case may be, such proxies, duly executed and in the form required by applicable law, as may be necessary or appropriate to permit the Company, NMEPI, NMEPHC or such Permitted Transferee, as the case may be, to vote on each matter submitted to the holders of shares of Vencor Common Stock or other securities which are part of the Escrowed Property. SECTION 6. Investment of Cash All cash received and retained by the Escrow Agent under Section 10.05 of the Indenture shall, at the specific written direction of the Company, be invested in securities issued or guaranteed by the United States of America or any agency or instrumentality thereof, PROVIDED that such obligations shall mature by their terms within 12 months following their purchase. SECTION 7. Distribution of Escrowed Property to Company or Permitted Transferee Subject to the provisions of Section 9(c) hereof, the Escrow Agent shall cause any Escrowed Property which the Company, NMEPI, NMEPHC or any Permitted Transferee is entitled to receive under Section 10.05 of the Indenture to be delivered to the Company, NMEPI, NMEPHC or such Permitted Transferee. SECTION 8. Amendment or Modification of Agreement The Company, NMEPI, NMEPHC and the Escrow Agent may by mutual accord cure any ambiguity or correct or supplement any provision contained herein which may be inconsistent with any other provision contained herein or with any provision of the Indenture. Otherwise, except with respect to an amendment which is for one or more of the following purposes: (1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein contained; (2) to add to the covenants of the Company, for the benefit of the holders of the Notes, or to surrender any right or power herein conferred upon the Company; (3) to comply with the requirements of Section 10.10 of the Indenture; 6 <PAGE> (4) to make any other provisions with respect to matters or questions arising under this Agreement or the Indenture which shall not be inconsistent with the provisions of this Agreement or the Indenture, provided such action shall not adversely affect the interest of the holders of the Notes; or (5) to evidence the acceptance by a Permitted Transferee of its obligations hereunder; this Agreement may not be amended or modified at any time without the written consent of the Escrow Agent, the written consent of the Company and the consent of the holders of not less than a majority of the outstanding aggregate principal amount of the Notes. No amendment or modification shall change the right to exchange any Notes for Vencor Common Shares and other Escrowed Property at the Exchange Rate and upon the terms set forth in Article 10 of the Indenture or reduce the aforesaid percentage of Notes the holders of which are required to consent to any amendment or modification, without the consent of all the holders of all Notes then outstanding. SECTION 9. Duties and Obligations of Escrow Agent (a) The Escrow Agent shall not at any time be under any duty or responsibility to any holder of Notes to determine whether any facts exist which may require any adjustments of the Exchange Rate, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment; and the Escrow Agent may conclusively rely as to all such matters upon the notice furnished by the Company pursuant to this Agreement, including without limitation, those pursuant to Section 3 hereof. The Escrow Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any Vencor Common Shares, or of any other securities or other property, which may at any time be delivered upon the exchange of any Note; and the Escrow Agent makes no representation with respect thereto. The Escrow Agent shall not be responsible for any failure of the Company or any Permitted Transferee to comply with any of its covenants contained in this Agreement or in the Indenture. (b) The Escrow Agent, either directly or through its nominee, shall be under no duty or obligation to enforce, through the institution of legal proceedings or otherwise, any of its rights as the record owner (either directly or through its nominee) of the Vencor Common Shares or any other Escrowed Property either to secure possession of any cash or other securities or other property or otherwise to assert any rights or claims in the interest of any holder of Notes, nor shall it be required to make independent inquiry as to any matter but may rely upon such written notice pertaining to the Vencor Common 7 <PAGE> Shares or other securities or other property as it shall receive from the Company, the Trustee or from the issuer of any of the securities held by it hereunder; PROVIDED that if the Escrow Agent shall be furnished with indemnity, in manner and form satisfactory to it, against losses or expenses which may be sustained or incurred by it in taking such action, the Escrow Agent shall take such action as may be specifically directed in writing by the Company, but the Escrow Agent shall have the right to decline to follow any such direction if it shall be advised by counsel that the actions so directed may not be lawfully taken or if the Escrow Agent shall in good faith determine that such action so directed would be unjustly prejudicial to the holders of Notes. (c) The Escrow Agent shall be obligated to perform only such duties as are herein specifically set forth. The Escrow Agent shall not be liable for any action taken, omitted or suffered by it in good faith and believed by it to be authorized or within the rights or powers conferred upon it by this Agreement, and may conclusively rely and shall be protected in acting or refraining from acting in reliance upon advice of counsel (which need not constitute an Opinion of Counsel) or upon any certificate, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties; PROVIDED that the Escrow Agent shall not make any payment or deliver any Escrowed Property to the Company, NMEPI, NMEPHC or any Permitted Transferee until delivery to the Escrow Agent of an Officers' Certificate as to compliance with the conditions precedent provided for in Section 10.05(h) of the Indenture. The Escrow Agent shall not be required to take any action hereunder which, in the opinion of its counsel, will be contrary to law. In the event the Escrow Agent is instructed by the Company to sell any securities (including the Vencor Common Shares) that constitute Escrowed Property, the Escrow Agent shall be entitled to an opinion of counsel (which counsel is satisfactory to the Escrow Agent), to the effect that the proposed sale of securities will not violate any applicable United States federal or state securities laws. SECTION 10. Sales and Tenders of Escrowed Property In the event that Article 10 of the Indenture requires or permits the Company to direct the Escrow Agent to sell or tender its respective share of Escrowed Property, the Escrow Agent shall sell or tender such Escrowed Property in such manner as shall be set forth in written instructions concerning any such sale or tender which are given by the Company by means of an Officers' Certificate and shall remit the proceeds thereof as provided in such Officers' Certificate. The Escrow Agent shall 8 <PAGE> have no liability whatsoever for any loss, tax, fee or other charge in connection with such sale or tender. SECTION 11. Release or Sale of Excess Escrowed Property The Company, NMEPI, NMEPHC and any applicable Permitted Transferee, upon demand by the Company, shall be entitled at any time and from time to time, out of the Escrowed Property held by the Escrow Agent, to such kind and amount of Escrowed Property as shall be in excess of the kind and amount of Escrowed Property which would be required for the exchange of all Notes then outstanding for the Escrowed Property on the basis of the then applicable Exchange Rate and other terms and provisions of the Indenture and this Agreement, and such excess shall, upon delivery of the certificate provided for in the next following sentence, be released to the Company, NMEPI, NMEPHC or such Permitted Transferee or sold for the account of the Company, NMEPI, NMEPHC or such Permitted Transferee upon demand by the Company. Upon demanding any release or sale of Escrowed Property, the Company shall deliver to the Escrow Agent an Officers' Certificate that shall (i) state the principal amount of Notes then outstanding and the kind and amount of Escrowed Property required for delivery to the Holders thereof upon exchange; (ii) state that the release or sale of such kind and amount of Escrowed Property as so requested is permitted by the provisions of this Section and the Indenture, (iii) state that the Escrowed Property to be released or sold would not be deliverable upon exchange of all Notes then outstanding, and (iv) if the Company shall have directed the Escrow Agent to sell any of such excess Escrowed Property, state that such sale is a bona fide sale to a Person (as hereinafter defined) who is not an affiliate of the Company. Upon receipt of such Certificate from the Company, the Escrow Agent shall, as promptly as possible, release to the Company or such Permitted Transferee or sell, as the case may be, the kind and amount of Escrowed Property requested to be released or sold as specified in such Certificate. The term "Person" as used herein means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. SECTION 12. Cash Dividends Promptly upon its receipt thereof, the Escrow Agent shall deliver to the Company, NMEPI, NMEPHC or any Permitted Transferee all cash dividends received with respect to any Vencor Common Shares, to the extent that the Company, NMEPI, NMEPHC or such Permitted Transferee is entitled to receive such dividends 9 <PAGE> pursuant to the terms of the Indenture, in accordance with the terms of such Notes and of the Indenture. SECTION 13. Merger, etc., of the Company (a) The Company hereby covenants and agrees that, upon any consolidation or merger, or any transfer or lease of all or substantially all of its assets other than a consolidation or merger in which the Company is the continuing corporation, the rights and obligations of the Company under this Agreement shall be expressly assumed, by a supplemental agreement satisfactory in form to the Escrow Agent, executed and delivered to the Escrow Agent by the Person formed by such consolidation, or with or into which the Company shall have merged or to which the assets of the Company shall have been transferred or leased. (b) In the case of any consolidation or merger, or any transfer or lease of all or substantially all of the Company's assets referred to in subsection (a) hereof, and upon the execution and delivery to the Escrow Agent of the supplemental agreement referred to therein by the successor or acquiring Person, such successor or acquiring Person shall succeed to the rights and obligations of and be substituted for the Company under this Agreement, with the same effect as if such Person had been named herein as the Company, and in the event of any such sale or conveyance, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Agreement or any successor Person which shall theretofore have become such in the manner described in this Section) shall be discharged from all obligations and covenants under this Agreement and may (but need not) be dissolved and liquidated. SECTION 14. Reliance on Information Supplied The Escrow Agent may conclusively rely on the contents of any Officers' Certificate furnished hereunder and, in delivering any such certificate, the Company may rely on information furnished to the Company by the Escrow Agent as to the quantity and identity of Vencor Common Shares and other Escrowed Property delivered to holders of Notes upon exchange thereof and on published information as of the end of the preceding year (or such more recent date as of which such information has been publicly announced by Vencor) as to matters concerning Vencor Common Shares and Vencor. The Escrow Agent will furnish on request to the Company such information as to the Escrow Agent's holdings and as to Escrowed Property delivered to Holders of Notes upon exchange thereof. 10 <PAGE> SECTION 15. Expenses and Indemnification of the Escrow Agent The Company covenants and agrees to pay to the Escrow Agent from time to time, and the Escrow Agent shall be entitled to, such compensation as shall be agreed upon between the Company and the Escrow Agent, and the Company will pay or reimburse the Escrow Agent upon its request for all reasonable, out-of-pocket expenses, disbursements and advances incurred or made by the Escrow Agent in accordance with any of the provisions of this Agreement (including the reasonable, out-of-pocket compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its gross negligence or bad faith. The Company also covenants to indemnify the Escrow Agent for, and to hold it harmless against, any loss, liability, claim, cause of action or expense incurred without gross negligence or bad faith on the part of the Escrow Agent and arising out of or in connection with its acceptance of, or its duties under, this Agreement. The Trustee and the Holders of the Notes shall not be liable for any expenses or compensation of the Escrow Agent and no charge shall be made for such expenses or compensation against the Escrowed Property. SECTION 16. Resignation or Removal of the Escrow Agent (a) The Escrow Agent may at any time resign by giving 60 days' written notice of resignation to the Company and the Trustee. The Company may at any time remove the Escrow Agent by giving like written notice of removal to the Escrow Agent and the Trustee. The Holders of a majority in principal amount of the Notes at the time outstanding may at any time remove the Escrow Agent. If the Escrow Agent shall resign or be removed, a successor Escrow Agent, which in each case shall be a bank or trust company having surplus and capital of at least $100,000,000 shall be appointed by the Company by written instrument executed and delivered to the Escrow Agent and to such successor Escrow Agent, a copy of which shall be delivered by the Company to the Trustee. (b) Any resignation or removal of the Escrow Agent and any appointment of a successor Escrow Agent pursuant to any of the provisions of this Agreement shall become effective upon acceptance of appointment by the successor as provided in Section 17 hereof. If a successor Escrow Agent does not take office within 60 days after the retiring Escrow Agent resigns or is removed, the retiring Escrow Agent, the Company, or the Holders of at least 10% in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Escrow Agent. 11 <PAGE> SECTION 17. Acceptance by Successor Escrow Agent Any successor Escrow Agent appointed as provided in Section 16 of this Agreement shall execute, acknowledge and offer to the Company and to its predecessor Escrow Agent an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Escrow Agent shall become effective and such successor Escrow Agent, without any further act, deed or conveyance shall become vested with all the right, title and interest to all property held hereunder, and all other rights, powers, duties and obligations hereunder, of such predecessor Escrow Agent; but nevertheless such predecessor Escrow Agent shall forthwith deliver to such successor Escrow Agent physical possession of the certificates evidencing the Vencor Common Shares and of all other Escrowed Property, and such predecessor Escrow Agent shall, on the written request of the Company or such successor Escrow Agent and upon payment of any amounts then due it pursuant to the provisions of Section 15 hereof, execute and deliver to such successor Escrow Agent an instrument transferring to such successor Escrow Agent all right, title and interest hereunder in and to the Vencor Common Shares and the other Escrowed Property, and all other rights and powers hereunder, of such predecessor Escrow Agent. SECTION 18. Succession by Merger, etc. Any Person into which the Escrow Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Escrow Agent shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Escrow Agent, shall be the successor of the Escrow Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation shall be eligible under Section 16 hereof. SECTION 19. Termination of Agreement This Agreement shall terminate when the rights of all holders of Notes under the Indenture to surrender Notes for exchange pursuant to Article 11 of the Indenture shall have expired or been terminated and when all other obligations of the Company shall have been satisfied under this Agreement, which termination or expiration and satisfaction shall be evidenced by an Officers' Certificate of the Company to that effect. Upon termination of this Agreement pursuant to this Section 19, any Vencor Common Shares and any other Escrowed Property remaining in the hands of the Escrow Agent hereunder which are not required for the exchange of Notes previously duly surrendered and duly accepted for the exchange shall be delivered first to the 12 <PAGE> Permitted Transferee to the extent of its interest therein, and second to the Company. SECTION 20. Notices Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail, postage prepaid, addressed as follows: If to the Company: Scott M. Brown, Esq. Senior Vice President, Secretary and General Counsel Tenet Healthcare Corporation 2700 Colorado Avenue Santa Monica, California 90404 Telephone: (310) 998-8000 If to the Escrow Agent: The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration The Company or the Escrow Agent by notice to the other may designate additional or different addresses for subsequent notices of communications. Any notice or communication mailed to a holder of Notes shall be mailed by first-class mail, postage prepaid, to such holder at such holder's address as it appears on the registration books of the Registrar for the Notes and shall be sufficiently given to such holder if so mailed within the time prescribed. Failure to mail notice or communication to a holder of Notes or any defect in it shall not affect its sufficiency with respect to other holders of Notes. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 21. Benefits of Agreement Nothing in this Agreement or the Notes, expressed or implied, shall give or be construed to give any person, firm or corporation, other than the parties hereto and the Trustee as representative of the holders of the Notes, any legal or equitable right, remedy or claim under any covenant, condition or 13 <PAGE> provision herein contained, all the covenants, conditions and provisions contained in this Agreement being for the sole benefit of the parties hereto and the Trustee as representative of the holders of the Notes. SECTION 22. Headings The headings contained in this Agreement are for convenience of reference only and shall have no effect on the interpretation or operation of this Agreement. SECTION 23. Definitions Terms defined in the Indenture and not otherwise defined herein have, as used herein, the respective meanings provided for therein. SECTION 24. Choice of Laws This Agreement shall be construed in accordance with the law of the State of New York, without regard to the conflict of laws provisions thereof. 14 <PAGE> IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by duly authorized officers as of the day and year first above written. TENET HEALTHCARE CORPORATION By /S/ RAYMOND L. MATHIASEN ------------------------------------------------ Title: Senior Vice President THE BANK OF NEW YORK, as Escrow Agent By /S/ VIVIAN GEORGES ------------------------------------------------ Title: Assistant Vice President NME PROPERTIES, INC. By /S/ LAWRENCE G. HIXON ------------------------------------------------ Title: Vice President NME PROPERTY HOLDING CO., INC. By /S/ TERENCE P. MCMULLEN ------------------------------------------------ Title: Vice President 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>4 <DESCRIPTION>AMENDMENT #2 - CREDIT AGREEMENT <TEXT> <PAGE> AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT dated as of December 20, 1995 to the $2,300,000,000 Credit Agreement dated as of February 28, 1995 as heretofore amended (the "Agreement") among TENET HEALTHCARE CORPORATION (formerly National Medical Enterprises, Inc.), the LENDERS party thereto, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, THE BANK OF NEW YORK and BANKERS TRUST COMPANY, as Arranging Agents, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. WHEREAS, the parties hereto desire to amend the Agreement to permit the Borrower, at its election, to apply prepayments of the Term Loans to reduce the amounts of subsequent Term Loan Amortization Payments in inverse order of maturity; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement has the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the Amendment Effective Date (as defined in Section 7 hereof) refer to the Agreement as amended hereby. SECTION 2. AMENDMENT OF SECTION 2.06. Section 2.06 of the Agreement is amended by adding at the end thereof the following new subsection (i): (i) ELECTION TO PREPAY LATER INSTALLMENTS. Notwithstanding anything to the contrary in the foregoing subsections of this Section or in Section 2.08, the Borrower may elect to apply all or any portion (not less than the lesser of (x) $10,000,000 or (y) the then unpaid amount of the last Term Loan Amortization Payment to mature) of any prepayment of Term Loans to reduce the amounts of the subsequent Term Loan Amortization Payments in inverse order to maturity. Any such election shall be made by giving notice thereof to the Administrative Agent on or before the date of the relevant prepayment. Upon receiving any such notice the Administrative Agent shall promptly notify each relevant Lender of the contents thereof and such notice shall not thereafter be revocable by the Borrower. SECTION 3. AMENDMENT OF SECTION 2.08. Section 2.08 of the Agreement is amended by adding the following words at the end of the last sentence thereof: , unless the Borrower shall have elected pursuant to Section 2.06(i) to apply such prepayment to the subsequent Term Loan Amortization Payments in inverse order of maturity. <PAGE> SECTION 4. CONFIRMATION OF AGREEMENT. Except as modified or amended in this Agreement, all terms and conditions in the Agreement remain in full force and effect and are hereby ratified and confirmed. SECTION 5. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 6. COUNTERPARTS. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 7. EFFECTIVENESS. The amendment of the Agreement provided for herein shall become effective on the date (the "Amendment Effective Date") when the Administrative Agent shall have received counterparts hereof signed by the Borrower and the Required Lenders (or, in the case of any such party as to which a signed counterpart shall not have been received, telegraphic, telex, facsimile or other written confirmation from such party that a counterpart hereof has been signed by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. TENET HEALTHCARE CORPORATION By: /s/ Maris Andersons ------------------------------------------- Title: Senior Vice President - Treasurer 2 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 11 <TEXT> <PAGE> <TABLE> <CAPTION> EXHIBIT 11 TENET HEALTHCARE CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS * (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended November 30, November 30, -------------------------- ------------------------ 1994 1995 1994 1995 ----------- ---------- ---------- ---------- <S> <C> <C> <C> <C> FOR PRIMARY EARNINGS PER SHARE Shares outstanding at beginning of period . . . . 166,276 200,053 166,081 199,938 Shares issued upon exercise of stock options . . 55 251 171 209 Dilutive effect of outstanding stock options . . 1,988 2,823 2,138 2,361 Shares issued upon exercises of performance investment options . . . . . . . . . . . . . -- 718 -- 357 --------- --------- --------- --------- Weighted average number of shares and share equivalents outstanding . . . . . . . . . . 168,319 203,845 168,390 202,865 --------- --------- --------- --------- --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . $ 46,218 $ 182,863 $ 110,246 $ 301,116 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per share . . . . . . . . . . . . . . . $ 0.27 $ 0.90 $ 0.65 $ 1.48 --------- --------- --------- --------- --------- --------- --------- --------- FOR FULLY DILUTED EARNINGS PER SHARE Weighted average number of shares used in primary calculation . . . . . . . . . . . . 168,319 203,845 168,390 202,865 Additional dilutive effect of stock options . . . -- 197 168 307 Assumed conversion of dilutive convertible debentures . . . . . . . . . . . . . . . . . 13,850 12,141 12,909 13,003 --------- --------- --------- --------- Fully diluted weighted average number of shares . 182,169 216,183 181,467 216,175 --------- --------- --------- --------- --------- --------- --------- --------- Income used in primary calculation . . . . . . . $ 46,218 $ 182,863 $ 110,246 $ 301,116 Adjustments: Interest expense on convertible debentures . . 3,867 3,716 6,412 7,652 Reduced reimbursement of above interest expense by Medicare . . . . . . . . . . . . . . . . (142) (922) (230) (1,958) Income taxes on interest less Medicare reimbursement . . . . . . . . . . . . . . . (1,467) (1,102) (2,454) (2,215) --------- --------- --------- --------- Adjusted income used in fully diluted calculation $ 48,476 $ 184,555 $ 113,974 $ 304,595 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per share . . . . . . . . . . . . . . . . $ 0.27 $ 0.85 $ 0.63 $ 1.41 --------- --------- --------- --------- --------- --------- --------- --------- - --------------------- * All shares in these tables are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>6 <DESCRIPTION>EXHIBIT 27 (FDS) <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1996 <PERIOD-END> NOV-30-1995 <CASH> 98,800 <SECURITIES> 135,200 <RECEIVABLES> 1,416,200 <ALLOWANCES> 161,100 <INVENTORY> 125,100 <CURRENT-ASSETS> 1,454,600 <PP&E> 4,464,700 <DEPRECIATION> 901,200 <TOTAL-ASSETS> 8,140,500 <CURRENT-LIABILITIES> 1,178,700 <BONDS> 3,254,900 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 16,400 <OTHER-SE> 2,365,100 <TOTAL-LIABILITY-AND-EQUITY> 8,140,500 <SALES> 0 <TOTAL-REVENUES> 2,654,800 <CGS> 0 <TOTAL-COSTS> 2,152,600 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 137,000 <INTEREST-EXPENSE> 158,400 <INCOME-PRETAX> 534,800 <INCOME-TAX> 233,700 <INCOME-CONTINUING> 301,100 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 301,100 <EPS-PRIMARY> 1.48 <EPS-DILUTED> 1.41 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1996

0QTR1

WOR

https://www.sec.gov/Archives/edgar/data/108516/0000896463-96-000004.txt

-----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, No7aPpRPJFl4j7HqdiLj/lm5N2/gOufkwzFk4BoQzSpjrE52XkOGjP+QWMWfpdh9 Zkp2QbIScC1pp4m4N3bY6Q== <SEC-DOCUMENT>0000896463-96-000004.txt : 19960116 <SEC-HEADER>0000896463-96-000004.hdr.sgml : 19960116 ACCESSION NUMBER: 0000896463-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORTHINGTON INDUSTRIES INC CENTRAL INDEX KEY: 0000108516 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 311189815 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04016 FILM NUMBER: 96503006 BUSINESS ADDRESS: STREET 1: 1205 DEARBORN DR CITY: COLUMBUS STATE: OH ZIP: 43085 BUSINESS PHONE: 6144383210 MAIL ADDRESS: STREET 1: 1205 DEARBORN DR CITY: COLUMBUS STATE: OH ZIP: 43085 FORMER COMPANY: FORMER CONFORMED NAME: WORTHINGTON STEEL CO DATE OF NAME CHANGE: 19720123 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: November 30, 1995 Commission File No. 0-4016 WORTHINGTON INDUSTRIES, INC. -------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) DELAWARE 31-1189815 --------------------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 1205 DEARBORN DRIVE, COLUMBUS, OHIO 43085 ---------------------------------------- --------------------- (Address of Principal Executive Offices) (Zip Code) (614) 438-3210 ---------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Not Applicable ---------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, If Changed From Last Report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 90,779,668 -------------------------------------- ----------------------------- Class Outstanding December 31, 1995 <PAGE> WORTHINGTON INDUSTRIES, INC. INDEX PAGE PART I. FINANCIAL INFORMATION Consolidated Condensed Balance Sheets - November 30, 1995 and May 31, 1995.................................3 Consolidated Condensed Statements of Earnings - Three and Six Months Ended November 30, 1995 and 1994 .............4 Consolidated Condensed Statements of Cash Flows - Six Months Ended November 30, 1995 and 1994........................5 Notes to Consolidated Condensed Financial Statements...............6 Management's Discussion and Analysis of Results of Operations and Financial Condition......................7 PART II. OTHER INFORMATION.................................................10 <PAGE> PART I. FINANCIAL INFORMATION WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands, Except Per Share) November 30 May 31 1995 1995 ------------- --------- ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents ...................... $ 14,856 $ 2,003 Accounts receivable - net ...................... 185,223 216,443 Raw materials ................................. 117,230 142,738 Work in process and finished products ......... 57,589 58,140 --------- --------- Inventories .................................... 174,819 200,878 Prepaid expenses and other current assets ...... 37,183 32,578 --------- --------- TOTAL CURRENT ASSETS .......................... 412,081 451,902 Investment in Unconsolidated Affiliates .......... 131,966 104,764 Other Assets ..................................... 24,017 25,381 Property, plant and equipment .................... 633,140 589,286 Less accumulated depreciation .................... 271,428 254,369 --------- --------- Property, Plant and Equipment - net ........... 361,712 334,917 --------- --------- TOTAL ASSETS .................................. $ 929,776 $ 916,964 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ............................... $ 81,617 $ 87,329 Notes payable .................................. 38,200 Accrued compensation, contributions to employee benefit plans and related taxes ...... 26,440 31,741 Dividends payable .............................. 9,980 9,992 Other accrued items ............................ 7,688 8,597 Income taxes ................................... 6,159 2,709 Current maturities of long-term debt ........... 660 660 --------- --------- TOTAL CURRENT LIABILITIES ..................... 132,544 179,228 Other Liabilities ................................ 17,471 18,055 Long-Term Debt ................................... 83,146 53,476 Deferred Income Taxes ............................ 81,636 75,873 Shareholders' Equity Common shares, $.01 par value .................. 908 908 Additional paid-in capital ..................... 104,280 102,733 Min. pension liability/ foreign currency translation ................ (1,841) (1,017) Retained earnings ............................. 511,632 487,708 --------- --------- Total Shareholders' Equity .................... 614,979 590,332 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .... $ 929,776 $ 916,964 ========= ========= See notes to consolidated condensed financial statements. <PAGE> <TABLE> WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In Thousands Except Per Share) (Unaudited) Three Months Ended Six Months Ended November 30 November 30 ------------------ -------------------- 1995 1994 1995 1994 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales ................... $ 354,544 $ 363,276 $ 680,280 $ 709,533 Cost of goods sold .......... 301,533 305,268 580,264 599,393 --------- --------- --------- --------- GROSS MARGIN ............... 53,011 58,008 100,016 110,140 Selling, general & administrative expense .... 21,499 20,536 41,368 40,027 --------- --------- --------- --------- OPERATING INCOME ........... 31,512 37,472 58,648 70,113 Other income (expense): Miscellaneous income (expense) ............... 139 (138) 386 129 Interest expense ......... (1,234) (1,580) (2,641) (2,774) Equity in net income of unconsolidated affiliates ............ 11,442 9,469 19,878 18,472 --------- --------- --------- --------- EARNINGS BEFORE INCOME TAXES 41,859 45,223 76,271 85,940 Income taxes ................ 15,671 16,959 28,575 32,228 --------- --------- --------- --------- NET EARNINGS ............... $ 26,188 $ 28,264 $ 47,696 $ 53,712 ========= ========= ========= ========= AVERAGE COMMON SHARES OUTSTANDING .............. 90,748 90,709 90,817 90,665 EARNINGS PER COMMON SHARE ... $ .29 $ .31 $ .53 $ .59 --------- --------- --------- --------- CASH DIVIDENDS DECLARED PER COMMON SHARE ....... $ .11 $ .10 $ .22 $ .20 --------- --------- --------- --------- </TABLE> See notes to consolidated condensed financial statements. <PAGE> WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands, Unaudited) Six Months Ended November 30 ---------------- 1995 1994 ---- ---- OPERATING ACTIVITIES Net earnings ......................................... $ 47,696 $ 53,712 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation ....................................... 18,482 17,259 Provision for deferred income taxes ................ 5,763 6,621 Equity in undistributed net income of unconsolidated affiliates ........................ (19,576) (18,232) Changes in assets and liabilities: Accounts receivable ............................ 31,220 (1,035) Inventories .................................... 26,059 (28,230) Prepaid expenses and other current assets ...... (4,604) (1,691) Other assets ................................... 1,364 280 Accounts payable and accrued expenses .......... (8,472) (103) Other liabilities .............................. (584) (238) -------- -------- Net Cash Provided (Used) By Operating Activities ... 97,348 28,343 INVESTING ACTIVITIES Investment in property, plant and equipment, net ..... (45,277) (36,397) Investment in unconsolidated affiliates .............. (8,290) -- -------- -------- Net Cash Used By Investing Activities .............. (53,567) (36,397) FINANCING ACTIVITIES Proceeds from (payments on) short-term borrowings .... (38,200) 16,000 Proceeds from long-term debt ......................... 43,000 -- Principal payments on long-term debt ................. (13,330) (591) Proceeds from issuance of common shares .............. 1,618 2,013 Repurchase of common shares .......................... (4,024) -- Dividends paid ....................................... (19,992) (18,123) -------- -------- Net Cash Provided (Used) By Financing Activities ... (30,928) (701) -------- -------- Increase (decrease) in cash and cash equivalents ....... 12,853 (8,755) Cash and cash equivalents at beginning of period ....... 2,003 13,275 -------- -------- Cash and cash equivalents at end of period ............. $ 14,856 $ 4,520 ======== ======== See notes to consolidated condensed financial statements. <PAGE> WORTHINGTON INDUSTRIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - MANAGEMENT'S OPINION In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of a normal recurring nature) necessary to present fairly the financial position of Worthington Industries, Inc. and Subsidiaries (the Company) as of November 30, 1995 and May 31, 1995; the results of operations for the three and six months ended November 30, 1995 and 1994; and the cash flows for the six months then ended. The accounting policies followed by the Company are set forth in Note A to the consolidated financial statements in the 1995 Worthington Industries, Inc. Annual Report to Shareholders which is incorporated by reference in the Company's 1995 Form 10-K. NOTE B - INCOME TAXES The income tax rate is based on statutory federal and state rates, and an estimate of annual earnings adjusted for the permanent differences between reported earnings and taxable income. NOTE C - EARNINGS PER SHARE Earnings per common share for the three and six months ended November 30, 1995 and 1994 are based on the weighted average common shares outstanding during each of the respective periods. NOTE D - RESULTS OF OPERATIONS The results of operations for the three and six months ended November 30, 1995 and 1994 are not necessarily indicative of the results to be expected for the full year. <PAGE> WORTHINGTON INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS For the three months ended November 30, 1995, net sales of $354.5 million were 2% lower and net earnings of $26.2 million and earnings per share of $.29 were 7% and 6%, respectively, lower than the results from last year's second quarter. For the first six months of fiscal 1996, net sales were $680.3 million, 4% below those of the same period last year. Net earnings of $47.7 million and earnings per share of $.53 were off 11% and 10%, respectively, from the first half of last year. Demand in most of the Company's markets softened this year from a strong fiscal 1995. The Company started to see improved market demand for its products in the second quarter, but results still reflect lower volume and prices from last year. Results for the second quarter and first six months of fiscal 1995 were driven principally by volume and selling price increases. Gross margin was down 9% for both the quarter and the six months. This was greater than the sales shortfall, primarily due to the soft selling price environment and the working down of more expensive inventory. Last year's gross margin outpaced the growth in sales due to higher operating efficiencies and selling price increases. Gross margin as a percentage of sales for the quarter was 15.0% compared to 16.0% last year and for the six months, 14.7% compared to 15.5%. Selling, general and administrative expense increased 5% for the quarter and 3% for the six months due to the inclusion of expenses for new operations offset by lower profit-sharing. Last year's expense was driven by higher profit sharing. As a percent of sales, this expense for the quarter was 6.1% compared to 5.7% last year and for the six months was 6.1% compared to 5.6%. Operating income was 16% lower for the quarter and six month periods. As a percentage of sales, operating income decreased to 8.9% from 10.3% for the quarter and to 8.6% from 9.9% for the six months. Interest expense decreased 22% for the three months and 5% for the six months. The average interest rate rose to 6.7% from 5.6% and average debt outstanding increased offset by $1,010,000 of capitalized interest for the six months. Average debt rose because of increased borrowings to support capital expenditures. Equity in net income of unconsolidated affiliates was up 21% for the quarter. Equity from Rouge Steel was up as a one time gain more than offset decreased operating earnings caused by lower industry demand and selling prices. Equity from Worthington Armstrong Venture was up significantly on increased volume in both the U.S. and Europe. This venture's French facility is expanding to meet demand and the new Las Vegas plant is in startup. The Acerex joint venture in Mexico started production in October and is shipping within Mexico and into the southwest U.S. Income taxes decreased in line with pre-tax earnings for both the three and six month periods as the effective tax rate for both years was 37.5%. The processed steel products segment saw decreases in sales and earnings for the second quarter and the first six months. Steel processing shipments, although improved from the first quarter, were below those of last year mainly due to lower automotive demand. Operating margins also remain lower due to the reduced volume and lower selling prices. Pressure cylinder's sales for the quarter were up, but results for the six months were below last year as increased demand for heating tanks did not fully offset lower shipments of refrigerant cylinders. Pressure cylinders had realized growth in most product lines in the prior year. Sales for the custom products segment were up for both the second quarter and six months; however, earnings were lower for both periods. The plastics operation increased sales and earnings as it continued to perform well despite overall lower industry automotive demand due to new automotive and appliance contracts. Volume from new jobs increased sales for precision metals above last year for both periods, but profits are lower due to inefficiencies caused by startups and specification changes on certain parts. The cast products segment results were down slightly for the quarter as demand has leveled somewhat from last year. This segment continues to perform well as sales and earnings remain above last year's strong six month numbers. Last year's results benefited from very strong railcar demand and high production levels. LIQUIDITY AND CAPITAL RESOURCES At November 30, 1995, the Company's current ratio was 3.1:1, up from 2.5:1 at May 31, 1995, as $30 million of short-term debt was replaced with long-term debt. Long-term debt increased to 10.7% from 7.4% of total capital (defined as long-term debt, deferred taxes and shareholders' equity.) Working capital was $279.5 million, 45% of the Company's total net worth, down from 46% at May 31, 1995. During the six months, the Company's cash position increased by $12.9 million. Cash provided by operating activities was $97.3 million, aided by a $26.1 million decrease in inventories and a $31.2 million decrease in accounts receivable, which occurred in part because of lower raw material costs and lower sales volume and prices. Days sales in accounts receivable was down 3 days from fiscal year-end and days of inventory was down modestly. Capital expenditures and investments in affiliates totaled $53.6 million and dividends paid were $20 million. The Company expects its operating results to improve during the year; however, borrowings may be needed to support anticipated capital expenditures. The Company has a $150 million committed, revolving credit agreement, of which $80 million was unused at November 30, 1995. Immediate borrowing capacity plus cash generated from operations should be more than sufficient to fund expected normal operating cash needs, dividends, debt payments and capital expenditures for existing businesses. <PAGE> PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Registrant's Annual Meeting of Shareholders was held on September 21, 1995. In connection with the meeting, proxies were solicited. Following are the voting results on proposals considered and voted upon. 1. All nominees for Class of Directors whose term expires in 1998 were elected by the stockholders who were present or represented by proxy. Votes for Votes the Election Withholding Shares of Director Authority to Vote Not Voted ____________ _________________ _________ Robert J. Klein 76,152,495 65,984 -0- Katherine LeVeque 76,092,427 126,052 -0- John P. McConnell 76,155,495 62,984 -0- Robert B. McCurry 76,114,912 103,567 -0- Gerald B. Mitchell 76,133,988 84,491 -0- 2. The appointment of Ernst & Young LLP as the Registrant's independent auditors for the year ending May 31, 1996 was ratified by a majority of the votes entitled to be cast by the stockholders who were present or represented by proxy. FOR: 75,978,256 AGAINST: 65,520 ABSTAIN: 174,703 NOT VOTED: -0- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits - Exhibit 27 Financial Data Schedule B. Reports on Form 8-K. There were no reports on Form 8-K during the three months ended November 30, 1995. 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. WORTHINGTON INDUSTRIES, INC. Date: January 12, 1996 By: /S/DONALD G. BARGER, JR. ______________________________ Donald G. Barger, Jr. Vice President-Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1996 <PERIOD-START> JUN-01-1995 <PERIOD-END> NOV-30-1995 <EXCHANGE-RATE> 1 <CASH> 14,856 <SECURITIES> 0 <RECEIVABLES> 187,927 <ALLOWANCES> 2,704 <INVENTORY> 174,819 <CURRENT-ASSETS> 412,081 <PP&E> 633,140 <DEPRECIATION> 271,428 <TOTAL-ASSETS> 929,776 <CURRENT-LIABILITIES> 132,544 <BONDS> 83,146 <COMMON> 908 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 614,071 <TOTAL-LIABILITY-AND-EQUITY> 929,776 <SALES> 680,280 <TOTAL-REVENUES> 680,280 <CGS> 580,264 <TOTAL-COSTS> 580,264 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 2,641 <INCOME-PRETAX> 76,271 <INCOME-TAX> 28,575 <INCOME-CONTINUING> 47,696 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 47,696 <EPS-PRIMARY> .53 <EPS-DILUTED> .53 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

AAPL

https://www.sec.gov/Archives/edgar/data/320193/0000320193-97-000002.txt

-----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, JilZ5DY8FMRueLQeXExEFWTmCmuuuqoSU3f1xm+H88D0jL66R7Bh0pavwr7Lh218 rukMcRHsJDNf8MW3VgCyNQ== <SEC-DOCUMENT>0000320193-97-000002.txt : 19970221 <SEC-HEADER>0000320193-97-000002.hdr.sgml : 19970221 ACCESSION NUMBER: 0000320193-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961227 FILED AS OF DATE: 19970210 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: 97521233 BUSINESS ADDRESS: STREET 1: 1 INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961010 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> ________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 27, 1996 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 Identification No.] of incorporation or organization] 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 [ ] 124,669,324 shares of Common Stock Issued and Outstanding as of January 31, 1997 <PAGE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements APPLE COMPUTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in millions, except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED December 27, December 29, 1996 1995 <S> <C> <C> Net sales $ 2,129 $ 3,148 Costs and expenses: Cost of sales 1,732 2,673 Research and development 149 153 Selling, general and administrative 372 441 2,253 3,267 Operating loss (124) (119) Interest and other income (expense), net 4 10 Loss before benefit from income taxes (120) (109) Benefit from income taxes -- (40) Net loss $ (120) $ (69) Loss per common share $(0.96) $(0.56) Cash dividends paid per common share $ -- $ .12 Common shares used in the calculations of loss per share (in thousands) 124,532 122,994 </TABLE> See accompanying notes. 2 <PAGE> APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In millions) <TABLE> <CAPTION> December 27, September 27, 1996 1996 (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 1,174 $ 1,552 Short-term investments 633 193 Accounts receivable, net of allowance for doubtful accounts of $92 ($91 at September 27, 1996) 1,492 1,496 Inventories: Purchased parts 176 213 Work in process 24 43 Finished goods 288 406 488 662 Deferred tax assets 324 342 Other current assets 308 270 Total current assets 4,419 4,515 Property, plant, and equipment: Land and buildings 484 480 Machinery and equipment 543 544 Office furniture and equipment 122 136 Leasehold improvements 178 188 1,327 1,348 Accumulated depreciation and amortization (734) (750) Net property, plant, and equipment 593 598 Other assets 260 251 $ 5,272 $ 5,364 </TABLE> See accompanying notes. 3 <PAGE> APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions) <TABLE> <CAPTION> December 27, September 27, 1996 1996 (Unaudited) <S> <C> <C> Current liabilities: Notes payable to banks $ 180 $ 186 Accounts payable 820 791 Accrued compensation and employee benefits 112 120 Accrued marketing and distribution 363 257 Accrued warranty and related 157 181 Accrued restructuring costs 105 117 Other current liabilities 307 351 Total current liabilities 2,044 2,003 Long-term debt 950 949 Deferred tax liabilities 336 354 Shareholders' equity: Common stock, no par value; 320,000,000 shares authorized; 124,585,025 shares issued and outstanding at December 27, 1996 (124,496,972 shares at September 27, 1996) 442 439 Retained earnings 1,514 1,634 Other (14) (15) Total shareholders' equit 1,942 2,058 $ 5,272 $ 5,364 </TABLE> See accompanying notes. 4 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) <TABLE> <CAPTION> THREE MONTHS ENDED December 27, December 29, 1996 1995 <S> <C> <C> Cash and cash equivalents, beginning of the period $ 1,552 $ 756 Operating: Net loss (120) (69) Adjustments to reconcile net loss to cash generated by operating activities: Depreciation and amortization 25 42 Net book value of property, plant, and equipment retirements 2 1 Changes in assets and liabilities: Accounts receivable 4 (13) Inventories 174 (172) Deferred tax assets 18 (51) Other current assets (38) 57 Accounts payable 29 266 Other current liabilities 18 78 Deferred tax liabilities (18) 48 Cash generated by operating activities 94 187 Investing: Purchase of short-term investments (542) (244) Proceeds from sale of short-term investments 102 164 Purchase of property, plant, and equipment (20) (31) Other (10) (36) Cash used for investing activities (470) (147) Financing: Increase (decrease) in short-term borrowings (6) 37 Increase in long-term borrowings 1 1 Increases in common stock, net of related tax benefits 3 5 Cash dividends -- (15) Cash generated by (used for) financing activities (2) 28 Total cash generated (used) (378) 68 Cash and cash equivalents, end of the period $ 1,174 $ 824 </TABLE> See accompanying notes. 5 <PAGE> 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. The restructuring actions under this plan that the Company has taken and intends to take consist primarily of terminating approximately 1,500 full-time employees (down from an initial planned termination of approximately 2,800), approximately 900 of whom have been terminated from plan inception through December 27, 1996, 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 these 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 as a result of terminating eWorld(trademark), Apple's on-line service. These actions resulted in an initial charge of $207 million. The charge was adjusted downward by $28 million in the fourth quarter of 1996, primarily as a result of greater than expected voluntary terminations, which led to fewer than planned involuntary terminations, as well as lower than expected costs to cancel or vacate certain facility leases, partially offset by greater than expected costs to cancel certain contracts and to write down certain operating assets sold or to be sold. The restructuring actions have resulted in cash expenditures of $66 million and noncash asset write-downs of $8 million from plan inception through December 27, 1996. The Company expects that the remaining $105 million accrued balance at December 27, 1996, will result in cash expenditures of approximately $50 million over the next twelve months and approximately $9 million thereafter. The Company expects that most of the contemplated restructuring actions related to the plan implemented in the second quarter of 1996 will be completed within the next six months and will be financed through current working capital and continued short-term borrowings. 6 <PAGE> The following table depicts the restructuring activity from September 27, 1996 to December 27, 1996: (In millions) <TABLE> <CAPTION> Category Balance at Balance at September 27, December 27, 1996 Spending 1996 <S> <C> <C> <C> Payments to employees involuntarily terminated (C) $33 $6 $27 Payments on canceled or vacated facility leases (C) 15 3 12 Write-down of operating assets to be sold (N) 47 1 46 Payments on canceled contracts (C) 22 2 20 $117 $12 $105 </TABLE> C: Cash; N: Noncash The Company recently announced that supplemental restructuring actions, including significant headcount reductions, will be necessary to meet the foregoing objectives of the 1996 restructuring plan. The Company expects to recognize a charge for the estimated costs of those actions when the details of the related supplemental plan are announced later in the second quarter. 3. On February 4, 1997, the Company acquired all of the outstanding shares of NeXT Software, Inc. ("NeXT"). NeXT, headquartered in Redwood City, California, develops, markets and supports 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 comprehensive purchase price, which is comprised of $325 million of cash; the issuance of 1.5 million shares of the Company's common stock; the issuance of approximately 1.8 million options to purchase the Company's common stock; the assumption of approximately $55 million of net monetary liabilities; and approximately $5 million of closing and related costs, is expected to be approximately $430 million. The comprehensive purchase price is expected to require cash expenditures of approximately $385 million, substantially all of which will be expended in the second quarter. The acquisition will be treated as a purchase for accounting purposes. The Company expects that approximately 75% of the comprehensive purchase price will be expensed as in-process research and development in the second quarter. 4. The information set forth in Item 1 of Part II hereof is hereby incorporated by reference. 7 <PAGE> 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) <TABLE> <CAPTION> First First First Fourth Results of Quarter Quarter Change Quarter Quarter Change Operations 1997 1996 1997 1996 <S> <C> <C> <C> <C> <C> <C> Net sales $ 2,129 $ 3,148 (32%) $ 2,129 $ 2,321 (8%) Gross margin $ 397 $ 475 (16%) $ 397 $ 511 (22%) Percentage of net sales 18.6% 15.1% 18.6% 22.0% Research and Development $ 149 $ 153 (3%) $ 149 $ 146 2% Percentage of net sales 7.0% 4.9% 7.0% 6.3% Selling, General and Administrative $ 372 $ 441 (16%) $ 372 $ 359 4% Percentage of net sales 17.5% 14.0% 17.5% 15.5% Restructuring costs $ -- $ -- -- $ -- $ (28) NM Percentage of net sales -- -- -- (1.2%) Interest and Other Income(Expense), net $ 4 $ 10 (60%) $ 4 $ 6 (33%) Net income (loss) $ (120) $ (69) (74%) $ (120) $ 25 (580%) Earnings (loss) per share $(0.96) $(0.56) (71%) $ (0.96)$ 0.20 (580%) </TABLE> NM: Not meaningful. Overview During the first quarter of 1997, the Company continued to experience declines in net sales, units shipped and share of the personal computer market. This continued decline in demand and the resulting operating loss, coupled with intense price competition throughout the industry, has led to the Company's announcement that supplemental restructuring actions, including significant headcount reductions, will be necessary in order to reduce costs and return the Company to sustainable profitability. The details of those actions are expected to be announced later in the second quarter. The Company has also acquired NeXT. The Company plans to develop and market a new operating system ("OS") based on its Mac OS and NeXT software technologies. Net Sales Q1 97 compared with Q1 96 Net sales decreased 32% in the first quarter of 1997 compared with the same period of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 29% and 27%, respectively, in the first quarter of 1997, compared with the same period of 1996, as a result of a decline in worldwide demand for most product families, especially the Performa(registered trademark) line of consumer-oriented products, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, and future prospects, and to competitive pressures in the marketplace. In addition, Macintosh unit sales were negatively affected as a result of the Company's inability to fulfill all purchase orders of PowerBook(registered trademark) and Power Macintosh(registered trademark) products due to product transition constraints on manufacturing and the unavailability of sufficient quantities of certain components. The average aggregate revenue per Macintosh unit decreased 10% in the first quarter of 1997 8 <PAGE> compared with the same period of 1996, primarily due to continued pricing actions, including rebates, across most product lines in order to stimulate demand. The average aggregate revenue per peripheral product increased 12% in the first quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward higher priced products, partially offset by continued pricing actions, including rebates, across most product lines in order to stimulate demand. International net sales represented 56% of total net sales in the first quarter of 1997 compared with 51% in the same period of 1996. International net sales declined 25% in the first quarter of 1997 compared with the same period of 1996. Net sales in European markets decreased during the first quarter of 1997 compared with the same period in 1996, as a result of decreases in Macintosh and peripheral unit sales, partially offset by an increase in the average aggregate revenue per peripheral unit. The average aggregate revenue per Macintosh unit remained constant in the first quarter of 1997 compared with the same period of 1996. Net sales in Japan decreased during the first quarter 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, slightly offset by an increase in the average aggregate revenue per peripheral unit. Domestic net sales declined 40% in the first quarter 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 Macintosh unit, slightly offset by an increase in the average aggregate revenue per peripheral unit. According to an industry source, in the first quarter of 1997 compared with the comparable period of 1996, the Company's share of the worldwide and U.S. personal computer markets declined to 4.3% from 7.0% and to 5.2% from 9.4%, respectively. In addition, the Company believes that its licensees' share of the worldwide personal computer market increased to approximately 0.5% from approximately 0.1%. Q1 97 compared with Q4 96 Net sales decreased 8% in the first quarter of 1997 compared with the fourth quarter of 1996. Total Macintosh computer unit sales decreased by less than 1% in the first quarter of 1997 compared with the prior quarter as a result of a decline in unit sales of entry-level and PowerBook products, substantially offset by an increase in unit sales of Performa and Power Macintosh products. PowerBook unit sales were negatively affected as a result of the Company's inability to fulfill all purchase orders due to product transition constraints on manufacturing. In addition, although Performa unit sales increased compared with the fourth quarter of 1996, they were substantially lower than the Company expected for the holiday buying season. Unit sales of peripheral products increased 11% in the first quarter of 1997 compared with the fourth quarter of 1996. The average aggregate revenue per Macintosh and peripheral unit decreased 11% and 2%, respectively, in the first quarter of 1997 compared with the fourth quarter of 1996, primarily due to continued pricing actions, including rebates, taken on most product lines in order to stimulate demand. The average 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 56% of total net sales in the first quarter of 1997, compared with 47% in the fourth quarter of 1996. International net sales increased 9% in the first quarter of 1997 compared with the fourth quarter of 1996. Net sales in European markets increased during the first quarter of 1997 compared with the fourth quarter of 1996, as a result of increases in Macintosh and peripheral unit sales and average aggregate revenue per Macintosh unit, slightly offset by a decrease in the average aggregate revenue per peripheral unit. Net sales in Japan decreased during the first quarter of 1997 compared with the fourth quarter of 1996, as a result of decreases in Macintosh unit sales and average aggregate revenue per Macintosh and peripheral unit, partially offset by an increase in peripheral unit sales over the prior quarter. 9 <PAGE> Domestic net sales declined 24% in the first quarter of 1997 compared with the prior quarter, due to decreases in Macintosh unit sales and the average aggregate revenue per Macintosh unit, slightly offset by increases in peripheral unit sales and the average aggregate revenue per peripheral unit. According to an industry source, in the first quarter of 1997 compared with the fourth quarter of 1996, the Company's share of the worldwide and U.S. personal computer markets declined to 4.3% from 5.3%, and to 5.2% from 7.2%, respectively. In addition, the Company believes that its licensees' share of the worldwide personal computer market increased to approximately 0.5% from approximately 0.2%. 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 was approximately $454 million at January 31, 1997 and consisted primarily of the Company's PowerBook and PowerMacintosh products. 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 sharply 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 fourth quarter of 1997, if not longer. In addition, the Company believes that net sales in the second quarter of 1997 will be below the level of the first quarter of 1997. 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 as a percentage of sales in the first quarter of 1997, compared with the same period of 1996, primarily as a result of more aggressive pricing actions taken relative to product costs in the first quarter of 1996 in order to stimulate demand and increase market share. Gross margin decreased as a percentage of sales in the first quarter of 1997, compared with the fourth quarter of 1996, primarily as a result of continued pricing actions, including rebates, taken on most product lines in order to stimulate demand and reduced sales of fully reserved product, partially offset by a decrease in charges incurred to provide for the costs to correct certain quality problems in certain products. 10 <PAGE> The gross margin levels in the first quarter of 1997 compared with first and fourth quarters of 1996 were also slightly negatively impacted as a result of a stronger U.S. dollar relative to certain foreign currencies, partially 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 first quarter 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. <TABLE> <CAPTION> Research and First First First Fourth Development Quarter Quarter Quarter Quarter 1997 1996 Change 1997 1996 Change <S> <C> <C> <C> <C> <C> <C> Research and development $ 149 $ 153 (3%) $ 149 $ 146 2% Percentage of net sales 7.0% 4.9% 7.0% 6.3% </TABLE> Research and development expenditures were relatively flat in the first quarter of 1997 compared with the first and fourth quarters of 1996. The increase as a percentage of net sales resulted from a decrease in the level of net sales. The Company believes its research and development expenditures will be relatively flat in the second quarter of 1997 compared with the same period of the prior year and with the first quarter of 1997. The Company believes its research and development expenditures will decrease in the third and fourth quarters of 1997 compared with the same periods of the prior year and compared with the immediate prior quarters, as a result of expected actions under the Company's 1997 supplemental restructuring plan, the details of which will be announced later in the second quarter. In addition, as a result of the acquisition of NeXT, the Company believes it will take a substantial charge to in-process research and development at the time of the completion of the purchase which occurred in the second quarter. For additional information regarding the 1997 supplemental restructuring plan 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. 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. 11 <PAGE> <TABLE> <CAPTION> First First First Fourth Selling, General and Quarter Quarter Quarter Quarter Administrative 1997 1996 Change 1997 1996 Change <S> <C> <C> <C> <C> <C> <C> Selling, general and administrative $ 372 $ 441 (16%) $ 372 $ 359 4% Percentage of net sales 17.5% 14.0% 17.5% 15.5% </TABLE> Selling, general and administrative expenses decreased in amount in the first quarter of 1997 when compared with the corresponding period of 1996, primarily due to reduced expenditures as a result of actions taken under the Company's 1996 restructuring plan. Selling, general and administrative expenses increased in amount in the first quarter of 1997 when compared with the fourth quarter of 1996 primarily as a result of increased advertising and marketing expenditures incurred during the holiday buying season. Selling, general and administrative expenses increased as a percentage of net sales in the first quarter of 1997 when compared to the first and fourth quarters of 1996, as a result of a decrease in the level of net sales. The Company believes its selling, general and administrative expenditures will decrease slightly in the second quarter of 1997 compared with the first quarter of 1997, as a result of lower advertising and marketing expenditures and further implementation of the 1996 restructuring plan. The Company believes its selling, general and administrative expenditures will decrease in the third and fourth quarters of 1997 compared with the same quarters of the prior year and compared with the immediate prior quarters, as a result of its anticipated actions under the 1997 supplemental restructuring plan, the details of which will be announced later in the second quarter, partially offset by the amortization expense on the intangible assets the Company expects to recognize 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. <TABLE> <CAPTION> First First First Fourth Restructuring Costs Quarter Quarter Quarter Quarter 1997 1996 Change 1997 1996 Change <S> <C> <C> <C> <C> <C> <C> Restructuring costs -- -- -- $ (28) NM Percentage of net sales -- -- -- (1.2%) </TABLE> NM: Not meaningful. For information regarding the Company's restructuring actions initiated in the second quarter of 1996, including the adjustment to the restructuring charge in the fourth quarter of 1996, refer to 12 <PAGE> 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. The Company recently announced that supplemental restructuring actions, including significant headcount reductions, will be necessary to meet the objectives of the 1996 restructuring plan. The Company expects to recognize a charge for the estimated costs of those actions when the details of the related supplemental plan are announced later in the second quarter. <TABLE> <CAPTION> First First First Fourth Interest and Other Quarter Quarter Quarter Quarter Income(Expense), Net 1997 1996 Change 1997 1996 Change <S> <C> <C> <C> <C> <C> <C> Interest and other income (expense), net $ 4 $ 10 (60%) $ 4 $ 6 (33%) </TABLE> Interest and other income (expense), net, decreased slightly in the first quarter of 1997 compared with the same period of 1996, primarily as a result of lower net gains on foreign exchange instruments, partially offset by higher interest income. Interest and other income (expense), net, was relatively unchanged in the first quarter of 1997 compared with the fourth quarter of 1996. The Company expects interest income to decrease in the second, third and fourth quarters of 1997 compared with the immediate prior quarters, due to lower cash balances as a result of cash used to acquire NeXT, fund the 1997 supplemental restructuring actions and the remaining 1996 restructuring actions, and fund operations over at least the next two quarters. In January 1997, the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency. The Company was also placed on negative credit watch by Moody's Investor Services. These actions could increase the Company's cost of funds in future periods. <TABLE> <CAPTION> First First First Fourth Income Tax Provision Quarter Quarter Quarter Quarter (Benefit) 1997 1996 Change 1997 1996 Change <S> <C> <C> <C> <C> <C> <C> Provision (benefit) for income taxes -- $ (40) NM -- $ 15 NM Effective tax rate -- 37% -- 37% </TABLE> NM: Not meaningful. At December 27, 1996, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $519 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 quarter a valuation allowance of $41 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 13 <PAGE> 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 and condition. 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. Factors That May Affect Future Results and Financial Condition The Company's future operating results and financial condition are dependent on 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. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and 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 Company's ability to supply products in certain categories; the Company's ability to make timely delivery to the marketplace of technological innovations, including its ability to make timely delivery of planned enhancements to the current Mac 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; uncertainties concerning the Company's ability to successfully implement its strategic direction and restructuring actions, including the expected supplemental restructuring actions; the effects of significant adverse publicity; and the availability of third-party software for particular applications. The Company expects to incur a substantial loss in the second quarter as a result of the aforementioned in-process research and development and restructuring charges, and the aforementioned expected decrease in net sales compared with the first quarter of 1997. The Company expects that it will not return to profitability until at least the fourth quarter of 1997, if not later. 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. The Company recently announced that supplemental restructuring actions, including significant headcount reductions, will be necessary in order to meet the foregoing objectives. The details of the 1997 supplemental restructuring plan will be announced later in the second quarter. 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 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 14 <PAGE> 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. 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. In addition, although the Company believes that the actions it is taking and will take under its current and supplemental restructuring plans, and its acquisition of NeXT, should help restore marketplace confidence in the Macintosh platform, there can be no assurance that such actions will be successful. For the foregoing reasons there can be no assurance that the new business model, including the restructuring actions and the acquisition of NeXT, 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. 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. 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. 15 <PAGE> 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 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 recently announced a "dual track" approach to its OS development. The Company plans to continue to introduce enhancements to the current Mac OS and later introduce a new OS (code named "Rhapsody") which is expected to offer advanced functionality based upon the Mac OS 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 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. 16 <PAGE> The Company is currently the primary maker of hardware that uses the Macintosh operating system ("Mac(registered trademark) 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 introduced by Windows 95, have added features to the Windows platform similar to those offered by the Mac OS. 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. 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 January 1995, as well as an additional licensing initiative in 1996. Several vendors currently sell products that utilize the Macintosh operating system. The Company believes that licensing the operating system will result in a broader installed base on which software vendors can develop and provide technical innovations for the Macintosh platform. However, there can be no assurance that the installed base will be broadened by the licensing of the operating system or that licensing will result in an increase in the number of application software titles or the rate at which vendors will bring to market application software based on the Mac OS. In addition, 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. 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. Depending on customer demand, the Company may supply customers who purchase Cross-Platform Products with Windows operating system software under licensing agreements with Microsoft. However, in order to do so, the Company will need to enter into one or more agreements with certain Microsoft distributors. The Company, International Business Machines Corporation ("IBM") and Motorola, Inc. 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. 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 17 <PAGE> 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 Corporation is an important developer of application software for the Company's products. Accordingly, Microsoft's interest in producing application software for the Company's products may be influenced by Microsoft's perception of its interests as the vendor of the Windows operating systems. The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, Inc., 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. 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. Several competitors of the Company, including Compaq, IBM, and Microsoft, 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. The Company is integrating Internet capabilities into its new and existing hardware and software platforms. There can be no assurance that the Company will be able to continue to do so successfully. In addition, the Internet market is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed products addressing access to, authoring for, or communication over, the Internet. Many of these competitors have a significant lead over the Company in developing products for the Internet, have significantly greater financial, marketing, manufacturing, and technological resources than the Company, or both. 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 international factors, such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. 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). 18 <PAGE> 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 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 cancelled, 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 affect on the Company's financial position and results of operations. 19 <PAGE> 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 a result of the Company's restructuring actions, which include the sale of the Company's Fountain, Colorado, manufacturing facility to SCI Systems, Inc. ("SCI") and a related manufacturing outsourcing agreement with SCI, the proportion of the Company's products produced and distributed under outsourcing arrangements will 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 cancelation 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. The Company's ability to satisfy demand for its products may be limited by the availability of key components. 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. 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. 20 <PAGE> 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. 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 is currently in the process of replacing its existing transaction systems (which include order management, product procurement, distribution, and finance) with a single integrated system as part of its ongoing effort to increase operational efficiency. The Company's future operating results and financial condition could be adversely affected if the Company is unable to implement and effectively manage the transition to this new integrated system. As part of the Company's restructuring plan, the Company sold its Napa, California, data center to MCI Systemhouse ("MCI"), and entered into a data processing outsourcing agreement with MCI. While this outsourcing agreement may lower the Company's fixed costs of operations, it will also reduce the direct control the Company has over its data processing. It is uncertain what effect such diminished control will have on the Company's data processing. 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, increased to $1,627 million at December 27, 1996, from $1,559 million at September 27, 1996. The Company's financial position with respect to cash, cash equivalents, and short-term investments increased to $1,807 million at December 27, 1996, from $1,745 million at September 27, 1996. The Company's cash and cash equivalent balance at December 27, 1996 and September 27, 1996, includes $174 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 generated by operations during the first quarter of 1997 totaled $94 million, primarily the result of a decrease in inventories, partially offset by the Company's net loss. The Company expects to use cash to fund operations over at least the remainder of 1997, if not longer. 21 <PAGE> The Company expects that cash generated from the sale of equity investments and property, plant and equipment will be significantly less for the remainder of 1997 compared with the same period of 1996. Cash used for the purchase of property, plant, and equipment totaled $20 million in the first three 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. In January 1997, the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency. 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, together with continued short-term borrowings from banks, will be sufficient to meet its cash requirements over the next 12 months. In addition to funding net losses over at least the next two quarters, expected cash requirements include, without limitation, an estimated $385 million for the acquisition of NeXT, an estimated $59 million to complete the remaining actions under the 1996 restructuring plan, and an as yet unquantified amount for the actions under the expected 1997 supplemental restructuring plan. 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 plans 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 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 for the years 1984 through 1988, and most of the issues in dispute for these years have been resolved. On June 29, 1995, the IRS issued a notice of deficiency proposing increases to the amount of the Company's federal income taxes for the years 1989 through 1991. The Company has filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate provision has been made for any adjustments that may result from these tax examinations. 22 <PAGE> 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 purported shareholder class action suits, certain consumer class actions relating to monitor-size advertising, and "repetitive stress injury" claims. In December 1996, the Company filed a demurrer to the first amended complaint in the case styled Derek Pritchard v. Michael Spindler et al., and in January 1997 filed a demurrer to the complaint in the action entitled LS Men's Clothing Defined Benefit Pension Fund v. Michael Spindler et al. 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. 23 <PAGE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 2 Agreement and Plan of Merger Among Apple Computer, Inc., Blackbird Acquisition Corporation and NeXT Software, Inc., dated as of December 20, 1996. 10.A.41 Employment Agreement effective December 2, 1996, between Registrant and John B. Douglas III. 27 Financial Data Schedule. (b) Reports on Form 8-K Current Reports on Form 8-K, dated October 28, 1996 and December 24, 1996, respectively, were filed by Registrant with the Securities and Exchange Commission to report under Item 5 thereof the press release issued to the public on October 16, 1996 regarding the Registrant's fourth quarter results and the press release issued to the public on December 20, 1996 regarding the ageement to acquire NeXT Software,Inc. Current Reports on Form 8-K dated December 13, 1996 and Form 8-K/A dated December 20, 1996 respectively, were filed by Registrant with the Securities and Exchange Commission to report under Item 4 thereof the Registrant's appointment on December 4, 1996, of KPMG Peat Marwick LLP as the Company's Certifying Accountant. 24 <PAGE> 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 February 7, 1997 25 <PAGE> INDEX TO EXHIBITS Exhibit Index Number Description Page 2 Agreement and Plan of Merger Among Apple Computer, Inc., Blackbird Acquisition Corporation and NeXT Software, Inc., dated as of December 20, 1996. 27 10.A.41 Employment Agreement effective December 2, 1996, between Registrant and John B. Douglas III. 71 27 Financial Data Schedule. 75 26 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2 <SEQUENCE>2 <TEXT> EXHIBIT 2 AGREEMENT AND PLAN OF MERGER Among APPLE COMPUTER, INC., BLACKBIRD ACQUISITION CORPORATION and NEXT SOFTWARE, INC. Dated as of December 20, 1996 27 <PAGE> TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms ARTICLE II THE MERGER SECTION 2.01. The Merger SECTION 2.02. Effective Time SECTION 2.03. Effect of the Merger SECTION 2.04. Articles of Incorporation; Bylaws SECTION 2.05. Directors and Officers SECTION 2.06. Effect on Capital Stock SECTION 2.07. Dissenting Shares SECTION 2.08. Surrender of Certificates SECTION 2.09. No Further Ownership Rights in Company Common Stock or Company Preferred Stock SECTION 2.10. Lost, Stolen or Destroyed Certificates SECTION 2.11. Taking of Necessary Action; Further Action ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 3.01. Organization, Authority and Qualification of the Company SECTION 3.02. Capital Stock of the Company; Ownership of the Shares SECTION 3.03. Subsidiaries SECTION 3.04. Corporate Books and Records SECTION 3.05. No Conflict SECTION 3.06. Governmental Consents and Approvals SECTION 3.07. Financial Information/Books and Records SECTION 3.08. No Undisclosed Liabilities SECTION 3.09. Receivables; Inventory SECTION 3.10. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions SECTION 3.11. Litigation SECTION 3.12. Certain Interests SECTION 3.13. Compliance with Laws SECTION 3.14. Environmental and Other Permits and Licenses; Related Matters SECTION 3.15. Material Contracts SECTION 3.16. Intellectual Property SECTION 3.17. Real Property SECTION 3.18. Assets SECTION 3.19. Customers SECTION 3.20. Employee Benefit Plans; Employment Agreements SECTION 3.21. Labor Matters SECTION 3.22. Key Employees SECTION 3.23. Taxes 28 <PAGE> SECTION 3.24. Insurance SECTION 3.25. Brokers SECTION 3.26. Approval Requirements ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB SECTION 4.01. Organization and Authority SECTION 4.02. No Conflict SECTION 4.03. Governmental Consents and Approvals SECTION 4.04. Brokers SECTION 4.05. SEC Documents: Undisclosed Liabilities SECTION 4.06. Absence of Certain Changes or Events SECTION 4.07. Litigation SECTION 4.08. Voting Requirements ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. Conduct of Business Prior to the Closing SECTION 5.02. Access to Information SECTION 5.03. Regulatory and Other Authorizations; Notices and Consents SECTION 5.04. Notice of Developments SECTION 5.05. No Solicitation or Negotiation SECTION 5.06. Further Action SECTION 5.07. Conduct of Business by Parent ARTICLE VI STOCK OPTIONS SECTION 6.01. Stock Options SECTION 6.02. Certain Employee Benefit Matters. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01. Securities Filings SECTION 7.02. Company Shareholder Approval. SECTION 7.03. NNM Listing SECTION 7.04. Shelf Registration SECTION 7.05. Form S-8 SECTION 7.06. Guaranteed Debt SECTION 7.07. Directors' and Officers' Indemnification and Insurance ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.01. Conditions to Obligations of Each of the Company and Parent SECTION 8.02. Conditions to Obligations of the Company SECTION 8.03. Conditions to Obligations of Parent 29 <PAGE> ARTICLE IX SURVIVAL; INDEMNIFICATION SECTION 9.01. Survival of Representations and Warranties ARTICLE X TERMINATION AND WAIVER SECTION 10.01. Termination SECTION 10.02. Effect of Termination SECTION 10.03. Waiver ARTICLE XI GENERAL PROVISIONS SECTION 11.01. Expenses SECTION 11.02. Notices SECTION 11.03. Public Announcements SECTION 11.04. Headings SECTION 11.05. Severability SECTION 11.06. Entire Agreement SECTION 11.07. Assignment SECTION 11.08. No Third Party Beneficiaries SECTION 11.09. Amendment SECTION 11.10. Governing Law SECTION 11.11. Counterparts ANNEXES Annex A Form of Agreement of Merger 30 <PAGE> AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of December 20, 1996 (the "Agreement"), among APPLE COMPUTER, INC., a California corporation ("Parent"), BLACKBIRD ACQUISITION CORPORATION, a California corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and NEXT SOFTWARE, INC., a California corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that it is in the best interests of their respective shareholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein; WHEREAS, in furtherance of such acquisition, the Boards of Directors of Parent, Merger Sub and the Company have each approved the merger (the "Merger") of Merger Sub with and into the Company in accordance with the General Corporation Law of the State of California ("California Law") and upon the terms and subject to the conditions set forth herein; WHEREAS, concurrently with the execution of this Agreement and as an inducement to Parent to enter into this Agreement, the Principal Shareholder has entered into a voting agreement (the "Voting Agreement") pursuant to which the Principal Shareholder has agreed to sign a written consent with regard to all of his shares of Company Common Stock and Company Preferred Stock in favor of the approval of this Agreement and the Merger; WHEREAS, the Principal Shareholder will become an at will, part-time employee of Parent reporting to Parent's Chief Executive Officer and Chairman to work on new products, software development, product software strategy and the integration of the Company into Parent; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority. "Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Agreement" or "this Agreement" means this Agreement and Plan of Merger, dated as of December 20, 1996, among the Company, Parent and Merger Sub (including the Exhibits hereto and the Disclosure Schedule) and all amendments hereto made in accordance with the provisions of Section 11.09. "Assets" has the meaning specified in Section 3.18. "Business" means the business of developing, marketing and supporting software and all other business which is conducted by the Company and the Subsidiaries. 31 <PAGE> "California Law" has the meaning specified in the recitals to this Agreement. Termination for "Cause" shall mean termination of an Optionee's employment with Parent because of (A) his refusal or failure (other than by reason of the incapacity of an Optionee due to physical or mental illness) to perform his duties hereunder or to comply with the reasonable directions received or policies established by Parent, the CEO, the Board or any other person to whom an Optionee reports, (B) the commission by an Optionee of a felony, or the perpetration by an Optionee of a dishonest act or a crime involving fraud or moral turpitude or common law fraud against Parent or any affiliate or subsidiary thereof, or (C) any act or omission by an Optionee which is the result of such Optionee's willful misconduct or gross negligence and which, in the good faith opinion of Parent, is injurious in any material respect to the financial condition, business or reputation of Parent or any of its affiliates or subsidiaries. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended through the date hereof. "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System, as updated through the date hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Common Merger Consideration" means $10.00, as adjusted pursuant to Section 2.06(h). "Company" has the meaning specified in the recitals to this Agreement. "Company's Accountants" means KPMG Peat Marwick LLP, independent accountants of the Company. "Company Common Stock" means the common stock of the Company. "Company Preferred Stock" means the Company Series A Preferred Stock, the Company Series B Preferred Stock, the Company Series C Preferred Stock and the Company Series D Preferred Stock, collectively. "Company Series A Preferred Stock" means the Series A Preferred Stock of the Company. "Company Series B Preferred Stock" means the Series B Preferred Stock of the Company. "Company Series C Preferred Stock" means the Series C Preferred Stock of the Company. "Company Series D Preferred Stock" means the Series D Preferred Stock of the Company. "Company Stock Options" means the "Options" referred to in the Stock Option Plan. "Confidentiality Agreement" means the letter agreement effective November 25, 1996 between the Company and Parent. "Consent" has the meaning specified in Section 6.01(c). 32 <PAGE> "Control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause thedirection of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Conversion Ratio" means the quotient determined by dividing the Common Merger Consideration by the Effective Time Parent Price. "Disclosure Schedule" means the Disclosure Schedule attached hereto, dated as of the date hereof, and forming a part of this Agreement. "Effective Time" has the meaning specified in Section 2.02. "Effective Time Parent Price" means the average of the closing prices of Parent Common Stock on the NNM over the last 10 full trading days prior to the Effective Time. "Encumbrance" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential arrangement or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. "Environment" means surface waters, groundwaters, soil, subsurface strata and air. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of non-compliance or violation, notice of liability or potential liability, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law, any Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the Environment, including, without limitation, (a) by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any Governmental Authority or any Person for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "Environmental Laws" means any Law, now or hereafter in effect and as amended, and any judicial, administrative or otherwise binding interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including, without limitation, the CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. SS 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. SS 6901 et seq.; the Clean Water Act,33 U.S.C. SS 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. SS 2601 et seq.; the Clean Air Act, 42 U.S.C. SS 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. SS 300f et seq.; the Atomic Energy Act, 42 U.S.C. SS 2011 et seq; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. SS 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. SS 301 et seq. "Environmental Permits" means all permits, approvals, identification numbers, licenses and other authorizations required under any applicable Environmental Law. "ERISA" has the meaning specified in Section 3.21(a). "Financial Statements" has the meaning specified in Section 3.07(a). "Funded Debt" means the sum of all Indebtedness, including accrued interest, pursuant to the Loan Agreement between the Company and Canon, Inc. dated as of July 27, 1992, as amended. 33 <PAGE> "Good Reason" shall mean, with regard to a Transferred Senior Executive, any of the following: (i) a substantial diminution in such Transferred Senior Executive's position or duties as of the Effective Time, or an adverse change to the title of such Transferred Senior Executive specified as of the Effective Time; or (ii) the failure of Parent or any of its subsidiaries to pay when due such Transferred Senior Executive any salary or established bonus target in accordance with the terms specified as of the Effective Time or the reduction by Parent or any of its subsidiaries of such Transferred Senior Executive's salary; or (iii) the relocation of the office of Parent or any of its subsidiaries at which such Transferred Senior Executive is employed as specified as of the Effective Date (the "Employment Location") to a location more than seventy-five (75) miles away from the Employment Location, or Parent or any of its subsidiaries requiring such Transferred Senior Executive to be based more than seventy-five (75) miles away from the Employment Location (except for required travel on Parent's or any of its subsidiaries' business to an extent substantially consistent with such Transferred Senior Executive's business travel obligations); which, in any such case, is not remedied within thirty (30) days after receipt of written notice from such Transferred Senior Executive specifically delineating each such act and setting forth such Transferred Senior Executive's intentions to resign if such breach is not duly remedied, provided that if the specified breach cannot reasonably be remedied withinsaid thirty (30) day period and Parent commences reasonable steps within said thirty (30) day period to remedy such breach and diligently continues such steps thereafter until a remedy is effected, such breach shall not constitute "Good Reason". "Governmental Authority" means any United States federal, state or local or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body. "Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "Guaranteed Debt" means all Indebtedness of the Company that is personally guaranteed by the Principal Shareholder. "Hazardous Materials" means (a) petroleum and petroleum products, radioactive materials, asbestos-containing materials, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls, and radon gas, and (b) any other chemicals, materials or substances defined or regulated as "hazardous" or "toxic" or words of similar import, under any applicable Environmental Law. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. 34 <PAGE> "Indebtedness" means, without duplication with respect to any Person, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables created in the ordinary course of business), (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (d) all obligations of such Person as lessee under leases that have been or should be, in accordance with U.S. GAAP, recorded as capital leases, (e) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (f) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (g) all Indebtedness of others referred to in clauses (a) through (e) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of suchIndebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered), and (h) all Indebtedness referred to in clauses (a) through (e) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Intellectual Property" means all of the following: (i) U.S. and foreign registered and unregistered trademarks, trade dress, service marks, logos, trade names, corporate names and all registrations and applications to register the same (the "Trademarks"); (ii) issued U.S. and foreign patents and pending patent applications, patent disclosures, and any and all divisions, continuations, continuations-in-part, reissues, reexaminations, and extension thereof, any counterparts claiming priority therefrom, utility models, patents of importation/confirmation, certificates of invention and like statutory rights (the "Patents"); (iii) U.S. and foreign registered and unregistered copyrights (including, but not limited to, those in computer software and databases) rights of publicity and all registrations and applications to register the same (the "Copyrights"); (iv) U.S. and foreign rights in any semiconductor chip product works or "mask works" as such term is defined in 17 U.S.C. 901, et seq. and any registrations or applications therefor ("Mask Works"); (v) all categories of trade secrets as defined in the Uniform Trade Secrets Act including, but not limited to, business information; (vi) all License and agreements pursuant to which the Company has acquired rights in or to any Trademarks, Patents, Copyrights or Mask Works, or Licenses and agreements pursuant to which the Company has Licensed or transferred the right to use any of the foregoing ("Licenses"). "IRS" means the Internal Revenue Service of the United States. "Law" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "Liabilities" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any Law (including, without limitation, any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking. 35 <PAGE> "Material Adverse Effect" means any circumstance, change in, or effect on the Business that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Business is, or could reasonably be expected to be, materially adverse to the business, operations, assets or Liabilities, results of operations or the financial condition of the Company and the Subsidiaries, taken as a whole; provided, however, that a Material Adverse Effect will not exist as a result of circumstances that are demonstrated to haveresulted directly from the public announcement of the Merger or the performance by the Company of its obligations hereunder. "Material Contracts" has the meaning specified in Section 3.15(a). "Merger Consideration" means the Common Merger Consideration, the Series A Merger Consideration, the Series B Merger Consideration, the Series C Merger Consideration and the Series D Merger Consideration, collectively. "Multiemployer Plan" has the meaning specified in Section 3.21(b). "Multiple Employer Plan" has the meaning specified in Section 3.21(b). "NNM" means the Nasdaq National Market. "Parent" has the meaning specified in the recitals to this Agreement. "Parent Common Stock" means the common stock of Parent. "Permits" has the meaning specified in Section 3.14(a). "Permitted Encumbrances" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens for taxes, assessments and governmental charges or levies not yet due and payable or for taxes, assessments and governmental charges or levies that are being contested in good faith; (b) Encumbrances imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations that (i) are not overdue for a period of more than 30 days and (ii) are not in excess of $100,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (d) minor survey exceptions, reciprocal easement agreements and other customary encumbrances on and imperfections to title to real property and other Encumbrances that (i) do not render title to the property encumbered thereby uninsurable and (ii) do not, individually or in the aggregate, materially adversely affect the value or use of such property for its current purposes; and (e) Encumbrances related to Funded Debt and purchase money mortgages and conditional sales contracts entered into in the ordinary course of business. "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Plans" has the meaning specified in Section 3.21(a). "Principal Shareholder" means Steven P. Jobs. "RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C. SS 6901 et seq., as amended through the date hereof. "Receivables" means any and all accounts receivable, notes and other amounts receivable by the Company or any Subsidiary from third parties, including, without limitation, customers, arising before the Effective Time, whether or not in the ordinary course, together with all unpaid financing charges accrued thereon. 36 <PAGE> "Regulations" means the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes. "Release" means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like into or upon any land or water or air or otherwise entering into the Environment. "Series A Merger Consideration" means (i) an amount of cash equal to the amount by which the unadjusted Common Merger Consideration exceeds the product of (A) the Share Number and (B) the Effective Time Parent Price and (ii) that number (the "Share Number") of shares of Parent Common Stock equal to the quotient of 1,500,000 and the number of outstanding shares of Company Series A Preferred Stock immediately prior to the Effective Time, as adjusted pursuant to Section 2.06(h). "Series B Merger Consideration" means $10.00, as adjusted pursuant to Section 2.06(h). "Series C Merger Consideration" means $10.03009027, as adjusted pursuant to Section 2.06(h). "Series D Merger Consideration" means the $10.00, as adjusted pursuant to Section 2.06(h). "Stock Option Plan" means the NeXT Software, Inc. 1990 Stock Option Plan. "Subsidiaries" means all corporations, partnerships, joint ventures, associations and other entities controlled by the Company directly or indirectly through one or more intermediaries. "Tax" or "Taxes" means any and all taxes, levies, duties, tariffs, imposts, and other similar fees or charges of any kind, foreign or domestic, (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto), imposed by any government or taxing authority, including, without limitation: taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs duties and tariffs. "Unvested Company Stock Options" means Company Stock Options that are not exercisable immediately prior to the Effective Time. "U.S. GAAP" means United States generally accepted accounting principles and practices as in effect from time to time and applied consistently throughout the periods involved. "Vested Company Stock Options" means Company Stock Options that are exercisable immediately prior to the Effective Time. 37 <PAGE> ARTICLE II THE MERGER SECTION 2.01. The Merger. At the Effective Time (as defined in Section 2.02) and subject to and upon the terms and conditions of this Agreement and California Law, Merger Sub will be merged with and into the Company, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation". SECTION 2.02. Effective Time. As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article VIII, the parties hereto shall cause the Merger to be consummated by filing an agreement of merger in the form attached hereto as Annex A (the "Agreement of Merger") with the Secretary of State of the State of California, in such form as required by, and executed in accordance with the relevant provisions of, California Law (the time of such filing or such later mutually agreed upon time as may be set forth in the Agreement of Merger being the "Effective Time"). SECTION 2.03. Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law. Withoutlimiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.04. Articles of Incorporation; Bylaws. (a) Articles of Incorporation. Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time the Articles of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation; provided, however, that Article I of the Articles of Incorporation of the Surviving Corporation shall be amended to read as follows: "The name of the corporation is NeXT Software, Inc.". (b) Bylaws. The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by California Law, the Articles of Incorporation of the Surviving Corporation and such Bylaws. SECTION 2.05. Directors and Officers. The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation, and the officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. SECTION 2.06. Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub and the Company or the holders of any of the following securities: (a) Conversion of Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than any such shares to be canceled pursuant to Section 2.06(f) or constituting Dissenting Shares (as defined and to the extent provided in Section 2.07(a)) will be cancelled and extinguished and be converted automatically into the right to receive the Common Merger Consideration in the manner provided in Section 2.08, upon surrender of the certificate representing such share of Company Common Stock. 38 <PAGE> (b) Conversion of Company Series A Preferred Stock. Each share of Company Series A Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any such shares to be cancelled pursuant to Section 2.06(f) or constituting Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive theSeries A Merger Consideration in the manner provided in Section 2.08, upon surrender of the certificate representing such share of Company Series A Preferred Stock. (c) Conversion of Company Series B Preferred Stock. Each share of Company Series B Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any such shares to be cancelled pursuant to Section 2.06(f) or constituting Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive the Series B Merger Consideration in the manner provided in Section 2.08, upon surrender of the certificate representing such share of Company Series B Preferred Stock. (d) Conversion of Company Series C Preferred Stock. Each share of Company Series C Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any such shares to be cancelled pursuant to Section 2.06(f) or constituting Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive the Series C Merger Consideration in the manner provided in Section 2.08, upon surrender of the certificate representing such share of Company Series C Preferred Stock. (e) Conversion of Company Series D Preferred Stock. Each share of Company Series D Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding any such shares to be cancelled pursuant to Section 2.06(f) or constituting Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive the Series D Merger Consideration in the manner provided in Section 2.08, upon surrender of the certificate representing such share of Company Series D Preferred Stock. (f) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of Company Common Stock and Company Preferred Stock held in the treasury of the Company and each share of Company Common Stock and Company Preferred Stock owned by Parent or any direct or indirect wholly owned subsidiary of Parent or of the Company immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof. (g) Assumption of Stock Option Plan. The Stock Option Plan and all Company Stock Options then outstanding under the Stock Option Plan shall be assumed by Parent subject to the provisions of Article VI. (h) Adjustments to Merger Consideration. The applicable Merger Consideration per share of Company Common Stock, Company Series A Preferred Stock, Company Series B Preferred Stock, Company Series C Preferred Stock and Company Series D Preferred Stock shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Company Common Stock or Company Preferred Stock), reorganization, recapitalization or other like change with respect to Company Common Stock or Company Preferred Stock occurring after the date hereof and prior to the Effective Time. (i) Fractional Shares. No fraction of a share of Parent Common Stock will be issued, but in lieu thereof each holder of shares of Company Series A Preferred Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall receive from Parent an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the Effective Time Parent Price. 39 <PAGE> (j) Capital Stock of Merger Sub. Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time will be cancelled and extinguished and be converted automatically into the right to receive one newly and validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. SECTION 2.07. Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of capital stock of the Company held by a holder who has exercised dissenters' rights for such shares in accordance with California Law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall not be converted into or represent a right to receive Merger Consideration pursuant to Section 2.06, but the holder thereof shall only be entitled to such rights as are granted by California Law. (b) Notwithstanding the provisions of subsection (a), if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) his dissenters' rights, then, as of the later of Effective Time or the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the applicable Merger Consideration, without interest thereon, upon surrender of the certificate or certificates representing such Dissenting Shares. (c) The Company shall give Parent (i) prompt notice of any written demands received by the Company to require the Company to purchase shares of capital stock of the Company, withdrawals of such demands, and any other instruments served pursuant to California Law and received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. SECTION 2.08. Surrender of Certificates. (a) Exchange Agent. Parent shall supply, or shall cause to be supplied, to or for the account of a bank or trust company designated by Parent (the "Exchange Agent"), in trust for the benefit of the holders of Company Common Stock and Company Preferred Stock (other than Dissenting Shares), for exchange in accordance with this Section 2.08, through the Exchange Agent, (i) cash payable pursuant to Section 2.06 and (ii) certificates evidencing the shares of Parent Common Stock issuable pursuant to Section 2.06, in each case in exchange for outstanding shares of Company Common Stock and Company Preferred Stock. (b) Parent to Provide Parent Common Stock. At or prior to the Effective Time, Parent shall make available to the Exchange Agent for exchange and payment in accordance with this Article II, through the procedures set forth in the Exchange Agent Agreement, the shares of Parent Common Stock issuable pursuant to, and the cash payable pursuant to, Section 2.06 and in accordance with the Exchange Agent Agreement. (c) Exchange Procedures. The Surviving Corporation shall, in accordance with the Exchange Agent Agreement, cause to be delivered or mailed to each holder of record of a certificate or certificates (the "Certificates") which immediately prior to the Effective Time represented outstanding shares of Company Common Stock or Company Preferred Stock whose shares were converted into the right to receive Merger Consideration pursuant to Section 2.06, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates or shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the cash payable to such holder pursuant to Section 2.06 and certificates representing shares of Parent Common Stock payable to such holder pursuant to Section 2.06, if any. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by 40 <PAGE> Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor the cash payable to such holder pursuant to Section 2.06 and a certificate representing the number of whole shares of Parent Common Stock and payment in lieu of fractional shares, if any, which such holder has the right to receive pursuant to Section 2.06, and the Certificate so surrendered shall forthwith be cancelled. Until so surrendered, each outstanding Certificatethat, prior to the Effective Time, represented shares of Company Common Stock or Company Preferred Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of Parent Common Stock, if any, into which such shares of Company Common Stock or Company Preferred Stock shall have been so converted, the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 2.06(i), and the right to receive cash in the manner provided by Section 2.06 hereof. (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable with respect to such shares of Parent Common Stock. (e) Transfers of Ownership. If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Parent Common Stock in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. (f) No Liability. Notwithstanding anything to the contrary in this Section 2.08, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of Company Common Stock or Company Preferred Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. SECTION 2.09. No Further Ownership Rights in Company Common Stock or Company Preferred Stock. All cash paid or payable in respect of shares of Company Common Stock and Company Preferred Stock in accordance with the terms hereof (together with all shares of Parent Common Stock issued upon the surrender for exchange of shares ofCompany Series A Preferred Stock in accordance with the terms hereof) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock and Company Preferred Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Common Stock or Company Preferred Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article II. 41 <PAGE> SECTION 2.10. Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Company Common Stock or Company Preferred Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock, cash for fractional shares, if any, as may be required pursuant to Section 2.06(i) and the cash payable in the manner specified in Section 2.06 hereof; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance and payment thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. SECTION 2.11. Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Parent, the officers and directors of the Company and Parent are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY As an inducement to Parent to enter into this Agreement, the Company hereby represents and warrants to Parent as follows: SECTION 3.01. Organization, Authority and Qualification of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on the Business as it has been and is currently conducted. Except as set forth inSection 3.01 of the Disclosure Schedule, the Company is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the failure to be licensed or qualified would have a Material Adverse Effect. The Company has not taken any action that in any respect conflicts with, constitutes a default under or results in a violation of any provision of its Articles of Incorporation or Bylaws. True and correct copies of the Articles of Incorporation and Bylaws of the Company, each as in effect on the date hereof, have been made available or delivered by the Company to Parent. This Agreement has been duly executed and delivered by the Company, and (assuming due authorization, execution and delivery by Parent and Merger Sub) this Agreement constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 42 <PAGE> SECTION 3.02. Capital Stock of the Company; Ownership of the Shares. (a) The authorized capital stock of the Company consists of 100,000,000 shares of Company Common Stock, 14,000,000 shares of Company Series A Preferred Stock, 5,000,000 shares of Company Series B Preferred Stock, 9,412,500 shares of Company Series C Preferred Stock and 232,000 shares of Company Series D Preferred Stock. As of the date hereof, (i) 4,028,930 shares of Company Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) 10,050,000 shares of Company Common Stock are reserved for issuance pursuant to employee stock options granted pursuant to the Stock Option Plan, (iii) 7,626,901 Company Stock Options are outstanding thereunder, (iv) 12,200,000 shares of Company Series A Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (v) 5,000,000 shares of Company Series B Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (vi) 9,012,500 shares of Company Series C Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, and (vii) 232,000 shares of Company Series D Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable. None of the issued and outstanding shares of Company Common Stock or Company Preferred Stock was issued in violation of any preemptive rights. Except for the Stock Option Plan and except as disclosed in Section 3.02(a)(i) of the Disclosure Schedule, there are no options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the capital stock of the Company to which the Company is a party or obligating the Company to issue or sell any shares of capital stock of, or any other interest in, the Company. There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of Company Common Stock or Company Preferred Stock or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person. Except as disclosed in Section 3.02(a)(ii) of the Disclosure Schedule, there are no voting trusts, stockholder agreements, proxies or other agreements orunderstandings in effect with respect to the voting or transfer of any of the Company Common Stock or Company Preferred Stock. (b) Except as set forth in Section 3.02(b) of the Disclosure Schedule, the stock register of the Company accurately records: (i) the name and last known address of each owner of record of shares of capital stock of the Company and (ii) the certificate number of each certificate evidencing shares of capital stock issued by the Company, the number of shares evidenced by each such certificate, the date of issuance thereof and, in the case of cancellation, the date of cancellation. SECTION 3.03. Subsidiaries. (a) Section 3.03(a) of the Disclosure Schedule sets forth a true and complete list of all Subsidiaries, listing for each Subsidiary its name, type of entity, the jurisdiction and date of its incorporation or organization, its authorized capital stock, partnership capital or equivalent, the number and type of its issued and outstanding shares of capital stock, partnership interests or similar ownership interests and the current ownership of such shares, partnership interests or similar ownership interests by the Company and its Subsidiaries. (b) There are no other corporations, partnerships, joint ventures, associations or other similar entities in which the Company owns, of record or beneficially, any direct or indirect equity or other interest or any right (contingent or otherwise) to acquire the same. (c) Except as set forth in Section 3.03(c) of the Disclosure Schedule, each Subsidiary that is a corporation: (i) is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation, (ii) has all necessary corporate power and authority to own, operate or lease the properties and assets owned, operated or leased by such Subsidiary and to carry on its business as it has been and is currently conducted by such Subsidiary and (iii) is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except for, in each of clauses (i), (ii) and (iii), such failures which, when taken together with all other such failures, would not have a Material Adverse Effect. Each Subsidiary that is not a corporation: (i) is duly organized and validly existing under the laws of its 43 <PAGE> jurisdiction of organization, (ii) has all necessary power and authority to own, operate or lease the material properties and material assets owned, operated or leased by such Subsidiary and to carry on its business as it has been and is currently conducted by such Subsidiary and (iii) is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except for, in each of clauses (i), (ii) and (iii), such failures which, when taken together with all other such failures, would not have a Material Adverse Effect. (d) Other than directors' qualifying shares in foreign jurisdictions, all the outstanding shares of capital stock of each Subsidiary that is a corporation are validly issued, fully paid, nonassessable and free of preemptive rights and are owned by the Company, whether directly or indirectly, free and clear of all Encumbrances. (e) There are no options, warrants, convertible securities, or other rights, agreements, arrangements or commitments of any character to which Company or any Subsidiary is a party obligating the Company or any Subsidiary to issue or sell any shares of capital stock of, or any other interest in, any Subsidiary. (f) No Subsidiary has taken any action that in any respect conflicts with, constitutes a default under or results in a violation of any provision of its charter or by-laws (or similar organizational documents) except for such actions which, when taken together with all other such actions, would not have a Material Adverse Effect. True and complete copies of the charter and by-laws (or similar organizational documents), in each case as in effect on the date hereof, of each Subsidiary have been made available or delivered by the Company to Parent. (g) There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any shares of capital stock of or any other interests in any Subsidiary. (h) The stock register of each Subsidiary that is a corporation accurately records: (i) the record owners of capital stock of such Subsidiary and (ii) the certificate number of each certificate evidencing shares of capital stock issued by such Subsidiary, the number of shares evidenced each such certificate, the date of issuance thereof and, in the case of cancellation, the date of cancellation. SECTION 3.04. Corporate Books and Records. Complete and accurate copies of all the minute books and of the stock register of the Company and each Subsidiary have been provided or made available by the Company to Parent. SECTION 3.05. No Conflict. Subject to approval of the Merger and this Agreement by the Company's shareholders (which at a minimum shall be provided by the written consent of the Principal Shareholder), assuming that all consents, approvals, authorizations and other actions described in Section 3.06 have been obtained and all filings and notifications listed in Section 3.06 of the Disclosure Schedule have been made, the execution, delivery and performance of this Agreement by the Company do not and will not (a) violate, conflict with or result in the breach of any provision of the charter or by-laws (or similar organizational documents) of the Company or any Subsidiary, (b) conflict with or violate any Law or Governmental Order applicable to the Company or any Subsidiary (other than conflicts and violations which could not reasonably be expected to have a MaterialAdverse Effect or as would occur solely as a result of the identity or the legal or regulatory status of Parent or any of its Affiliates), or (c) except as set forth in Section 3.05(c) of the Disclosure Schedule, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance (other than a Permitted Encumbrance) on any of the assets or properties of the Company or any Subsidiary 44 <PAGE> pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which the Company or any Subsidiary is a party or by which any of such assets or properties is bound or affected. SECTION 3.06. Governmental Consents and Approvals. The execution, delivery and performance of this Agreement by the Company do not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to any Governmental Authority, except (a) as described in Section 3.06 of the Disclosure Schedule, (b) the notification requirements of the HSR Act, (c) the filing of the Agreement of Merger and (d) such other consents, the absence of which could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.07. Financial Information/Books and Records. (a) True and complete copies of (i) the audited consolidated balance sheet of the Company for each of the three fiscal years ended as of December 31, 1995, December 31, 1994 and December 31, 1993, and the related audited consolidated statements of income, retained earnings, stockholders' equity and cash flows of the Company, together with all related notes and schedules thereto, accompanied by the reports thereon of the Company's Accountants (collectively referred to herein as the "Financial Statements") and (ii) the unaudited consolidated balance sheet of the Company as of September 30, 1996 (the "Interim Balance Sheet"), and the related consolidated statements of income, retained earnings, stockholders' equity and cash flows of the Company, together with all related notes and schedules thereto (collectively referred to herein as the "Interim Financial Statement") have been made available or delivered by the Company to Parent. The Financial Statements and the Interim Financial Statement (i) were prepared in accordance with the books of account and other financial records of the Company, (ii) present fairly the consolidated financial condition and results of operations of the Company and the Subsidiaries as of the dates thereof or for the periods covered thereby, (iii) have been prepared in accordance with U.S. GAAP applied on a basis consistent with the past practices of the Company and (iv) include all material adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial condition of the Company and the Subsidiaries and the results of the operations of the Company and the Subsidiaries as of the dates thereof or for the periods covered thereby, except that the unaudited Interim Financial Statement wasand is subject to normal and recurring year-end adjustments which were or were not expected to be material in amount. (b) The books of account and other financial records of the Company and the Subsidiaries: (i) reflect all items of income and expense and all assets and Liabilities required to be reflected therein in accordance with U.S. GAAP applied on a basis consistent with the past practices of the Company and the Subsidiaries, respectively, (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies and (iii) have been maintained in accordance with good business and accounting practices. SECTION 3.08. No Undisclosed Liabilities. There are no Liabilities of the Company or any Subsidiary required by U.S. GAAP to be recognized or disclosed on a consolidated balance sheet of the Company and the Subsidiaries in the notes thereto, other than Liabilities (i) reflected or reserved against on the Interim Balance Sheet, (ii) disclosed in Section 3.08 of the Disclosure Schedule or (iii) incurred since the date of the Interim Balance Sheet in the ordinary course of business, consistent with the past practice, of the Company and the Subsidiaries and which do not and could not reasonably be expected to have a Material Adverse Effect. Reserves are reflected on the Interim Balance Sheet against all material Liabilities of the Company and the Subsidiaries in amounts that have been established on a basis consistent with the past practices of the Company and the Subsidiaries and in accordance with U.S. GAAP. 45 <PAGE> SECTION 3.09. Receivables; Inventory. (a) Except to the extent, if any, reserved for on the Interim Balance Sheet, all Receivables reflected on the Interim Balance Sheet arose from the sale of inventory or services and in the ordinary course of business consistent with past practice and, except as reserved against on the Interim Balance Sheet, constitute, to the Company's knowledge, only valid, undisputed claims of the Company or a Subsidiary not subject to material and valid claims of set-off or other defenses or counterclaims other than normal cash discounts accrued in the ordinary course of business consistent with past practice. All Receivables reflected on the Interim Balance Sheet (subject to the reserve for bad debts, if any, reflected on the Interim Balance Sheet) have been collected or are or could reasonably be expected to be collectible in the normal course, without resort to litigation or extraordinary collection activity. (b) All of the inventories of the Company reflected on the Interim Balance Sheet and the Company's books and records on the date hereof were purchased, acquired or produced in the ordinary and regular course of business and in a manner consistent with the Company's regular inventory practices and are set forth on the Company's books and records in accordance with the practices and principals of the Company consistent with the method of treating said items in prior periods. The presentation of inventory on the Interim BalanceSheet conforms to U.S. GAAP and such inventory is stated at the lower of cost (determined using the first-in, first-out method) or net realizable value. SECTION 3.10. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Since the date of the Interim Balance Sheet, except as disclosed in Section 3.10 of the Disclosure Schedule, the business of the Company and the Subsidiaries has been conducted in the ordinary course and consistent with past practice. As amplification and not limitation of the foregoing, except as disclosed in Section 3.10 of the Disclosure Schedule, since the date of the Interim Balance Sheet, neither the Company nor any Subsidiary has: (i) permitted or allowed any of the material assets or material properties (whether tangible or intangible) of the Company or any Subsidiary to be subjected to any Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to the Effective Time; (ii) except in the ordinary course of business consistent with past practice, discharged or otherwise obtained the release of any Encumbrance or paid or otherwise discharged any Liability, other than current liabilities reflected on the Interim Balance Sheet and current liabilities incurred in the ordinary course of business consistent with past practice since the date of the Interim Balance Sheet; (iii) except in the ordinary course of business consistent with past practice, made any loan to, guaranteed any Indebtedness of or otherwise incurred any Indebtedness on behalf of any Person; (iv) redeemed any of the capital stock or declared, made or paid any dividends or distributions (whether in cash, securities or other property) to the holders of capital stock of the Company or any Subsidiary or otherwise, other than dividends, distributions and redemptions declared, made or paid by any Subsidiary solely to the Company; (v) made any material changes in the customary methods of operations of the Company or any Subsidiary, including, without limitation, practices and policies relating to manufacturing, purchasing, inventories, marketing, selling and pricing; (vi) merged with, entered into a consolidation with or acquired an interest of 5% or more in any Person or acquired a substantial portion of the assets or business of any Person or any division or line of business thereof, or otherwise acquired any assets material to the Company and the Subsidiaries taken as a whole, other than in the ordinary course of business consistent with past practice; (vii) made any capital expenditure or commitment for any capital expenditure in excess of $200,000 individually or $2,000,000 in the aggregate; 46 <PAGE> (viii) sold, transferred, leased, subleased, licensed or otherwise disposed of any material properties or material assets, real, personal or mixed material to the Company and the Subsidiaries taken as a whole but excluding the sale of inventories in the ordinary course of business consistent with past practice; (ix) except for exercises and conversions of securities outstanding on the date of this Agreement and customary stock option grants (covering no greater than 150,000 or, in the event that the Effective Time has not occurred by March 31, 1997, 300,000 shares of Company Common Stock) for new hires and existing employees consistent with past practice and issued or sold any capital stock, notes, bonds or other securities, or any option, warrant or other right to acquire the same, of, or any other interest in, the Company or any Subsidiary; (x) entered into any material agreement, arrangement or transaction with any of its directors, officers, employees or shareholders (or with any relative, beneficiary, spouse or Affiliate of such Person); (xi) (A) other than as contemplated by this Agreement, granted any material increase, or announced any material increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by the Company or any Subsidiary to any of its employees, including, without limitation, any increase or change pursuant to any Plan or (B) established or increased or promised to increase any benefits under any Plan, in either case except as required by Law or any existing agreement and/or involving ordinary increases consistent with the past practices of the Company or such Subsidiary; (xii) materially written down or materially written up (or failed to write down or write up in accordance with U.S. GAAP consistent with past practice) the value of any inventories or Receivables or revalued any assets of the Company or any Subsidiary other than in the ordinary course of business consistent with past practice and in accordance with U.S. GAAP; (xiii) amended, terminated, cancelled or compromised any material claims of the Company or any Subsidiary or waived any other rights of substantial value to the Company or any Subsidiary; (xiv) made any change in any method of accounting or accounting practice or policy used by the Company or any Subsidiary, other than such changes required by U.S. GAAP; (xv) allowed any Permit or Environmental Permit that was issued or relates to the Company or any Subsidiary or otherwise relates to any asset to lapse or terminate or failed to renew any such Permit or Environmental Permit or any insurance policy that is scheduled to terminate or expire within 45 calendar days of the Effective Time, except for such lapses, terminations or failures which could not reasonably be expected to have a Material Adverse Effect; (xvi) materially amended, modified or consented to the termination of, any Material Contract or the Company's or any Subsidiary's rights thereunder; (xvii) amended or restated the Articles of Incorporation or the Bylaws (or other organizational documents) of the Company or any Subsidiary; (xviii) terminated, discontinued, closed or disposed of any plant, facility or other business operation, or laid off any employees (other than layoffs of less than twenty (20) employees in any six-month period in the ordinary course of business consistent with past practice) or implemented any early retirement, separation or program providing early retirement window benefits within the meaning of Section 1.401(a)-4 of the Regulations or announced or planned any such action or program for the future; 47 <PAGE> (xix) made any express or deemed election (other than an election pursuant to Section 341(f) of the Code) or settled or compromised any liability, with respect to Taxes of the Company or any Subsidiary; (xx) suffered any casualty loss or damage with respect to any asset which individually has a replacement cost of more than $500,000, whether or not such loss or damage shall have been covered by insurance; (xxi) received notice of any claim of ownership by a third party of the Owned Intellectual Property or of infringement by the Company of any third party's Intellectual Property rights; (xxii) materially changed the pricing or royalties set or charged by the Company to its customers or licensees or been the subject of a material change in pricing or royalties set or charged with regard to the Licensed Intellectual Property; or (xxiii) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 3.10 except as is expressly contemplated by this Agreement. SECTION 3.11. Litigation. Except as set forth in Section 3.11 of the Disclosure Schedule (which, with respect to each Action disclosed therein, sets forth: the parties, nature of the proceeding, date and method commenced, amount of damages or other relief sought and, if applicable, paid or granted), there are no Actions by or against the Company or any Subsidiary (or by or against the Company or any Affiliate thereof and relating to the Company or any Subsidiary), or affecting any of the Assets, pending before any Governmental Authority (or, to the knowledge of the Company, threatened to be brought by or before any Governmental Authority) that could reasonably be expected to have a Material Adverse Effect. None of the matters disclosed in Section 3.11 of the Disclosure Schedule has or has had a Material Adverse Effect or could reasonably be expected to materially adversely affect the legality, validity or enforceability of this Agreement or the consummation of the transactions contemplated hereby. Except as set forth in Section 3.11 of the Disclosure Schedule, none of the Company, the Subsidiaries nor any of the Assets nor the Company is subject to any Governmental Order (nor, to the knowledge of the Company are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has or has had a Material Adverse Effect since the date of the Interim Balance Sheet. SECTION 3.12. Certain Interests. (a) Except as disclosed in Section 3.12(a) of the Disclosure Schedule, no officer or director of the Company or any Subsidiary and no relative or spouse (or relative of such spouse) who resides with, any such officer or director: (i) has any material direct or indirect financial interest in any competitor, supplier or customer of the Company or any Subsidiary, provided, however, that the ownership of debt securities or the ownership of equity securities representing no more than ten percent of the outstanding voting power of any competitor, supplier or customer, shall not be deemed to be a "financial interest" so long as the Person owning such securities has no other material connection or relationship with such competitor, supplier or customer; (ii) owns, directly or indirectly, in whole or in part, or has any other material interest in any material tangible or intangible property which the Company or any Subsidiary uses or has used in the conduct of its business or otherwise; or (iii) has outstanding any material Indebtedness to the Company or any Subsidiary. 48 <PAGE> (b) Except as disclosed in Section 3.12(b) of the Disclosure Schedule, neither the Company nor any Subsidiary has any material Liability or any other obligation of any nature whatsoever to any officer, director or shareholder of the Company or any Subsidiary or to any relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such officer, director or shareholder. SECTION 3.13. Compliance with Laws. (a) Except as set forth in Section 3.13(a) of the Disclosure Schedule, the Company and the Subsidiaries have each conducted and continue to conduct the Business in substantial compliance with all Laws and Governmental Orders applicable to the Company or any Subsidiary or any of the Assets, and neither the Company nor any Subsidiary is in material violation of any such Law or Governmental Order. To the knowledge of executive officers of the Company, none of the Company, any Subsidiary nor any officer, director, employee, agent or representative of the Company or any Subsidiary has, on behalf of the Company, furthered or supported any foreign boycott in violation of the Anti- Boycott laws and regulations promulgated pursuant to the Export Administration Act of 1979 (50 U.S.C.A. Appx S 2407, and regulations promulgated thereunder). (b) Section 3.13(b) of the Disclosure Schedule sets forth a brief description of each material Governmental Order applicable to the Company or any Subsidiary or any of the Assets, and no such Governmental Order has or has had a Material Adverse Effect. SECTION 3.14. Environmental and Other Permits and Licenses; Related Matters. (a) Except as disclosed in Section 3.14(a)(i) of the Disclosure Schedule, the Company and the Subsidiaries currently hold and at all times have possessed all the health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities (collectively, "Permits"), including, without limitation, Environmental Permits, necessary or proper for the current use, occupancy and operation of each Asset of the Company and the Subsidiaries, and all such Permits are in full force and effect. Section 3.14(a)(ii) of the Disclosure Schedule sets forth those Permits the absence of which would have a Material Adverse Effect. Except as disclosed in Section 3.14(a)(iii) of the Disclosure Schedule, to the Company's knowledge, there is no existing practice, action or activity of the Company or any Subsidiary and, to the Company's knowledge, no existing condition of the Assets of the Company or any Subsidiary which will give rise to any civil or criminal Liability under, or violate or prevent compliance with, any health or occupational safety or other applicable Law. None of the Company or any Subsidiary has received any notice from any Governmental Authority revoking, cancelling, rescinding, materially modifying or refusing to renew any Permit or providing written notice of violations under any Law. Except as disclosed in Section 3.14(a)(iv) of the Disclosure Schedule, the Company and each Subsidiary is in all material respects in compliance with the Permits and the requirements of the Permits. Section 3.14(a)(v) of the Disclosure Schedule identifies all Permits that are nontransferable or which will require the consent of any Governmental Authority in the event of the consummation of the transactions contemplated by this Agreement. (b) Except as disclosed in Section 3.14(b) of the Disclosure Schedule, (i) to the knowledge of the Company, Hazardous Materials have not been treated, stored, disposed of or transported to or from, or Released on any real property owned or leased by theCompany or any Subsidiary (the "Real Property") or, to the knowledge of the Company, any property adjoining any such real property; (ii) the Company and the Subsidiaries have disposed of all wastes, including those wastes containing Hazardous Materials, in compliance with all applicable Environmental Laws and Environmental Permits; (iii) there are no past, pending or, to the Company's knowledge, threatened Environmental Claims against the Company, any Subsidiary, or any Real Property; (iv) no Real Property or, to the knowledge of the Company, any property adjoining any Real Property, is listed or proposed for listing on the National Priorities List under CERCLA or on the CERCLIS or any analogous state list of sites requiring investigation or cleanup; and (v) to the Company's knowledge, neither the Company nor any Subsidiary has transported or arranged for the 49 <PAGE> transportation of any Hazardous Materials to any location that is listed or proposed for listing on the National Priorities List under CERCLA or on the CERCLIS or any analogous state list or which is the subject of any Environmental Claim. (c) Except as disclosed in Section 3.14(c) of the Disclosure Schedule, to the Company's knowledge, there are no circumstances with respect to any Real Property or other Asset or the operation of the Company's business which could reasonably be anticipated (i) to form the basis of an Environmental Claim against the Company, any Subsidiary or any Real Property or Asset or (ii) to cause such Real Property or Asset to be subject to any restrictions on ownership, occupancy, use or transferability under any applicable Environmental Law. SECTION 3.15. Material Contracts. (a) Section 3.15(a) of the Disclosure Schedule lists each of the following material contracts and material agreements (including, without limitation, oral and informal arrangements) of the Company and the Subsidiaries (such contracts and agreements, together with all material contracts, agreements, leases and subleases concerning the management or operation of any Real Property (including, without limitation, material brokerage contracts) listed or otherwise disclosed in Section 3.17(a) or 3.17(b) of the Disclosure Schedule to which the Company or any Subsidiary is a party and all material agreements relating to Intellectual Property set forth in Section 3.18(a) of the Disclosure Schedule, being "Material Contracts"): (i) each contract or agreement for the purchase of inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to the Company or any Subsidiary under the terms of which the Company or any Subsidiary: (A) is likely to pay or otherwise give consideration of more than $250,000 in the aggregate during the calendar year ended December 31, 1996 or (B) is likely to pay or otherwise give consideration of more than $500,000 in the aggregate over the remaining term of such contract; (ii) each contract and agreement for the sale of Inventory or other personal property or for the furnishing of services by the Company or any Subsidiary which: (A) is likely to involve consideration of more than $500,000 in the aggregate during the calendar year ended December 31, 1996 or (B) is likely to involve consideration of more than $2,000,000 in the aggregate over the remaining term of the contract; (iii) all material broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising contracts and agreements to which the Company or any Subsidiary is a party; (iv) all management contracts and contracts with independent contractors or consultants (or similar arrangements) to which the Company or any Subsidiary is a party and which are not cancelable without penalty or further payment and without more than 30 days' notice; (v) all contracts and agreements relating to Indebtedness in excess of $100,000 of the Company or any Subsidiary; (vi) all contracts and agreements with any Governmental Authority to which the Company or any Subsidiary is a party; (vii) all contracts and agreements to which the Company or any Subsidiary is a party that limit or purport to limit the ability of the Company or any Subsidiary to compete in any line of business or with any Person or in any geographic area or during any period of time; (viii) all contracts and agreements between or among the Company and any Affiliate of the Company that will survive (in whole or in part) the Effective Time; (ix) all contracts and agreements providing for benefits under any Plan; 50 <PAGE> (x) any distribution, joint marketing or development agreement; (xi) all contracts and agreements under which the Company has obtained or will obtain Intellectual Property that is a component of any of the Company's products or services or that is necessary to develop, test, support, modify, maintain, reproduce, distribute, license or sell the Company's products or provide the Company's services; (xii) all contracts and agreements that in any way substantially limit or restrict or would substantially limit and restrict the Company's or, immediately after the Effective Time, Parent's or its subsidiaries' ability to use, modify, display,reproduce, distribute, license or sell the Company's products or provide the Company's services; and (xiii) all other contracts and agreements whether or not made in the ordinary course of business, which are material to the Company, any Subsidiary or the conduct of the Business or the absence of which would have a Material Adverse Effect. For purposes of this Section 3.15 and Sections 3.16, 3.17 and 3.18, the term "lease" shall include any and all leases, subleases, sale/leaseback agreements or similar arrangements. (b) Except as disclosed in Section 3.15(b) of the Disclosure Schedule, each Material Contract: (i) is valid and binding on the Company or any Subsidiary which is a party thereto and, to the knowledge of the Company, the other parties thereto and is in full force and effect and (ii) upon consummation of the transactions contemplated by this Agreement, except to the extent that any consents set forth in Section 3.06 of the Disclosure Schedule are not obtained, shall be in full force and effect without material penalty or other material adverse consequence. Neither the Company nor any Subsidiary is in material breach of, or default under, any Material Contract. (c) Except as disclosed in Section 3.15(c) of the Disclosure Schedule, to the Company's knowledge, no other party to any Material Contract is in material breach thereof or default hereunder. (d) Except as disclosed in Section 3.15(d) of the Disclosure Schedule, there is no contract, agreement or other arrangement granting any Person any preferential right to purchase, other than in the ordinary course of business consistent with past practice, any of the properties or assets of the Company or any Subsidiary which are material to the Company and its Subsidiaries. SECTION 3.16. Intellectual Property. (a) Section 3.16(a) of the Disclosure Schedule contains an accurate and complete listing setting forth (x) all registered Trademarks, Patents, Copyrights and registered Mask Works (as each such term is hereinafter defined) which are owned by the Company or any of its Subsidiaries and (y) all Licenses to which the Company or any of its Subsidiaries is a party (other than shrink-wrap software and databases licensed to the Company or to any of its Subsidiaries under nonexclusive software Licenses granted to end-user customers by third parties in the ordinary course of business of such third parties' businesses), such schedule indicating, as to each such License, whether the Company or any of its Subsidiaries is the licensee or licensor. (b) Except as set forth in Section 3.16(b)(i) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is under any obligation to pay any royalty orother compensation to any third party or to obtain any approval or consent for the use of any Intellectual Property used in or necessary for its business as currently conducted or as currently proposed to be conducted. None of the Intellectual Property owned by the Company or by any of its Subsidiaries, or to the Company's knowledge, licensed to the Company or to any of its Subsidiaries, is subject to any outstanding judgment, order, decree, stipulation, injunction or charge. Except as set forth in Section 3.16(b)(ii) of the Disclosure Schedule, there is no complaint, action, suit, proceeding, hearing, investigation or demand pending or, to the Company's knowledge, threatened, which challenges the legality, validity, enforceability, or the Company's or any of its Subsidiaries' use or 51 <PAGE> ownership of any of the Intellectual Property owned by the Company or any of its Subsidiaries or, to the Company's knowledge, licensed to the Company or to any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has agreed to indemnify any person for or against any interference, infringement, misappropriation, or other conflict with respect to any Intellectual Property, except as may be contained within agreements for the sale of the Company's products in the ordinary course or the Licenses set forth in Section 3.16(a) of the Company Disclosure Schedule. (c) No material breach or material default (or event which with notice or lapse of time or both would result in a material event of default) by the Company or any of its Subsidiaries exists or has occurred under any License or other agreement pursuant to which the Company or any of its Subsidiaries uses any Intellectual Property owned by a third party or has granted any third party the right to use its Intellectual Property, and the consummation of the transactions contemplated by this Agreement will not violate or conflict with or constitute a material default (or an event which, with notice or lapse of time or both, would constitute a material default), result in a forfeiture under, or constitute a basis for termination of any such License or other agreement. (d) The Company and its Subsidiaries own or have the right to use all items of Intellectual Property set forth in Section 3.16(a) of the Disclosure Schedule and own or have the right to use all items of Intellectual Property necessary to provide, produce, use, sell and License the services and products currently provided, produced, used, sold and licensed by the Company and its Subsidiaries and to conduct the business of the Company and its Subsidiaries as presently conducted, free and clear of all Encumbrances, provided that the Company makes no warranty with respect to infringement of intellectual property rights of third parties except as expressly provided in Section 3.16(e) . (e) To the Company's knowledge, except as set forth in Section 3.16(e) of the Disclosure Schedule, the conduct of the Company's and its Subsidiaries' business, the Intellectual Property owned or used by the Company and its Subsidiaries, and the products or services produced, sold or licensed by or under development by the Company and its Subsidiaries do not infringe any Intellectual Property rights or any other proprietary right of any Person or give rise to any obligations to any Person as a result of co-authorship, coinventorship, or an express or implied contract for any use or transfer. Except as set forth in Section 3.16(e) of the Disclosure Schedule, the Company and its Subsidiaries have received no notice or have any knowledge of any allegations or threats that the Company's and its Subsidiaries' use of any of the Intellectual Property infringes upon or is in conflict with any Intellectual Property or proprietary rights of any third party, and to the Company's knowledge, no basis exists for any such allegations or threats. (f) Except as set forth on Section 3.16(f) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has sent or otherwise communicated to any other person any notice, charge, claim or assertion of any present, impending or threatened infringement by any other Person of any Intellectual Property of the Company and its Subsidiaries or any Intellectual Property that the Company has the right to use. (g) None of the Company's and its Subsidiaries' products or services incorporate, are based upon or are derived or adapted from, any Intellectual Property of any other person in violation of any statutory or other legal obligation or any agreement to which the Company and its Subsidiaries is a party or by which it is bound. (h) All of the Company's and its Subsidiaries' Patents, Trademarks and Copyrights that are material to the conduct of the Business issued by, registered with or filed with the United States Patent and Trademark Office or Register of Copyrights or the corresponding offices of other countries have been so duly registered, filed in or issued, as the case may be, have been properly maintained and renewed in all material respects in accordance with all applicable provisions of law and administrative regulations, and the Company and its Subsidiaries, as the case may be, are the 52 <PAGE> record owners thereof. The Company and its Subsidiaries have taken reasonable steps in accordance with normal industry practice to maintain the confidentiality of its trade secrets and other confidential Intellectual Property, and, to the Company's knowledge, there have been no acts or omissions by the Company or its Subsidiaries, the result of which would be to compromise the rights of the Company or its Subsidiaries to apply for or enforce appropriate legal protection of such Intellectual Property. (i) Except as described in Section 3.16(i) of the Disclosure Schedule, substantially all of the Company's and its Subsidiaries' employees and agents and independent contractors retained by the Company or any of its Subsidiaries and each of the Company's and its Subsidiaries' officers and directors has entered into a written agreement with the Company or any of its Subsidiaries (x) providing that all of the Company's and its Subsidiaries' Intellectual Property is confidential and proprietary to the Company or any of its Subsidiaries, and (y) obligating to the fullest extent allowed by law the disclosure and transfer to the Company or any of its Subsidiaries, in consideration for no more than normal salary and continued employment or consultant fees, as the case may be, of all inventions, developments and work product which during the period of his or her employment orconsultancy with the Company or any of its Subsidiaries, as the case may be, such employee, officer, director or independent contractor made or makes that related or relate to any subject matter with which such employee's, officer's, director's or independent contractor's work for the Company or any of its Subsidiaries was concerned, or, in the case of employees, officers, agents and directors, are made during such person's period of employment (or contractual relationship) or in connection therewith. No former employees, officers, directors or independent contractors of the Company or any of its Subsidiaries have asserted any claim, or, to the Company's knowledge, have any, valid claim or valid right to any of the Company's or any of its Subsidiaries' Intellectual Property used in or necessary for the conduct of the Company's or its Subsidiaries' business as now conducted. To the Company's knowledge, no employee, officer, agent or director of the Company or any of its Subsidiaries is a party to or otherwise bound by any agreement with or obligated to any other Person (including, any former employer) which conflicts with any obligation or commitment of such employee to the Company or any of its Subsidiaries under any agreement to which he or she is a party or otherwise. (j) Section 3.16(j) of the Disclosure Schedule identifies each person to whom the Company or any of its Subsidiaries has sold or otherwise transferred any interest or rights to any Intellectual Property (other than end user licenses for computer software and related documentation transferred in the ordinary course of business) or purchased rights in any Intellectual Property, and the date, if applicable, of each such sale, transfer or purchase. (k) The Company and each of its Subsidiaries have taken reasonable steps in accordance with normal industry practice to preserve and maintain, reasonably complete notes and records (including, without limitation, drawings, flow-charts and prototypes) relating to its know- how, inventions, processes, procedures, drawings, specifications, designs, plans, written proposals, technical data, works of authorship and other proprietary technical information, sufficient to cause such proprietary information to be readily identified, understood and available. SECTION 3.17. Real Property. (a) The Company owns no real property, nor has it ever owned any real property. Section 3.17(a) of the Disclosure Schedule sets forth a list of all real property currently leased by the Company, the name of the lessor, the date of the lease and each amendment thereto and, with respect to any current lease, the aggregate annual rental and/or other fees payable under any such lease. To the Company's knowledge, all such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and to the Company's knowledge, there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). (b) The Company has good and valid title to, or, in the case of material leased properties and assets, valid leasehold interests in, all of its material tangible propertiesand assets, real, personal and mixed, used or held for use in its business, free and clear of any Encumbrances, 53 <PAGE> except as reflected in the Interim Financial Statements or in Section 3.17(b) of the Disclosure Schedule and except for Permitted Encumbrances. SECTION 3.18. Assets. (a) Except as disclosed in Section 3.18 of the Disclosure Schedule, either the Company or a Subsidiary, as the case may be, owns, leases or has the legal right to use all the properties and assets, including, without limitation, the Owned Intellectual Property, the Licensed Intellectual Property, the Real Property and the Equipment, material to the conduct of the Company's business or otherwise owned, leased or used by the Company or any Subsidiary and, with respect to contract rights, is a party to and enjoys the right to the benefits of all material contracts, agreements and other arrangements used or intended to be used by the Company or any Subsidiary or in or relating to the conduct of the Company's business (all such properties, assets and contract rights being the "Assets"). Either the Company or a Subsidiary, as the case may be, has good title to, or, in the case of leased or subleased Assets, valid and subsisting leasehold interests in, all the Assets, free and clear of all Encumbrances, except (i) as disclosed in Section 3.16, 3.17(a), 3.17(b) or 3.18 of the Disclosure Schedule and (ii) Permitted Encumbrances. (b) The Assets constitute all the properties, assets and rights, used or intended to be used in the conduct of, the Company's business. At all times since the date of the Interim Balance Sheet, the Company has caused the Assets to be maintained in accordance with good business practice. (c) Immediately following the Effective Time, either the Company or a Subsidiary, as the case may be, will continue to own, pursuant to good and marketable title, or lease, under valid and subsisting leases, or otherwise retain its respective interest in the Assets without incurring any penalty or other adverse consequence, including, without limitation, any material increase in rentals, royalties, or licenses or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement. Immediately following the Closing, either the Company or a Subsidiary, as the case may be, shall own and possess all material documents, books, records, agreements and financial data of any sort used by the Company or such Subsidiary in the conduct of the Company's business or otherwise. SECTION 3.19. Customers. Listed in Section 3.19 of the Disclosure Schedule are the names and addresses of the 20 most significant customers (by revenue) of the Company and the Subsidiaries for the twelve-month period ended December 31, 1995 and the amount for which each such customer was invoiced during such period. Except as disclosed in Section 3.19 of the Disclosure Schedule, none of the Company or any Subsidiary has received any notice that any customer listed in Section 3.19 of the Disclosure Schedule of the Company has ceased, or will cease, to use the products, equipment, goods or servicesof the Company or any Subsidiary, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services at any time. SECTION 3.20. Employee Benefit Plans; Employment Agreements. (a) Section 3.20(a) of the Disclosure Schedule lists all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), regardless of whether ERISA is applicable thereto, all other bonus, stock option, restricted stock, stock purchase, incentive, deferred compensation, supplemental retirement, severance or termination pay, medical or life insurance, supplemental unemployment benefits, change in control, non-competition, profit-sharing, pension or retirement plans, programs, agreements or arrangements, including any employee plans or arrangements that is not subject to United States law, and any current or former employment, consulting or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of the Company, any trade or business (whether or not incorporated) which is a member of the controlled group including the Company or which is under common control with Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or any Subsidiary, to which the Company, an ERISA Affiliate, or any Subsidiary is a party, with respect to which the Company, an ERISA Affiliate, or 54 <PAGE> any Subsidiary could have a material obligation, as well as each plan with respect to which the Company or an ERISA Affiliate could incur material liability if such plan has been or were terminated (together, the "Employee Plans'), and a copy of each such written Employee Plan and any related trust or other funding arrangement, summary, plan description and actuarial report has been made available to Parent. (b) Except as set forth in Section 3.20(b) of the Disclosure Schedule, (i) none of the Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person and none of the Employee Plans is a "multiemployer plan" as such term is defined in Section 3(37) of ERISA; (ii) there has been no transaction or failure to act with respect to any Employee Plan, which would result in any material liability of the Company or any of its subsidiaries; (iii) all Employee Plans are in compliance in all material respects with the requirements prescribed by any and all statutes, orders, or governmental rules and regulations currently in effect with respect thereto, and the Company and each of its subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or violations of, and have no knowledge of any default or violation by any other party to, any of the Employee Plans except as to which non-compliance, non-performance or default would not result in a Material Adverse Effect; (iv) each Employee Plan intended to qualify under Section 401(a) of the Code is the subject of a favorable determination letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions (including premiums) required to be made to any Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Employee Plan for the current plans years, and except as disclosed inSection 3.20(b) of the Disclosure Schedule, without limiting the foregoing, there are no material unfunded liabilities under any Employee Plan; (vi) with respect to each Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations of Section 4043 of ERISA) nor has any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither the Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability for premium payments to the Pension Benefit Guaranty Corporation arising in the ordinary course). (c) There are no pending or, to the knowledge of the Company, threatened litigation, suits, claims or enforcement actions against the Company with respect to any of the Employee Plans. (d) Section 3.20(d) of the Disclosure Schedule sets forth a true and complete list of each current or former employee, officer, director of the Company or any Subsidiary or consultants, advisors or other independent contractors to the Company or any of its subsidiaries who holds any option to purchase the Company Common Stock as of the date hereof, together with the number of shares of the Company Common Stock subject to such option, the date of grant of such option, the extent to which such option is vested, the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock option within the meaning of Section 422 of the Code (an "ISO"), and the expiration date of such option. All of the Company's options are nonqualified options. SECTION 3.21. Labor Matters. There are no disputes pending or, to the knowledge of the Company or any of its subsidiaries, threatened, between the Company or any of its subsidiaries and any of their respective employees, which disputes have or may have a Material Adverse Effect; neither the Company nor any of its subsidiaries is a party to a collective bargaining agreement or other labor contract applicable to persons employed by the Company or its subsidiaries nor does the Company know of any activities or proceedings of any labor union to organize any such employees; and neither the Company nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Company or any of its subsidiaries. 55 <PAGE> SECTION 3.22. Key Employees. Section 3.22 of the Disclosure Schedule lists the name, place of employment, the current annual salary rates, bonuses, deferred or contingent compensation, pension, accrued vacation, "golden parachute" and other like benefits paid or payable (in cash or otherwise) in 1995, the date of employment and a description of position and job function of each current salaried employee, officer, director,consultant or agent of the Company or any Subsidiary whose annual compensation exceeded (or, in 1996, is expected to exceed) $175,000. SECTION 3.23. Taxes. (a) Except as disclosed in Section 3.23 of the Disclosure Schedule, (i) all returns and reports in respect of material Taxes required to be filed with respect to the Company and each Subsidiary (including the consolidated federal income tax return of the Company and any state Tax returns that includes the Company or any Subsidiary on a consolidated or combined basis) have been timely filed or are under a valid extension of time to file; (ii) all Taxes required to be shown on such returns and reports or otherwise due have been timely paid or adequate reserves for their payment have been made; (iii) no adjustment relating to such returns has been proposed formally or informally by any Tax authority to the Company or any Subsidiary or representative thereof and, to the knowledge of the Company, no basis exists for any such adjustment; (iv) there are no pending or, to the knowledge of the Company, threatened actions or proceedings for the assessment or collection of a material amount of Taxes against the Company or any Subsidiary or any corporation that was included in the filing of a return with the Company on a consolidated or combined basis; (v) there are no Tax liens on any assets of the Company or any Subsidiary other than liens for Taxes not yet due and payable; (vi) other than as set forth in Section 3.23(a) of the Disclosure Schedule and other than as provided in Section 6.02, neither the Company nor any Subsidiary nor, to the knowledge of the Company, any Affiliate of the Company, is a party to any agreement or arrangement that would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code (disregarding Section 280G(b)(4) of the Code); (vii) other than as provided in Section 6.02, no acceleration of the vesting schedule for any property that is substantially unvested within the meaning of the regulations under Section 83 of the Code will occur in connection with the transactions contemplated by this Agreement; (viii) from and after December 31, 1992, the Company and each Subsidiary has been and continues to be a member of the affiliated group (within the meaning of Section 1504(a)(1) of the Code) for which the Company files a consolidated return as the common parent, and has not been includible in any other consolidated return for any taxable period for which the statute of limitations has not expired; (ix) neither the Company nor any Subsidiary has been at any time a member of any partnership or joint venture or the holder of a beneficial interest in any trust for any period for which the statute of limitations for any Tax has not expired; (x) neither the Company nor any Subsidiary has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; and (xi) neither the Company nor any Subsidiary is subject to any accumulated earnings tax or personal holding company tax. (b) Except as disclosed with reasonable specificity in Section 3.23(b) of the Disclosure Schedule: (i) there are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which the Company or anySubsidiary may be subject; (ii) neither the Company nor any Subsidiary (A) has been or is a passive foreign investment company within the meaning of Section 1296 of the Code, (B) has an unrecaptured overall foreign loss within the meaning of Section 904(f) of the Code or (C) has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code; (iii) neither the Company nor any Subsidiary has any (A) income reportable for a period ending after the Effective Time but attributable to a transaction (e.g., an installment sale) occurring in or a change in accounting method made for a period ending on or prior to the Effective Time which resulted in a deferred reporting of income from such transaction or from such change in accounting method (other than a deferred intercompany transaction), (B) deferred gain or loss arising out of any deferred intercompany transaction or (C) any excess loss account; (iv) there are no proposed reassessments of any property owned by the Company or any Subsidiary or other proposals that could materially increase the amount of any Tax to which the Company or any Subsidiary would be subject which could reasonably be expected to have a material Adverse Effect; (v) neither the 56 <PAGE> Company nor any Subsidiary is obligated under any agreement with respect to industrial development bonds or similar obligations, with respect to which the excludibility from gross income of the holder for federal income tax purposes could be affected by the transactions contemplated hereunder; and (vi) no power of attorney that is currently in force has been granted with respect to any matter relating to Taxes that could affect the Company or a Subsidiary. (c) (i) Section 3.23 of the Disclosure Schedule lists all income, franchise and similar tax returns (federal, state, local and foreign) filed with respect to each of the Company and the Subsidiaries for taxable periods ended on or after December 31, 1992, indicates for which jurisdictions Returns have been filed on the basis of a unitary group, indicates the most recent income, franchise or similar tax return for each relevant jurisdiction for which an audit has been completed or the statute of limitations has lapsed and indicates all tax returns that currently are the subject of audit; (ii) the Company has made available to Parent correct and complete copies of all federal, state and foreign income, franchise and similar tax returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company or any Subsidiary since December 31, 1992; and (iii) the Company has made available to Parent a true and complete copy of any tax-sharing or allocation agreement or arrangement involving the Company or any Subsidiary. SECTION 3.24. Insurance. Section 3.24 of the Disclosure Schedule lists all insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company. There is no material claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies and bonds. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has noknowledge of any threatened termination of, or material premium increase with respect to, any of such policies. SECTION 3.25. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. SECTION 3.26. Approval Requirements. The only actions by the shareholders of the Company necessary to approve this Agreement and the transactions contemplated by this Agreement are (a) the approval of a majority of the outstanding shares of the Company Common Stock and (b) the approval of a majority of the outstanding shares of the Company Preferred Stock, voting together (on an as converted basis) as a single class. The approval of this Agreement and the transactions contemplated hereby by all of the shares of Company Common Stock and Company Preferred Stock owned by the Principal Shareholder (the "Principal Shareholder Approval") will be sufficient to satisfy the required actions described in clauses (a) and (b) of the immediately preceding sentence. The Principal Shareholder has provided, or will prior to the Effective Time provide, the Principal Shareholder Approval by written consent pursuant to the Articles of Incorporation and Bylaws of the Company and to California Law. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB As an inducement to the Company to enter into this Agreement, Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company as follows: SECTION 4.01. Organization and Authority. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary corporate power and authority to enter into this Agreement, to 57 <PAGE> carry out its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by each of Parent and Merger Sub, the performance by each of its obligations hereunder and the consummation by each of the transactions contemplated hereby have been duly authorized by all requisite action on the part of Parent and Merger Sub. This Agreement has been duly executed and delivered by Parent and Merger Sub, and (assuming due authorization, execution and delivery by the Company) this Agreement constitutes a legal, valid and binding obligation of Parent and Merger Sub enforceable against each in accordance with its terms except as such enforceability may be limited by principles of public policy and subject to the laws of generalapplication relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 4.02. No Conflict. Assuming compliance with the notification requirements of the HSR Act and the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.03, except as may result from any facts or circumstances relating solely to the Company, the execution, delivery and performance of this Agreement by each of Parent and Merger Sub do not and will not (a) violate, conflict with or result in the breach of any provision of the Articles of Incorporation or Bylaws of either, (b) conflict with or violate any Law or Governmental Order applicable to either or (c) conflict with, or result in any breach of, constitute a default (or event which with the giving of notice or lapse or time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation, or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Parent or Merger Sub pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Parent or Merger Sub is a party or by which any of such assets or properties are bound or affected which would have a material adverse effect on the business, operations, assets, results of operations or the condition (financial or otherwise) of Parent or the ability of Parent or Merger Sub to consummate the transactions contemplated by this Agreement. SECTION 4.03. Governmental Consents and Approvals. The execution, delivery and performance of this Agreement by Parent do not and Merger Sub will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority, except (a) as described in a writing given to the Company by Parent on the date of this Agreement and (b) the notification requirements of the HSR Act and for applicable requirements, if any, of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, state securities laws, and the filing of appropriate merger documents under California Law. SECTION 4.04. Brokers. No broker, finder or investment banker other than DMG Technology Group is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Merger Sub. SECTION 4.05. SEC Documents: Undisclosed Liabilities. Parent has filed all required reports, schedules, forms, statements and other documents with the SEC since December 31, 1994 (the "Parent SEC Documents"). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents, and none of the ParentSEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Parent SEC Document has been revised or superseded by a later Filed Parent SEC Document (as defined below), none of the Parent SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements 58 <PAGE> of Parent included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with U.S. GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of Parent and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows (or changes in financial position prior to the approval of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 95) for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the Filed Parent SEC Documents, neither Parent nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by U.S. GAAP to be set forth on a consolidated balance sheet of Parent and its consolidated subsidiaries or in the notes thereto and reasonably be expected to have a material adverse effect on Parent and its subsidiaries taken as a whole. SECTION 4.06. Absence of Certain Changes or Events. Except as disclosed in the Parent SEC Documents filed and publicly available prior to the date of this Agreement (the "Filed Parent SEC Documents"), since the date of the most recent audited financial statements included in the filed Parent SEC Documents, Parent has conducted its business only in the ordinary course, and there has not been (i) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) with respect to any of Parent's capital stock except for regular quarterly dividends on Parent's outstanding preferred stock, (ii) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iii) any damage, destruction or loss, whether or not covered by insurance, that has or is likely to have a material adverse effect on Parent and its subsidiaries taken a whole, or (iv) any change in accounting methods, principles or practices by Parent materially affecting its assets, liabilities, or business, except insofar as may have been required by a change in U.S. GAAP. SECTION 4.07. Litigation. Except as disclosed in the filed Parent SEC Documents, there is no suit, action or proceeding pending or, to the knowledge of Parent, threatened against or affecting Parent or any of its subsidiaries (and Parent is not aware ofany basis for any such suit, action or proceeding) that, individually or in the aggregate, could reasonably be expected to (i) have a material adverse effect on Parent and its subsidiaries taken as a whole, (ii) impair the ability of Parent to perform its obligations under this Agreement or (iii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Parent or any of its subsidiaries having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. SECTION 4.08. Voting Requirements. No action by the shareholders of Parent is required to approve this Agreement and the transaction contemplated by this Agreement. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. Conduct of Business Prior to the Closing. (a) The Company covenants and agrees that, except as described in Section 5.01(a) of the Disclosure Schedule or as otherwise permitted by this Agreement (and subject to the limitations on conduct set forth in this Section 5.01), between the date hereof and the Effective Time, none of the Company or any Subsidiary shall conduct its business other than in the ordinary course and consistent with the Company's and such Subsidiary's prior practice. Without limiting the generality of the foregoing, except as described in Section 5.01(a) of the Disclosure Schedule, the Company shall, and shall cause each Subsidiary to, (i) continue its advertising and promotional activities, and pricing and 59 <PAGE> purchasing policies, in accordance with past practice; (ii) not shorten or lengthen the customary payment cycles for any of its payables or receivables; (iii) use its reasonable efforts to (A) preserve intact its business organizations and the business organization of the Business, (B) keep available to Parent and Merger Sub the services of the employees of the Company and each Subsidiary, (C) continue in full force and effect without material modification all existing policies or binders of insurance currently maintained in respect of the Company, each Subsidiary and the Business and (D) preserve its current relationships with its customers, suppliers and other persons with which it has significant business relationships; (iv) exercise, but only after notice to Parent and receipt of Parent's prior written approval, any rights of renewal pursuant to the terms of any of the leases or subleases set forth in Section 3.17(a) of the Disclosure Schedule which by their terms would otherwise expire; (v) not make an offer of employment to any Person without the approval of Parent and (vi) not engage in any practice, take any action, fail to take any action or enter into any transaction with knowledge that it would or could reasonably be expected to cause any representation or warranty of the Company to be untrue in any material respect or result in a material breach of any covenant made by the Company in this Agreement. (b) Except as described in Section 5.01(b) of the Disclosure Schedule, the Company covenants and agrees that, prior to the Effective Time, without the prior written consent of Parent, neither the Company nor any Subsidiary will do any of the things enumerated in the second sentence of Section 3.10 (including, without limitation, clauses (i) through (xxiii) thereof). SECTION 5.02. Access to Information. (a) From the date hereof until the Effective Time, upon reasonable notice, the Company shall, and shall cause the Subsidiaries and each of the Company's and the Subsidiaries' officers, directors, employees, agents, representatives, accountants and counsel to: (i) afford the officers, employees and authorized agents, accountants, counsel, and representatives of Parent reasonable access, during normal business hours, to the offices, properties, plants, other facilities, books and records of the Company and each Subsidiary and to those officers, directors, employees, agents, accountants and counsel of the Company and of each Subsidiary who have any knowledge relating to the Company, any Subsidiary or the Company's business and (ii) furnish to the officers, employees and authorized agents, accountants, counsel, and representatives of Parent such additional financial and operating data and other information regarding the assets, properties and goodwill of the Company, the Subsidiaries and the Company's business (or legible copies thereof) as Parent may from time to time reasonably request. (b) Parent shall keep such information confidential in accordance with the terms of the Confidentiality Agreement. SECTION 5.03. Regulatory and Other Authorizations; Notices and Consents. (a) Each of Parent and the Company shall use its best reasonable efforts to obtain (or cause Merger Sub or the Subsidiaries, as the case may be, to obtain) all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for execution and delivery of, and the performance of obligations pursuant to, this Agreement and will cooperate fully with each other in promptly seeking to obtain all such authorizations, consents, orders and approvals. Each party hereto agrees to make an appropriate filing, if necessary, pursuant to the HSR Act with respect to the transactions contemplated by this Agreement as promptly as reasonably practicable and to supply, as promptly as practicable to the appropriate Governmental Authorities any additional information and documentary material that may be requested pursuant to the HSR Act. (b) Each of Parent and the Company shall, and shall cause Merger Sub and the Subsidiaries, as the case may be, to, give promptly such notices to third parties and use its or their reasonable efforts to obtain such third party consents and estoppel certificates as may be reasonably necessary in connection with the transactions contemplated by this Agreement. 60 <PAGE> (c) Each of Parent and the Company shall use their reasonable best efforts to obtain an assignment to Parent on reasonable terms of the license and distribution agreement dated as of August 12, 1996 between Microsoft Corporation ("Microsoft") and the Company, or the Company shall provide reasonable assurances as to a way of achieving equivalent functionality without the need for a license from Microsoft. (d) The Company shall (i) use its reasonable best efforts to obtain from Hewlett Packard a confirmation of the termination or expiration of Section 2.5(a) of the software porting and marketing agreement between Hewlett Packard and the Company or (ii) have provided Parent, prior to the Effective Time, evidence reasonably satisfactory to Parent that such termination or expiration has occurred. SECTION 5.04. Notice of Developments. Prior to the Effective Time, each of Parent and the Company shall promptly notify the other in writing of (i) all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which could reasonably be expected to result in any material breach of a representation or warranty or covenant of Parent or the Company, as the case may be, in this Agreement or which could have the effect of making any representation or warranty of Parent or the Company in this Agreement or which could have the effect of making any representation or warranty of Parent or the Company, as the case may be, in this Agreement untrue or incorrect in any material respect. SECTION 5.05. No Solicitation or Negotiation. The Company agrees that between the date of this Agreement and the earlier of (i) the Effective Time and (ii) the termination of this Agreement, none of the Company, and its Subsidiaries nor any of their respective Affiliates, officers, directors, representatives or agents will (a) solicit, initiate, consider, encourage or accept any other proposals or offers from any Person (i) relating to any acquisition or purchase of all or any portion of the capital stock of the Company or any Subsidiary (other than the exercise or conversion of outstanding options) or assets of the Company or any Subsidiary (other than inventory to be sold in the ordinary course of business consistent with past practice), (ii) to enter into any business combination with the Company or any Subsidiary or (iii) to enter into any other extraordinary business transaction involving or otherwise relating to the Company or any Subsidiary, or (b) participate in any discussions, conversations, negotiations and other communications regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage any effort or attempt by any other Person to seek to do any of the foregoing. The Company immediately shall cease and cause to be terminated all existing discussions, conversations, negotiations and other communications with any Persons conducted heretofore with respect to any of the foregoing. The Company shall notify Parent promptly if any such proposal or offer, or any inquiry or other contact with any Person with respect thereto, is made and shall, in any such notice to Parent, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contactand the terms and conditions of such proposal, offer, inquiry or other contact. The Company agrees not to, and to cause each Subsidiary not to, without the prior written consent of Parent, release any Person from, or waive any provision of, any confidentiality or standstill agreement to which the Company or any Subsidiary is a party. SECTION 5.06. Further Action. Each of the parties hereto shall use all reasonable best efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated by this Agreement. SECTION 5.07. Conduct of Business by Parent. During the period from the date of this Agreement to the Effective Time of the Merger, Parent shall not, and shall not permit any of its subsidiaries to: 61 <PAGE> (a) (i) declare, set aside or pay any dividends on, or make any other distributions in respect of, any capital stock of Parent or (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in resect of, in lieu of or in substitution for shares of Parent's capital stock; or (b) authorize any of, or commit or agree to take any of, the foregoing actions. ARTICLE VI STOCK OPTIONS SECTION 6.01. Stock Options. (a) At or prior to the Effective Time, the Company shall take all actions necessary to cause each outstanding Vested Company Stock Option, including obtaining the written consent of holders of Vested Company Stock Options, to be converted, at the Effective Time, into the right to receive as of the Effective Time in cancellation of such Vested Company Stock Option an amount in cash equal to the amount, if any, by which (i) the product determined by multiplying the number of shares of Company Common Stock subject to such Vested Company Stock Option by the Common Merger Consideration exceeds (ii) the aggregate exercise price for the shares of Company Common Stock subject to such Vested Company Stock Option. (b) Subject to the provisions of this Section 6.01, at the Effective Time the Company's obligations under the Stock Option Plan and with respect to each outstandingUnvested Company Stock Option will be assumed by Parent. Each Unvested Company Stock Option so assumed shall continue to have, and be subject to, the same terms and conditions set forth in the applicable option agreement and the Stock Option Plan pursuant to which such Unvested Common Stock Option was issued as in effect on the date hereof, except that at or prior to the Effective Time the Company shall take all actions necessary to cause each outstanding Unvested Company Stock Option to be converted, at the Effective Time, into an option to acquire, on the same terms and conditions as were applicable under the relevant option agreement and the Stock Option Plan (as modified by this Section 6.01(b)), that number of shares of Parent Common Stock which is equal to the product of the Conversion Ratio and the number of shares of Company Common Stock underlying such Company Stock Option immediately prior to the Effective Time, rounded, if necessary, down to the nearest whole share, at a price per share equal to (x) the aggregate exercise price for the Company Common Stock subject to such Company Stock Option divided by (y) the number of shares of Parent Common Stock deemed to be subject to such Company Stock Option. (c) In the event that holders of Vested Common Stock Options do not exercise such options or consent to the amendment of such options as set forth in Section 6.01(a) as of the Effective Time, such remaining Vested Company Stock Options shall terminate as of the Effective Time in accordance with the provisions of the Stock Option Plan. SECTION 6.02. Certain Employee Benefit Matters. (a) As of the Effective Time, Parent and the Company shall take all actions necessary to cause all option agreements which are in effect under the Stock Option Plan following the Effective Time in accordance with the provisions of Section 6.01 (the "Option Agreements") to provide that, in the event a recipient of options under such Option Agreement who is employed by Parent or its subsidiaries in accordance with this Agreement (each, an "Optionee") is terminated from employment without Cause during the period from the Effective Time until the second anniversary of the Effective Time (the "Covered Period"), all options granted to such Optionee under such Option Agreements which are not exercisable under the terms of such agreements on the date that the Optionee's employment is terminated shall accelerate, and that all options subject to such Option Agreements shall be exercisable for a period of thirty (30) days beginning on the date that the Optionee's employment is terminated, after which period all such options shall be cancelled and such Option Agreements 62 <PAGE> shall terminate. In the event an Optionee voluntarily resigns from employment with Parent or its subsidiaries without Good Reason (as defined below), is terminated from employment with Parent or its subsidiaries for Cause, or refuses an offer of employment in a similar position and at a comparable salary with Parent or its subsidiaries, all options which are not exercisable or have not been exercised on the date the Optionee's employment terminates shall be cancelled and the Option Agreements to which such Optionee is a party shall terminate. Except as otherwise provided, all other terms of the Option Agreements shall remain unchanged. Further, with respect to executives of the Company who are employed at the level of vicepresident or above as identified in the document titled "Current NeXT Software Employment Data", effective December 17, 1996, who are employed by Parent or the Company immediately after the Effective Time ("Transferred Senior Executives"), Parent and the Company shall take all actions necessary to amend the Option Agreements which are in effect with respect to such Transferred Senior Executives to provide that in the event such Transferred Senior Executive resigns from employment with Parent or its subsidiaries for Good Reason during the Covered Period, all options subject to such Option Agreements which are not exercisable under the terms of such agreements as of the date that the Transferred Senior Executive resigns shall accelerate, and that all options subject to such Option Agreements shall be exercisable for a period of thirty (30) days beginning on the date of such Transferred Senior Executive's resignation, after which time all such options shall be cancelled and such Option Agreements shall terminate. (b) It is the express understanding and intention of the Company and Parent that no employee of the Company or Parent or any of their subsidiaries or other person shall be deemed to be a third party beneficiary, or have or acquire any right to enforce the provisions of this Section, and that nothing in this Agreement shall be deemed to constitute an employee benefit plan or arrangement of the Company, Parent or any of their respective subsidiaries. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01. Securities Filings. Parent and the Company shall make all necessary filings with respect to the Merger under the Securities Act and the Exchange Act and the rules and regulations thereunder, under applicable Blue Sky or similar securities laws, rules and regulations and shall use all reasonable efforts to obtain required approvals and clearances with respect thereto. SECTION 7.02. Company Shareholder Approval. The Company shall use its best efforts to obtain the written consent of the Principal Shareholder in favor of the Merger, to notify all other shareholders of the Company of such consent and to take all other action necessary or advisable to secure the vote or consent of shareholders required by California Law to effect the Merger. SECTION 7.03. NNM Listing. Parent shall use reasonable efforts to cause the shares of Parent Common Stock issuable to the Company's stockholders pursuant to this Agreement to be authorized for listing on the NNM. SECTION 7.04. Shelf Registration. Parent shall be required to make available an effective shelf registration statement for the purpose of permitting resale of theshares of Parent Common Stock received pursuant hereto by the Principal Shareholder within 180 days of the date hereof. SECTION 7.05. Form S-8. With respect to the Stock Option Plan, Parent shall take all corporate action necessary or appropriate to as soon as practicable after the Effective Time, file a registration statement on Form S-3 or Form S-8, as appropriate (or any successor or other appropriate forms), with respect to the shares of Parent Common Stock subject to such plan to the extent such registration statement is required under applicable law in order for such shares of Parent 63 <PAGE> Common Stock to be sold without restriction, and Parent shall use its best efforts to maintain the effectiveness of such registration statements (and maintain the current status of the prospectuses contained therein) for so long as such benefits and grants remain payable and such options remain outstanding. SECTION 7.06. Guaranteed Debt. Parent shall cause the Guaranteed Debt to be paid at the Effective Time. SECTION 7.07. Directors' and Officers' Indemnification and Insurance. (a) For a period of three years after the Effective Time, Parent shall cause the Surviving Corporation to use its best efforts to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been heretofore delivered to Parent) on terms comparable to those applicable to the then current directors and officers of Parent, or (ii) those now applicable to directors and officers of the Company, whichever is more favorable to such directors and officers; provided, however, that in no event shall Parent or the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by the Company for such coverage, and provided further, that if the premium for such coverage exceeds such amount, Parent or the Surviving Corporation shall purchase a policy with the greatest coverage available for such 150% of the annual premium. (b) The Articles of Incorporation and Bylaws of the Surviving Corporation shall contain the provisions that are set forth, as of the date of this Agreement, in the Articles of Incorporation and Bylaws of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of five years from the Effective Time in any manner that would affect adversely the rights thereunder of individuals who at or at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of the Company. ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.01. Conditions to Obligations of Each of the Company and Parent. The respective obligations of the Company and Parent to consummate the transactions contemplated by this Agreement shall each be subject to the fulfillment, at or prior to the Effective Time, of each of the following conditions: (a) HSR Act. Any waiting period (and any extension thereof) under the HSR Act applicable to the Merger shall have expired or shall have been terminated; (b) Consents and Approvals. Parent and the Company shall have received, each in form and substance reasonably satisfactory to the parties, all authorizations, consents, orders and approvals of all Governmental Authorities and officials and all third party consents required in order to consummate the Merger; and (c) Court Order. No court of competent jurisdiction shall have issued or entered any order, writ, injunction or decree, and no other Governmental Entity shall have issued any order, which is then in effect and has the effect of making the Merger illegal or otherwise prohibiting its consummation. SECTION 8.02. Conditions to Obligations of the Company. The obligations of the Company to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Effective Time, of each of the following conditions: 64 <PAGE> (a) Representations, Warranties and Covenants. The representations and warranties of Parent contained in this Agreement shall have been true and correct in all material respects when made and shall be true and correct in all material respects as of the Effective Time, with the same force and effect as if made as of the Effective Time, other than such representations and warranties as are made as of another date, the covenants and agreements contained in this Agreement to be complied with by Parent and Merger Sub on or before the Effective Time shall have been complied with in all material respects, and the Company shall have received a certificate from Parent and Merger Sub to such effect signed by a duly authorized officer thereof; (b) No Proceeding or Litigation. No Action shall have been commenced by or before any Governmental Authority against either the Company, Merger Sub or Parent, seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which, in the reasonable, good faith determination of the Company, is likely to render it impossible or unlawful to consummate such transactions; provided, however, that the provisions of this Section 8.02(b) shall not apply if the Company or an affiliate thereof has directly or indirectly solicited or encouraged any such Action; (c) Legal Opinion. The Company shall have received an opinion, dated as of the Effective Time, from Shearman & Sterling, counsel to Parent, in form and substance reasonably satisfactory to the Company; (d) NNM Listing. The shares of Parent Common Stock issuable to the Company's shareholders pursuant to this Agreement shall have been authorized for listing on the NNM, upon official notice of issuance; and (e) Resolutions. The Company shall have received a true and complete copy, certified by the Secretary or an Assistant Secretary of Parent, of the resolutions duly and validly adopted by the Board of Directors of Parent and Merger Sub evidencing their authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. SECTION 8.03. Conditions to Obligations of Parent. The obligations of Parent and Merger Sub to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Effective Time, of each of the following conditions: (a) Representations, Warranties and Covenants. The representations and warranties of the Company contained in this Agreement shall have been true and correct in all material respects (without regard to any knowledge qualification) when made and shall be true and correct in all material respects (without regard to any knowledge qualification) as of the Effective Time with the same force and effect as if made as of the Effective Time, other than such representations and warranties as are made as of another date, except in all cases for such breaches of, inaccuracies in or omissions from such representations and warranties as do not have a Material Adverse Effect, the covenants and agreements contained in this Agreement to be complied with in all material respects by the Company on or before the Effective Time shall have been complied with in all material respects, and Parent shall have received a certificate of the Company to such effect signed by a duly authorized officer thereof; (b) No Proceeding or Litigation. No Action shall have been commenced or threatened by or before any Governmental Authority against either the Company or Parent, seeking to restrain or materially and adversely alter the transactions contemplated hereby which in the reasonable, good faith determination of the Parent, is likely to render it impossible or unlawful to consummate such transactions; provided, however, that the provisions of this Section 8.03(b) shall not apply if Parent or an affiliate thereof has solicited or encouraged any such Action; 65 <PAGE> (c) Resolutions of the Company. Parent shall have received a true and complete copy, certified by the Secretary or an Assistant Secretary of the Company, of the resolutions duly and validly adopted by the Board of Directors of the Companyevidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (d) Certificate of Non-Foreign Status. Parent shall have received a certificate from the Company that complies with Sections 1.1445- 2(c)(3) and 1.8972(a) of the Regulations certifying that the Company is not a United States Real Property Holding Corporation for purposes of Section 897 of the Code; (e) Canon Approvals. The waiver letter dated December 19, 1996 from Canon, Inc. to the Company shall not have been withdrawn and shall be in full force and effect; (f) Shareholder Approval. Each of this Agreement and the Merger shall have been duly approved by the requisite vote of shareholders of the Company; (g) June 30 Audited Financials. True and complete copies of an audited consolidated balance sheet as of June 30, 1996 and the related audited consolidated statements of income, retained earnings, stockholders' equity and cash flows of the Company, together with all related notes and schedules thereto, accompanied by the reports thereon of the Company's accountants (the "June 30 Financials") shall have been made available or delivered to Parent, and the June 30 Financials shall satisfy the requirements of the second sentence of Section 3.07(a); and (h) Legal Opinion. Parent shall have received an opinion, dated as of the Effective Time, from Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, in form and substance reasonably satisfactory to Parent and its counsel. ARTICLE IX SURVIVAL; INDEMNIFICATION SECTION 9.01. Survival of Representations and Warranties. The representations and warranties of the Company and Parent contained in this Agreement shall not survive the Effective Time. ARTICLE X TERMINATION AND WAIVER SECTION 10.01. Termination. This Agreement may be terminated at any time prior to the Closing: (a) by Parent if, between the date hereof and the Effective Time: (i) any representation or warranty of the Company contained in this Agreement shall have been breached such that the conditions set forth in Section 8.03(a) would or could not be satisfied by June 30, 1997, (ii) the Company shall not have complied in any material respect with any covenant or agreement to be complied with by it and contained in this Agreement within 15 days after receipt of notice of non-compliance from Parent; or (iii) the Company or any Subsidiary makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Company or any Subsidiary seeking to adjudicate any of them a bankrupt or insolvent, or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency or reorganization; or 66 <PAGE> (b) by either the Company or Parent if the Effective Time shall not have occurred by June 30, 1997; provided, however, that the right to terminate this Agreement under this Section 10.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Effective Time to occur on or prior to such date; or (c) by either Parent or the Company in the event that any Governmental Authority shall have issued a final, non-applicable order, decree or ruling or taken any other action permanently, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or (d) by the Company if, between the date hereof and the Effective Time any representation, warranty or covenant of Parent contained in this Agreement shall have been breached such that the conditions set forth in Section 8.02(a) would or could not be satisfied by June 30, 1997, or Parent makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against Parent seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency or reorganization; or (e) by the mutual written consent of the Company and Parent. SECTION 10.02. Effect of Termination. In the event of termination of this Agreement as provided in Section 10.01, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (a) as set forth in 11.01 and (b) that nothing herein shall relieve either party from liability for any willful breach of this Agreement. SECTION 10.03. Waiver. Either party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered by the other party pursuant hereto or (c) waive compliance with any of the agreements or conditions of the other party contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Agreement. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any of such rights. ARTICLE XI GENERAL PROVISIONS SECTION 11.01. Expenses. Except as otherwise specified in this Agreement, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Effective Time shall have occurred. SECTION 11.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by cable, by telecopy, by telegram, by telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 11.02): 67 <PAGE> (a) if to the Company: NeXT Software, Inc. 900 Chesapeake Drive Redwood City, California 94063 Telecopy: (415) 780-3714 Attention: Nancy Heinen, Esq.with a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Telecopy: (415) 493-6811 Attention: Larry Sonsini, Esq. and (b) if to Parent or Merger Sub: Apple Computer, Inc. 1 Infinite Loop Cupertino, California 95014 Telecopy: (408) 974-2023 Attention: Mr. Fred D. Anderson with a copy to: Shearman & Sterling 555 California Street San Francisco, CA 94104 Telecopy: (415) 616-1199 Attention: William H. Hinman, Esq. SECTION 11.03. Public Announcements. No party to this Agreement shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without prior consent of the other parties, subject, in the case of Parent, to Parent's obligations to comply with applicable securities laws and NNM listing requirements, and the parties shall cooperate as to the timing and contents of any such press release or public announcement. SECTION 11.04. Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force andeffect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. SECTION 11.06. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersedes all prior 68 <PAGE> agreements and undertakings, both written and oral, between the Company and Parent with respect to the subject matter hereof and thereof. SECTION 11.07. Assignment. This Agreement may not be assigned by operation of law or otherwise without the express written consent of the Company, Merger Sub and Parent (which consent may be granted or withheld in the sole discretion of the Company, Merger Sub or Parent). SECTION 11.08. No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 11.09. Amendment. This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, the Company, Merger Sub and Parent or (b) by a waiver in accordance with Section 10.03. SECTION 11.10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts executed in and to be performed entirely within that state. SECTION 11.11. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 69 <PAGE> IN WITNESS WHEREOF, the Company, Parent and Merger Sub have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. NEXT SOFTWARE, INC. By: /s/ STEVEN P. JOBS Name: Steven P. Jobs Title: Chairman of the Board and Chief Executive Officer APPLE COMPUTER, INC. By: /s/ GILBERT F. AMELIO Name: Gilbert F. Amelio Title: Chairman of the Board and Chief Executive Officer BLACKBIRD ACQUISITION CORPORATION By: /s/ GILBERT F. AMELIO Name: Gilbert F. Amelio Title: President CONFORMED COPY 70 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <TEXT> EXHIBIT 10.A.41 November 26, 1996 John (Jack) B. Douglas III Reebok International Ltd. 100 Technology Center Drive Stoughton, MA 02072 Employment Agreement Dear Jack: The following sets forth our agreement regarding the terms and provisions of your employment as an officer and employee of Apple Computer, Inc. (the"Company"). Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 6 of this Agreement. 1. Commencement of Employment. Your employment under this Agreement shall commence on January 6, 1997 (the "Effective Date"). 2. Position. You shall be employed as Senior Vice President and General Counsel of the Company and shall report directly to me and your duties and responsibilities to the Company shall be consistent in all respects with such position. You shall devote substantially all of your business time, attention, skills and efforts exclusively to the business and affairs of the Company, other than de minimis amounts of time devoted by you to the management of your personal finances or to engaging in charitable or community services. Your principal place of employment shall be the executive offices of the Company in Cupertino, California, although you understand and agree that you will be required to travel from time to time for business purposes. 3. Compensation. (a) Base Salary. As compensation to you for all services rendered to the Company and its subsidiaries, the Company will pay you a base salary at the rate of not less than three hundred sixty thousand dollars ($360,000) per annum as of the Effective Date. Your base salary will be paid to you in accordance with the Company's regular payroll practices applicable to its executive employees. (b) Bonus. You shall be eligible to participate in the annual Senior Executive Bonus Plan (domestic) sponsored by the Company or any successor plan thereto. Such bonus program shall afford you the opportunity to earn an annual bonus for each fiscal year of the Company during your employment. During the Company's Fiscal Year 1997 only, your Target Annual Bonus shall be 67% of your Base Compensation, or two hundred forty one thousand, two hundred dollars ($241,200) prorated for that portion of the Company's Fiscal Year 1997 during 71 <PAGE> which you are employed. The amount of your Target Annual Bonus thereafter, expressed as a percentage of your Base Compensation, shall be reviewed annually by the Company but shall not be less than 67% of your Base Compensation so long as you remain employed in the position of Senior Vice President and General Counsel. Each annual bonus shall be paid to you in accordance with the terms and conditions of the bonus plan then in effect. (c) Hiring Bonus. Subject to other provisions of this Agreement, the Company shall pay you a Hiring Bonus in the amount of seventy five thousand dollars ($75,000) and shall be paid to you within thirty (30) days after the Effective Date of this Agreement. If you voluntarily terminate your employment with the Company within six (6) months of the Effective Date, you may be responsible for reimbursement of all or part of the hiring bonus. (d) Stock Options. In consideration of this Agreement, we will recommend to the Apple Computer, Inc. Board of Directors an initial stock option grant of 100,000 shares of Apple Computer, Inc. common stock. Each grant vests over a three year period at 33% increments beginning one year from the grant date and shall at all times be subject to the terms and conditions of the Apple Computer, Inc. 1990 Stock Option Plan, as amended, and any successor plans thereto ("Stock Plan"). You shall be eligible to participate in the Stock Plan established by the Company in accordance with the terms and provisions of the Stock Plan. (e) Benefits. You shall be eligible to participate in all employee 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. 4. Termination. (a)Termination for Cause. If your employment is terminated by the Company for Cause, the Company shall pay you the full amount of the accrued but unpaid base salary you have earned through the date of your termination, plus a cash payment (calculated on the basis of your base salary then in effect) for all unused accrued vacation. In addition, you shall be entitled to benefits under the employee plans and arrangements described in Section 3(e) above in accordance with terms and provisions of such plans and arrangements. (b)Termination Other than for Cause. During the three (3) year period following the Effective Date only, if your employment is terminated by the Company for reasons other than for Cause, the Company shall pay you the full amount of the accrued but unpaid base salary you have earned through the date of your termination, plus a cash payment (calculated on the basis of your base salary then in effect) for all unused accrued vacation. In addition, during the three (3) year period following the Effective Date only, the Company shall pay you a lump sum amount depending on the date of your employment termination as follows: Termination Date Amount During 1-year period 100% of annual base salary following Effective Date ($360,000) 100% of Target Annual Bonus ($241,200) Following first anniversary 100% of annual base salary of Effective Date 100% of target annual bonus There shall be no other payments or benefits on termination. 72 <PAGE> 5. Relocation. The Company will provide you with full executive relocation benefits in accordance with the Company's Relocation Policy for executives including mortgage assistance in the amount of four hundred thousand dollars ($400,000) or 25% of the purchase price of your new California residence, whichever is less. The Company also shall pay for travel expenses for you and your wife to come to California during the month of December, 1996. Any additional relocation items or arrangements will be determined in writing as authorized by the Company's Senior Vice President of Human Resources. 6. Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "Cause" shall mean a termination of your employment 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) after a written demand for substantial performance is delivered to you by the Company's Chief Executive Officer, which demand specifically identifies the manner in which the Company 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. 7. 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 Apple Computer, Inc., 1 Infinite Loop, MS 75-8A, Cupertino, California 95014, Attn.: George Scalise, Chief Administrative Officer, 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. 8. 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. (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. 73 <PAGE> (d) Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes. (e) 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 Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (f) 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. (g) 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 terms and conditions of your employment with the Company, 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/ George Scalise George Scalise Agreed to as of this 2nd day of December, 1996. __/s/ John B. Douglas III__ John B. Douglas III 74 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR FY97 FORM 10-K <FLAWED> <TEXT> WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-26-1997 <PERIOD-END> DEC-27-1996 <CASH> 1,174 <SECURITIES> 633 <RECEIVABLES> 1,584 <ALLOWANCES> 92 <INVENTORY> 488 <CURRENT-ASSETS> 4,419 <PP&E> 1,327 <DEPRECIATION> 734 <TOTAL-ASSETS> 5,272 <CURRENT-LIABILITIES> 2,044 <BONDS> 950 <COMMON> 442 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,500 <TOTAL-LIABILITY-AND-EQUITY> 5,272 <SALES> 2,129 <TOTAL-REVENUES> 2,129 <CGS> 1,732 <TOTAL-COSTS> 1,732 <OTHER-EXPENSES> 521 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 18 <INCOME-PRETAX> (120) <INCOME-TAX> 0 <INCOME-CONTINUING> (120) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (120) <EPS-PRIMARY> (0.96) <EPS-DILUTED> (0.96) 75 <PAGE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

ADM

https://www.sec.gov/Archives/edgar/data/7084/0000007084-97-000002.txt

-----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, FC840wz1wxNk1i0sdqKU6SU7zHvg55yGdnPAYBRfsVh0xY7UYn2vobGtMXg7NZ7z ll/CG/S0X/4SZn7OedG1gg== <SEC-DOCUMENT>0000007084-97-000002.txt : 19970222 <SEC-HEADER>0000007084-97-000002.hdr.sgml : 19970222 ACCESSION NUMBER: 0000007084-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970213 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCHER DANIELS MIDLAND CO CENTRAL INDEX KEY: 0000007084 STANDARD INDUSTRIAL CLASSIFICATION: FATS & OILS [2070] IRS NUMBER: 410129150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00044 FILM NUMBER: 97531016 BUSINESS ADDRESS: STREET 1: 4666 FARIES PKWY CITY: DECATUR STATE: IL ZIP: 62526 BUSINESS PHONE: 2174245200 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q FOR 12/31/96 <TEXT> PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 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 1-44 ARCHER-DANIELS-MIDLAND COMPANY (Exact name of registrant as specified in its charter) Delaware 41-0129150 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 4666 Faries Parkway Box 1470 Decatur, Illinois 62525 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code217-424-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value--543,277,011 shares (January 31, 1997) 1 PAGE 2 PART I - FINANCIAL INFORMATION ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, 1996 1995 -------------------------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $3,548,072 $3,415,05 8 Cost of products sold and other operating costs 3,166,754 3,018,206 _________ _________ Gross Profit 381,318 396,852 Selling, general and administrative 108,916 128,519 expenses _________ _________ Earnings From Operations 272,402 268,333 Other income 15,386 74,046 _________ _________ Earnings Before Income Taxes 287,788 342,379 Income taxes 97,847 116,409 _________ _________ Net Earnings $ 189,941 $ 225,97 0 ========= ========= Average number of shares outstanding 544,056 550,350 Net earnings per common share $.35 $.41 Dividends per common share $.05 $.048 </TABLE> See notes to consolidated financial statements. 2 PAGE 3 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1996 1995 ------------------------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $6,937,44 $6,535,79 6 6 Cost of products sold and other operating costs 6,191,064 5,814,613 _________ _________ Gross Profit 746,382 721,183 Selling, general and administrative expenses 415,312 227,240 _________ _________ Earnings From Operations 331,070 493,943 Other income 34,827 95,561 _________ _________ Earnings Before Income Taxes 365,897 589,504 Income taxes 172,403 200,432 _________ _________ Net Earnings $ 193,49 $ 389,07 4 2 ========= ========= Average number of shares outstanding 544,581 553,800 Net earnings per common share $ $ .36 .70 Dividends per common share $ $.098 .071 </TABLE> See notes to consolidated financial statements. 3 PAGE 4 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1996 1996 -------------------------- (In thousands) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ $ 337,254 534,702 Marketable securities 555,902 820,147 Receivables 1,306,209 1,131,591 Inventories 2,199,435 1,790,636 Prepaid expenses 135,778 107,607 _________ __________ _ Total Current Assets 4,534,578 4,384,683 Investments and Other Assets Investments in and advances to affiliates 1,008,763 624,305 Long-term marketable securities 958,638 1,092,969 Other assets 217,750 233,611 _________ __________ _ 2,185,151 1,950,885 Property, Plant and Equipment Land 115,627 114,542 Buildings 1,282,737 1,245,662 Machinery and equipment 6,233,236 6,034,979 Construction in progress 699,546 588,711 Less allowances for depreciation (4,034,270 (3,869,593 ) ) _________ __________ _ 4,296,876 4,114,301 _________ __________ _ $11,016,6 $10,449,86 05 9 ========= ========== = </TABLE> See notes to consolidated financial statements. 4 PAGE 5 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1996 1996 -------------------------- (In thousands) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt $ 171,914 $ - Accounts payable 1,243,561 993,403 Accrued expenses 588,145 525,626 Current maturities of long-term debt 126,957 114,522 __________ __________ Total Current Liabilities 2,130,577 1,633,551 Long-Term Debt 1,984,735 2,002,979 Deferred Credits Income taxes 564,867 562,362 Other 106,194 106,165 __________ __________ 671,061 668,527 Shareholders' Equity Common stock 3,830,125 3,869,875 Reinvested earnings 2,400,107 2,274,937 __________ __________ 6,230,232 6,144,812 __________ __________ $11,016,605 $10,449,869 ========== ========== </TABLE> See notes to consolidated financial statements. 5 PAGE 6 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1996 1995 ----------------------- (In thousands) <S> <C> <C> Operating Activities Net earnings $ $ 193,494 389,072 Adjustments to reconcile to net cash provided by operations Depreciation and amortization 215,135 194,407 Deferred income taxes (24,350) 58,938 Amortization of long-term debt discount 14,056 12,434 (Gain) loss on marketable securities transactions (48,272) (67,811) Other 14,177 (27,206) Changes in operating assets and liabilities Receivables (159,998) (92,723) Inventories (405,795) (891,458) Prepaid expenses (28,496) (7,167) Accounts payable and accrued expenses 355,598 433,713 ________ ________ Total Operating Activities 125,549 2,199 Investing Activities Purchases of property, plant and equipment (400,249) (354,510) Business acquisitions (44,091) (26,120) Investments in and advances to affiliates (334,164) (56,482) Purchases of marketable securities (688,349) (279,702) Proceeds from sales of marketable 1,105,500 965,659 securities Other - (1,241) ________ ________ _ Total Investing Activities (361,353) 247,604 Financing Activities Long-term debt borrowings - 6,305 Long-term debt payments (18,024) (8,434) Net borrowings under line of credit 171,914 296,336 agreements Purchases of treasury stock (63,212) (187,948) Cash dividends and other (52,322) (36,752) ________ ________ _ Total Financing Activities 38,356 69,507 ________ ________ _ Increase (Decrease) In Cash and Cash Equivalents (197,448) 319,310 Cash and Cash Equivalents Beginning of 534,702 454,593 Period ________ ________ _ Cash and Cash Equivalents End of Period $ $ 337,254 773,903 ======== ======== = </TABLE> See notes to consolidated financial statements. 6 PAGE 7 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1.The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for the year ending June 30, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1996. Note 2. Other Income <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1996 1995 1996 1995 ------------------------------------- (In thousands) (In thousands) <S> <C> <C> <C> <C> Investment income $ 30,348 $ 37,328 $ 69,215 $ 79,151 Interest expense (48,133) (42,556) (94,260)(82,633) Gain on marketable securities transactions17,983 67,181 48,284 67,869 Equity in earnings of affiliates 13,666 8,936 11,675 13,343 Other 1,522 3,157 (87) 17,831 ______ ______ ______ ______ $ 15,386 $ 74,046 $34,827 $95,561 ====== ====== ====== ====== </TABLE> Note 3. Per Share Data All references to share and per share information have been adjusted for the 5 percent stock dividend paid September 16, 1996. Note 4.Antitrust Investigation and Related Litigation A federal grand jury in the Northern District of Illinois has been conducting an investigation into possible violations by the Company of federal antitrust laws and related matters with respect to the sale of lysine, an amino acid feed additive used in poultry and swine feed. A federal grand jury in the Northern District of California has been investigating possible antitrust violations by the Company with respect to the sale of citric acid, an organic acid used in various foods, beverages and other products. A federal grand jury in the Northern District of Georgia has been investigating possible antitrust violations by the Company with respect to the sale of the Company's high fructose corn syrup product line. Each of these investigations has been under the direction of the United States Department of Justice. Two former executive officers of the Company, Michael D. Andreas and Terrance S. Wilson, have been indicted in connection with the lysine investigation. On October 15, 1996, the Company pled guilty to a two count information in the Northern District of Illinois pursuant to an agreement with the Department of Justice. This information states that the Company engaged in anticompetitive conduct in connection with the sale of lysine and citric acid. In connection with its agreement the Company has paid the United States a fine of $70 million with respect to lysine and $30 million with respect to citric acid. This agreement constitutes a global resolution of all matters between the United States Department of Justice and the Company and brings to a close all Department of Justice investigations of the Company, including the federal grand jury's investigation with respect to high fructose corn syrup. Following public announcement in June 1995 of these investigations, the Company and certain of its directors and executive officers were named as defendants in a number of putative class action suits for alleged violations of federal securities laws on behalf of all purchasers of securities of the Company during the period between certain dates in 1992 and 1995. The Company along with other domestic and foreign companies, has been named as a defendant in a number of putative class action antitrust suits involving the sale of lysine, citric acid, and high fructose corn syrup. The plaintiffs generally request unspecified compensatory damages, costs, expenses and unspecified relief. The Company and the individuals named as defendants intend to vigorously defend these class actions unless they can be settled on terms deemed acceptable by the parties. These matters have resulted, as discussed below, and could result in the Company being subject to monetary damages, other sanctions and expenses. On July 20, 1996, Federal District Court Judge Milton Shadur approved a settlement in the federal lysine class action antitrust suit filed in the Northern District of Illinois (consolidated as In Re Amino Acid Lysine Antitrust Litigation MDL No. 1083) and the Company has paid $25 million in full settlement thereof without admitting the alleged violations of law. Several plaintiffs opted out of this settlement and numerous state class action antitrust cases involving the sale of lysine remain pending. A non-class action federal antitrust suit involving the sale of lysine which was filed in November 1995 and encaptioned Purina Mills, Inc. et al. v. Archer-Daniels-Midland Co. was subsequently consolidated with In Re Amino Acid Lysine Antitrust Litigation and the Company recently settled this action, including plaintiffs who opted out of or objected to the settlement noted above, for an amount deemed not material. On September 27, 1996, the Company entered into an agreement with counsel for the plaintiff class in the consolidated federal securities class action suit pending in the Central District of Illinois (G.M. Lawrence Limited Frozen Retirement Trust Dated September 1, 1992, et al. v. Archer-Daniels-Midland Co., et al., Case Number 95-2287) in which among other things, the Company agreed to pay $30 million to members of the class without admitting 7 PAGE 8 the alleged violations of law. The court has preliminary approved the settlement. On September 27, 1996, the Company entered into an agreement with counsel for the plaintiff class in the consolidated federal citric acid class action antitrust suit filed in the Northern District of California (consolidated as In Re Citric Acid Antitrust Litigation, MDL No. 1092, Marten File No. C-95-2963 (FMS)) in which among other things, the Company agreed to pay $35 million to members of the class without admitting the alleged violations of law. Formal papers seeking court approval of the settlement recently have been filed. The Company has also entered into settlement agreements relating to certain state actions filed by indirect purchasers of lysine in which, among other things, the Company has agreed to pay amounts deemed not material to certain members of the class without admitting the alleged violations of law. The Company made a $200 million provision in the quarter ended September 30, 1996 to cover the fines, litigation settlements and related costs and expenses described above. Such provision is reflected in the Company's first quarter selling, general and administrative expenses. Because of the early stage of other putative class actions, including those related to high fructose corn syrup, the ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the unaudited consolidated financial statements. The Company and its directors also have been named as defendants in two putative class action suits, one of which alleges violations of Delaware state law and a similar case in District Court in Illinois which alleges violations of federal securities laws. Both cases seek invalidation of the election of the Company's directors on the basis of alleged omissions from the proxy statement issued by the Company prior to its 1995 Annual Meeting of Shareholders. The case relating to violations of Delaware law has been dismissed and is now on appeal in the Supreme Court of Delaware. The case filed in Federal District Court in Illinois has likewise been dismissed and has been appealed to the Seventh Circuit Court of Appeals. The Company and the individuals named as defendants intend to vigorously defend these actions. Shareholder derivative actions also have been filed against certain of the Company's directors and executive officers and nominally against the Company alleging that the individuals named as defendants breached their fiduciary duties to the Company and seeking monetary damages and other relief on behalf of the Company from the individuals named as defendants. The Company has moved to dismiss these derivative actions on the ground that they cannot be maintained unless the plaintiffs first brought their complaints to the Company's Board of Directors, which they did not. The Company from time to time, in the ordinary course of business, is named as a defendant in various other lawsuits. In the Company's opinion, the gross liability from such other lawsuits, including environmental exposure, with or without insurance recoveries is not considered to be material to the Company's consolidated financial condition or results of operations. 8 PAGE 9 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION The Company is in one business segment - procuring, transporting, storing, processing and merchandising agricultural commodities and products. The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as: weather; plantings; government (domestic and foreign) farm programs and policies; changes in global demand created by population growth and higher standards of living; and global production of similar and competitive crops. Generally, changes in the price of agricultural commodities can be passed through to the price of processed products. Ethanol is one of a limited few of the Company's processed products which must be priced to compete with products produced from other raw materials. To reduce the price risk of market fluctuations, the Company follows a policy of hedging substantially all inventory and related purchase and sale contracts. In addition, the Company from time to time will hedge portions of its anticipated production requirements. The instruments used are principally readily marketable exchange traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. Also, the underlying commodity can be delivered against such contracts. To obtain a proper matching of revenue and expense, gains or losses arising from open and closed hedging transactions are included in inventory as a cost of the commodities and reflected in the income statement when the product is sold. Inflation, over time, has an impact on agricultural commodity prices. The Company's business is capital intensive and inflation could impact the cost of capital investment. OPERATIONS Net sales and other operating income increased $133 million to $3.5 billion for the quarter and increased $401 million to $6.9 billion for the six months due primarily to increases in average selling prices of 5 percent and 9 percent, respectively. These increases were partially offset by decreases in volume of products sold of 1 percent for the quarter and 3 percent for the six months. A summary of net sales and other operating income by classes of products and services is as follows: <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1996 1995 1996 1995 _______________ ______________ ___ ___ (In millions) (In millions) <S> <C> <C> <C> <C> Oilseed products $ 2,276 $ 2,07 $ 4,385 $ 3,929 3 Corn products 596 674 1,165 1,290 Wheat and other milled 424 429 874 831 products Other products and 252 239 513 486 services ______ ______ ______ ______ $ 3,548 $ 3,41 $ 6,937 $ 6,536 5 ====== ====== ====== ====== </TABLE> 9 PAGE 10 Sales of oilseed products increased 10 percent for the quarter and 12 percent for the six months due principally to higher average selling prices reflecting the higher cost of raw materials. Sales volumes of oilseed products were 4 percent higher for the quarter and 1 percent higher for the six months reflecting relatively strong protein meal demand from both the domestic and export markets. Sales of corn products decreased 12 percent for the quarter and 10 percent for the six months due primarily to decreased sales volumes of fuel alcohol as reduced corn supplies and the resulting higher cost of corn resulted in the Company reducing its grind. Average selling prices of corn products were up 6 percent for both the quarter and six month periods due to the good demand for the Company's fuel, beverage and industrial alcohol as well as for the Company's bioproducts, including lysine, threonine and MSG. Sales of wheat and other milled products decreased 1 percent for the quarter due principally to decreased sales volumes reflecting reduced export flour demand and increased production capacity in the industry. For the six month period, sales of wheat and other milled products increased 5 percent due principally to increased average selling prices reflecting the higher cost of raw materials. This average selling price increase was partially offset by decreased sales volumes. Cost of products sold and other operating costs increased $149 million for the quarter to $3.2 billion and increased $376 million for the six months to $6.2 billion due primarily to increased average raw material commodity prices and increased energy costs. These price increases were partially offset by the decrease in volume of product sold. Gross profit declined $15 million to $381 million for the quarter as lower merchandising margins combined with the negative effect of increased energy costs on processing and transportation margins more than offset the effect of higher average selling prices versus increased raw material prices. For the six months gross profit increased $25 million to $746 million due primarily to the effect of higher selling prices versus increased raw material commodity prices partially offset by decreased sales volumes, lower merchandising margins and the negative effect of increased energy costs on processing and transportation margins. Selling, general and administrative expenses decreased $20 million to $109 million for the quarter due primarily to decreased legal and litigation related expenses. For the six months, selling, general and administrative expense increased $188 million to $415 million due principally to increased legal and litigation related costs including the $200 million provision made in the first quarter of the fiscal year related to fines and litigation settlements arising out of the United States Department of Justice antitrust investigation of the Company's lysine and citric acid products as well as a securities suit brought by shareholders (see note 4). The decrease in other income for the quarter and six months was due principally to decreased gains on marketable securities transactions. To a lesser extent, other income decreased for the quarter and six months due to decreased investment income due to both lower interest rates and lower invested funds and increased interest expense due primarily to lower amounts of interest capitalized on construction projects. For the six months, the decrease in other income reflects the prior year's $15 million gain on the sale of the Company's Supreme Sugar subsidiary. 10 PAGE 11 The decrease in income taxes for both the quarter and six months resulted primarily from lower pretax earnings. For the six months, this decrease was partially offset by a higher effective income tax rate. The increase in the Company's effective income tax rate to 47 percent for the six months compared to an effective rate of 34 percent last year was due primarily to the non-deductibility for income tax purposes of a portion of the Company's litigation settlements and fines. The Company's effective income tax rate of 34 percent for the quarter was comparable to the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company continued to show substantial liquidity with working capital of $2.4 billion, including cash and marketable securities net of short-term debt of $721 million. Capital resources remained strong as the Company's net worth at quarter-end was $6.2 billion. The Company's ratio of long-term liabilities to total capital at December 31, 1996 was approximately 22 percent. As discussed in Note 4 to the unaudited consolidated financial statements, various grand juries under the direction of the United States Department of Justice have been conducting investigations into possible violations by the Company of federal antitrust laws and related matters with respect to the sale of lysine, citric acid and high fructose corn syrup product lines. Two former executive officers of the Company have been indicted in connection with the lysine investigation. On October 15, 1996, the Company pled guilty to engaging in anticompetitive conduct in connection with the sale of lysine and citric acid and agreed to pay the United States $100 million in fines. The agreement brings to a close all Department of Justice investigations against the Company, including the investigation with respect to high fructose corn syrup. In addition, related civil class actions have been filed against the Company which could result in the Company being subject to monetary damages, other sanctions and expenses. As also discussed in note 4 to the unaudited consolidated financial statements, the Company has agreed to settle certain civil class action suits involving lysine antitrust, citric acid antitrust and federal securities law litigation. The Company made a $200 million provision in the quarter ended September 30, 1996 sufficient to cover such fines and settlements and related costs and expenses. Because of the early stage of other putative class actions, including those related to high fructose corn syrup, the ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the unaudited consolidated financial statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings ENVIRONMENTAL MATTERS In 1993, the State of Illinois Environmental Protection Agency brought administrative enforcement proceedings arising out of the Company's failure to obtain permits for certain pollution control equipment at certain of the Company's processing facilities in Illinois. The Company believes it has meritorious defenses. In management's opinion these proceedings will not, either individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. The Company is involved in approximately 24 administrative and judicial proceedings in which it has been identified as a potentially responsible party (PRP) under the federal Superfund law and its state analogs for the study and clean-up of sites contaminated by material discharged into the environment. In all of these matters, there are numerous PRPs. Due to various factors such as the required level of remediation and participation in the clean-up effort by others, the Company's future clean-up costs at these sites cannot be reasonably estimated. However, in management's opinion these proceedings will not, either individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. LITIGATION REGARDING ALLEGED ANTICOMPETITIVE PRACTICES The Company and certain of its current and former officers and directors are currently defendants in various lawsuits related to alleged anticompetitive practices by the Company as described in more detail below. The Company and the individual defendants named in these actions intend to vigorously defend the actions unless they can be settled on terms deemed acceptable to the parties. The Company has paid and intends to continue to pay the legal expenses of its current and former officers and directors and to indemnify these persons with respect to these actions in accordance with Article X of the Bylaws of the Company. GOVERNMENTAL INVESTIGATIONS A federal grand jury in the Northern District of Illinois has been conducting an investigation into possible violations by the Company of federal antitrust laws and related matters with respect to the sale of lysine, an amino acid feed additive used in poultry and swine feed. A federal grand jury in the Northern District of California has been investigating possible antitrust violations by the Company with respect to the sale of citric acid, an organic acid used in various foods, beverages and other products. A federal grand jury in the Northern District of Georgia has been investigating possible antitrust violations by the Company with respect to the sale of the Company's high fructose corn syrup product line. Each of these investigations has been under the direction of the United States Department of Justice. Two former executive officers of the Company, Michael D. Andreas and Terrance S. Wilson, have been indicted in connection with the lysine investigation. On October 15, 1996, the Company pled guilty to a two count information in the Northern District of Illinois pursuant to an agreement with the Department of Justice. This information states that the Company engaged in anticompetitive conduct in connection with the sale of lysine and citric acid. In connection with its agreement the Company will pay the United States a fine of $70 million with respect to lysine and $30 million with respect to citric acid. This agreement constitutes a global resolution of all matters between the United States Department of Justice and the Company and brings to a close all Department of Justice 11 PAGE 12 Item 1. Legal Proceedings--Continued investigations of the Company, including the federal grand jury's investigation with respect to high fructose corn syrup. The Company's agreement with the Department of Justice further obligates the Company to cooperate with the government's continued investigation with respect to possible violations by others of federal antitrust laws and related matters in the food additives industry. Under the agreement, the Department of Justice agrees not to bring any action against any director, officer or employee of the Company (or its subsidiaries or affiliates), other than Michael D. Andreas and Terrance S. Wilson, involving the sale or production of any product sold or produced by the Company's BioProducts Division, Animal Health and Nutrition Division, Food Additives Division, or Sweetener Group or for any action which was or is the subject of pending investigations in the Central District of Illinois and the Southern District of Alabama. Mr. Andreas, who no longer serves as an officer of the Company, requested and was granted a temporary administrative leave from the Company. Mr. Wilson has retired from the Company for medical reasons. There is no understanding or agreement as to what position, if any, Mr. Andreas may return to at the Company. As part of the agreement, the United States agreed not to bring further criminal charges against the Company or any of its subsidiaries or affiliates for any offense committed prior to the date of the agreement that was undertaken in furtherance of or in connection with any attempted or completed antitrust conspiracy involving the sale or production of any product by the Company's BioProducts Division, Animal Health and Nutrition Division, Food Additives Division, or Sweetener Group, or for any alleged offense which is or was the subject of any pending investigation of ADM. Although the immunity agreement excepted any criminal violations of the federal tax law from its scope, the agreement represented that ADM was not a subject of the investigation being conducted by the Fraud Section of the Criminal Division of the Department of Justice. The government further agreed not to prosecute any current officer, director, or employee of the Company or any of its subsidiaries or affiliates (other than Michael D. Andreas and Terrance S. Wilson) for any of the antitrust matters set forth above or for any alleged misappropriation of technology committed prior to the date of the agreement. The Company also agreed to cooperate with the government's investigations by: (i) providing non-privileged documents, information, and other materials; and (ii) securing, using its best efforts, the cooperation of any current director, officer, or employee of the company or its subsidiaries or affiliates (other than Michael D. Andreas and Terrance S. Wilson) for service of process, interviews, grand jury testimony, and trial testimony. The agreement also provided that if any current officer, director or employee failed to comply with the cooperation obligations as specified, the agreement not to prosecute those 12 PAGE 13 Item 1. Legal Proceedings--Continued persons would be void. The full details of the plea agreement and the Company's cooperation obligations thereunder are set forth in the agreement, which is a matter of public record in 96-CR-00640. On February 12, 1997 the Company's three Mexican subsidiaries each received notice that the Mexican Federal Competition Commission has commenced an investigation in order to determine if, as a result of the Company's guilty plea in the United States, violations of the Mexican Federal Anti-trust Law have been committed relative to the marketing and sale of lysine in Mexico. SECURITIES LAWS CLASS ACTION Following public announcement in June 1995 of the government's antitrust investigation, the Company and certain of its then current directors and executive officers were named as defendants in seventeen putative class action suits filed on behalf of all purchasers of securities of the Company during the period between certain dates in 1992 and 1995. Fourteen of these suits were consolidated under the name In Re Archer-Daniels- Midland Company Securities Litigation, United States District Court, Northern District of Illinois, Civil Action No. 95-C-3979, and a consolidated complaint was filed on September 22, 1995. The consolidated complaint alleges that the defendants made material misrepresentations and omissions with respect to the Company and its operations and with respect to actions of the Company and its officers regarding antitrust violations, as a result of which market prices of the Company's securities were artificially inflated during the putative class period. The consolidated complaint alleges that the conduct complained of violates federal securities laws. The plaintiffs request unspecified compensatory damages, costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative class. On October 31, 1995, the Court granted the defendants' motion to transfer the consolidated action to the Central District of Illinois (wherein it now bears the caption E. M. Lawrence Limited Frozen Retirement Trust Dated September 1, 1992, et al. v. Archer-Daniels-Midland Co., et al., Case Number 95- 2287). The three remaining actions, which originally were filed in the Central District of Illinois, also have been consolidated as part of the E.M. Lawrence Limited Frozen Retirement Trust Dated September 1, 1992, et al. v. Archer Daniels Midland Co., et al., action. The Company and the individual defendants moved to dismiss this consolidated action. On September 27, 1996, the Company entered into an agreement with counsel for the plaintiff class in which among other things, the Company agreed to pay $30 million to members of the class, without admitting the alleged violations of law. The court has preliminary approved the settlement. Notice is being sent to members of the plaintiff class at this time, and a final approval hearing has been scheduled for April 11, 1997. 13 PAGE 14 Item 1. Legal Proceedings--Continued HIGH FRUCTOSE CORN SYRUP ACTIONS The Company, along with other companies, has been named as a defendant in thirty antitrust suits involving the sale of high fructose corn syrup. Twenty-nine of these actions have been brought as putative class actions. FEDERAL ACTIONS. Twenty-two of these putative class actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of high fructose corn syrup during certain periods in the 1990s. These twenty-two actions have been transferred to the United States District Court for the Central District of Illinois and consolidated under the caption In Re High Fructose Corn Syrup Antitrust Litigation, MDL No. 1087 and Master File No. 95-1477. The parties are in the midst of discovery in this action. On January 14, 1997, the Company, along with other companies, was named a defendant in a non-class action antitrust suit involving the sale of high fructose corn syrup and corn syrup. This action alleges violations of federal antitrust laws and Oregon and Michigan state antitrust laws, including allegations that defendants conspired to fix, raise, maintain and stabilize the price of corn syrup and high fructose corn syrup, and seeks treble damages, attorneys' fees and costs of an unspecified amount. The Company has not yet filed a responsive pleading. STATE ACTIONS. The Company, along with other companies, also has been named as a defendant in six putative class action antitrust suits filed in California state court involving the sale of high fructose corn syrup. These California actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. One of the California putative classes comprise certain direct purchasers of high fructose corn syrup in the State of California during certain periods in the 1990s. This action was filed on October 17, 1995 in Superior Court for the County of Stanislaus, California and encaptioned Kagome Foods, Inc. v Archer-Daniels-Midland Co. et al., Civil Action No. 37236. This action has been removed to federal court and consolidated with the federal class action litigation pending in the Central District of Illinois referred to above. The other five California putative classes comprise certain indirect purchasers of high fructose corn syrup in the State of California during certain periods in the 1990s. One such action was filed on July 21, 1995 in the Superior Court of the County of Los Angeles, California and is encaptioned Borgeson v. Archer-Daniels-Midland Co., et al., Civil Action No. BC131940. This action and the other four indirect purchases actions have been coordinated before a single court in Stanislaus County, California. The other four actions are encaptioned, Goings v. Archer Daniels Midland Co., et al., Civil Action No. 750276 (Filed on July 21, 1995, Orange County Superior Court); Rainbow Acres v. Archer Daniels Midland Co., et al., Civil Action No. 974271 (Filed on November 22, 1995, San Francisco County Superior Court); Patane v. Archer Daniels Midland Co., et al., Civil Action No. 212610 (Filed on January 17, 1996, Sonoma County Superior Court); and St. Stan's Brewing Co. v. Archer Daniels Midland Co., et al., Civil Action No. 37237 (Filed on October 17, 1995, Stanislaus County Superior Court). The Company, along with other companies, also has been named a defendant in a putative class action antitrust suit filed in Alabama state court. The Alabama action alleges violations of the Alabama, Michigan and Minnesota antitrust laws, including allegations that defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seeks an injunction against continued illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Alabama action comprises certain indirect purchasers in Alabama, Michigan and Minnesota during the period March 18, 1994 to March 18, 1996. This action was filed on March 18, 1996 in the Circuit Court of Coosa County, Alabama, and is encaptioned Caldwell v. Archer- Daniels-Midland Co., et al., Civil Action No. 96-17. On April 22, 1996, defendants moved to sever the non-Alabama claims and have them dismissed. This motion is still pending. 14 PAGE 15 Item 1. Legal Proceedings--Continued LYSINE CLASS ACTION The Company, along with other companies, has been named as a defendant in twenty-one putative class action antitrust suits involving the sale of lysine. FEDERAL ACTIONS. Six of these actions allege violations of federal antitrust laws, including allegations that certain entities agreed to fix, stabilize and maintain at artificially high levels the price of lysine, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of lysine for certain periods in the 1990s. These six actions were transferred to the United States District Court for the Northern District of Illinois and consolidated under the caption In Re Amino Acid Lysine Antitrust Litigation, MDL No. 1083 and Master File No. 95- 7679. On April 4, 1996, the Company executed a settlement agreement with counsel for the plaintiff class in which, among other things, the Company agreed to pay $25 million to members of the class, without admitting the alleged violations of law. Several plaintiffs opted out of this settlement. This settlement agreement was approved by the court and certain objectors to the settlement appealed the final order of approval to the United States Court of Appeals for the Seventh Circuit. That appeal subsequently was dismissed. The Company, along with other companies also was named as a defendant in one non-class action federal antitrust suit involving the sale of lysine. This action was filed on November 13, 1995 in the United States District Court for the Eastern District of Missouri and is encaptioned Purina Mills, Inc., et al. v Archer-Daniels-Midland Co., Civil Action No. 95-CV-2227. It alleges violations of federal antitrust laws, including allegations that certain entities agreed to fix, stabilize and maintain at artificially high levels the price of lysine, and seeks an injunction against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. This action was subsequently consolidated with In Re Amino Acid Lysine Antitrust Litigation and the Company recently settled this action, including plaintiffs who opted out of or objected to the settlement noted above, for an amount deemed not material. The Company, along with other companies, also has been named a defendant in a nationwide federal class action brought on behalf of consumers of certain poultry products during the period 1992 through 1996. This action alleges violations of the federal antitrust laws, including allegations that the defendants unlawfully fixed the price of lysine, and requests $300 million in treble damages. On January 17, 1997, the court dismissed the action without prejudice after plaintiff requested a voluntary dismissal. This action is encaptioned Silvious v. Archer-Daniels-Midland Co., et al., No. 96-0128(H) and was filed on November 18, 1996 in federal court in the Western District of Virginia. 15 PAGE 16 Item 1. Legal Proceedings--Continued STATE ACTIONS. The Company also has been named as a defendant, along with other companies, in six putative class action antitrust suits filed in California state court, two putative class action antitrust suits filed in Alabama state court, two putative class action antitrust suits filed in Minnesota state court, one putative class action antitrust suit filed in Georgia state court, one putative class action antitrust suit filed in Tennessee state court and two putative class action antitrust suits filed in Michigan state court involving the sale of lysine. The California actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. The putative classes in the California actions comprise certain indirect purchasers of lysine in the State of California during certain periods in the 1990s. These six actions were consolidated before the Superior Court for San Francisco County under the caption Feedstuffs Processing Co. v. Archer Daniels Midland Co, et al., Case No. 974597. The Company has entered into an agreement with plaintiffs' counsel in these California actions, in which among other things, the Company agreed to pay $500,000 to certain members of the class, without admitting the alleged violations of law. This settlement has received final court approval. The two Alabama actions allege violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in the Alabama actions comprise certain indirect purchasers of lysine in the State of Alabama during certain periods in the 1990s. One such action was filed on August 17, 1995 in the Circuit Court of DeKalb County, Alabama, and is encaptioned Ashley v. Archer-Daniels-Midland Co., et al., Civil Action No. 95- 336. The parties are in the midst of discovery in this action. The other Alabama action, encaptioned Bailey v. Archer Daniels Midland Co., et al., Civil Action No. 95- 165, and filed on December 11, 1995 in the Circuit Court of Tallapoosa County, has been placed on the court's administrative docket pending the outcome of the Ashley action. One Minnesota action alleges violations of certain laws of the states of Minnesota, Tennessee, Wisconsin, South Dakota, North Dakota, Kansas, Louisiana, Michigan, Maine, Arizona, Florida, Mississippi, New Mexico, North Carolina and West Virginia, and the District of Columbia, including allegations that defendants conspired to maintain the price of lysine at artificially high levels, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in this action comprises certain indirect purchasers in the aforementioned states of lysine during the period June 1, 1992 through April 19, 1996. This action was filed on April 10, 1996 in the District Court for Renville County, Minnesota and is encaptioned Big Valley Milling, Inc. v. Archer-Daniels-Midland Co., et al., No. C7-96-260. The other Minnesota action, encaptioned, United Mills v. Archer-Daniels-Midland Co., et al., No. 65-C2-96-215, and filed in the same court, seeks identical relief on behalf of certain indirect purchasers of lysine in all of the aforementioned states. On September 30, 1996, the Company moved to dismiss the non-Minnesota claims in the two Minnesota actions and moved for summary judgment on all claims in these actions. That motion is currently pending. On February 5, 1997, the Company entered into an agreement with plaintiffs' counsel in the Minnesota actions, in which among other things, the Company agreed to pay $1 million to certain members of the putative classes, without admitting the alleged violations of law. The parties are in the process of obtaining court approval of this agreement. The Georgia action, encaptioned Long v. Archer-Daniels-Midland Co., et al., Civil Action No. E-43829, and filed on December 13, 1995 in Fulton County Superior Court, alleges a restraint of trade in violation of Georgia common law and the Georgia state RICO act. This action includes allegations that the defendants conspired to maintain the price of lysine at artificially high levels and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, punitive damages attorneys fees and costs, and other unspecified relief. The putative class in the action comprises certain indirect purchasers of lysine in the state of Georgia during the period January 1, 1990 until the present. On December 19, 1996, the Court granted the Company's motion to dismiss this action. The Tennessee action, encaptioned McCormack Farms v. Archer Daniels Midland Co., et al., Civil Action No. 96C-2190, and filed on June 11, 1996 in Davidson County Circuit Court, alleges a restraint of trade in violation of the Tennessee Trade Practices Act and Tennessee Consumer Protection Act. This action includes allegations that defendants conspired to fix, maintain or stabilize the prices of lysine and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, attorneys' fees and costs, and other unspecified relief. The putative class in this case comprises certain indirect purchasers of lysine within the State of Tennessee during the period June 10, 1992 through June 10, 1996. The Company has not yet filed a responsive pleading. The Michigan actions allege a restraint of trade in violation of the Michigan Antitrust Reform Act and include allegations that defendants conspired to fix, raise, maintain and stabilize the price of lysine and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, attorneys' fees and costs, and other unspecified relief. The putative classes in these cases comprise certain indirect purchasers of lysine within the State of Michigan during certain periods in the 1990s. One such action, encaptioned Michigan Pork Producers Assn, et al. v. Archer Daniels Midland Co., et al., No. 906-10696-CZ, was filed on September 25, 1996 in Kent County Circuit Court. The second action, encaptioned Bacon Acres v. Archer Daniels Midland Co., et al., No P23920, was filed on September 24, 1996 in the Circuit Court for the County of Washtenaw, Michigan. The Company has not yet filed a responsive pleading in either action. 16 PAGE 17 Item 1. Legal Proceedings--Continued CITRIC ACID CLASS ACTIONS The Company, along with other companies, has been named as a defendant in ten putative class action antitrust suits involving the sale of citric acid. FEDERAL ACTIONS. Six of these actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of citric acid, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of citric acid for certain periods in the 1990s. These six actions have been transferred to the United States District Court for the Northern District of California and consolidated as In Re Citric Acid Antitrust Litigation, MDL No. 1092, Master File No. C-95-2963(FMS). On September 27, 1996 the Company entered into an agreement with counsel for the plaintiff class in this consolidated action in which among other things, the Company agreed to pay $35 million to members of the class, without admitting the alleged violations of law. Formal papers seeking court approval of the settlement recently have been filed. STATE ACTIONS. The Company, along with other companies, also has been named as a defendant in one putative class action antitrust suit filed in Alabama state court involving the sale of citric acid. This action alleges violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of citric acid, and seeks an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Alabama action comprises certain indirect purchasers of citric acid in the State of Alabama from July 1993 until July 1995. This action was filed on July 27, 1995 in the Circuit Court of Walker County, Alabama and is encaptioned Seven Up Bottling Co. of Jasper, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-436. The Company currently is seeking appellate review of the denial of its motion to dismiss this action. The Company, along with other companies, also has been named as a defendant in two putative class action antitrust suits filed in California state court involving the sale of citric acid. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants conspired to fix, maintain or stabilize the price of citric acid, and seek injunctions against continued illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain indirect purchasers of citric acid within the State of California during certain periods in the 1990s. One such action was filed on June 12, 1996 in the Superior Court of the County of San Francisco, California and is encaptioned Bianco v. Archer Daniels Midland Co., et al., Civil Action No. 978912. The second action was filed on June 28, 1996 in San Francisco County Superior Court and is encaptioned Wignall v. Archer Daniels Midland Co., et al., Civil Action No. 979360. These actions recently have been coordinated before a single court in San Francisco, County, California. The Company, along with other companies, also has been named as a defendant in one putative class action antitrust suit filed in Wisconsin state court involving the sale of citric acid. This action alleges violations of the laws of Wisconsin, Minnesota, Alabama, Arizona, California, District of Columbia, Florida, Tennessee, West Virginia, Mississippi New Mexico, North Carolina, South Dakota, North Dakota, Kansas, Louisiana, Michigan and Maine, including allegations that defendants conspired to maintain the price of citric acid at artificially high levels and seeks injunctive relief, treble damages of an unspecified amount, attorneys fees and costs and other unspecified relief. The putative class in this case comprises certain indirect purchasers of citric acid in the above referenced states during the period July 1, 1991 through June 27, 1995. This action was filed on December 20, 1996 in the Circuit Court for Milwaukee County, Wisconsin and is encaptioned Raz, et al. v. Archer-Daniels-Midland Co., et al., No.[] 17 PAGE 18 Item 1. Legal Proceedings --Continued HIGH FRUCTOSE CORN SYRUP/CITRIC ACID STATE CLASS ACTIONS The Company, along with other companies, has been named as a defendant in six putative class action antitrust suits involving the sale of both high fructose corn syrup and citric acid. Two of these actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. The putative class in one of these California cases comprises certain direct purchasers of high fructose corn syrup and citric acid in the State of California during the period January 1, 1992 until at least October 1995. This action was filed on October 11, 1995 in the Superior Court of Stanislaus County, California and is entitled Gangi Bros. Packing Co. v. Archer-Daniels-Midland Co., et al., Civil Action No. 37217. The putative class in the other California case comprises certain indirect purchasers of high fructose corn syrup and citric acid in the state of California during the period October 12, 1991 until November 20, 1995. This action was filed on November 20, 1995 in the Superior Court of San Francisco County and is encaptioned MCFH, Inc. v. Archer-Daniels- Midland Co., et al., Civil Action No. 974120. The California Judicial Council has bifurcated the citric acid and high fructose corn syrup claims in these actions and coordinated them with other actions in San Francisco County Superior Court and Stanislaus County Superior Court. The Company, along with other companies, also has been named as a defendant in at least one putative class action antitrust suit filed in West Virginia state court involving the sale of high fructose corn syrup and citric acid. This action also alleges violations of the West Virginia antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the West Virginia action comprises certain entities within the State of West Virginia that purchased products containing high fructose corn syrup and/or citric acid for resale from at least 1992 until 1994. This action was filed on October 26, 1995, in the Circuit Court for Boone County, West Virginia, and is encaptioned Freda's v. Archer- Daniels-Midland Co., et al., Civil Action No. 95-C-125. The parties are in the midst of discovery in this action. The Company, along with other companies, also has been named as defendant in a putative class action antitrust suit filed in Michigan state court involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the Michigan antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Michigan action comprises certain persons within the State of Michigan that purchased products containing high fructose corn syrup and/or citric acid during the period January 1992 through February 26, 1996. This action was filed on February 26, 1996 in the Circuit Court for Ingham County, Michigan, and is encaptioned Wilcox v. Archer-Daniels-Midland Co., et al., Civil Action No. 96-82473-CP. The parties are in the midst of discovery in this action. The Company, along with other companies, also has been named as a defendant in a putative class action antitrust suit filed in the Superior Court for the District of Columbia involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the District of Columbia antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the District of Columbia action comprises certain persons within the District of Columbia that purchased products containing high fructose corn syrup and/or citric acid during the period January 1, 1992 through December 31, 1994. This action was filed on April 12, 1996 in the Superior Court for the District of Columbia, and is encaptioned Holder v. Archer-Daniels-Midland Co., et al., Civil Action No. 96-2975. The parties are in the midst of discovery in this action. The Company, along with other companies, has been named as a defendant in at least one putative class action antitrust suit filed in Kansas state court involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the Kansas antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, court costs and other unspecified relief. The putative class in the Kansas action comprises certain persons within the State of Kansas that purchased products containing high fructose corn syrup and/or citric acid during at least the period January 1, 1992 through December 31, 1994. This action was filed on May 7, 1996 in the District Court of Wyandotte County, Kansas and is encaptioned Waugh v. Archer-Daniels-Midland Co., et al., Case No. 96-C-2029. The parties are in the midst of discovery in this action. 18 PAGE 19 Item 1. Legal Proceedings--Continued HIGH FRUCTOSE CORN SYRUP/CITRIC ACID/LYSINE STATE CLASS ACTIONS The Company, along with other companies, has been named as a defendant in six putative class action antitrust suits filed in California state court involving the sale of high fructose corn syrup, citric acid and/or lysine. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, citric acid and/or lysine, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. One of the putative classes comprises certain direct purchasers of high fructose corn syrup, citric acid and/or lysine in the State of California during a certain period in the 1990s. This action was filed on December 18, 1995 in the Superior Court for Stanislaus County, California and is encaptioned Nu Laid Foods, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 39693. The other five putative classes comprise certain indirect purchasers of high fructose corn syrup, citric acid and/or lysine in the State of California during certain periods in the 1990s. One such action was filed on December 14, 1995 in the Superior Court for Stanislaus County, California and is encaptioned Batson v. Archer- Daniels-Midland Co., et al., Civil Action No. 39680. The other actions are encaptioned Nu Laid Foods, Inc. v. Archer Daniels Midland Co., et al., No 39693 (Filed on December 18, 1995 Stanislaus County Superior Court); Abbott v. Archer Daniels Midland Co., et al., No. 41014 (Filed on December 21, 1995, Stanislaus County Superior Court); Noldin v. Archer Daniels Midland Co., et al., No. 41015 (Filed on December 21, 1995, Stanislaus County Superior Court); Guzman v. Archer Daniels Midland Co., et al., No. 41013 (Filed on December 21, 1995, Stanislaus County Superior Court) and Ricci v. Archer Daniels Midland Co., et al., No. 96-AS-00383 (Filed on February 6, 1996, Sacramento County Superior Court). As noted above, the plaintiffs in these actions and the lysine defendants have executed a settlement agreement that has been approved by the court and the California Judicial Council has bifurcated the citric acid and high fructose corn syrup claims and coordinated them with other actions in San Francisco County Superior Court and Stanislaus County Superior Court. SHAREHOLDER DERIVATIVE ACTIONS Following the public announcement of the grand jury investigation in June 1995, three shareholder derivative suits were filed against certain of the Company's then current directors and executive officers and nominally against the Company in the United States District Court for the Northern District of Illinois and fourteen similar shareholder derivative suits were filed in the Delaware Court of Chancery. The derivative suits filed in federal court in Illinois were consolidated under the name Felzen, et al. v. Andreas, et al., Civil Action No. 95-C-4006, 95-C-4535, and a consolidated amended derivative complaint was filed on September 29, 1995. This complaint names all then current directors of the Company (except Mr. Coan) and one former director as defendants and names the Company as a nominal defendant. It alleges breach of fiduciary duty, waste of corporate assets, abuse of control and gross mismanagement, based on the antitrust allegations described above, as well as other alleged wrongdoing. On October 31, 1995, the Court granted the defendants' motion to transfer the Illinois consolidated derivative action to the Central District of Illinois, wherein it now bears the case number 95-2279. On April 26, 1996, the court dismissed the suit without prejudice and permitted the plaintiffs twenty-one days to refile it. The plaintiffs refiled the complaint on May 17, 1996. The defendants again moved to dismiss the complaint on June 7, 1996. That motion is currently pending. Plaintiffs have supplemented the complaint to include the antitrust settlements and guilty plea described above. The fourteen shareholder derivative suits filed in the Delaware Court of Chancery have been consolidated as In Re Archer Daniels Midland Derivative Litigation, Consolidated No. 14403. An amended and consolidated complaint was filed on November 19, 1996. ADM moved to dismiss the complaint on December 12, 1996. That motion is currently pending. 19 PAGE 20 Item 1. Legal Proceedings--Continued DELAWARE STATE LAW/FEDERAL SECURITIES LAWS ACTIONS The Company and its directors also have been named as defendants in a putative class action suit encaptioned Loudon v. Archer-Daniels-Midland Co., et al., Civil Action No. 14638, filed in the Delaware Court of Chancery on October 20, 1995. This action alleges violations of Delaware state law and seeks invalidation of the 1995 election of the Company's directors on the basis of alleged omissions from the proxy statement issued by the Company prior to its October 19, 1995 annual meeting of shareholders. The Delaware Court of Chancery dismissed this action on February 20, 1996, and the case is now on appeal in the Supreme Court of Delaware. The Company and its directors also have been named as defendants in a similar suit filed on November 1, 1995 in the United States District Court for the Central District of Illinois, and encaptioned Buckley v. Archer-Daniels- Midland Co., et al., Civil Action No. 95-C-2269, alleging violations of analogous provisions of federal securities law. The defendants moved to dismiss this action. The Court granted the motion to dismiss on June 6, 1996, and the case is now on appeal. As described in the notes to financial statements and management's discussion of operations in prior Form 10- Q's, the Company has made provisions to cover assessed fines, litigation settlements and related costs and expenses described above. However, because of the early stage of other putative class actions described above, including those related to high fructose corn syrup, the ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the consolidated financial statements. Item 4. Submission of matters to a vote of Security Holders: The Annual Meeting of Shareholders was held on October 17, 1996. Proxies for the Annual Meeting were solicited pursuant to Regulation 14. There was no solicitation in opposition to the Board of Director nominees as listed in the proxy statement and all of such nominees were elected as follows: 20 PAGE 21 <TABLE> <CAPTION> Nominee Shares Cast Shares For Withheld <S> <C> <C> D. O. Andreas 403,996,052 48,693,195 G. O. Coan 405,231,972 47,457,275 L. W. Andreas 403,308,001 49,381,246 S. M. Archer, Jr. 403,949,593 48,739,654 J. K. Vanier 405,020,884 47,668,363 R. R. Burt 409,209,821 43,479,426 O. G. Webb 404,908,866 47,780,381 F. R. Johnson 407,471,039 45,218,208 R. S. Strauss 404,348,243 48,341,004 M. B. Mulroney 404,638,775 48,050,472 J. R. Block 409,166,611 43,522,636 M. H. Carter 405,769,429 46,919,818 There were no abstentions or broker non-votes regarding the election of directors. The shareholder proposal relative to the Adoption of an Incentive Stock Option Plan was ratified as follows: For Against Abstain 316,897,743 133,112,790 2,678,714 The shareholder proposal relative to the Adoption of a Stock Unit Plan for Nonemployee Directors was ratified as follows: For Against Abstain 428,385,363 21,489,262 2,814,622 The appointment by the Board of Directors of Ernst & Young LLP as Independent Accountants to audit the accounts of the Company for the fiscal year ending June 30, 1997 was ratified as follows: For Against Abstain 448,865,995 2,811,267 1,011,985 The shareholder proposal relative to the Adoption of Stockholder's Proposal No. 1 (Board Diversity) was defeated as follows: For Against Abstain 68,968,589 291,887,583 13,698,419 The shareholder proposal relative to the Adoption of Stockholder's Proposal No. 2 (Cumulative Voting) was defeated as follows: For Against Abstain 91,366,745 275,195,548 7,992,298 The shareholder proposal relative to the Adoption of Stockholder's Proposal No. 3 (Confidential Voting) was defeated as follows: For Against Abstain 167,623,514 199,840,343 7,090,734 The shareholder proposal relative to the Adoption of Stockholder's Proposal No. 4 (Independent Board) was defeated as follows: For Against Abstain 153,320,313 215,348,980 5,885,298 The shareholder proposal relative to the Adoption of Stockholder's Proposal No. 5 (Director Liability) was defeated as follows: For Against Abstain 44,913,954 314,568,679 15,071,958 </TABLE> Item 6. Exhibits and Reports on Form 8-K a) Notice of annual meeting and proxy statement dated September 26, 1996 incorporated as an exhibit herein by reference. b) A Form 8-K was not filed during the quarter ended December 31, 1996. 21 PAGE 22 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARCHER-DANIELS-MIDLAND COMPANY /s/ D. J. Schmalz D. J. Schmalz Vice President and Chief Financial Officer /s/ R. P. Reising R. P. Reising Vice President, Secretary and General Counsel Dated: February 13, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE FOR 10-Q 12/31/96 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 337,254 <SECURITIES> 555,902 <RECEIVABLES> 1,306,209 <ALLOWANCES> 0 <INVENTORY> 2,199,435 <CURRENT-ASSETS> 4,534,578 <PP&E> 8,331,146 <DEPRECIATION> 4,034,270 <TOTAL-ASSETS> 11,016,605 <CURRENT-LIABILITIES> 2,130,577 <BONDS> 1,984,735 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 3,830,125 <OTHER-SE> 2,400,107 <TOTAL-LIABILITY-AND-EQUITY> 11,016,605 <SALES> 6,937,446 <TOTAL-REVENUES> 6,937,446 <CGS> 6,191,064 <TOTAL-COSTS> 6,191,064 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 94,260 <INCOME-PRETAX> 365,897 <INCOME-TAX> 172,403 <INCOME-CONTINUING> 193,494 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 193,494 <EPS-PRIMARY> .36 <EPS-DILUTED> .36 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

ADP

https://www.sec.gov/Archives/edgar/data/8670/0000008670-97-000002.txt

-----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, K3JhS+R0huMMhCN6GbOfgXpmL/81ZhLvnZjCAHbITlJWgwY7YgRMpnGgYUQnOUaH 0qubzgN8trWDNBOvEh0JAQ== <SEC-DOCUMENT>0000008670-97-000002.txt : 19970501 <SEC-HEADER>0000008670-97-000002.hdr.sgml : 19970501 ACCESSION NUMBER: 0000008670-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC CENTRAL INDEX KEY: 0000008670 STANDARD INDUSTRIAL CLASSIFICATION: 7374 IRS NUMBER: 221467904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05397 FILM NUMBER: 97532631 BUSINESS ADDRESS: STREET 1: ONE ADP BOULVARD CITY: ROSELAND STATE: NJ ZIP: 07068 BUSINESS PHONE: 2019945000 MAIL ADDRESS: STREET 1: ONE ADP BOULEVARD CITY: ROSELAND STATE: NJ ZIP: 07068 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>LIVE <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1996 Commission File Number 1-5397 Automatic Data Processing, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1467904 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One ADP Boulevard, Roseland, New Jersey 07068 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code (201) 994-5000 No change Former name, former address & former fiscal year, if changed since last report. Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed with the commission and (2) has been subject to the filing requirements for at least the past 90 days. X Yes No As of January 31, 1997 there were 292,060,000 common shares outstanding. <PAGE> Form 10Q Part I. Financial Information Statements of Consolidated Earnings (In thousands, except per share amounts) Three Months Ended Six Months Ended December 31, December 31, 1996 1995 1996 1995 Revenue $995,575 $819,723 $1,906,305 $1,566,817 Operating expenses 418,015 342,690 809,535 659,467 General, administrative and selling expenses 261,531 210,343 522,320 425,365 Depreciation and amortization 55,284 48,618 108,353 93,089 Systems development and programming costs 73,065 58,867 139,128 113,046 Interest expense 6,970 8,605 14,159 14,450 814,865 669,123 1,593,495 1,305,417 EARNINGS BEFORE INCOME TAXES 180,710 150,600 312,810 261,400 Provision for income taxes 53,130 41,700 91,950 70,600 NET EARNINGS 127,580 108,900 220,860 190,800 EARNINGS PER SHARE $ .44 $ .38 $ .76 $ .66 Dividends per share $ .12 $ .10 $ .22 $ .1875 See notes to consolidated statements. <PAGE> Form 10Q Consolidated Balance Sheets (In thousands) December 31, June 30, Assets 1996 1996 Cash and cash equivalents $ 462,300 $ 314,416 Short-term marketable securities 372,687 321,743 Accounts receivable 577,787 507,198 Other current assets 246,899 310,926 Total current assets 1,659,673 1,454,283 Long-term marketable securities 419,118 462,461 Long-term receivables 178,507 188,184 Land and buildings 352,070 322,975 Data processing equipment 621,146 578,935 Furniture, leaseholds and other 348,345 330,610 1,321,561 1,232,520 Less accumulated depreciation (812,174) (764,254) 509,387 468,266 Other assets 21,549 19,597 Intangibles 1,335,555 1,247,094 $ 4,123,789 $3,839,885 Liabilities and Shareholders' Equity Notes payable $ 132,236 $ 90,746 Accounts payable 93,377 96,351 Accrued expenses & other current liabilities 594,208 590,355 Income taxes 62,386 52,954 Current portion of long-term debt 1,831 5,207 Total current liabilities 884,038 835,613 Long-term debt 418,300 403,743 Other liabilities 104,853 78,508 Deferred income taxes 89,329 112,880 Deferred revenue 100,650 93,795 Shareholders' equity: Common stock 31,429 31,428 Capital in excess of par value 425,821 406,200 Retained earnings 2,697,043 2,537,952 Treasury stock (627,674) (660,234) 2,526,619 2,315,346 $ 4,123,789 $3,839,885 See notes to consolidated statements. <PAGE> Form 10Q Condensed Statements of Consolidated Cash Flows (In thousands) Six Months Ended December 31, 1996 1995 Cash Flows From Operating Activities: Net earnings $ 220,860 $ 190,800 Expenses not requiring outlay of cash 112,720 101,851 Changes in operating net assets (17,353) 23,629 Net cash flows from operating activities 316,227 316,280 Cash Flows From Investing Activities: Purchase of marketable securities (602,688) (532,254) Proceeds from sale of marketable securities 595,087 693,652 Capital expenditures (79,093) (79,455) Other changes to property, plant and equipment (752) 1,738 Additions to intangibles (32,711) - Acquisitions of businesses (64,494) (481,915) Net cash flows from investing activities (184,651) (398,234) Cash Flows From Financing Activities: Proceeds from issuance of notes 41,780 50,350 Repayments of long-term debt (3,991) (9,549) Proceeds from issuance of common stock 78,324 69,413 Repurchases of common stock (37,358) (47,727) Dividends paid (62,447) (54,025) Other - (1,856) Net cash flows from financing activities 16,308 6,606 Net change in cash and cash equivalents 147,884 (75,348) Cash and cash equivalents, at beginning of period 314,416 313,612 Cash and cash equivalents, at end of period $ 462,300 $ 238,264 See notes to consolidated statements. <PAGE> Form 10Q Notes to Consolidated Statements The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. All adjustments are of a normal recurring nature. These statements should be read in conjunction with the annual financial statements and related notes of the Company for the year ended June 30, 1996. Note A - The results of operations for the six months ended December 31, 1996 may not be indicative of the results to be expected for the year ending June 30, 1997. Note B - Earnings per share are based on a weighted average number of shares outstanding, which for the quarters ended December 31, 1996 and 1995 were 290,502,000 and 288,001,000 respectively. The weighted average number of shares for the six months ended December 31, 1996 and 1995 were 289,493,000 and 287,866,000 respectively. <PAGE> Form 10Q MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Revenue and earnings again reached record levels during the quarter ended December 31, 1996. Revenue and revenue growth by ADP's major business groups are shown below: Revenue 3 Months Ended 6 Months Ended December 31, December 31, 1996 1995 1996 1995 ($ in millions) Employer Services (a) $ 551 $ 445 $1,042 $ 843 Brokerage Services 200 169 388 338 Dealer Services 162 132 315 258 Other (a) 83 74 161 128 $ 996 $ 820 $1,906 $1,567 Revenue Growth 3 Months Ended 6 Months Ended December 31, December 31, 1996 1995 1996 1995 Employer Services (a) 24% 16% 24% 15% Brokerage Services 18 22 15 23 Dealer Services 23 21 22 26 Other (a) 12 76 26 59 21% 22% 22% 21% (a) reclassified Consolidated revenue for the quarter grew 21% from last year to $996 million. Revenue growth in the Company's three largest businesses, Employer, Brokerage and Dealer Services, was strong at 24%, 18% and 23% respectively. Each includes some acquisitions. The primary components of "Other revenue" are claims services, services for wholesalers, the non-employer services businesses of GSI and interest income. In addition, "Other revenue" has been reduced to adjust for the difference between actual interest income earned on invested tax filing funds and income credited to Employer Services at a standard rate. In prior years, this standard rate was 7.8%. In fiscal 97 the standard rate was changed to 6.0% and, accordingly, the previously reported balances for Employer Services and "Other revenue" have been reclassified. Pretax earnings for the quarter increased 20% from last year. As expected, corporate margins were slightly lower than in the comparable prior year's quarter because of the impact of prior year acquisitions. Systems development and programming investments increased to accelerate automation, migrate to new computing technologies, and develop new products. <PAGE> Net earnings for the quarter, after a higher effective tax rate, increased 17% to $128 million. The effective tax rate of 29.4% increased from 27.7% in the comparable quarter last year, primarily because of the impact of non-deductible amortization of intangibles arising from the GSI acquisition and an increased mix of taxable vs. non-taxable investments. Earnings per share grew 16% to $.44 from $.38 last year. For the full year, we continue to expect double-digit revenue growth and about 15% earnings per share growth. FINANCIAL CONDITION The Company's financial condition and balance sheet remain exceptionally strong, and operations continue to generate a strong cash flow. At December 31, 1996, the Company had cash and marketable securities in excess of $1.2 billion. Shareholders' equity exceeded $2.5 billion and the ratio of long-term debt to equity was 17%. Capital expenditures for fiscal 1997 are expected to approximate $200 million, compared to $168 million in fiscal 1996. During the first half of fiscal 97, ADP purchased 992,000 shares of common stock for treasury at an average price of about $38. The Company has remaining Board authorization to purchase up to 6.6 million additional shares to fund equity related employee benefit plans. <PAGE> Form 10Q PART II. OTHER INFORMATION Except as noted below, all other items are inapplicable or would result in negative responses and, therefore, have been omitted. Item 2. Changes in Securities On October 4, 1996, the Company issued an aggregate amount of 96,982 shares of its Common Stock to the three shareholders of a company acquired by the Company in exchange for all of the issued and outstanding shares of capital stock of the acquired company pursuant to the terms of a stock purchase agreement. No underwriters were involved in the foregoing sale of securities. The Company issued the shares without registration under the Securities Act of 1933, as amended, in reliance upon the exemption therefrom set forth in Section 4(2) of such Act, relating to sales by an issuer not involving a public offering. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of the Stockholders was held on November 12, 1996. The following members were elected to the Company's Board of Directors to hold office for the ensuing year. Nominee In Favor Withheld Gary C. Butler 221,180,456 709,142 Joseph A. Califano Jr 221,110,149 779,449 Leon G. Cooperman 221,277,002 612,596 George H. Heilmeier 221,257,241 632,357 Ann Dibble Jordan 221,225,079 664,519 Harvey M. Krueger 221,205,991 683,607 Charles P. Lazarus 220,910,099 979,499 Frederic V. Malek 221,232,167 657,431 Henry Taub 221,252,820 636,778 Laurence A. Tisch 220,832,311 1,057,287 Arthur F. Weinbach 221,210,653 678,945 Josh S. Weston 221,177,268 712,330 The result of the voting on the following additional item were as follows: (a) Ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent certified public accountants for the fiscal year which began on July 1, 1996. The votes of the stockholders on this amendment were as follows: In Favor Opposed Abstained 220,987,378 423,795 478,425 <PAGE> Form 10Q 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. AUTOMATIC DATA PROCESSING, INC. (Registrant) Date: February 13, 1997 s/ ____________________________ Richard J. Haviland Vice President, Finance (Principal Financial Officer) (Title) <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 462300 <SECURITIES> 372687 <RECEIVABLES> 614033 <ALLOWANCES> 36246 <INVENTORY> 30829 <CURRENT-ASSETS> 1659673 <PP&E> 1321561 <DEPRECIATION> 812174 <TOTAL-ASSETS> 4123789 <CURRENT-LIABILITIES> 884038 <BONDS> 418300 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 31429 <OTHER-SE> 2495190 <TOTAL-LIABILITY-AND-EQUITY> 4123789 <SALES> 0 <TOTAL-REVENUES> 1906305 <CGS> 0 <TOTAL-COSTS> 1574417 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 4919 <INTEREST-EXPENSE> 14159 <INCOME-PRETAX> 312810 <INCOME-TAX> 91950 <INCOME-CONTINUING> 220860 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 220860 <EPS-PRIMARY> .76 <EPS-DILUTED> .74 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

AIT

https://www.sec.gov/Archives/edgar/data/109563/0000950152-97-001040.txt

-----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, F0gvOZo1DQunkY/4sy1x8y/43HYuHDFj/L6R/rea4oljw04oDXI08jruV0Z52AJd kjRrTeIDG5K/KqLqLo8mgg== <SEC-DOCUMENT>0000950152-97-001040.txt : 19970222 <SEC-HEADER>0000950152-97-001040.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950152-97-001040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEARINGS INC /OH/ CENTRAL INDEX KEY: 0000109563 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 340117420 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02299 FILM NUMBER: 97534709 BUSINESS ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2168818900 MAIL ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BROWN JIM STORES INC DATE OF NAME CHANGE: 19600201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>APPLIED INDUSTRIAL TECHNOLOGIES, INC 10-Q <TEXT> <PAGE> 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 1996 ---------------------------- 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 1-2299 -------- APPLIED INDUSTRIAL TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0117420 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3600 Euclid Avenue, Cleveland, Ohio 44115 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 881-2838 ------------------------- BEARINGS, INC. - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of common stock outstanding on January 31, 1997 12,348,869 ----------------------------------------- (No par Value) <PAGE> 2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. ------------------------------------- (formerly BEARINGS, INC.) INDEX <TABLE> <CAPTION> - ------------------------------------------------------------------------------- Page No. <S> <C> Part I: FINANCIAL INFORMATION Item 1: Financial Statements Statements of Consolidated Income - Three Months and Six Months Ended December 31, 1996 and 1995 2 Consolidated Balance Sheets - December 31, 1996 and June 30, 1996 3 Statements of Consolidated Cash Flows Six Months Ended December 31, 1996 and 1995 4 Statements of Consolidated Shareholders' Equity - Six Months Ended December 31, 1996 and Year Ended June 30, 1996 5 Notes to Consolidated Financial Statements 6 - 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Part II: OTHER INFORMATION Item 1: Legal Proceedings 13 - 14 Item 4: Other Information 14 Item 6: Exhibits and Reports on Form 8-K 14 - 15 Cautionary Statement under Private Securities Litigation Reform Act of 1995 15 - 16 Signatures 16 </TABLE> <PAGE> 3 PART I: FINANCIAL INFORMATION ITEM I: Financial Statements APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (formerly BEARINGS, INC.) STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Thousands, except per share amounts) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended December 31 December 31 1996 1995 1996 1995 ------------------------- -------------------------- <S> <C> <C> <C> <C> Net Sales $274,992 $275,140 $557,241 $552,199 --------- --------- --------- --------- Cost and Expenses Cost of sales 200,025 203,246 408,800 410,089 Selling, distribution and administrative 63,265 60,526 126,014 120,831 --------- --------- --------- --------- 263,290 263,772 534,814 530,920 --------- --------- --------- --------- Operating Income 11,702 11,368 22,427 21,279 --------- --------- --------- --------- Interest Interest expense 1,595 2,394 3,156 4,453 Interest income (253) (106) (571) (177) --------- --------- --------- --------- 1,342 2,288 2,585 4,276 --------- --------- --------- --------- Income Before Income Taxes 10,360 9,080 19,842 17,003 --------- --------- --------- --------- Income Taxes Federal 3,704 3,145 6,959 5,899 State and local 653 759 1,475 1,399 --------- --------- --------- --------- 4,357 3,904 8,434 7,298 --------- --------- --------- --------- Net Income $ 6,003 $ 5,176 $ 11,408 $ 9,705 ========= ========= ========= ========= Net Income per share $ 0.48 $ 0.42 $ 0.92 $ 0.79 ========= ========= ========= ========= Cash dividends per common share $ 0.16 $ 0.14 $ 0.30 $ 0.26 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements. 2 <PAGE> 4 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (formerly BEARINGS, INC.) CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- December 31 June 30 1996 1996 -------------------- ------------------- (Unaudited) <S> <C> <C> Assets ------ Current assets Cash and temporary investments $ 6,882 $ 9,243 Accounts receivable, less allowance of $2,892 and $2,400 136,465 155,524 Inventories (at LIFO) 133,113 127,937 Other current assets 4,363 2,434 -------------------- ------------------- Total current assets 280,823 295,138 -------------------- ------------------- Property - at cost Land 13,028 13,529 Buildings 65,194 64,441 Equipment 74,115 71,938 -------------------- ------------------- 152,337 149,908 Less accumulated depreciation 67,810 63,574 -------------------- ------------------- Property - net 84,527 86,334 -------------------- ------------------- Other assets 18,618 22,600 -------------------- ------------------- TOTAL ASSETS $ 383,968 $ 404,072 ==================== =================== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Notes payable $ 25,106 $ 30,056 Current portion of long-term debt 11,429 11,429 Accounts payable 52,735 67,652 Compensation and related benefits 18,700 19,081 Other accrued liabilities 13,730 14,964 -------------------- ------------------- Total current liabilities 121,700 143,182 Long-term debt 57,143 62,857 Other liabilities 10,232 8,741 -------------------- ------------------- TOTAL LIABILITIES 189,075 214,780 -------------------- ------------------- Shareholders' Equity Preferred Stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 30,000 shares authorized; 13,954 shares issued 10,000 10,000 Additional paid-in capital 9,012 7,528 Income retained for use in the business 204,916 197,232 Less 1,611 and 1,577 treasury shares - at cost (23,853) (21,260) Less shares held in trust for deferred compensation plans (4,014) (3,008) Less unearned restricted common stock compensation (1,168) (1,200) -------------------- ------------------- TOTAL SHAREHOLDERS' EQUITY 194,893 189,292 -------------------- ------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 383,968 $ 404,072 ==================== =================== </TABLE> See notes to consolidated financial statements. 3 <PAGE> 5 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (Formerly Bearings, Inc.) STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in thousands) <TABLE> <CAPTION> Six Months Ended December 31 ---------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows from Operating Activities Net income $ 11,408 $ 9,705 Adjustments to reconcile net income to cash provided by (used in)operating activities: Depreciation 6,829 6,885 Provision for losses on accounts receivable 1,048 1,477 Gain on sale of property (143) (629) Amortization of restricted common stock compensation and goodwill 383 455 Treasury shares contributed to employee benefit plans 1,914 1,821 Changes in current assets and liabilities, net of effects from acquisition and disposal of businesses: Accounts receivable 14,995 4,560 Inventories (11,176) (25,920) Other current assets (1,929) (156) Accounts payable and accrued expenses (16,021) (4,687) Other - net 868 622 - ------------------------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) Operating Activities 8,176 (5,867) - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Property purchases (6,636) (7,768) Proceeds from property sales 1,657 1,787 Proceeds from sale of Aircraft Division 9,090 Acquisition of businesses, less cash acquired (4,253) Deposits and other 3,745 (4,917) - ------------------------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) Investing Activities 7,856 (15,151) - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net borrowings (repayments) under Line-of-credit agreements (4,950) 26,520 Long-term debt repayments (5,714) Exercise of stock options 264 1,112 Dividends paid (3,724) (3,071) Purchase of treasury shares (4,269) (1,307) - ------------------------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) Financing Activities (18,393) 23,254 - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and temporary investments (2,361) 2,236 Cash and temporary investments at beginning of period 9,243 4,789 - ------------------------------------------------------------------------------------------------------------------------ Cash and Temporary Investments at End of Period $ 6,882 $ 7,025 ======================================================================================================================== Supplemental Cash Flow Information Cash paid during the period for: Income taxes $ 9,425 $ 8,766 Interest $ 3,418 $ 3,998 </TABLE> See notes to consolidated financial statements. 4 <PAGE> 6 APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ----------------------------------------------------- (formerly BEARINGS, INC.) STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY For the Six Months Ended December 31, 1996 (Unaudited) and Year Ended June 30, 1996 (Amounts in thousands) <TABLE> <CAPTION> Income Shares of Additional Retained Treasury Common Stock Common Paid-in for Use in Shares Outstanding Stock Capital the Business - at cost ================================================================================================================================== <S> <C> <C> <C> <C> <C> Balance at July 1, 1995 12,174 $10,000 $4,812 $180,426 ($22,845) Net income 23,334 Cash dividends - $.54 per share (6,528) Purchase of common stock for treasury (86) (2,212) Treasury shares issued for: Retirement Savings Plan contributions 138 1,692 1,805 Exercise of stock options 107 391 1,390 Deferred compensation plans 43 416 583 Restricted common stock awards 1 13 19 Amortization of restricted common stock compensation 204 Other - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 12,377 10,000 7,528 197,232 (21,260) Net income 11,408 Cash dividends - $.30 per share (3,724) Purchase of common stock for treasury (157) (4,269) Treasury shares issued for: Retirement Savings Plan contributions 67 980 934 Exercise of stock options 22 (20) 284 Deferred compensation plans 30 466 402 Restricted common stock awards 4 58 56 Amortization of restricted common stock compensation Other - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 12,343 $10,000 $9,012 $204,916 ($23,853) ================================================================================================================================== <CAPTION> Shares Held in Unearned Trust for Restricted Total Deferred Common Stock Shareholders' Compensation Plans Compensation Equity ====================================================================== <S> <C> <C> <C> ($1,426) ($2,633) $168,334 23,334 (6,528) (2,212) 3,497 1,781 (999) (32) 1,465 1,669 (583) (583) - ------------------------------------------------------------------- (3,008) (1,200) 189,292 11,408 (3,724) (4,269) 1,914 264 (868) (114) 146 146 (138) (138) - ------------------------------------------------------------------- ($4,014) ($1,168) $194,893 =================================================================== </TABLE> See notes to consolidated financial statements. <PAGE> 7 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (formerly BEARINGS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) - ----------------------------------------------------------------------------- 1. NAME CHANGE Effective January 1, 1997, the Company changed its name from Bearings, Inc. to Applied Industrial Technologies, Inc. 2. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of December 31, 1996 and June 30, 1996, and the results of operations for the three months and six months ended December 31, 1996 and 1995, and cash flows for the six months ended December 31, 1996 and 1995. The results of operations for the three and six months ended December 31, 1996 are not necessarily indicative of the results to be expected for the fiscal year. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are made based on the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. 3. NET INCOME PER SHARE Net income per share was computed using the weighted average number of common shares outstanding for the period. Average shares outstanding for the computation of net income per share were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1996 1995 1996 1995 ------------------ ---------------- <S> <C> <C> <C> 12,410 12,307 12,408 12,257 </TABLE> 6 <PAGE> 8 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (formerly BEARINGS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) ----------------------------------------------------------------------------- 4. BUSINESS COMBINATIONS On February 9, 1996 the Company exchanged 486 shares of Bearings, Inc. common stock for all of the outstanding shares of Engineered Sales, Inc., a distributor of hydraulic, pneumatic and electro-hydraulic components, systems and related fluid power engineering services. This business combination is accounted for as a pooling of interests. The Company's reported statements of consolidated income for the three months and six months ended December 31, 1995 and shareholders equity at July 1, 1995 have been restated to reflect the Engineered Sales acquisition. 5. SALE OF DIVISION On August 9, 1996 the Company sold the Dixie Bearings Aircraft Division located in Atlanta, GA to Aviation Sales Company for $9,090. The assets were sold at their approximate net book value. The sale did not have a material effect on the consolidated financial statements. 6. RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which the Company will be required to adopt for the fiscal year ending June 30, 1997. As permitted by SFAS 123, the Company does not intend to change its method of accounting for stock-based compensation. The Company has not yet determined the pro forma disclosures for employee awards granted in the six months ended December 31, 1996 and the fiscal year ending June 30, 1996, which will be presented in the notes to financial statements for the year ending June 30, 1997. 7. LONG-TERM DEBT The Company has entered into an agreement with Prudential Insurance Company of America for an uncommitted shelf facility enabling the Company to borrow up to $50,000 in additional long-term financing. The Company may make long-term borrowings at its sole discretion, with terms ranging anywhere from seven to twenty years under this agreement. At December 31, 1996 there were no borrowings under this agreement. 7 <PAGE> 9 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ (formerly BEARINGS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) ----------------------------------------------------------------------------- 8. LITIGATION As reported in the Notes to the Consolidated Financial Statements contained in the 1996 Annual Report to shareholders, a $32,400 judgment was rendered against King Bearing, Inc. (King) in June 1992 in a lawsuit pending in the Superior Court of Orange County, California. The 1990 agreement for the acquisition of King included specific indemnification of the Company for any financial damages or losses related to the lawsuit. The indemnification was also guaranteed by the ultimate parent of King's former owner, a Fortune 500 company with stockholders' equity exceeding five billion dollars at June 30, 1996. The judgment was strongly contested by counsel retained by the indemnitor on behalf of King, and in September 1992 the trial court granted King's motion for a new trial as to all but $219 in damages returned by the jury. In September 1996 the California Court of Appeals, Fourth Appellate District, affirmed the trial court's grant of King's motion for a new trial and reversed its exclusion of the $219 in damages from the new trial order. As a result, a new trial will be scheduled. Due to the indemnification and guarantee, management believes that the outcome of this matter will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 8 <PAGE> 10 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES (formerly BEARINGS, INC.) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------ The following is Management's discussion and analysis of certain significant factors which have affected the Company's: (1) financial condition at December 31, 1996 and June 30, 1996 and (2) results of operations during the periods included in the accompanying Statements of Consolidated Income and Consolidated Cash Flows. FINANCIAL CONDITION Liquidity and Working Capital - ----------------------------- Cash provided by operating activities was $8.2 million in the six months ended December 31, 1996. This compares to $5.9 million used in operating activities in the same period a year ago. Cash flow from operations depends primarily upon generating operating income and controlling the investment in inventory and receivables, and managing the timing of payments to suppliers. The Company has continuing programs to monitor and control these investments. During the six month period ended December 31, 1996 inventories (excluding inventories sold with the Aircraft Division) increased approximately $11.2 million. Inventory increased for purchases made in anticipation of the January 1997 price increases by certain suppliers. Accounts receivable decreased by $15.0 million due to improved timing of collections and traditionally lower sales in the first six months of the fiscal year. Investments in property totaled $6.6 million and $7.8 million in the six months ended December 31, 1996 and 1995 respectively. These capital expenditures were primarily made for building and upgrading branch and distribution center facilities, acquisition of data processing equipment, and vehicles. The new company owned distribution center in Atlanta was opened during the quarter ended September 30, 1996. Construction was started on a new distribution center in Ft. Worth, TX. This build-to-suit facility will be financed under an operating lease and is expected to open in late-Spring of 1997. Working capital at December 31, 1996 was $159.1 million compared to $152.0 million at June 30, 1996. The current ratio was 2.3 at December 31, 1996 and 2.1 at June 30, 1996. This increase is primarily due to a decrease in short-term notes payable, from cash provided from operations, the receipt of proceeds from the sale of the Aircraft Division, and the refund of insurance deposits included in other assets. 9 <PAGE> 11 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES (formerly BEARINGS, INC.) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------ Capital Resources - ----------------- Capital resources are obtained from income retained in the business, indebtedness under the Company's lines of credit and long-term debt and from operating lease arrangements. Average combined short-term and long-term borrowing was $91.8 million for the six months ended December 31, 1996 and $111.8 million during the year ended June 30, 1996. The average effective interest rate on the short-term borrowings for the six months ended December 31, 1996 decreased to 6.4% from an average rate of 6.6% for the six months ended December 31, 1995 due to lower interest rates on short-term debt. The Company has $110 million of short-term lines of credit with commercial banks which provide for payment of interest at various interest rate options, none of which are in excess of the banks' prime rate. The Company had $20.0 million of borrowings under these short-term bank lines of credit at December 31, 1996. Unused bank lines of credit of $90.0 million are available for future short-term financing needs. In addition, the Company also had $5.1 million of other short-term notes payable outstanding outside of these bank line of credit arrangements. The Board of Directors has authorized the purchase of up to 420,000 shares of the Company's common stock to fund employee benefit programs and stock option and award programs. These purchases are made in open market and negotiated transactions, from time-to-time, depending upon market conditions. The Company acquired 150,500 shares of its common stock for $4.1 million during the quarter. Management expects that capital resources provided from operations, available lines of credit and long-term debt and operating leases will be sufficient to finance normal working capital needs, business acquisitions, enhancement of facilities and equipment and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained if desired. 10 <PAGE> 12 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES (formerly BEARINGS, INC.) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------ RESULTS OF OPERATIONS - --------------------- A summary of the period-to-period changes in principal items included in the statements of consolidated income follows: <TABLE> <CAPTION> Increase (Decrease) (Dollars in thousands) Three Months Ended Six Months Ended December 31 December 31 1996 and 1995 1996 and 1995 Percent Percent Amount Change Amount Change ------ ------ ------ ------ <S> <C> <C> <C> <C> Net sales $ (148) (.1)% $ 5,042 .9% Cost of sales (3,221) (1.6)% (1,289) (.3)% Selling, distribution and administrative expenses 2,739 4.5% 5,183 4.3% Operating income 334 2.9% 1,148 5.4% Interest expense -net (946) (41.3)% (1,691) (39.5)% Income before income taxes 1,280 14.1% 2,839 16.7% Income taxes 453 11.6% 1,136 15.6% Net income 827 16.0% 1,703 17.5% </TABLE> Three Months Ended December 31, 1996 and 1995 - --------------------------------------------- The sales decrease of .1% for the quarter was due to an overall slowing in the industrial economy, particularly in the machine tool, steel and forest products industry and the sale of the Dixie Bearings Aircraft Division during the quarter ended September 30, 1996. Gross profit, as a percentage of sales, increased from 26.1% to 27.3% primarily due to changes in the product mix, as sales of lower margin bearing products declined and sales of non-bearing products continued to grow. Additionally, lower freight costs also favorably impacted the gross profit percentage. 11 <PAGE> 13 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES (formerly BEARINGS, INC.) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------ Selling, distribution and administrative expenses increased by 4.5% from higher compensation and health care costs and higher advertising and other expense related to the Company's name change. Interest expense-net for the quarter decreased by 41.3% primarily from a decrease in average borrowing. Income taxes as a percentage of income before taxes was 42.1% in the three months ended December 31, 1996 and 43.0% in the three months ended December 31, 1995. As a result of the above factors, net income increased by 16.0% compared to the same quarter of last year. Income per share increased by 14.3% due to the increase in net income and offset by an increase in the average number of shares outstanding. Six Months Ended December 31, 1996 and 1995 - ------------------------------------------- The sales increase of .9% for the period was lower than in prior six month period-to-period comparisons. The slowing in sales growth occurred from an overall slowing in the industrial economy, particularly in the machine tool, steel and forest products industry. The decline in sales growth was also affected by the sale of Dixie Aircraft division during the quarter ended September 30, 1996. Gross profit, as a percentage of sales, increased from 25.7% to 26.6% primarily due to changes in the product mix as sales of lower margin bearing products declined and sales in non-bearing products continue to grow. In addition, lower freight costs also favorably impacted the gross profit percentage. Selling, distribution and administrative expenses increased by 4.3% from higher compensation expense and health care costs. Interest expense-net for the period decreased by 39.5% primarily from a decrease in average borrowing. Income taxes as a percentage of income before taxes was 42.5% in the six months ended December 31, 1996 and 42.9% in the six months ended December 31, 1995. As a result of the above factors, net income increased by 17.5% compared to the same period last year. Income per share increased by 16.5% due to an increase in income and an increase in the average number of shares outstanding. 12 <PAGE> 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. (a) The Company incorporates by reference herein the description of the case captioned IN RE: ROBERT LEE BICKHAM, ET AL. V. METROPOLITAN LIFE INS. CO., ET AL., 22nd Judicial District Court for the Parish of Washington, State of Louisiana, Case No. 70,760-E; and two related cases pending in the same court -- IDA MAE WILLIAMS, ET AL. V. METROPOLITAN LIFE INS. CO., ET AL., Case No. 72,986-F and BENNIE L. ADAMS, ET AL. V. METROPOLITAN LIFE INS. CO., ET AL., Case No. 72,154-B, -- found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 30, 1996. Notwithstanding potential indemnification from suppliers and insurance, the Company believes, based on circumstances presently known, that these cases are not material to its business or financial condition. (b) The Company also incorporates by reference herein the descriptions of the case captioned KING BEARING, INC. V. CARYL EDMUND ORANGES, ET AL., Superior Court of the State of California, County of Orange, Case No. 53-42-31 found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 30, 1996, and in Part II, Item 1 of the Form 10-Q for the quarter ended September 30, 1996. On September 30, 1996, the California Court of Appeal, Fourth Appellate District, affirmed the trial court's grant of King Bearing's motion for a new trial; reversed the trial court's exclusion of the $219,000 in damages from the new trial order; and affirmed the judgment in favor of Bearings, Inc. The cross-complainants' petition for rehearing by the Court of Appeal and petition for review by the California Supreme Court were both denied. As a result, the matter will be remanded to the trial court for a new trial. Under the 1990 Stock Purchase Agreement relative to the acquisition of King Bearing, the Company is specifically indemnified by the ultimate parent of the former owner of King Bearing (whose stockholders' equity exceeded $5 billion at June 30, 1996) for any damages or loss relating to this action. The Company believes that this case will have no material adverse effect on its business or financial condition. (c) The Company and/or one of its subsidiaries is a defendant in several employment- and product-related 13 <PAGE> 15 lawsuits. Based on circumstances presently known, the Company believes that these cases are not material to its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Shareholders of the Company held on October 22, 1996, the Shareholders (i) reelected William E. Butler, Russell R. Gifford and L. Thomas Hiltz as Directors of Class III for a term expiring in 1999, (ii) approved an amendment to the Company's Amended and Restated Articles of Incorporation to change the name of the Company to Applied Industrial Technologies, Inc., and (iii) ratified the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending June 30, 1997. Substantially the same information was previously reported in Part II, Item 5 "Other Information" of the Company's Form 10-Q for the quarter ended September 30, 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. EXHIBIT NO. DESCRIPTION ----------- ----------- 4(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc. 4(b) Code of Regulations of Applied Industrial Technologies, Inc., adopted September 6, 1988 (filed as Exhibit 4(b) to the Applied Industrial Technologies, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(c) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4 to the Applied Industrial Technologies, Inc. Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and incorporated here by reference). 14 <PAGE> 16 4(d) 80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between Applied Industrial Technologies, Inc. and The Prudential Insurance Company of America (as amended and restated). 10(a) Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan (January 1, 1997 Restatement). 10(b) Applied Industrial Technologies, Inc. Deferred Compensation Plan (January 1, 1997 Restatement). 10(c) Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement). 11 Computation of Net Income Per Share. 27 Financial Data Schedule. (b) The Company did not file, nor was it required to file, a Report on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1996. CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including Part I, Item 2 -- Management's Discussion and Analysis, may contain statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. Important risk factors include, but are not limited to, the following: changes in operating expenses; changes in the economy; the availability of product; the effect of price increases; the variability and timing of business opportunities including acquisitions, customer agreements, supplier 15 <PAGE> 17 authorizations and other business strategies; changes in accounting policies and practices; the effect of organizational changes within the Company; adverse results in significant litigation matters; adverse state and federal regulation and legislation; and the occurrence of extraordinary events (including natural events and acts of God, fires, floods and accidents). SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. (Company) Date: February 14, 1997 By:/S/ John C. Dannemiller ----------------------- John C. Dannemiller Chairman, Chief Executive Officer & President Date: February 14, 1997 By:/S/ John R. Whitten ------------------- John R. Whitten Vice President-Finance & Treasurer 16 <PAGE> 18 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION PAGE <S> <C> <C> 4(a) Amended and Restated Articles of Attached Incorporation of Applied Industrial Technologies, Inc. 4(b) Code of Regulations of Applied Industrial Technologies, Inc., adopted September 6, 1988 (filed as Exhibit 4(b) to the Applied Industrial Technologies, Inc. Form 8-K dated October 21, 1988, SEC File No. 1-2299, and incorporated here by reference). 4(c) Certificate of Merger of Bearings, Inc.(Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988 (filed as Exhibit 4 to the Applied Industrial Technologies, Inc. Form 10-K for the fiscal year ended June 30, 1989, SEC File No. 1-2299, and incorporated here by reference). 4(d) $80,000,000 Maximum Aggregate Attached Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between Applied Industrial Technologies, Inc. and The Prudential Insurance Company of America (as amended and restated). 10(a) Applied Industrial Technologies, Inc. Supplemental Attached Defined Contribution Plan (January 1, 1997 Restatement). 10(b) Applied Industrial Technologies, Attached Inc. Deferred Compensation Plan (January 1, 1997 Restatement). </TABLE> <PAGE> 19 10(c) Applied Industrial Technologies, Inc. Attached Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement). 11 Computation of Net Income Per Share. Attached 27 Financial Data Schedule. Attached </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.A <SEQUENCE>2 <DESCRIPTION>EXHIBIT 4(A) <TEXT> <PAGE> 1 Exhibit 4(a) AMENDED AND RESTATED ARTICLES OF INCORPORATION OF APPLIED INDUSTRIAL TECHNOLOGIES, INC. FIRST: The name of the Corporation shall be Applied Industrial Technologies, Inc. SECOND: The place in the State of Ohio where the principal office of the Corporation will be located is 3600 Euclid Avenue, Cleveland, Ohio 44115, in Cuyahoga County, or such other location as the Board of Directors shall from time to time determine. THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Revised Code of Ohio, as now in effect or hereinafter amended. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Thirty Million (30,000,000) shares of Common Stock, without par value, and Two Million Five Hundred Thousand (2,500,000) shares of Preferred Stock, without par value. No holder of shares of stock of any class of the Corporation shall, as such holder, have any rights to subscribe for or purchase (a) any shares of stock of any class, any warrants, options or other instruments that shall confer upon the holder thereof the right to subscribe for or purchase or receive from the Corporation any shares of stock of any class which the Corporation may issue or sell, whether or not such shares shall be exchangeable for any shares of stock of the Corporation of any class or classes and whether or not such shares shall be unissued shares, now or hereafter authorized, or shares acquired by the Corporation after the issue thereof, and whether or not such shares of stock, warrants, options or other instruments are issued for cash or services or property or by way of dividend or otherwise, or (b) any other security of the Corporation which shall be convertible into, or exchangeable for, any shares of stock of the Corporation or any class or classes, or to which shall be attached or appurtenant to any warrant, option or other instrument that shall confer upon the holder of such security the right to subscribe for or purchase or receive from the Corporation any shares of its stock or any class or classes, whether or not such shares shall be unissued shares, now or hereafter authorized, or shares acquired by the Corporation after the issue thereof, and whether or not such securities are issued for cash or services or property or by way of dividend or otherwise, other than such right, if any, as the Board of Directors, in its sole discretion, may from time to time determine. If the Board of Directors shall offer to the holders of shares of stock of any class of the Corporation, or any of them, any such shares of stock, options, warrants, instruments or other securities of the Corporation, such offer shall not, in any way, constitute a waiver or release of the right of the Board of Directors subsequently to dispose of other securities of the Corporation without offering the same to said holders. <PAGE> 2 The shares of such classes shall have the following express terms: DIVISION A EXPRESS TERMS OF THE PREFERRED STOCK (1) The Preferred Stock may be issued from time to time in one or more series. All shares of Preferred Stock shall be of equal rank and shall be identical with all other shares except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of each series shall be identical with all other shares of such series, except, if dividends are to be cumulative, as to the date from which dividends are cumulative. Subject to the provisions of Sections 2 and 3 of this Division, which provisions shall apply to all Preferred Stock, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series prior to the issuance thereof to fix: (a) The number of shares constituting such series, including the authority to increase or decrease such number, and the distinctive designation of such series. (b) The dividend rate of the shares of such series, whether the dividends shall be cumulative and, if so, the date from which they shall be cumulative, and the relative rights of priority, if any, of payment of dividends on shares of such series. (c) The right, if any, of the Corporation to redeem shares of such series and the terms and conditions of such redemption including the redemption price. (d) The rights of the shares in case of a voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of such series. (e) The obligation, if any, of the Corporation to retire shares of such series pursuant to a retirement or sinking fund or fund of a similar nature and the terms and conditions of such obligation. (f) The terms and conditions, if any, upon which shares of such series shall be convertible into or exchangeable for shares of stock of any other class or classes of stock of the Corporation or other entity or of any other series of Preferred Stock, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any. (g) Any other rights, preferences or limitations of the shares of such series as may be permitted by law. The Board of Directors is authorized to adopt from time to time amendments to the Articles of Incorporation fixing, with respect to each such series, the matters described in clauses (a) through (g), inclusive, of this Section 1. 2 <PAGE> 3 (2) The Preferred Stock shall be senior to the Common Stock in payment of dividends and payment in respect of liquidation or dissolution. (3) The holders of Preferred Stock shall be entitled to one vote for each share of such stock upon all matters presented to the shareholders; and, except as otherwise required by law, the holders of Preferred Stock and the holders of Common Stock shall vote together as one class on all matters. DIVISION B EXPRESS TERMS OF THE COMMON STOCK The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof and to the terms of Article EIGHTH. Each share of Common Stock shall be equal to every other share of Common Stock and the holders thereof shall be entitled to one vote for each share of such stock on all questions presented to the shareholders. FIFTH: Except as otherwise provided in these Articles of Incorporation or in the Regulations, the holders of a majority of the outstanding shares are authorized to take any action which, but for this provision, would require the vote or other action of the holders of more than a majority of such shares. SIXTH: Except as otherwise provided in these Articles of Incorporation, the Corporation, by its Board of Directors, may purchase issued shares, to the extent permitted by law. SEVENTH: The affirmative vote of the holders of not less than eighty percent (80%) of the voting power of the Corporation in the election of directors shall be required for the approval or authorization of any Business Combination; provided, however, that the eighty percent voting requirement shall not be applicable if the Business Combination is a merger or consolidation and the cash or fair market value of the property, securities or other consideration to be received per share by holders of the Common Stock of the Corporation in the Business Combination (a) is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends and like distributions), paid by the Related Person in acquiring any of its holdings of the Corporation's Common Stock and (b) if the Related Person has acquired Common Stock with varying forms of consideration, the form of consideration to be received by the holders of the Common Stock in the Business Combination is cash or the form used to acquire the largest percentage of the voting power of the Corporation in the election of directors owned by the Related Person. For the purpose of this Article SEVENTH: (1) The term "Business Combination" shall mean (i) any merger or consolidation of the Corporation or a subsidiary with or into a Related Person, (ii) any sale, lease, exchange, transfer 3 <PAGE> 4 or other disposition, including, without limitation, a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets, either of the Corporation (including, without limitation, of any voting securities of a subsidiary) or of a subsidiary, to a Related Person, (iii) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation, (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation, (v) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person, (vi) any reclassification of securities (including any reverse stock split) or recapitalization what would have the effect of increasing the voting power of a Related Person, (vii) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of a Related Person, and (viii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. (2) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on October 18, 1988 in Rule 12b-2 under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined on October 18, 1988 in Rule 13d-3 under the Securities Exchange Act of 1934) Common Stock or Preferred Stock of the Corporation consisting in the aggregate of 20 percent or more of the outstanding voting power of the Corporation in the election of directors, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity. (3) The term "Substantial Part" shall mean more than thirty percent (30%) of the fair market value of the total assets of the corporation in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made. (4) Without limitation, any Common Stock of the Corporation, or Preferred Stock of the Corporation that has voting power in the election of directors, that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise shall be deemed beneficially owned by the Related Person. (5) For the purposes of this Article SEVENTH, the term "other consideration to be received" shall include, without limitation, Common Stock of the Corporation retained by its existing public stockholders in the event of a Business Combination in which the Corporation is the surviving corporation. Notwithstanding any other provisions of these Articles of Incorporation or the Regulations of the Corporation or any provision of law which might otherwise permit a lesser vote, but in addition to any affirmative vote of the holders of any particular class or series of stock required by law or these Articles of Incorporation or the Regulations of the Corporation, the affirmative vote of the holders of at least eighty percent (80%) of the Corporation's voting power in the election of directors, voting as a single class, shall be required to alter, amend or repeal this Article SEVENTH or to adopt any provisions in these Articles of Incorporation or the 4 <PAGE> 5 Regulations of the Corporation which are inconsistent with the provisions of this Article SEVENTH. EIGHTH: No person shall make a Control Share Acquisition without first obtaining the prior authorization of the Corporation's shareholders at a special meeting of shareholders called by the Board of Directors in accordance with this Article EIGHTH. (1) Procedure. Any Person who proposes to make a Control Share Acquisition shall deliver a notice ("Notice") to the Corporation at its principal place of business that sets forth all of the following information: a) The identity of the Person who is giving the Notice; b) A statement that the Notice is given pursuant to this Article EIGHTH; c) The number and class of shares of the Corporation owned, directly or indirectly, by the Person who gives the Notice; d) The range of voting power (as specified in Section (6)(b)(1) of this Article EIGHTH) under which the proposed Control Share Acquisition would, if consummated, fall; e) A description in reasonable detail of the terms of the proposed Control Share Acquisition; and f) Representations, supported by reasonable information, that the proposed Control Share Acquisition would be consummated if shareholder approval is obtained and, if consummated, would not be contrary to law and that the Person who is giving the Notice has the financial capacity to make the proposed Control Share Acquisition. (2) Call of Special Meeting of Shareholders. The Board of Directors of the Corporation shall, within ten (10) days after receipt by the Corporation of a Notice that complies with Section (1), call a special meeting of shareholders to be held not later than fifty (50) days after receipt of the Notice by the Corporation, unless the Person who delivered the Notice agrees to a later date, to consider the proposed Control Share Acquisition; provided that the Board of Directors shall have no obligation to call such a meeting if they make a determination within ten (10) days after receipt of the Notice that (i) the Notice was not given in good faith; (ii) the proposed Control Share Acquisition would not be in the best interests of the Corporation and its shareholders or (iii) the proposed Control Share Acquisition could not be consummated for financial or legal reasons. Notwithstanding anything to the contrary contained in clause (ii) of the immediately preceding sentence, the Board of Directors shall call such special meeting of shareholders if the Control Share Acquisition described in the Notice is for any and all shares of the Corporation, for cash, at a price higher than the highest price at which shares of Common 5 <PAGE> 6 Stock have been traded during the ninety (90) day period prior to the date on which the Corporation receives the Notice. The Board of Directors may adjourn such special meeting of shareholders if prior to such meeting the Corporation has received a Notice from any other Person and the Board of Directors has determined that the Control Share Acquisition proposed by such other Person, or a merger, consolidation or sale of assets of the Corporation, should be presented to shareholders at an adjourned meeting or at a special meeting held at a later date. For purposes of making a determination that a special meeting of shareholders should not be called pursuant to this Section (2), no such determination shall be deemed void or voidable with respect to the Corporation merely because one or more of its directors or officers who participated in deliberations regarding such determination may be deemed to be other than disinterested, if in any such case the material facts of the relationship giving rise to a basis for self-interest are known to the directors and the directors, in good faith reasonably justified by the facts, make such determination by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors constitute less than a quorum. For purposes of this paragraph, "disinterested directors" shall mean directors whose material contacts with the Corporation are limited principally to activities as a director or shareholder. Persons who have material and recurring business or professional contacts with the Corporation shall not be deemed to be "disinterested directors" for purposes of this provision. A director shall not be deemed to be other than a "disinterested director" merely because he would no longer be a director if the proposed Control Share Acquisition were approved and consummated. (3) Notice of Special Meeting. The Corporation shall, as promptly as practicable, give notice of the special meeting of shareholders called pursuant to Section (2) to all shareholders of record as of the record date set for such meeting. Such notice shall include or be accompanied by a copy of the Notice and by a statement of the Corporation, authorized by the Board of Directors, of its position or recommendation, or that it is taking no position or making no recommendation, with respect to the proposed Control Share Acquisition. (4) Requirements for Approval. The Person who delivered the Notice may make the proposed Control Share Acquisition if both of the following occur: (a) The shareholders of the Corporation authorize such acquisition at the special meeting of shareholders called pursuant to Section (2), at which meeting a quorum is present, by the affirmative vote of a majority of the Voting Stock represented at such meeting in person or by proxy and by a majority of the portion of such Voting Stock represented at such meeting in person or by proxy excluding the votes of Interested Shares. A quorum shall be deemed to be present at such special meeting if at least a majority of the issued and outstanding Voting Stock, and a majority of such Voting Stock excluding Interested Shares, are represented at such meeting in person or by proxy. 6 <PAGE> 7 (b) Such acquisition is consummated, in accordance with the terms so authorized, not later than three hundred sixty (360) days following shareholder authorization of the Control Share Acquisition. (5) Violations of Restriction. Any Voting Stock issued or transferred to any Person in violation of this Article EIGHTH shall hereinafter be called "Excess Shares." In the event that any Person acquires Excess Shares, then, in addition to any other remedies which the Corporation may have at law or in equity as a result of such acquisition, the Corporation shall have the right to treat the issuance or transfer of any such Excess Shares as null and void. In the event the Corporation is not permitted to treat an issuance or transfer of Excess Shares as null and void, such Excess Shares will be treated as the equivalent of treasury shares of the Corporation and, as such, holders of Excess Shares will hold such Excess Shares as agent of the Corporation and shall have no right to exercise or receive the benefits of shareholder rights appurtenant to such Excess Shares. In such event, the Corporation may redeem any or all Excess Shares, arrange a sale to one or more purchasers who could acquire such Excess Shares without violating this Article EIGHTH, or seek other appropriate remedies. In addition, any Person who receives dividends, interest or any other distribution with respect to Excess Shares shall hold the same as agent for the Corporation and, following a permitted transfer, for the transferee thereof. Notwithstanding the foregoing, any person who holds Excess Shares may transfer the same (together with any distributions thereon) to any Person who, following such transfer, would not own shares in violation of this Article EIGHTH. Upon such permitted transfer, the Corporation shall pay or distribute to the transferee any distributions on the Excess Shares not previously paid or distributed. (6) Definitions. As used in this Article EIGHTH: (a) "Person" includes, without limitation, an individual, a corporation (whether nonprofit or for profit), a partnership, an unincorporated society or association, and two or more persons having a joint or common interest. (b)(1) "Control Share Acquisition" means the acquisition, directly or indirectly, by any Person, of shares of the Corporation that, when added to all other shares of the corporation in respect of which such Person, directly or indirectly, may exercise or direct the exercise of voting power as provided in this paragraph, would entitle such Person, immediately after such acquisition, directly or indirectly, to exercise or direct the exercise of voting power of the Corporation in the election of directors within any of the following ranges of such voting power: (i) One-fifth or more but less than one-third of such voting power; (ii) One-third or more but less than a majority of such voting power; or (iii) A majority of such voting power. 7 <PAGE> 8 A bank, broker, nominee, trustee, or other Person who acquires shares in the ordinary course of business for the benefit of others in good faith and not for the purpose of circumventing this Article EIGHTH shall, however, be deemed to have voting power only of shares in respect of which such Person would be able to exercise or direct the exercise of votes at a special meeting of shareholders called pursuant to Section (2) of this Article EIGHTH without further instruction from others. For purposes of this Article EIGHTH, the acquisition of securities immediately convertible into shares of the Corporation with voting power in the election of directors shall be treated as an acquisition of such shares. (b)(2) The acquisition of any shares of the Corporation does not constitute a Control Share Acquisition for the purposes of this Article EIGHTH if the acquisition is consummated in any of the following circumstances: (i) By underwriters in good faith and not for the purpose of circumventing this Article EIGHTH in connection with any offering to the public of securities of the Corporation; (ii) By bequest or inheritance, by operation of law upon the death of any individual, or by any other transfer without valuable consideration, including a gift, that is made in good faith and not for the purpose of circumventing this Article EIGHTH; (iii) Pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing this Article EIGHTH; (iv) Pursuant to a merger, consolidation, combination or majority share acquisition adopted or authorized by shareholder vote in compliance with the provisions of Article SEVENTH of these Articles of Incorporation and Sections 1701.78, 1701.79 or 1701.83 of the Ohio Revised Code if the Corporation is a party to the agreement of merger, consolidation or acquisition, as the case may be; (v) Under such circumstances that the acquisition does not result in the Person acquiring shares of the Corporation being entitled, immediately thereafter and for the first time, directly or indirectly, to exercise or direct the exercise of voting power of the Corporation in the election of directors within the range of one-fifth or more but less than one-third of such voting power, or within any of the ranges of voting power specified in Section (6)(b)(1)(i), (ii) or (iii) which is higher than the range of voting power applicable to such Person immediately prior to such acquisition; (vi) Prior to October 18, 1988; or (vii) Pursuant to a contract existing prior to October 18, 1988. 8 <PAGE> 9 The acquisition by any Person of shares of the Corporation in a manner described under this Section (6)(b)(2) shall be deemed to be a Control Share Acquisition authorized pursuant to this Article EIGHTH within the range of voting power specified in Section (6)(b)(1)(i), (ii) or (iii) that such Person is entitled to exercise after such acquisition, provided that, in the case of an acquisition in a manner described under Section (6)(b)(1)(i), (ii) or (iii), the transferor of shares to such Person had previously obtained any authorization of shareholders required under this Article EIGHTH in connection with such transferor's acquisition of shares of the Corporation. (b)(3) The acquisition of shares of the Corporation in good faith and not for the purpose of circumventing this Article EIGHTH from any Person whose Control Share Acquisition had previously been authorized by shareholders in compliance with this Article EIGHTH, or from any Person whose previous acquisition of shares would have constituted a Control Share Acquisition but for Section (6)(b)(2), does not constitute a Control Share Acquisition for the purpose of this Article EIGHTH unless such acquisition entitles any Person, directly or indirectly, alone or with others, to exercise or direct the exercise of voting power of the Corporation in the election of directors in excess of the range of such voting power authorized pursuant to this Article EIGHTH, or deemed to be so authorized under Section (6)(b)(2). (c) "Interested Shares" means Voting Stock with respect to which any of the following persons may exercise or direct the exercise of the voting power: (1) any Person whose Notice prompted the calling of a special meeting of shareholders pursuant to Section (2); (2) any officer of the Corporation elected or appointed by the directors of the Corporation; and (3) any employee of the Corporation who is also a director of the corporation. (d) "Voting Stock" means all securities of the Corporation entitled to vote generally in the election of directors, and, for purposes of Sections (5) and (10) of this Article EIGHTH, shall mean securities of the Corporation immediately convertible into securities entitled to vote generally in the election of the directors. (7) Proxies. No proxy appointed for or in connection with the shareholder authorization of a Control Share Acquisition pursuant to this Article EIGHTH is valid if it provides that it is irrevocable. No such proxy is valid unless it is sought, appointed, and received both: (a) In accordance with all applicable requirements of law; and 9 <PAGE> 10 (b) Separate and apart from the sale or purchase, contract or tender for sale or purchase, or request or invitation for tender for sale or purchase, of shares of the Corporation. (8) Revocability of Proxies. Proxies appointed for or in connection with the shareholder authorization of a Control Share Acquisition pursuant to this Article EIGHTH shall be revocable at all times prior to the obtaining of such shareholder authorization, whether or not coupled with an interest. (9) Amendments. Notwithstanding any other provisions of these Articles of Incorporation or the Regulations of the Corporation or any provision of law that might otherwise permit a lesser vote, but in addition to any affirmative vote of the holders of any particular class or series of stock required by law, the Articles of Incorporation or the Regulations of the Corporation, the affirmative vote of the holders of at least eighty percent (80%) of the Voting Stock, voting as a single class, shall be required to alter, amend or repeal this Article EIGHTH or adopt any provisions in these Articles of Incorporation or the Regulations of the Corporation which are inconsistent with the provisions of this Article EIGHTH. (10) Legend on Share Certificates. Each certificate representing Voting Stock of the Corporation shall contain the following legend: Transfer of the securities represented by this Certificate is subject to the provisions of Article EIGHTH of the Corporation's Articles of Incorporation as the same may be in effect from time to time. Upon written request delivered to the Secretary of the Corporation at its principal place of business, the Corporation will mail to the holder of this Certificate a copy of such provisions without charge within five (5) days after receipt of written request therefor. By accepting this Certificate the holder hereof acknowledges that it is accepting same subject to the provisions of said Article EIGHTH as the same may be in effect from time to time and covenants with the Corporation and each holder thereof from time to time to comply with the provisions of said Article EIGHTH as the same may be in effect from time to time. NINTH: The provisions of Section 1701.831 of the Ohio Revised Code, as amended from time to time, or any successor provision or provisions to said Section, shall not apply with respect to any particular Control Share Acquisition, as such is defined in said Section, regarding this Corporation so long as Article NINTH of these Articles of Incorporation, as such Articles of Incorporation may be amended from time to time, remains an Article of these Articles of Incorporation and remains substantially in full force and effect, disregarding any renumbering of such Article NINTH resulting from any amendment of these Articles of Incorporation. TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation which may be contained in these articles of incorporation of a corporation organized under the laws of the State of Ohio, in the manner now or hereafter prescribed by statute or these Articles of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.D <SEQUENCE>3 <DESCRIPTION>EXHIBIT 4(D) <TEXT> <PAGE> 1 CONFORMED EXECUTION COPY Exhibit 4(d) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BEARINGS, INC. NOTE PURCHASE AND PRIVATE SHELF FACILITY WITH THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $80,000,000 MAXIMUM AGGREGATE PRINCIPAL AMOUNT Dated as of October 31, 1992, As Amended on November 27, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> 2 TABLE OF CONTENTS (Not Part of Agreement) Page 1. AUTHORIZATION OF ISSUE OF PRIVATE SHELF NOTES......................... 1 2. PURCHASE AND SALE OF NOTES............................................ 1 3. CONDITIONS OF CLOSING................................................. 5 4. PREPAYMENTS........................................................... 6 5. AFFIRMATIVE COVENANTS................................................. 7 6. NEGATIVE COVENANTS.................................................... 9 7. EVENTS OF DEFAULT..................................................... 12 8. REPRESENTATIONS, COVENANTS AND WARRANTIES............................. 15 9. REPRESENTATIONS OF THE PURCHASERS..................................... 18 10. DEFINITIONS........................................................... 19 11. MISCELLANEOUS......................................................... 25 <PAGE> 3 LIST OF ATTACHMENTS ------------------- PURCHASER SCHEDULE EXHIBIT A -- FORM OF PRIVATE SHELF NOTE EXHIBIT B -- FORM OF REQUEST FOR PURCHASE EXHIBIT C -- FORM OF CONFIRMATION OF ACCEPTANCE EXHIBIT D-1 -- FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL (Initial Closing) EXHIBIT D-2 -- FORM OF OPINION OF COMPANY'S COUNSEL (Private Shelf Note Closings) EXHIBIT E -- LIST OF AGREEMENTS RESTRICTING DEBT EXHIBIT F -- LIST OF SUBSIDIARIES EXHIBIT G -- LIST OF ENCUMBRANCES <PAGE> 4 BEARINGS, INC. 3600 Euclid Avenue Cleveland, Ohio 44115-2515 As of October 31, 1992, As Amended on November 27, 1996 To: The Prudential Insurance Company of America (herein called "PRUDENTIAL") Each Prudential Affiliate which becomes bound by this Agreement as hereinafter provided (together with Prudential, the "PURCHASERS") c/o Prudential Capital Group 9700 Sears Tower 233 South Wacker Drive Chicago, Illinois 60606 Gentlemen: The undersigned, Bearings, Inc., an Ohio corporation (herein called the "COMPANY"), hereby agrees with you as set forth below. Reference is made to paragraph 10 hereof for definitions of capitalized terms used herein and not otherwise defined herein. 1. AUTHORIZATION OF ISSUE OF PRIVATE SHELF NOTES. The Company will authorize the issue of its senior promissory notes (herein called the "PRIVATE SHELF NOTES") in the aggregate principal amount of $80,000,000, to be dated the date of issue thereof, to mature, in the case of each Private Shelf Note so issued, no less than seven (7) years and no more than fifteen (15) years after the issuance thereof (and, unless otherwise agreed by the Company, Prudential and the applicable Purchasers, have an average life of approximately 6.75 years), to bear interest on the unpaid balance thereof from the date thereof at the rate per annum (and to have such other particular terms consistent with the terms of this Agreement) as shall be set forth in the Confirmation of Acceptance with respect to such Private Shelf Note delivered pursuant to paragraph 2E, and to be substantially in the form of Exhibit A attached hereto. The terms "PRIVATE SHELF NOTE" and "PRIVATE SHELF NOTES" as used herein shall include each Private Shelf Note delivered pursuant to any provision of this Agreement and each Private Shelf Note delivered in substitution or exchange for any such Private Shelf Note pursuant to any such provision. The terms "NOTE" or "NOTES" as used herein shall include each Private Shelf Note (whether designated a Series A Note, Series B Note or Series C Note, etc.) delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods, and (vi) which are otherwise designated a "Series" hereunder or in the Confirmation of Acceptance whether or not the foregoing conditions are satisfied, are herein called a "SERIES" of Notes. 2. PURCHASE AND SALE OF NOTES. 2A. FACILITY. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties set forth herein, Prudential agrees to purchase and the Company agrees to issue Private Shelf Notes pursuant to the terms of this Agreement in an aggregate principal amount of $80,000,000 in increments of at least <PAGE> 5 $40,000,000 on or before December 24, 1992 (the "ISSUANCE PERIOD"). Prudential's agreement to purchase Private Shelf Notes hereunder is referred to herein as the "FACILITY". At any time, $80,000,000 minus the aggregate principal amount of Private Shelf Notes purchased and sold pursuant to this Agreement prior to such time is herein called the "AVAILABLE FACILITY AMOUNT" at such time. A maximum of two (2) draws may be made under the Facility which shall automatically expire concurrently with the second draw hereunder. Prudential agrees to use reasonable efforts to facilitate the prompt completion of the procedures specified in this Agreement for draws under the Facility. 2B. PERIODIC SPREAD INFORMATION. Not later than 9:30 A.M. (New York City local time) on a Business Day during the Issuance Period if there is an Available Facility Amount on such Business Day, the Company may request by telecopier or telephone, and within a reasonable time after such request, Prudential will, to the extent reasonably practicable, provide to the Company on such Business Day (or, if such request is received after 9:30 A.M. (New York City local time) on such Business Day, on the following Business Day), information (by telecopier or telephone) with respect to various spreads at which Prudential or Prudential Affiliates will consider purchasing Private Shelf Notes. 2C. REQUEST FOR PURCHASE. The Company may from time to time during the Issuance Period make requests for purchases of Private Shelf Notes (each such request being herein called a "REQUEST FOR PURCHASE"). Each Request for Purchase shall be made to Prudential by telecopier and confirmed by nationwide overnight delivery service, and shall (i) specify the aggregate principal amount of Private Shelf Notes covered thereby, which shall not be less than $40,000,000 and shall not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the final maturities, principal payment dates and amounts and interest payment periods (quarterly in arrears) of the Private Shelf Notes covered thereby, (iii) specify the use of proceeds of such Private Shelf Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Private Shelf Notes, which shall be a Business Day during the Issuance Period not more than thirty (30) days after the making of such Request for Purchase and in any event no more than ten (10) days after any Acceptance with respect to such Request for Purchase under paragraph 2E, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Private Shelf Notes are to be transferred on the Private Shelf Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 hereof are true on and as of the date of such Request for Purchase except to the extent of changes caused by the transactions herein contemplated and that there exists on the date of such Request for Purchase no Event of Default or Default (and that no Event of Default or Default shall arise as the result of the purchase and sale of such Private Shelf Notes), and (vii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2D. RATE QUOTES. As soon as practicable and in any event not later than five (5) Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2C, Prudential shall provide (by telephone and promptly thereafter confirmed by telecopier, in each case no earlier than 9:30 A.M. and no later than 1:00 P.M. New York City local time) interest rate quotes for the several principal amounts, maturities, prepayment schedules and interest payment periods of Private Shelf Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Private Shelf Notes until such balance shall have become due and payable, at which Prudential or a Prudential Affiliate would be willing to purchase such Private Shelf Notes at 100% of the principal amount thereof. Such rate quotes shall be made and determined by Prudential in accordance with the internal methods and - 2 - <PAGE> 6 procedures used by Prudential to price comparable transactions with companies similarly situated with similar credit risks. 2E. ACCEPTANCE. Within one hour after Prudential shall have provided any interest rate quotes pursuant to paragraph 2D or such shorter period as Prudential may reasonably specify to the Company (such period herein called the "ACCEPTANCE WINDOW"), the Company may, subject to the terms of paragraph 2F, elect to accept such interest rate quotes as to not less than $40,000,000 aggregate principal amount of the Private Shelf Notes specified in the applicable Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window (but not earlier than 9:30 A.M. or later than 2:00 P.M., New York City local time) that the Company elects to accept such interest rate quotes, specifying the Private Shelf Notes (each such Private Shelf Note being herein called an "ACCEPTED NOTE") as to which such acceptance (herein called an "ACCEPTANCE") relates. The day the Company notifies Prudential of an Acceptance with respect to any Accepted Notes is herein called the "ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Private Shelf Notes hereunder shall be made based on such expired interest rate quotes. In the event the closing with respect to any Accepted Notes fails to occur within ten (10) days of the Acceptance Day for any reason (other than Prudential's failure to fund the purchase price of the Private Shelf Notes after all conditions to closing specified in paragraph 3A have been satisfied on or before 11:30 A.M. New York City local time on the last Business Day preceding the end of such ten day period), the interest rate applicable to such Accepted Notes may increase based upon the costs of the delayed closing to Prudential as reasonably determined by Prudential. Subject to paragraph 2F and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. Prior to the close of business on the Business Day next following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "CONFIRMATION OF ACCEPTANCE"). 2F. Market Disruption. Notwithstanding the provisions of paragraph 2E, if Prudential shall have provided interest rate quotes pursuant to paragraph 2E and thereafter, prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2E, there shall occur a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the market for U.S. Treasury securities and other financial instruments, then such interest rate quotes shall expire, and no purchase or sale of Private Shelf Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2F are applicable with respect to such Acceptance. 2G. PRIVATE SHELF CLOSING. Not later than 11:30 A.M. (New York City local time) on the Private Shelf Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of Prudential Capital Group, 9700 Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606 Attention: Law Department, the Private Shelf Notes to be purchased by such Purchaser in the form of a single Accepted Note for the Accepted Notes which have exactly the same terms (or such greater number of Notes in authorized denominations as such Purchaser may request) dated the Private Shelf Closing Day and registered in such - 3 - <PAGE> 7 Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Private Shelf Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Private Shelf Closing Day for such Accepted Notes as provided above in this paragraph 2G, or any of the conditions specified in paragraph 3A shall not have been fulfilled by the time required on such scheduled Private Shelf Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Private Shelf Closing Day notify such Purchaser in writing whether (x) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 30 Business Days after such scheduled Private Shelf Closing Day (the "RESCHEDULED CLOSING DAY")) and certify to such Purchaser that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee, if any, in accordance with paragraph 2H(2) or (y) such closing is to be canceled as provided in paragraph 2H(3). In the event that the Company shall fail to give such notice referred to in the preceding sentence, such Purchaser may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Private Shelf Closing Day, notify the Company in writing that such closing is to be canceled as provided in paragraph 2H(3). 2H. FEES. 2H(1). FACILITY FEE. The Company agrees to pay Prudential in immediately available funds a fee (the "FACILITY FEE") on December 24, 1992 in an amount equal to one-eighth of one percent (.125%) of the Unused Facility Amount which will exist as of the close of business on such date; provided, however, that the Facility Fee shall be canceled if the Unused Facility Amount is less than or equal to $40,000,000 on December 24, 1992. The term "UNUSED FACILITY AMOUNT" shall mean, at any time, the Available Facility Amount at such time plus the aggregate principal amount of Accepted Notes which have not been purchased and sold hereunder prior to such time. 2H(2). DELAYED DELIVERY FEE. If the closing of the purchase and sale of any Accepted Note is delayed for any reason (other than Prudential's failure to fund the purchase price of the Accepted Notes after all conditions to closing specified in paragraph 3A have been satisfied on or before 11:30 A.M. New York City local time on the last Business Day preceding the 31st day after the Acceptance Day) beyond the original Closing Day for such Accepted Note, the Company will pay to Prudential on the last Business Day of each calendar month, commencing with the first such day to occur more than 30 days after the Acceptance Day for such Accepted Note and ending with the last such day to occur prior to the Cancellation Date or the actual closing date of such purchase and sale, and on the Cancellation Date or actual closing date of such purchase and sale (if such Cancellation Date or closing date occurs more than 30 days after the Acceptance Day for such Accepted Note), a fee (herein called the "DELAYED DELIVERY FEE") calculated as follows: (BEY - MMY) X DTS/360 X Full Price where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note; "MMY" means Money Market Yield, i.e., the yield per annum on an alternative investment selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Notes having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the thirty first day after the Acceptance Day of such Accepted Note (in the case of the first such payment - 4 - <PAGE> 8 with respect to such Accepted Note) or from and including the date of the immediately preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "Full Price" means the principal amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. If the Delayed Delivery Fee is zero or negative, there will be no Delayed Delivery Fee. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2G. 2H(3). CANCELLATION FEE. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2G that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being herein called the "CANCELLATION DATE"), the Company will pay Prudential in immediately available funds an amount (the "CANCELLATION FEE") calculated as follows: PI X Full Price where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Note(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "Full-Price" has the meaning set forth in paragraph 2H(2), above. The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data selected by Prudential). Each price shall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. If the Price Increase is zero or negative, there will be no Cancellation Fee. 3. CONDITIONS OF CLOSING. Prudential's and any Purchaser's obligation to purchase and pay for any Private Shelf Notes, is subject in each case to the satisfaction, on or before the applicable Closing Day for such Notes, of the conditions set forth in paragraph 3A and the Company's obligation to issue any Private Shelf Note is subject to the conditions set forth in paragraph 3B. 3A(1). OPINION OF COMPANY'S COUNSEL. On the Initial Closing Day, Prudential shall have received from Thompson, Hine and Flory, special counsel for the Company, a favorable opinion satisfactory to Prudential and substantially in the form of Exhibit D-1 attached hereto. 3A(2). OPINION OF COMPANY'S COUNSEL. On each Private Shelf Closing Day, each Purchaser shall have received from Robert C. Stinson, Esq., general counsel of the Company (or other counsel reasonably acceptable to the Purchasers), a favorable opinion satisfactory to the Purchasers and substantially in the form of Exhibit D-2 attached hereto. 3A(3). REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations and warranties contained in paragraph 8 hereof shall be true on and as of the applicable Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the applicable Closing Day no Event of Default or Default; and the Company shall have delivered to each Purchaser an Officer's Certificate, dated the applicable Closing Day, to both such effects. - 5 - <PAGE> 9 3A(4). FEES. On or before each Private Shelf Closing Day, the Company shall have paid in full to Prudential any fee required by paragraph 2H(1) and to the Purchasers any fee required by paragraph 2H(2) or 2H(3). 3A(5). PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for the Notes to be purchased on the applicable Closing Day on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject any Purchaser to any material tax (other than ordinary income taxes), material penalty, material liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as such Purchaser may have requested no less than 5 days before any scheduled closing to establish compliance with this condition. 3A(6). LEGAL MATTERS. Counsel for the Purchasers shall be satisfied as to all legal matters in all material respects relating to such purchase and sale. 3A(7). PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to each Purchaser, and each Purchaser shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 3A(8). SALE OF NOTES OF SAME SERIES TO OTHER PURCHASERS. The Company shall have tendered to the other Purchasers (if any) the Notes of the same Series to be purchased by them at the closing. 3B. CONDITIONS TO COMPANY'S OBLIGATION UNDER PARAGRAPH . The Company's obligation to issue Private Shelf Notes shall be subject to the following conditions: (i) the rate quotes provided by Prudential to the Company pursuant to paragraph 2D shall not exceed 131 basis points above the interpolated Treasury rate corresponding to the weighted average life of the applicable Notes; (ii) in the event that the interest rate quote provided by Prudential to the Company pursuant to paragraph 2D equals or exceeds 9.63% per annum, then the Company's obligation to offer Notes for purchase in an aggregate principal amount of $80,000,000 under paragraph 1 shall be reduced to $20,000,000; (iii) if the conditions specified in paragraph 2F are applicable, then the Company's obligations to offer Notes for purchase under paragraph 2A shall be suspended until such conditions are no longer applicable but the Company obligation to offer Notes shall in no event continue beyond January 31, 1993; and (iv) after all conditions to closing under paragraph 3A have been satisfied, the applicable Purchaser shall fund the purchase price of the Notes on the applicable Closing Day. 4. PREPAYMENTS. The Notes shall be subject to prepayment with respect to the required prepayments specified in paragraph 4A and under the circumstances specified in paragraphs 4B and 4E. - 6 - <PAGE> 10 4A. REQUIRED PREPAYMENT OF PRIVATE SHELF NOTES. Until each respective Series of Private Shelf Notes shall be paid in full, each respective Series of Private Shelf Notes shall be subject to such required prepayments, if any, as are specified for such Series of Private Shelf Notes in accordance with the provisions of paragraph 2C hereof. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any prepayment as specified in the respective Series of Private Shelf Notes. 4B. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. Subject to the limitations set forth below, the Notes shall be subject to prepayment, in whole at any time or from time to time in part (in $100,000 increments and not less than $2,000,000 per occurrence), at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each Note so prepaid. Any partial prepayment of the Notes pursuant to this paragraph 4B shall be applied in satisfaction of required payments of principal in the inverse order of their scheduled due dates. 4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give to the holder of each Note of a Series irrevocable written notice of any optional prepayment pursuant to paragraph 4B with respect to such Series not less than 30 days prior to the prepayment date, specifying (i) such prepayment date, (ii) the aggregate principal amount of the Notes of such Series to be prepaid on such date, (iii) the principal amount of the Notes of such holder to be prepaid on that date, and (iv) stating that such optional prepayment is to be made pursuant to paragraph 4B. Notice of optional prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, with respect thereto, shall become due and payable on such prepayment date. 4D. PARTIAL PAYMENTS PRO RATA. In the case of each prepayment pursuant to paragraphs 4A or 4B of less than the entire unpaid principal amount of all outstanding Notes of any Series, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series (including, for the purpose of this paragraph 4D only, all Notes of such Series prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraphs 4A or 4B) according to the respective unpaid principal amounts thereof. 4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than (i) by prepayment pursuant to paragraphs 4A or 4B or (ii) upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes held by each other holder of Notes at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4D. In the event that (i) the Company at any time requests in writing the approval by the holders of the Notes of a merger, acquisition, recapitalization or reorganization, the consummation of which would result in an Event of Default or Default hereunder, and (ii) the Required Holders shall have failed to grant such approval within ninety (90) days of the date of such written request, then the Company may, subject to the terms of the first sentence of this paragraph 4E and simultaneously with the consummation of such prohibited transaction, prepay the Notes of the nonconsenting holders at 100% of the principal amount so prepaid plus interest thereon to the - 7 - <PAGE> 11 prepayment date and the Yield-Maintenance Amount, if any, with respect to such Note within one hundred fifty (150) days of the date of the written request. 5. AFFIRMATIVE COVENANTS. 5A. FINANCIAL STATEMENTS. The Company covenants that it will deliver to each Significant Holder in triplicate: (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, however, that delivery pursuant to clause (iii) below of copies of the Quarterly Report on Form 10-Q of the Company for such quarterly period filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (i); (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of income, stockholders' equity, and cash flows of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and satisfactory in form to the Required Holder(s) and, reported on by independent public accountants of recognized national standing selected by the Company whose report shall be without limitation as to scope of the audit and satisfactory in substance to the Required Holder(s); provided, however, that delivery pursuant to clause (iii) below of copies of the Annual Report on Form 10-K of the Company for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (ii); (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission), excluding registration statements on Form S-8; (iv) promptly upon receipt thereof, a copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary; and (v) with reasonable promptness, such other financial data as such Significant Holder may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each Significant Holder an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraph 6 and stating that, to the best of their knowledge based upon reasonable inquiry, there exists no Event of Default or Default, or, if any Event of Default - 8 - <PAGE> 12 or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each Significant Holder a report of such accountants stating that, in making the audit necessary for their report on such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that immediately after any Responsible Officer obtains knowledge of an Event of Default or Default, it will deliver to each Significant Holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 5B. INFORMATION REQUIRED BY RULE 144A. The Company covenants that it will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 5C. INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its independent public accountants and, if a Default or Event of Default shall be continuing, to examine the corporate books and financial records of the Company and its Subsidiaries and obtain copies thereof or extracts therefrom, all at such reasonable times as the Company and such Significant Holder shall agree but in any event within three Business Days from request of any Purchaser and during normal business hours. 5D. COVENANT TO SECURE NOTES EQUALLY. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6B(1) (unless the prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. 5E. MAINTENANCE OF INSURANCE. The Company covenants that it and each Subsidiary shall maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as is ordinarily carried by companies similarly situated in the same or similar lines of business. 6. NEGATIVE COVENANTS. Unless the Required Holders shall otherwise consent in writing, the Company agrees to observe and perform each of the negative covenants set forth below so long as any Note shall remain outstanding. - 9 - <PAGE> 13 6A(1). LIQUIDITY. The Company covenants that it will not permit Consolidated Current Assets less Consolidated Current Liabilities determined at the end of any fiscal quarter to fall below an amount equal to $125,000,000. 6A(2). CURRENT RATIO. The Company covenants that it will not permit the ratio (expressed as a percentage) of Consolidated Current Assets to Consolidated Current Liabilities determined at the end of any fiscal quarter to fall below 150%. 6A(3). CONSOLIDATED TANGIBLE NET WORTH. The Company covenants that it will not permit Consolidated Tangible Net Worth determined at the end of any fiscal quarter to fall below $115,000,000 PLUS an amount equal to 30% of annual Consolidated Net Income (less 0% in the event of a loss), applied at the end of each fiscal year commencing with the fiscal year ending June 30, 1996. 6B. CREDIT AND OTHER RESTRICTIONS. The Company covenants that it will not and will not permit any Subsidiary to: 6B(1). LIEN RESTRICTIONS. Create, incur, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of Notes in accordance with the provisions of paragraph 5D hereof), except: (i) Liens for taxes or other governmental charges not yet due or which are being actively contested in good faith by appropriate proceedings; (ii) Liens incidental to the conduct of its business or the ordinary operation or use of its property which were not incurred in connection with the borrowing of money or obtaining credit or advances; (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary; (iv) Liens identified on EXHIBIT G to the Existing Agreement a copy of which is attached hereto; (v) Liens relating to the ledger balances, consignments, and other similar arrangements and other Liens (including Liens consisting of Capitalized Lease Obligations and/or purchase money security interests) to secure Debt, provided that (x) the Debt to which the Lien relates is permitted by paragraph 6B(2) and (y) the aggregate amount of Debt (plus, without duplication, the aggregate amount of such ledger balances, consignments and other similar arrangements) secured by such Liens does not exceed at any time 20% of Consolidated Tangible Net Worth; and (vi) Liens consisting of survey exceptions, minor encumbrance easements and rights of way, or zoning or other restrictions as to the use of real properties; provided, however, that such Liens in the aggregate do not materially impair the usefulness of such property in the business of the Company and its Subsidiaries, taken as a whole. 6B(2). DEBT RESTRICTION. Create, incur, assume or suffer to exist any Debt, except: (i) Debt in existence on March 28, 1996; (ii) Debt of any Subsidiary to the Company or to any other Subsidiary; and - 10 - <PAGE> 14 (iii) additional Debt of the Company and/or any Subsidiary subject to the proviso set forth below; PROVIDED, HOWEVER, (x) that the aggregate principal amount of consolidated Debt of the Company and its Subsidiaries shall not exceed at any time an amount equal to 58% of Consolidated Capitalization and (y) Priority Debt shall not exceed at any time an amount equal to 20% of Consolidated Tangible Net Worth. 6B(3). LOANS, ADVANCES AND INVESTMENTS. Make or permit to remain outstanding loans or advances to, or own, purchase or acquire any stock obligations or securities of, or any other interest in, or make any capital contributions to, any Person (collectively, "INVESTMENTS"), except that the Company or any Subsidiary may: (i) make or permit to remain outstanding loans or advances to any Subsidiary; (ii) own, purchase or acquire stock, obligations or securities of a Subsidiary or of a corporation which immediately after such purchase or acquisition will be a Subsidiary; (iii) acquire and own (a) stock of the Company so long as no Default or Event of Default exists after giving effect to the acquisition thereof and (b) stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Company or any Subsidiary; (iv) own, purchase or acquire prime commercial paper, banker's acceptances and certificates of deposit in the United States and Canadian commercial banks (having capital resources in excess of $100 million U.S.), repurchase agreements with respect to the foregoing, in each case due within one year from the date of purchase and payable in the United States in United States dollars, obligations of the United States Government or any agency thereof, and obligations guaranteed by the United States Government; (v) make or permit to remain outstanding relocation, travel and other like advances to officers and employees in the ordinary course of business; (vi) permit to remain outstanding Investments existing on March 28, 1996; and (vii) make other Investments not in excess of 15% of Consolidated Tangible Net Worth. 6B(4). DISPOSITION OF CERTAIN ASSETS. Sell, lease, transfer or otherwise dispose of any assets of the Company or any Subsidiary other than in an Excluded Transfer, unless the net book value of the assets sold, leased, transferred or otherwise disposed of outside of the ordinary course of business in the then most recent 24 month period together with the net book value of any assets then proposed to be sold, leased, transferred or otherwise disposed of outside of the ordinary course of business do not exceed 30% of Consolidated Tangible Net Worth. For purposes of this paragraph and paragraph 6B(2), a sale of the Company's or its Subsidiaries' receivables in connection with financing of the Company or any of its Subsidiaries under a securitization program shall be deemed to constitute Debt of the Company or any such Subsidiary and not a sale of assets. - 11 - <PAGE> 15 6B(5). SALE OF STOCK AND DEBT OF SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock or debt of any Subsidiary, except to the Company or any Subsidiary, and except that all shares of stock and debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may by sold as an entirety for fair market value (as determined in good faith by the Board of Directors of the Company) provided that the net book value of the assets of such Subsidiary, together with the net book value of the assets of the Company and any other Subsidiaries sold during the then most recent 24 month period do not exceed 30% of Consolidated Tangible Net Worth. 6B(6). MERGER AND CONSOLIDATION. Merge with or consolidate into any other company, except (i) Subsidiaries may be merged into the Company, (ii) the Company may merge with another entity provided that the Company is the surviving corporation and no Default or Event of Default under this Agreement would exist after giving effect to the merger or as a result thereof, (iii) any Subsidiary may be merged with or into another corporation provided that the surviving corporation is a Subsidiary (in the case of a merger that does not involve the Company) or the Company and no Default or Event of Default would exist after giving effect to the merger or as a result thereof, or (iv) the Company may be merged into a Subsidiary or a newly created entity organized under the laws of any state of the United States which has conducted no previous business and at the time of such merger shall have no liabilities, if, in either case, the surviving corporation assumes the obligations of the Company under the Notes in a manner reasonably satisfactory to the Required Holders of the Notes and no Default or Event of Default shall exist after giving effect to the merger or as a result thereof. 6B(7). SALE OR DISCOUNT OF RECEIVABLES. Sell with recourse, discount or pledge any of its notes receivable or accounts receivable other than receivables sold constituting Debt under clause (vii) of the definition thereof provided that (i) the aggregate face amount of all such receivables sold shall not exceed $70,000,000, and (ii) after giving effect to such sale, the Company is in compliance with paragraph 6B(2). 6B(8). LEASE OBLIGATIONS. Lease real property or personal property (excluding data processing equipment, vehicles, and other equipment leased in the ordinary course of business) for terms exceeding three years if after giving effect thereto the aggregate amount of all payments in any fiscal year payable by the Company and its Subsidiaries would exceed an aggregate of 15% of Consolidated Tangible Net Worth. 6B(9). RESTRICTED TRANSACTIONS. Deal directly or indirectly with an Affiliate, any Person related by blood, adoption, or marriage to any Affiliate or any Person owning 5% or more of the Company's stock, provided that (i) the Company may deal with such Persons in the ordinary course of business at arm's length, (ii) the Company may make loans or advances to officers permitted by paragraph 6B(3) and (iii) in addition to the foregoing, so long as the stock of the Company is publicly held, the Company may deal with such Persons so long as the aggregate amount of such transactions does not exceed $1,000,000 in any fiscal year. 7. EVENTS OF DEFAULT. 7A. ACCELERATION. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of, or Yield-Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or - 12 - <PAGE> 16 (ii) the Company defaults in the payment of any interest on any Note for more than five (5) days after the date due; or (iii) (A) (1) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (including any obligation under a conditional sale or other title retention agreement entered into as a means of acquiring the subject property, any obligation issued or assumed as full or partial payment for property if secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or (2) the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any of the foregoing obligations are issued or created (or if any other event thereunder or under any such agreement shall occur and be continuing), and the effect of such default under clause (1) above or failure or event under clause (2) above is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $5,000,000; or (B) the Company or any Subsidiary fails to perform or observe any term or condition of any agreement or lease (other than those specified in clause (A) of this paragraph 7A(iii)) beyond any applicable grace period with respect thereto (or if any other event thereunder shall occur and be continuing beyond any applicable grace period), if the effect of such failure or event is to cause, or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity or require the repurchase, redemption or defeasance of such obligation, provided that the aggregate amount of all obligations as to which such failure or other event causing or permitting acceleration or requiring the repurchase, redemption or defeasance shall exceed $10,000,000; or (iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or (v) the Company fails to perform or observe any agreement contained in paragraph 6; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any Responsible Officer obtains actual knowledge thereof; or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any jurisdiction; or - 13 - <PAGE> 17 (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any one or more unpaid or unsatisfied judgments or decrees in excess of $5,000,000 in the aggregate at any one time outstanding is entered against the Company and/or its Subsidiaries, excluding those judgments or decrees (A) that shall have been stayed, vacated or bonded, (B) which are not final and non-appealable, provided that the Company or such Subsidiary is contesting any such judgment or decree in good faith and by appropriate proceedings diligently pursued, (C) for and to the extent the Company or any Subsidiary is insured and with respect to which the insurer specifically has assumed responsibility in writing therefor, (D) for and to the extent the Company or any Subsidiary are otherwise indemnified if the terms of such indemnification are satisfactory to the Required Holders or (E) that have been outstanding for less than 60 days; then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, the holder of any Note (other than the Company or any of its Subsidiaries or Affiliates) may at its option, by notice in writing to the Company, declare such Note to be, and such Note shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) if such event is not an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, the Required Holder(s) of any Series of Notes may at its or their option, by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, provided that the Yield-Maintenance Amount, if any, with respect to each Note of such Series shall be due and payable upon such declaration only if (x) such event is an Event of Default specified in any of clauses (i) to (vi), inclusive, or (xi) or (xii) of this paragraph 7A, (y) the Required Holders of such Series shall have given to the Company, at least 10 Business Days before - 14 - <PAGE> 18 such declaration, written notice stating its or their intention so to declare the Notes of such Series to be immediately due and payable and identifying one or more such Events of Default whose occurrence on or before the date of such notice permits such declaration, and (z) one or more of the Events of Default so identified shall be continuing at the time of such declaration. 7B. RESCISSION OF ACCELERATION. At any time after any or all of the Notes of a Series shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) of such Series may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes of such Series, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes of such Series which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes of such Series or this Agreement (as this Agreement pertains to the Notes of such Series). No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note at the time outstanding. 7D. OTHER REMEDIES. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows: 8A. ORGANIZATION. The Company is a corporation duly organized and existing in good standing under the laws of the State of Ohio, each Subsidiary is a corporation existing and in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. The names and jurisdictions of incorporation of each Subsidiary are set forth on Exhibit F. 8B. FINANCIAL STATEMENTS. The Company has furnished Prudential and each Purchaser of any Accepted Notes with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as of the last day in each of the five fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to - 15 - <PAGE> 19 such Purchaser (other than fiscal years completed within 120 days prior to such date for which audited financial statements have not been released) and a consolidated statement of income, stockholders' equity and statement of cash flows of the Company and its Subsidiaries for each such year, all certified by Deloitte & Touche for such other accounting firm as may be reasonably acceptable to such Purchaser); and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 60 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of income and statements of cash flows fairly present the results of the operations of the Company and its Subsidiaries for the periods indicated. There has been no material adverse change in the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. ACTIONS PENDING. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary or any properties or rights of the Company or any Subsidiary, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to result in any material adverse change in the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8D. OUTSTANDING DEBT. Neither the Company nor any Subsidiary has any Debt outstanding except as permitted by paragraph 6B(2). There exists no payment default or other default in any material respect under the provisions of any instrument evidencing such Debt or of any agreement relating thereto. 8E. TITLE TO PROPERTIES. To the best knowledge of the Responsible Officers based upon reasonable inquiry, the Company has, and each Subsidiary has, good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6B(1). The Company and each Subsidiary enjoys peaceful and undisturbed possession of all leases necessary in any material respect for the conduct of their respective businesses, none of which contains any unusual or burdensome provisions which could be reasonably expected to materially affect or impair the operation of such businesses. All such leases are valid and subsisting and are in full force and effect. 8F. TAXES. To the best knowledge of the Responsible Officers based upon reasonable inquiry, the Company has, and each Subsidiary has, filed all Federal, State and other income tax returns which are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate - 16 - <PAGE> 20 proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, or financial condition. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), nor to the best of the Responsible Officers' knowledge based upon reasonable inquiry, any instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness of the Company or any of its Subsidiaries, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, indebtedness of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in EXHIBIT E attached hereto. 8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than Institutional Investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the registration provisions of any securities or Blue Sky law of any applicable jurisdiction. 8I. REGULATION G, ETC. Neither the Company nor any Subsidiary owns or has any present intention of acquiring any "margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called "margin stock"). The proceeds of the sale of any Private Shelf Notes will be used for the purposes stated in the relevant Request for Purchase. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is currently a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934, as amended, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither - 17 - <PAGE> 21 the Company, any Subsidiary or any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from, or will not involve any transaction which is subject to the prohibitions of, section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of each Purchaser's representation in paragraph 9B. 8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the date of closing with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions of this Agreement. 8L. ENVIRONMENTAL COMPLIANCE. To the best knowledge of the Responsible Officers based upon reasonable inquiry, the Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to comply would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8M. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 8N. DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, or financial condition of the Company and its Subsidiaries taken as a whole and which has not been set forth in this Agreement or in the other documents, certificates and statements furnished to the Purchasers by the Company prior to the date hereof in connection with the transactions contemplated hereby. 9. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser represents as follows: 9A. NATURE OF PURCHASE. Such Purchaser is not acquiring the Notes to be purchased by it hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all times be and remain within its control. - 18 - <PAGE> 22 9B. SOURCE OF FUNDS. No part of the funds used by such Purchaser to pay the purchase price of the Notes being purchased by such Purchaser hereunder constitutes assets allocated to any separate account maintained by such Purchaser. For the purpose of this paragraph 9B, the term "separate account" shall have the meaning specified in section 3 of ERISA. 10. DEFINITIONS. For the purpose of this Agreement, the terms defined in paragraphs 1 and 2 shall have the respective meanings specified therein, and the following terms shall have the meanings specified with respect thereto below: 10A. YIELD-MAINTENANCE TERMS. "CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4A or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "DISCOUNTED VALUE" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (calculated on the same periodic basis as that on which interest on such Note is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" shall mean, with respect to the Called Principal of any Note, the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. "REMAINING AVERAGE LIFE" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. - 19 - <PAGE> 23 "SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4A or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 10B. OTHER TERMS. "ACCEPTANCE" shall have the meaning specified in paragraph 2E. "ACCEPTANCE DAY" shall have the meaning specified in paragraph 2E. "ACCEPTANCE WINDOW" shall have the meaning specified in paragraph 2E. "ACCEPTED NOTE" shall have the meaning specified in paragraph 2E. "AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "AUTHORIZED OFFICER" shall mean (i) in the case of the Company, its chief executive officer, its chief operating officer, its chief financial officer, its corporate secretary, and any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, Allen Weaver, Regional Vice President, Jean Hamilton, President, Len Lillard, Vice President and any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers or a member of its Law Department. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "AVAILABLE FACILITY AMOUNT" shall have the meaning specified in paragraph 2A. "BANKRUPTCY LAW" shall have the meaning specified in clause (viii) of paragraph 7A. "BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City are required or authorized to be closed and (iii) for purposes of paragraph 2C hereof only, a day on which The Prudential Insurance Company of America is not open for business. - 20 - <PAGE> 24 "CANCELLATION DATE" shall have the meaning specified in paragraph 2H(3). "CANCELLATION FEE" shall have the meaning specified in paragraph 2H(3). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles. "CLOSING DAY" shall mean the Initial Closing Day or a Private Shelf Closing Day, as the case may be. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in paragraph 2E. "CONSOLIDATED CAPITALIZATION" shall mean Consolidated Tangible Net Worth of the Company and its Subsidiaries plus Debt. "CONSOLIDATED CURRENT ASSETS" and "CONSOLIDATED CURRENT LIABILITIES" shall mean the consolidated current assets and consolidated current liabilities of the Company and its Subsidiaries each determined in accordance with generally accepted accounting principles, provided that inventory shall be valued at current cost. The current portion of Funded Debt shall not be included in the calculation of Consolidated Current Liabilities. "CONSOLIDATED NET INCOME" shall mean consolidated net income of the Company and its Subsidiaries as determined in accordance with generally accepted accounting principles. "CONSOLIDATED TANGIBLE NET WORTH" shall mean the sum of (i) the par value (or value stated on the books of the Company) of the capital stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries, plus (iii) the amount of paid in capital, less the sum of treasury stock, unamortized debt discount and expense, goodwill, trademarks, trade names, patents, non-current deferred charges and other intangible assets and any write-up of the value of any asset, all determined on a consolidated basis for the Company and all Subsidiaries in accordance with generally accepted accounting principles. "DEBT" shall mean and include, (i) any obligation payable for borrowed money (including capitalized lease obligations but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation); (ii) indebtedness payable which is secured by any lien on property owned by the Company or any Subsidiary; (iii) guarantees, endorsements (other than endorsements of negotiable instruments for collection in the ordinary course of business) and other contingent liabilities (whether direct or indirect) in connection with the obligation, stock or dividends of any Person; (iv) obligations under any contract providing for the making of loans, advances or capital contributions to any Person, in each case in order to enable such Person primarily to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (v) ledger balances, consignments and other similar arrangements but only to the extent required to be shown as debt on the consolidated balance sheet of the Company in accordance with generally accepted accounting principles; and (vi) obligations under any other contract which, in economic effect, is substantially equivalent to a guarantee; all as determined in accordance with generally accepted accounting principles. The term Debt shall not include obligations under the Company's compensation or benefit plans in effect from time to time to the extent not required to be shown as debt on the consolidated - 21 - <PAGE> 25 balance sheet of the Company prepared in accordance with generally accepted accounting principles. "DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2H(2). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "EVENT OF DEFAULT" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FACILITY" shall have the meaning specified in paragraph 2A. "FACILITY FEE" shall have the meaning specified in paragraph 2H(1). "FUNDED DEBT" shall mean with respect to any Person, all Debt of such Person which by its terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable, more than one year from, or is directly or indirectly renewable or extendible at the option of the debtor to a date more than one year (including an option of the debtor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year) from, the date on which Funded Debt is to be determined. "HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as determined by Prudential) most closely matches the duration of such Accepted Note. "HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "INITIAL CLOSING DAY" shall mean October 31, 1992. "INSTITUTIONAL INVESTOR" shall mean Prudential, any Prudential Affiliate or any bank, bank affiliate, financial institution, insurance company, pension fund, endowment or other organization which regularly acquires debt instruments for investment. - 22 - <PAGE> 26 "ISSUANCE PERIOD" shall have the meaning specified in paragraph 2A. "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "NOTES" shall have the meaning specified in paragraph 1. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "PERSON" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "PLAN" shall mean any "employee pension benefit plan" (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "PRIVATE SHELF CLOSING DAY" for any Accepted Note shall mean the Business Day specified for the closing of the purchase and sale of such Private Shelf Note in the Request for Purchase of such Private Shelf Note, provided that if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2G, the Private Shelf Closing Day for such Accepted Note, for all purposes of this Agreement except paragraph 2H(3), shall mean the Rescheduled Closing Day with respect to such Closing. "PRIVATE SHELF NOTE" and "PRIVATE SHELF NOTES" shall have the meanings specified in paragraph 1. "PRUDENTIAL" shall mean The Prudential Insurance Company of America. "PRUDENTIAL AFFILIATE" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates. "PURCHASERS" shall mean, with respect to any Accepted Notes the Persons, either Prudential or a Prudential Affiliate, who is purchasing such Accepted Notes. "REQUEST FOR PURCHASE" shall have the meaning specified in paragraph 2C. "REQUIRED HOLDER(S)" shall mean, with respect to the Notes of any series, at any time, the holder or holders of at least 50.01% of the aggregate principal amount of the Notes of such series outstanding at such time. "RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph 2G. - 23 - <PAGE> 27 "RESPONSIBLE OFFICER" shall mean the chief executive officer, chief operating officer, chief financial officer or chief accounting officer of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SERIES" shall have the meaning specified in paragraph l. "SIGNIFICANT HOLDER" shall mean (i) Prudential or any Prudential Affiliate, so long as Prudential or any Prudential Affiliate shall hold any Note or any amount remains available under the Facility or (ii) any other holder of at least 10% of the aggregate principal amount of any Series of Notes from time to time outstanding. To the extent that any notice or document is required to be delivered to the Significant Holders under this Agreement, such requirement shall be satisfied with respect to Prudential and all Prudential Affiliates by giving notice, or delivery of a copy of any such document, to Prudential (addressed to Prudential and each such Prudential Affiliate). "SUBSIDIARY" shall mean any corporation organized under the laws of any state of the United States or Canada which conducts the major portion of its business in and makes the major portion of its sales to Persons located in the United States and Canada, and 80% of the stock of every class of which, except directors' qualifying shares, is owned by the Company either directly or through Subsidiaries. "TRANSFEREE" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement. "UNUSED FACILITY AMOUNT" shall have the meaning specified in paragraph 2H(1). "VOTING STOCK" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in this Agreement to "general accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles. Notwithstanding the foregoing, if any change in generally accepted accounting principles from those applied in the preparation of the financial statements referred to in paragraph 8B is occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), the initial application of which change is made after the date of this Agreement, and any such change results in a change in the method of calculation of financial covenants, standards or terms found in this Agreement, the parties hereto agree that until such time as the parties hereto agree upon an amendment to this Agreement addressing such change, such financial covenants, standards and terms shall be construed and calculated as though such change had not taken place. The parties hereto agree to enter into good faith negotiations in order to amend the affected provisions so as to reflect such accounting changes with the desired result that the criteria for evaluating the Company's financial - 24 - <PAGE> 28 condition shall be the same after such changes as if such changes had not been made. When used herein, the term "financial statement" shall include the notes and schedules thereto. 11. MISCELLANEOUS. 11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on and any Yield-Maintenance Amount payable with respect to such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 12:00 Noon, New York City local time, on the date due) to (i) the account or accounts specified in the applicable Confirmation of Acceptance (in the case of any Private Shelf Note) or (ii) such other account or accounts in the United States as such Purchaser may designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, such Purchaser will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as each Purchaser has made in this paragraph 11A. 11B. EXPENSES. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with this Agreement (other than with respect to the costs incurred in connection with the Initial Closing Day or any draw under the Facility), the transactions contemplated hereby and any subsequent proposed modification of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by any Purchaser or any Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation costs and expenses incurred in any bankruptcy case. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential - 25 - <PAGE> 29 (and not without the written consent of Prudential) the provisions of paragraph 2 may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2 and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000 except as may be necessary to reflect any amount not evenly divisible by $l,000,000; provided, however, that no such minimum denomination shall apply to Notes issued to, or issued upon transfer by any holder of the Notes to, Prudential or one or more Prudential Affiliates or accounts managed by Prudential or Prudential Affiliates or to any other entity or group of affiliates with respect to which the Notes so issued or transferred shall be managed by a single entity. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Each installment of principal payable on each installment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the installment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any installment or installments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. - 26 - <PAGE> 30 11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion. 11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. 11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. The Company shall not assign its rights under paragraph 2. 11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that Prudential, each Purchaser and each holder of any Note may deliver copies of any financial statements and other documents delivered to it, and disclose any other information disclosed to it, by or on behalf of the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) its directors, officers, employees, agents and professional consultants, (ii) any Purchaser or holder of any Note, (iii) any Institutional Investor to which it offers to sell any Note or any part thereof other than a Competitor, (iv) any Institutional Investor to which it sells or offers to sell a participation in all or any part of any Note other than a Competitor, (v) any Institutional Investor from which it offers to purchase any security of the Company, (vi) any federal or state regulatory authority having jurisdiction over it, (vii) the National Association of Insurance Commissioners or any similar organization, or (viii) any other Person to which such delivery or disclosure may be necessary (a) in compliance with any law, rule, regulation or order applicable to it, (b) in response to any subpoena or other legal process or informal investigative demand, (c) in connection with any litigation to which it is a party or (d) in order to enforce its rights under this Agreement. Subject to the disclosure permitted in the first sentence of this paragraph, Prudential, each such Purchaser, each such holder and any Person designated by any of the foregoing Persons under paragraph 5C each agree to use their best efforts to hold in confidence and not to disclose any Confidential Information. "Confidential Information" shall mean financial statements and reports delivered pursuant to paragraph 5A and other non-public information regarding the Company which was obtained pursuant to paragraph 5B or paragraph 5C; PROVIDED, HOWEVER, that such term shall not include information (x) which was publicly known, or otherwise known to you at the time of disclosure, (y) which subsequently becomes publicly known through no act or omission by you or any of your agents or (z) which otherwise becomes known to you other than through disclosure by the Company to you. For purposes of this paragraph, "Competitors" shall mean any Person which has (1) any of the following Standard Industrial Classification Codes ("SIC Codes"): 5084, 5085, and 5063, or (2) a pension or benefit plan maintained by a Person which has any of the foregoing SIC Codes. Prudential and each - 27 - <PAGE> 31 Purchaser shall be entitled to rely on a certificate from a Person that it is not a "Competitor" of the Company. The Company shall be entitled to modify or supplement in writing the foregoing SIC Codes with the consent of the Required Holders which consent shall not be unreasonably denied. 11I. NOTICES. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) or by hand delivery or telecopy and (i) if to Prudential, addressed to Prudential at the address specified for such communications in the Purchaser Schedule attached hereto or to such other address as Prudential shall have specified in writing to the Company, (ii) if to any Purchaser (other than Prudential), addressed to such Purchaser at the address specified in the Confirmation of Acceptance (in the case of any Private Shelf Notes), or at such other address as any Purchaser shall have specified in writing to the Company, and (iii) if to any other holder of any Note, addressed to such other holder at such address as such other holder shall have specified in writing to the Company or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such Note which shall have so specified an address to the Company, and (iv) if to the Company, addressed to it at Bearings, Inc., 3600 Euclid Avenue, Cleveland, Ohio 44115, Attention: John R. Whitten, Vice President-Finance and Treasurer, or at ouch other address as the Company shall have specified to the holder of each Note in writing; provided, however, that any such communication to the Company may also, at the option of the Person sending such communication, be delivered by any other means either to the Company at its address specified above or to any officer of the Company. 11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day. 11K. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11L. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11M. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the reasonable judgment (exercised in good faith) of the Person or Persons making such determination. 11N. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF ILLINOIS. - 28 - <PAGE> 32 11O. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11P. BINDING AGREEMENT. When this Agreement is executed and delivered by the Company and Prudential, it shall become a binding agreement between the Company and Prudential. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance. Very truly yours, BEARINGS, INC. By: /s/ John R. Whitten Title: Vice President & Treasurer The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Leonard H. Lillard IV - ------------------------------- Vice President - 29 - <PAGE> 33 PURCHASER SCHEDULE Bearings, Inc. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (1) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Three Gateway Center 100 Mulberry Street Newark, New Jersey 07102-4077 Attention: Investment Administration Unit Telecopy: (201) 802-8055 (2) Address for all other communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group 9700 Sears Tower 233 South Wacker Drive Chicago, Illinois 60606 Attention: Regional Vice President Telecopy: (312) 454-8222 (3) Recipient of telephonic prepayment notices: Manager, Asset Management Unit Telephone: (201) 802-6429 Telecopy: (201) 802-8055 (4) Tax Identification No.: 22-1211670 - 30 - <PAGE> 34 EXHIBIT A --------- [FORM OF PRIVATE SHELF NOTE] BEARINGS, INC. SENIOR NOTE (Fixed Rate) SERIES ________ No. _________ ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: 1 FINAL MATURITY DATE: PRINCIPAL INSTALLMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, BEARINGS, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Ohio, hereby promises to pay to ______________________________, or registered assigns, the principal sum of ______________________________ DOLLARS ton the Final Maturity Date specified above] [, payable in installments on the Principal Installment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest, and any overdue payment of any Yield-Maintenance Amount (as defined in the Note Agreement referred to below), payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% plus the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal of, and interest on, and any Yield-Maintenance Amount payable with respect to, this Note are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Note Purchase and Private Shelf Agreement, dated as of October 31, 1992 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each "Prudential Affiliate" (as defined in the Agreement) which becomes a party thereto, on the other hand, and is entitled to the benefits thereof. As -------- 1 Insert "April 30, July 30, October 30 and January 30" if interest payments are quarterly. A-1 <PAGE> 35 provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the law of such State. BEARINGS, INC. By: ---------------------------- Title: A-1 <PAGE> 36 EXHIBIT B [FORM OF REQUEST FOR PURCHASE] BEARINGS, INC. Reference is made to the Note Purchase and Private Shelf Agreement (the "Agreement"), dated as of October 31, 1992, between Bearings, Inc. (the "Company"), and The Prudential Insurance Company of America and each Prudential Affiliate which becomes a party thereto. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Pursuant to Paragraph 2C of the Agreement, the Company hereby makes the following Request for Purchase: 1. Aggregate principal amount of the Notes covered hereby (the "Notes") .......................... $_________________ 2. Individual specifications of the Notes: Principal Final Installment Interest Principal Maturity Dates and Payment Amount * Date Amounts Period - --------- -------- ----------- -------- 3. Use of proceeds of the Notes: 4. Proposed day for the closing of the purchase and sale of the Notes: ______________, or, if earlier, the last Business Day which is no more than ten (10) days after the Acceptance Day for the Notes covered by this Request for Purchase. - -------- * Minimum principal amount of $____________ B-2 <PAGE> 37 5. The purchase price of the Notes is to be transferred to: Name, Address Name and and ABA Routing Number of Telephone No. Number of Bank Account of Bank Officer - -------------- --------- --------------- 6. The Company certifies (a) that the representations and warranties contained in paragraph 8 of the Agreement are true on and as of the date of this Request for Purchase except to the extent of changes caused by the transactions contemplated in the Agreement and (b) that there exists on the date of this Request for Purchase no Event of Default or Default. Dated: BEARINGS, INC. By:________________________________ Authorized Officer B-3 <PAGE> 38 EXHIBIT C --------- [FORM OF CONFIRMATION OF ACCEPTANCE] BEARINGS, INC. Reference is made to the Note Purchase and Private Shelf Agreement (the "Agreement"), dated as of October 31, 1992 between Bearings, Inc. (the "Company") and The Prudential Insurance Company of America. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Prudential or the Prudential Affiliate which is named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2E and 2G of the Agreement relating to the purchase and sale of such Notes. Pursuant to paragraph 2E of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed: I. Accepted Notes: Aggregate principal amount $_____________ (A) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal installment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (B) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal installment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule [(C), (D)....... same information as above.] C-1 <PAGE> 39 II. Closing Day: [Must be within 10 days of the date of this Confirmation of Acceptance.] Dated: BEARINGS, INC. By:______________________________ Title:___________________________ [THE PRUDENTIAL INSURANCE COMPANY OF AMERICA] By:_______________________________ Vice President [PRUDENTIAL AFFILIATE] By:_______________________________ Vice President C-2 <PAGE> 40 Exhibit D-1 ----------- [TH&F LETTERHEAD] October 31, 1992 The Prudential Insurance Company of America c/o Prudential Capital Group 9700 Sears Tower 233 South Wacker Drive Chicago, IL 60606 Dear Sirs: We have acted as counsel for Bearings, Inc., an Ohio corporation (the "Company"), in connection with the Note Purchase and Private Shelf Facility, dated as of October 31, 1992, between the Company and you (the Agreement). All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. In this connection, we have examined such certificates of public officials, certificates of officers of the Company and copies certified to our satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as we have deemed relevant and necessary as a basis for our opinion hereafter set forth. We have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, we have also relied upon the representation made by you in paragraph 9A of the Agreement. With respect to the opinion expressed in para graph 4 below, we have relied solely upon the opinion of Robert C. Stinson, Vice President-General Counsel of the Company and upon our review of the Company's Amended and Restated Articles of Incorporation and Code of Regulations. Based on the foregoing, it is our opinion that: 1. The Company is validly existing in good standing under the laws of the State of Ohio. The Company has the corporate power to carry on its business as now being conducted. 2. The Agreement has been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and is a valid obligation of the Company, legally binding upon and enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, ask amended. <PAGE> 41 The Prudential Insurance Company of America Page 2 4. Insofar as is known to us after having made due inquiry with respect thereto, the execution and delivery of the Agreement, the offering of the Notes and fulfillment of and compliance with the provisions of the Agreement do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or any mortgage, deed of trust, indenture, loan agreement or other material agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree known to us to which the Company or any of its Subsidiaries is a party or otherwise subject. The opinions set forth above are subject to the following qualifications and assumptions: A. We are admitted to practice in the State of Ohio and have reviewed and relied upon Ohio law and the federal laws of the United States only, and we have undertaken no review of the laws or applications of laws of any other jurisdiction. Accordingly, this opinion is limited to the laws and application thereof of Ohio and the federal laws of the United States. For purposes of this opinion, we have assumed that Illinois law is substantively equivalent to Ohio law although we have not reviewed Illinois law. B. As used in this letter, the phrases "to our knowledge" or "known to us" with reference to matters of fact, mean that after inquiries of officers of the Company and on the basis of information that has come to our attention during the course of our representation of the Company in connection with the Agreement, we find no reason to believe that the opinions expressed herein are factually incorrect; beyond that we have made no independent factual investigations for the purpose of rendering this opinion. C. We have assumed that the Agreement is a valid, binding and enforceable obligation of Prudential which has been duly authorized, executed and delivered by it. D. We express no opinion as to the availability of any specific remedy upon breach of any of the agreements, documents or obligations referred to herein beyond the practical realization of the benefits intended to be provided to you thereby. In addition, we express no opinion with respect to the recoverability of attorneys' fees pursuant to any provision requiring the payment thereof. Very truly yours, <PAGE> 42 Exhibit D-2 ----------- [BEARINGS, INC. LETTERHEAD] [Dates of Draws] The Prudential Insurance Company of America c/o Prudential Capital Group 9700 Sears Tower 233 South Wacker Drive Chicago, IL 60606 [Names and addresses of other purchasers] Dear Sir: I am the general counsel of Bearings, Inc., an Ohio corporation (the "Company"), and have acted as counsel for the Company in connection with the $80,000,000 Maximum Aggregate Principal Amount Private Shelf Facility, dated as of October 29, 1992, between the Company and you (the "Agreement.), pursuant to which the Company has issued to you today its Series _____ Private Shelf Notes in the aggregate principal amount of $______________ (the "Notes"). All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. In this connection, I have examined such certificates of public officials, certificates of officers of the Company and copies certified to my satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as I have deemed relevant and necessary as a basis for our opinion hereafter set forth. We have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, I have also relied upon the representation made by you in paragraph 9A of the Agreement. Based on the foregoing, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Ohio. Each Subsidiary is a corporation validly existing in good standing under the laws of its jurisdiction of incorporation. The Company has, and each Subsidiary has, the corporate power to carry on its business as now being conducted. 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and is a valid obligation of the Company, legally binding upon and enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes <PAGE> 43 The Prudential Insurance Company of America Page 2 under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. Insofar as is known to me after having made due inquiry with respect thereto, the execution and delivery of the Agreement, the offering of the Notes and fulfillment of and compliance with the provisions of the Agreement do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or any mortgage, deed of trust, indenture, loan agreement or other material agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree known to me to which the Company or any of its Subsidiaries is a party or otherwise subject. The execution and delivery of the Agreement, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to me after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree known to me to which the Company or any of its Subsidiaries is a party or otherwise subject. The opinions set forth above are subject to the following qualifications and assumptions: A. I am admitted to practice in the State of Ohio and have reviewed and relied upon Ohio law and the federal laws of the United States only, and I have undertaken no review of the laws or applications of laws of any other jurisdiction. Accordingly, this opinion is limited to the laws and application thereof of Ohio and the federal laws of the United States. For purposes of this opinion, I have assumed that Illinois law is substantively equivalent to Ohio law although I have not reviewed Illinois law. B. As used in this letter, the phrase known to men with reference to matters of fact, mean that after inquiries of officers of the Company and on the basis of information that has come to my attention during the course of our representation of the Company in connection with the Agreement, I find no reason to believe that the opinions expressed herein are factually incorrect; beyond that I have made no independent factual investigations for the purpose of rendering this opinion. <PAGE> 44 The Prudential Insurance Company of America Page 3 C. I have assumed that the Agreement is a valid, binding and enforceable obligation of Prudential which has been duly authorized, executed and delivered by it. D. I express no opinion as to the availability of any specific remedy upon breach of any of the agreements, documents or obligations referred to herein beyond the practical realization of the benefits intended to be provided to you thereby. In addition, I express no opinion with respect to the recoverability of attorneys' fees pursuant to any provision requiring the payment thereof. Very truly yours, <PAGE> 45 EXHIBIT E --------- LIST OF AGREEMENTS RESTRICTING DEBT Director borrowing resolutions in effect from time to time may limit the total amount of indebtedness which the Company is authorized to incur. Presently those resolutions limit total borrowings to $140,000,000 (with temporary authority up to $190,000,000 through 12/31/92). Other than that none. <PAGE> 46 EXHIBIT F --------- LIST OF SUBSIDIARIES Active - ------ Dixie Bearings, Incorporated Bruening Bearings, Inc. King Bearing, Inc. Inactive - -------- Bearings, Inc. (TN) Bearings Continental, Inc. Bearings Pan American, Inc. Bearing Sales & Service, Inc. The Ohio Ball Bearing Company Industrial Distributions, Inc. Bearings, Inc. (AL) <PAGE> 47 EXHIBIT G --------- LIST OF ENCUMBRANCES 1. Possible liens of landlords for rents arising under applicable state laws. 2. Restrictions, easements, reservations and other encumbrances on real properties owned by the Company or any Subsidiary, none of which materially interfere with the operations of such properties. 3. Liens arising out of Ledger Balance Inventories, consignments and similar arrangements with suppliers. 4. Rights, if any, of creditors of customers to inventories on consignment with customers where no UCC filing has been made by the Company. 5. Financing statements, if any, filed in connection with equipment leases, none of which are material to the financial condition to the Company or its subsidiaries. 6. Guarantee by Company to Dunn & Bradstreet and its customers with respect to debt of subsidiaries. 7. Statutory liens, including mechanics liens, on vehicles, real estate and other equipment, none of which are material to the financial condition of the Company or its subsidiaries. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.A <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10(A) <TEXT> <PAGE> 1 Exhibit 10(a) APPLIED INDUSTRIAL TECHNOLOGIES, INC. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN (JANUARY 1, 1997 RESTATEMENT) <PAGE> 2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN (JANUARY 1, 1997 RESTATEMENT) TABLE OF CONTENTS ----------------- <TABLE> <CAPTION> Section Page ------- ---- ARTICLE I DEFINITIONS <S> <C> <C> 1.1 Definitions ................................................................... 2 1.2 Construction .................................................................. 4 ARTICLE II ELIGIBILITY FOR PLAN PARTICIPATION 5 ARTICLE III SUPPLEMENTAL CONTRIBUTIONS 3.1 Supplemental 401(k) Contributions ............................................. 6 3.2 Supplemental Matching Contributions ........................................... 6 3.3 Vesting of Supplemental Matching Contributions................................................................ 6 3.4 Years of Vesting Service....................................................... 7 ARTICLE IV SEPARATE ACCOUNTS 4.1 Types of Separate Accounts .................................................... 8 4.2 Adjustment of Separate Accounts ............................................... 8 4.3 Investment Elections for Supplemental 401(k) Contributions......................................................... 8 4.4 Investment Change of Future Supplemental 401(k) Contributions......................................................... 9 4.5 Election to Transfer Invested Past Supplemental 401(k) Contributions............................................ 9 4.6 Investment of Matching Contributions........................................... 9 </TABLE> -i- <PAGE> 3 ARTICLE V DISTRIBUTION <TABLE> <S> <C> <C> 5.1 Distribution Upon Termination of Employment ................................... 10 5.2 Method of Distribution ........................................................ 10 5.3 Times of Payments.............................................................. 10 5.4 Hardship Distribution.......................................................... 11 5.5 Distributions Upon Death....................................................... 11 5.6 Taxes.......................................................................... 11 ARTICLE VI BENEFICIARIES 13 ARTICLE VII ADMINISTRATIVE PROVISIONS 7.1 Administration ................................................................ 14 7.2 Powers and Authorities of the Committee ....................................... 14 7.3 Indemnification ............................................................... 14 7.4 Section 16b Procedures......................................................... 15 ARTICLE VIII AMENDMENT AND TERMINATION 16 ARTICLE IX MISCELLANEOUS 9.1 Non-Alienation of Benefits .................................................... 17 9.2 Payment of Benefits to Others ................................................. 17 9.3 Plan Non-Contractual .......................................................... 17 9.4 Funding ....................................................................... 18 9.5 Claims of Other Persons ....................................................... 18 9.6 Severability .................................................................. 18 9.7 Governing Law ................................................................. 18 </TABLE> -ii- <PAGE> 4 APPLIED INDUSTRIAL TECHNOLOGIES, INC. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN (JANUARY 1, 1997 RESTATEMENT) WHEREAS, Bearings, Inc. established the Bearings, Inc. Supplemental Defined Contribution Plan, effective as of January 1, 1996, for the benefit of a select group of management or highly compensated employees; and WHEREAS, the Bearings, Inc. Supplemental Defined Contribution Plan was amended subsequently on two occasions; and WHEREAS, effective as of January 1, 1997, Bearings, Inc. changed its name to Applied Industrial Technologies, Inc.; and WHEREAS, it is desired to amend and restate the Bearings, Inc. Supplemental Defined Contribution Plan to reflect such plan sponsor name change; NOW, THEREFORE, effective as of January 1, 1997, the Bearings, Inc. Supplemental Defined Contribution Plan is hereby renamed the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan and is amended and restated in the manner hereinafter set forth: <PAGE> 5 ARTICLE I DEFINITIONS ----------- 1.1 DEFINITIONS. Except as otherwise required by the context, the terms used in the Plan shall have the meaning hereinafter set forth. (1) The term "AFFILIATE" shall mean any member of a controlled group of corporations (as determined under Section 414(b) of the Code) of which the Company is a member, any member of a group of trades or businesses under common control (as determined under Section 414(c) of the Code) with the Company, any member of an affiliated service group (as determined under Section 414(m) of the Code) of which the Company is a member, and any other entity which is required to be aggregated with the Company pursuant to the provisions of Section 414(o) of the Code. (2) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article VI, is entitled to receive a distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full. (3) The term "BOARD" shall mean the Board of Directors of the Company. (4) The term "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (5) The term "COMPANY" shall mean, for any period prior to January 1, 1997, Bearings, Inc., and for any period after December 31, 1996, Applied Industrial Technologies, Inc. its corporate successors, and the surviving corporation resulting from any merger of Applied Industrial Technologies, Inc. with any other corporation or corporations. (6) The term "COMPANY STOCK" shall mean the common stock of the Company. (7) The term "COMPANY STOCK FUND" shall mean the Fund consisting primarily of Company Stock. - 2 - <PAGE> 6 (8) The term "COMMITTEE" shall mean the Applied Industrial Technologies, Inc. Supplemental Excess Defined Contribution Plan Committee (formerly the Bearings, Inc. Supplemental Excess Defined Contribution Plan Committee) which shall be comprised of the same individuals who serve on the administrative committee for the Retirement Savings Plan and which shall administer the Plan in accordance with the provisions of Article VII. (9) The term "COMPENSATION" shall mean the total wages which are paid to a Participant during a Plan Year by an Employer for his services as an Employee while he is a Participant, including incentive compensation, commissions, bonuses, and elective contributions made on behalf of such Participant under the Plan or any other plan that are not includible in gross income under Sections 125 and 402(e)(3) of the Code, but excluding moving or educational reimbursement expenses, amounts deferred under any non-qualified deferred compensation program, amounts realized from the exercise of stock options, imputed income attributable to any fringe benefit, and any amounts received in lieu of benefits under a plan that meets the requirements of Section 125 of the Code. (10) The term "COMPREHENSIVE PLAN" shall mean the Applied Industrial Technologies, Inc. Deferred Compensation and Supplemental Benefit Plan (formerly known as the Bearings, Inc. Comprehensive Deferred Compensation and Supplemental Benefit Plan). (11) The term "FUND" shall mean any of the funds maintained for the investment of Plan assets in accordance with the provisions of Article VII. (12) The term "PARTICIPANT" shall mean any employee of the Company or an Affiliate, who participates in the Plan pursuant to Article II of the Plan. (13) The term "PLAN" shall mean the Applied Industrial Technologies, Inc. Supplemental Defined Contribution Plan (formerly known as the Bearings, Inc. Supplemental Defined Contribution Plan) as amended and restated herein, effective as of January 1, 1997, with all amendments, modifications and supplements hereinafter made. The Plan is part of the Comprehensive Plan and listed on Exhibit A attached thereto. (14) The term "RETIREMENT SAVINGS PLAN" shall mean the Applied Industrial Technologies, Inc. Retirement Savings Plan - 3 - <PAGE> 7 (formerly the Bearings, Inc. Retirement Savings Plan), as amended from time to time. (15) The term "SEPARATE ACCOUNT" shall mean each of the accounts maintained in the name of a Participant pursuant to Section 4.1 of the Plan. (16) The term "SUPPLEMENTAL MATCHING ACCOUNT" shall mean the Separate Account to which Supplemental Matching Contributions are credited in accordance with the provisions of Sections 3.2 and 4.1 of the Plan. (17) The term "SUPPLEMENTAL MATCHING CONTRIBUTIONS" shall mean the contributions credited to a Participant under the Plan pursuant to Section 3.2. (18) The term "SUPPLEMENTAL 401(K) CONTRIBUTION ACCOUNT" shall mean the Separate Account to which Supplemental 401(k) Contributions are credited in accordance with the provisions of Sections 3.1 and 4.1 of the Plan. (19) The term "SUPPLEMENTAL 401(K) CONTRIBUTIONS" shall mean the contributions credited to a Participant under the Plan pursuant to Section 3.1. (20) The term "TRUST" shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Trust Agreement (formerly known as the Bearings, Inc. Supplemental Executive Retirement Benefits Trust Agreement). (21) The term "VALUATION DATE" shall mean each business day of each calendar month. (22) The term "YEARS OF VESTING SERVICE" shall mean service credited to a Participant under the provisions of Section 3.4. 1.2 CONSTRUCTION. Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. - 4 - <PAGE> 8 ARTICLE II ELIGIBILITY FOR PLAN PARTICIPATION ---------------------------------- Any select management or highly compensated employee of the Company or an Affiliate who is determined to be highly compensated pursuant to procedures established by the Company and whose contributions under the Retirement Savings Plan are limited due to the provisions of Section 401(a)(17), Section 401(k), Section 401(m), Section 402(g), or Section 415 of the Code, shall become a Participant in the Plan upon the filing of a written election in the form and manner prescribed by the Company to reduce his Compensation for the purpose of making Supplemental 401(k) Contributions under the Plan. - 5 - <PAGE> 9 ARTICLE III SUPPLEMENTAL CONTRIBUTIONS -------------------------- 3.1 SUPPLEMENTAL 401(K) CONTRIBUTIONS. The Supplemental 401(k) Contribution Account of each Participant shall be credited with Supplemental 401(k) Contributions equal to the amount deferred from his Compensation in accordance with a completed Compensation reduction authorization with respect to the Plan pursuant to procedures established by the Company. Such Compensation reduction authorization may be revised with respect to future Supplemental 401(k) Contributions as of any January 1 or July 1, provided that such revision occurs prior to such effective date. 3.2 SUPPLEMENTAL MATCHING CONTRIBUTIONS. The Supplemental Matching Account of each Participant who is employed by the Company or an Affiliate shall be credited each year with Supplemental Matching Contributions equal to the amount with respect to which Matching Contributions under the Retirement Savings Plan are limited for such year due to the requirements of the provisions of Sections 401(k) and 401(m) of the Code. 3.3 VESTING OF SUPPLEMENTAL MATCHING CONTRIBUTIONS. A Participant shall become vested in the balance of his Supplemental Matching Account pursuant to the following schedule. <TABLE> <CAPTION> Years Of Vesting Service Percentage Vested ------------------------ ----------------- <S> <C> Less than one 0% One but less than two 25% Two but less than three 50% Three but less than four 75% Four or more 100% </TABLE> - 6 - <PAGE> 10 Notwithstanding the foregoing, a Participant who is employed by the Company or an Affiliate shall become 100 percent vested in his Supplemental Matching Account upon the earlier of: (i) attainment of age 65, (ii) disability, (iii) death, or (iv) a Change of Control. 3.4 YEARS OF VESTING SERVICE. For purposes of determining the vested interest of a Participant in his Supplemental Matching Account, a Participant shall be credited with Years of Vesting Service equal to the Years of Service with which he is credited under the Retirement Savings Plan. - 7 - <PAGE> 11 ARTICLE IV SEPARATE ACCOUNTS ----------------- 4.1 TYPES OF SEPARATE ACCOUNTS. Each Participant shall have established in his name Separate Accounts which shall reflect the type of contributions credited to him pursuant to Article III. Such Separate Accounts shall be as follows: (a) a Supplemental 401(k) Account which shall reflect the Supplemental 401(k) Contributions credited to a Participant pursuant to Section 3.1 as well as any amount transferred from the King Bearing, Inc. Nonqualified Supplemental Executive Retirement Plan and any adjustment thereto pursuant to Section 4.2; and (b) a Supplemental Matching Account which shall reflect the Supplemental Matching Contributions credited to a Participant pursuant to Section 3.2 and any adjustment thereto pursuant to Section 4.2. 4.2 ADJUSTMENT OF SEPARATE ACCOUNTS. The Separate Accounts of a Participant shall be adjusted as of each Valuation Date to reflect the deemed investment of such Separate Accounts in the Funds as determined by the Committee. 4.3 INVESTMENT ELECTIONS FOR SUPPLEMENTAL 401(K) CONTRIBUTIONS. Each Participant, upon becoming a Participant under the Plan in accordance with the provisions of Article II, shall make an investment election directing the manner in which his Supplemental 401(k) Contributions shall be deemed to be invested in the Funds. The investment election of a Participant shall specify a combination, which in the aggregate equals 100 percent and conforms with procedures prescribed by the Company, indicating in which Funds his Supplemental 401(k) Contributions shall be deemed to be invested. The investment option so elected by a Participant shall remain in effect until he changes his investment election pursuant to Section 4.4 or receives distribution of his Separate Accounts. - 8 - <PAGE> 12 4.4 INVESTMENT CHANGE OF FUTURE SUPPLEMENTAL 401(K) CONTRIBUTIONS. Each Participant may elect to change the manner in which contributions credited to his Supplemental 401(k) Contribution Account are to be deemed invested. Any such change in the investment election of a Participant with respect to his Supplemental 401(k) Contributions shall specify a combination among the Funds which in the aggregate equals 100 percent. Such election shall be made in the manner specified by the Company and in accordance with procedures prescribed by the Company. The investment option so elected by a Participant shall remain in effect until he makes another election change with respect to future contributions in accordance with the provisions of the Plan. Any such election which directs a change in an investment election heretofore in effect shall become effective in accordance with procedures prescribed by the Company. Amounts credited to the Separate Accounts of such Participant as of any date prior to the date on which such change is to become effective shall not be affected by any such change. 4.5 ELECTION TO TRANSFER INVESTED PAST SUPPLEMENTAL 401(K) CONTRIBUTIONS. Subject to any procedures adopted by the Company, a Participant may elect to have the balance of his Supplemental 401(k) Contribution Account transferred from the Fund or Funds in which it is deemed invested to one or more of the other Funds. Any such election shall be made in accordance with procedures prescribed by the Company. Upon receipt of such election, the Company shall cause the transfer of such amount as of the effective date of the election of the Participant from the Fund or Funds in which it is deemed invested to the Fund or Funds so elected and designated by the Participant. 4.6 INVESTMENT OF MATCHING CONTRIBUTIONS. All Matching Contributions shall be deemed to be invested in the Company Stock Fund. - 9 - <PAGE> 13 ARTICLE V DISTRIBUTION ------------ 5.1 DISTRIBUTION UPON TERMINATION OF EMPLOYMENT. The entire balance credited to a Participant's Separate Accounts shall be distributed to such Participant or his Beneficiary after termination of such Participant's employment with the Company or an Affiliate. The value of any Separate Account deemed to be invested in Company Stock shall be distributed in Company Stock or in cash pursuant to the election of the Participant and the value of any Separate Account deemed to be invested in a Fund, other than one consisting of Company Stock, shall be distributed in cash. 5.2 METHOD OF DISTRIBUTION. Except as otherwise may be provided in Sections 5.3 and 5.4, the benefits payable under the Plan from a Participant's Separate Accounts shall be paid to the Participant, or his Beneficiary, if applicable, in a single sum cash payment or in equal annual installment payments over a period of not more than three years and shall be determined as of the most recent Valuation Date. 5.3 TIME OF PAYMENTS. Except as otherwise may be provided in the Trust or as provided in Section 5.4, distribution of the value of a Participant's Separate Accounts shall commence upon a date which is not more than 30 days after the earlier of (i) the Participant's termination of employment due to resignation, retirement, death or other reason, or (ii) the date he receives his interest under the Retirement Savings Plan. Notwithstanding any other provision of the Plan to the contrary, a Participant, subject to approval of the Company, may elect to change the manner and the time of distribution of the value of his Separate Accounts during the period which commences no earlier than 90 - 10 - <PAGE> 14 days prior to his termination of employment and terminates no later than 30 days prior to his termination of employment. 5.4 HARDSHIP DISTRIBUTION. Prior to the time the Separate Accounts of a Participant become payable under Section 5.3, the Company, in its sole discretion, may elect to distribute all or a portion of the Participant's Separate Accounts on account of severe financial hardship of the Participant. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Company determines that the Participant requires a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of his or her family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and the income taxes resulting from such distribution. 5.5 DISTRIBUTIONS UPON DEATH. Upon the death of a Participant, the balance of his Separate Accounts shall be paid to his Beneficiary pursuant to the provisions of Section 5.3 and Article VI. 5.6 TAXES. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Company shall cause the withholding of such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. In addition, it is the intention of the Company that benefits credited to a Participant under the Plan shall not be included in the gross income of the Participants or their Beneficiaries until such time as benefits are distributed under the - 11 - <PAGE> 15 provisions of the Plan. If, at any time, it is determined that benefits under the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to the Participant's Separate Accounts which become so taxable shall be distributable immediately to him; provided, however, that in no event shall amounts so payable to a Participant exceed the value of his Separate Accounts. - 12 - <PAGE> 16 ARTICLE VI BENEFICIARIES ------------- In the event a Participant dies before his interest under the Plan in his Separate Accounts has been distributed in full, any remaining interest shall be distributed pursuant to Article V to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Company. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his beneficiary under the Retirement Savings Plan shall be his Beneficiary for Plan purposes. - 13 - <PAGE> 17 ARTICLE VII ADMINISTRATIVE PROVISIONS ------------------------- 7.1 ADMINISTRATION. The Plan shall be administered by the Company in a manner that is generally consistent with the administration of the Retirement Savings Plan, as from time to time amended, except that the Plan shall be administered as an unfunded plan not intended to meet the qualification requirements of Section 401 of the Code. 7.2 POWERS AND AUTHORITIES OF THE COMMITTEE. The Company shall have full power and authority to interpret, construe and administer the Plan and its interpretations and construction hereof, and actions hereunder, including the timing, form, amount or recipient of any payment to be made hereunder, shall be binding and conclusive on all persons for all purposes. The Company may delegate any of its powers, authorities, or responsibilities for the operation and administration of the Plan to any person or to the Committee so designated in writing by it and may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his own willful misconduct or lack of good faith. Members of the Committee shall not participate in any action or determination regarding their own benefits, if any, payable under the Plan. 7.3 INDEMNIFICATION. In addition to whatever rights of indemnification a member of the Committee, or any other person or persons to whom any power, authority, or responsibility is delegated pursuant to Section 7.2, may be entitled under the articles of incorporation, regulations, or by-laws of the Company, under any provision of law, or under - 14 - <PAGE> 18 any other agreement, the Company shall satisfy any liability actually and reasonably incurred by any such member or such other person or persons, including expenses, attorneys' fees, judgments, fines, and amounts paid in settlement, in connection with any threatened, pending, or completed action, suit, or proceeding which is related to the exercise or failure to exercise by such member or such other person or persons of any of the powers, authority, responsibilities, or discretion provided under the Plan. 7.4 SECTION 16B PROCEDURES. In conjunction with rules promulgated by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, the Company has established Section 16b Procedures which affect certain transactions under the Plan involving Employer Securities held for the benefit of an Officer. Such Procedures, which are hereby incorporated into the Plan shall constitute for all purposes a part of the Plan. In the event that the Procedures conflict with any other provision of the Plan, the Procedures shall override such other provision and shall be controlling. For purposes of this Section 7.4, the following terms shall have the meaning hereinafter set forth. (a) The term "Employer Security" shall mean any qualifying employer security as defined in Section 407(d)(5) of ERISA which is also an equity security as defined under the Securities Exchange Act of 1934, as amended. (b) The term "Officer" shall mean any person who is designated as an "Officer" of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. (c) The term "Section 16b Procedures" or "Procedures" shall mean the Administrative Procedures Applicable to Officers and Directors Under Employee Benefit Plans Maintained by Applied Industrial Technologies, Inc., effective as of January 1, 1997, with all amendments and modifications thereafter made. - 15 - <PAGE> 19 ARTICLE VIII AMENDMENT AND TERMINATION ------------------------- The Company reserves the right to amend or terminate the Plan at any time by action of the Board; provided, however, that no such action shall adversely affect any Participant who is receiving benefits under the Plan or whose Separate Accounts are credited with any contributions thereto, unless an equivalent benefit is provided under another plan or program sponsored by the Company or an Affiliate. - 16 - <PAGE> 20 ARTICLE IX MISCELLANEOUS ------------- 9.1 NON-ALIENATION OF BENEFITS. No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise be received by anyone else or would not be enjoyed by him, his interest in all such benefits shall automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Board may select. 9.2 PAYMENT OF BENEFITS TO OTHERS. If any Participant or Beneficiary to whom a benefit is payable is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, or sister, or any other individual deemed by the Board to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 9.2 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid. 9.3 PLAN NON-CONTRACTUAL. Nothing herein contained shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. - 17 - <PAGE> 21 9.4 FUNDING. The Company may cause Plan benefits to be paid from the Trust, which is a grantor trust that provides for full funding of Plan benefits in the event of a potential change in control or a change in control. Subject to the provisions of the trust agreement governing such trust fund, the obligation of the Company under the Plan to provide a Participant or a Beneficiary with a benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company. 9.5 CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no event be construed as giving any person, firm or corporation any legal or equitable right as against the Company, its officers, employees, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan. 9.6 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. - 18 - <PAGE> 22 9.7 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. Executed at Cleveland, Ohio, this 11th day of February, 1997. APPLIED INDUSTRIAL TECHNOLOGIES, INC. By: /S/ John C. Robinson -------------------------------- Title: Vice Chairman And: /S/ Fred D. Bauer -------------------------------- Title: Assistant Secretary - 19 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.B <SEQUENCE>5 <DESCRIPTION>EXHIBIT 10(B) <TEXT> <PAGE> 1 Exhibit 10(b) APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN (JANUARY 1, 1997 RESTATEMENT) <PAGE> 2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN (JANUARY 1, 1997 RESTATEMENT) TABLE OF CONTENTS ----------------- <TABLE> <CAPTION> Section Page ------- ---- ARTICLE I DEFINITIONS <S> <C> <C> 1.1 Definitions............................................2 1.2 Construction...........................................4 ARTICLE II ELECTIONS BY ELIGIBLE EMPLOYEES 2.1 Election to Defer......................................5 2.2 Effectiveness of Elections.............................5 ARTICLE III ACCOUNTS AND INVESTMENTS 3.1 Establishment of Accounts..............................6 3.2 Amount of Deferrals....................................6 3.3 Adjustment of Accounts.................................6 ARTICLE IV DISTRIBUTION OF ACCOUNTS 4.1 Method of Distribution.................................7 4.2 Time of Payments.......................................7 4.3 Hardship Distribution..................................7 4.4 Distributions Upon Death...............................8 4.5 Taxes..................................................8 ARTICLE V BENEFICIARIES 9 ARTICLE VI MISCELLANEOUS 6.1 Amendment and Termination of the Plan.................10 6.2 Non-Alienation........................................10 6.3 Payment of Benefits to Others.........................10 6.4 Plan Non-Contractual..................................10 6.5 Taxability of Plan Benefits...........................11 6.6 Funding...............................................11 6.7 Section 16b Procedures................................11 </TABLE> -i- <PAGE> 3 <TABLE> <S> <C> <C> 6.8 Severability....................................12 6.9 Governing Law...................................12 </TABLE> -ii- <PAGE> 4 APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN (JANUARY 1, 1997 RESTATEMENT) WHEREAS, the Bearings, Inc. Deferred Compensation Plan was established, effective as of July 1, 1993, by Bearings, Inc. to provide key executives of Bearings, Inc. and its affiliates with a means by which to defer receipt of all or a portion of their incentive compensation payable under the Bearings, Inc. Management Incentive Plan; and WHEREAS, the Bearings, Inc. Deferred Compensation Plan was amended subsequently on two occasions; and WHEREAS, effective as of January 1, 1997, Bearings, Inc. changed its name to Applied Industrial Technologies, Inc.; and WHEREAS, it is desired to amend and restate the Bearings, Inc. Deferred Compensation Plan to reflect such plan sponsor name change; NOW, THEREFORE, effective as of January 1, 1997, the Bearings, Inc. Deferred Compensation Plan is hereby renamed the Applied Industrial Technologies, Inc. Deferred Compensation Plan and is amended and restated in the manner hereinafter set forth. <PAGE> 5 ARTICLE I DEFINITIONS ----------- 1.1 DEFINITIONS. As used herein, the following words shall have the meanings hereinafter set forth unless otherwise specifically provided. (1) The term "AFFILIATE" shall mean any member of a controlled group of corporations (as determined under Section 414(b) of the Code) of which the Company is a member any member of a group of trades or business under common control (as determined under Section 414(c) of the Code) with the Company any member of an affiliated service group (as determined under Section 414(m) of the Code) of which the Company is a member and any other entity which is required to be aggregated with the Company pursuant to the provisions of Section 414(o) of the Code. (2) The term "ANNUAL INCENTIVE PLAN" shall mean any management incentive plan adopted by the Board with respect to any Fiscal Year. (3) The term "AWARD" shall mean the aggregate benefit payable to a Plan Participant under an Annual Incentive Plan for a Fiscal Year. (4) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article V, is entitled to distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full. (5) The term "BOARD" shall mean the Board of Directors of the Company. (6) The term "COMMITTEE" shall mean the Executive Organization and Compensation Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Plan. The Committee shall be constituted so as to satisfy any applicable legal requirements including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any similar rule which may subsequently be in effect. The members shall be appointed by, and serve at the pleasure of, the Board and any vacancy on the Committee shall be filled by the Board. (7) The term "COMMON SHARES" shall mean the common stock of the Company. -2- <PAGE> 6 (8) The term "COMPANY" shall mean, for any period prior to January 1, 1997, Bearings, Inc., and for any period after December 31, 1996, Applied Industrial Technologies, Inc., its corporate successors, and any corporation into or with which it is merged or consolidated. (9) The term "COMPREHENSIVE PLAN" shall mean the Applied Industrial Technologies, Inc. Deferred Compensation and Supplemental Benefit Plan (formerly known as the Bearings, Inc. Comprehensive Deferred Compensation and Supplemental Benefit Plan.) (10) The term "DEFERRAL" shall mean that portion of an Award which a Participant elects to defer pursuant to the terms of the Plan. (11) The term "DEFERRAL ACCOUNT" shall mean the bookkeeping account established under the Plan in the name of each Participant to reflect the Deferrals of such Participant. (12) The term "ELIGIBLE EMPLOYEE" shall mean any highly compensated or select management employee of the Company or an Affiliate who is designated by the Committee to participate in an Annual Incentive Plan with respect to a particular Fiscal Year. (13) The term "FAIR MARKET VALUE" shall mean the average of the high and low prices of a Common Share as reported on the composite tape for securities listed on the New York Stock Exchange for the date in question, provided that if no sales of Common Shares were made on said exchange on that date, the average of the high and low prices of a Common Share as reported on said composite tape for the nearest preceding day on which sales of Common Shares were made on said Exchange. (14) The term "FISCAL YEAR" shall mean the fiscal year of the Company, which as of January 1, 1997, begins on each July 1 and ends on the subsequent June 30. (15) The term "FUND" shall mean any investment fund designated by the Committee in which Deferrals can be deemed to be invested; provided, however, that one such Fund shall be deemed to be invested in Common Shares. (16) The term "PARTICIPANT" shall mean an Eligible Employee who elects to defer all or any portion of an Award under the Plan pursuant to the provision of Article II. -3- <PAGE> 7 (17) The term "PLAN" shall mean Applied Industrial Technologies, Inc. Deferred Compensation Plan (formerly known as the Bearings, Inc. Deferred Compensation Plan), as amended and restated herein, with all amendments, supplements, and modifications hereafter made. The Plan is part of the Comprehensive Plan and listed on Exhibit A attached thereto. (18) The term "TRUST" shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Trust Agreement (formerly known as the Bearings, Inc. Supplemental Executive Retirement Benefits Trust Agreement). (19) The term "VALUATION DATE" shall mean the last day of each Fiscal Year quarter and any other date as may be designated as such by the Committee. 1.2 CONSTRUCTION. Where necessary or appropriate to the meaning herein, the singular shall be deemed to include the plural and the masculine pronoun to include the feminine. -4- <PAGE> 8 ARTICLE II ELECTIONS BY ELIGIBLE EMPLOYEES ------------------------------- 2.1 ELECTION TO DEFER. Prior to the January 1 following the adoption by the Board of an Annual Incentive Plan, an Eligible Employee may elect to defer receipt of all or a portion of the Award that he may receive under such Annual Incentive Plan as a Deferral under the Plan. Any election under this Section 2.1 shall be made in the form (an "Election Form") and manner specified by the Committee and acceptable to the Company. In addition, such election shall indicate the allocation of the Deferral to be deemed invested in the Funds. 2.2 EFFECTIVENESS OF ELECTIONS. Subject to the provisions of Section 4.3, elections shall be effective and irrevocable upon the delivery of an Election Form to the Committee. Subject to the provisions of Article IV and Section 6.7, amounts deferred pursuant to any election hereunder shall be invested and distributed in the manner and at the time set forth in such election. -5- <PAGE> 9 ARTICLE III ACCOUNTS AND INVESTMENTS ------------------------ 3.1 ESTABLISHMENT OF ACCOUNTS. The Deferral Account of each Participant shall have subaccounts, which shall reflect the Funds into which Deferrals are deemed invested and credited pursuant to the applicable Election Form filed by the Participant with the Committee. 3.2 AMOUNT OF DEFERRALS. If a Participant elects to have less than 50% of his Award deferred under the Plan as a Deferral, the amount of such Deferral shall be credited to his Deferral Account and subaccounts in accordance with his duly filed Election Form. If, however, the Participant elects to have at least 50% of his Award deferred under the Plan as a Deferral and elects to have at least 50% of his Award deemed to be invested in a Fund comprised of Common Shares, 110% of the amount of such Deferral deemed so invested in Common Shares, and 100% of the amount of such Deferral deemed to be invested in any other Fund, shall be credited to his Deferral Account and subaccounts in accordance with the terms of his duly filed Election Form. In the event any Deferral or portion thereof is deemed to be invested in a Fund, such crediting shall be made within 30 days after the date on which the Deferral would otherwise have been payable to the Participant under the applicable Annual Incentive Plan and Common Shares of a Fund so credited to a Deferral Account shall be valued at Fair Market Value. 3.3 ADJUSTMENT OF ACCOUNTS. As of each Valuation Date, the value of each Deferral Account shall be adjusted to reflect deemed earnings, losses and dividends determined by the Committee. Common Shares of a Fund credited to any Deferral Account shall be valued at Fair Market Value. -6- <PAGE> 10 ARTICLE IV DISTRIBUTION OF ACCOUNTS ------------------------ 4.1 METHOD OF DISTRIBUTION. The value of a Participant's Deferral Account deemed invested in a Fund comprised of Common Shares shall be distributed in Common Shares and the value of a Participant's Deferral Account deemed otherwise invested shall be distributed in cash. Such value shall be determined as of the most recent Valuation Date. Subject to the provisions of Section 4.2, distribution of a Participant's Deferral Account shall be made either in a lump sum or in equal annual installments over a period of not more than ten years as specified in such Participant's Election Form. 4.2 TIME OF PAYMENTS. Except as otherwise provided in this Section 4.2 or Section 4.3, distribution of the value of a Participant's Deferral Account shall commence on the date specified in his Election Form. Notwithstanding any other provision of the Plan to the contrary, a Participant may elect to change the manner and the time of distribution of the value of his Deferral Account during the period which commences no earlier than 90 days prior to his termination of employment and ends no later than 30 days prior to his termination of employment; provided, however, that in the event a Participant's employment is terminated with less than 30 days notice, such Participant may elect to change the manner and time of distribution of the value of his Deferral Account during the period which commences as of the day he receives notice of his termination of employment and ends ten days thereafter. 4.3 HARDSHIP DISTRIBUTION. Prior to the time the Deferral Account of a Participant becomes payable under Section 4.2, the Committee, in its sole discretion, may elect to distribute all or a portion of the a Participant's Deferral Account on account of -7- <PAGE> 11 severe financial hardship of the Participant. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that the Participant requires a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of his or her family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and the income taxes resulting from such distribution. 4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a Participant, the balance of his or her Deferral Account shall be paid to his Beneficiary pursuant to the provisions of Article V. 4.5 TAXES. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Committee shall cause such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. -8- <PAGE> 12 ARTICLE V BENEFICIARIES ------------- In the event a Participant dies before his interest under the Plan in his or her Deferral Account has been distributed in full, any remaining interest shall be distributed pursuant to Article IV to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Company. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his Beneficiary shall be his estate. -9- <PAGE> 13 ARTICLE VI MISCELLANEOUS ------------- 6.1 AMENDMENT AND TERMINATION OF THE PLAN. The Company reserves the right to amend or terminate the Plan at any time; provided, however, that no amendment or termination shall affect the rights of Participants to amounts previously credited to their Deferral Accounts pursuant to Section 3.2. 6.2 NON-ALIENATION. No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his rights or benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise be received by anyone else or would not be enjoyed by him, his interest in all such benefits shall automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Committee may select. 6.3 PAYMENT OF BENEFITS TO OTHERS. If any Participant or Beneficiary to whom a benefit is payable under the Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, sister, adult child, or any other individual deemed by the Company to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 5.3 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid. -10- <PAGE> 14 6.4 PLAN NON-CONTRACTUAL. Nothing contained herein shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. 6.5 TAXABILITY OF PLAN BENEFITS. This Plan is intended to be treated as an unfunded deferred compensation plan under the Internal Revenue Code of 1986, as amended. It is the intention of the Company that the amounts deferred pursuant to the Plan shall not be included in the gross income of the Participants or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. If, at any time, it is determined that amounts deferred pursuant to the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to such Participant's Deferral Account which become so taxable shall be distributed immediately to him; provided, however, that in no event shall amounts so payable under the Plan to a Participant exceed the value of his Deferral Account. 6.6 FUNDING. The Company may cause Plan benefits to be paid from the Trust which is a grantor trust that provides full funding of the Plan benefits in the event of a potential change in control or change in control. Subject to the provisions of the Trust, the obligation of the Company under the Plan to provide a Participant or Beneficiary with a benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company. -11- <PAGE> 15 6.7 SECTION 16B PROCEDURES. In conjunction with rules promulgated by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, the Company has established Section 16b Procedures which affect certain transactions under the Plan involving Employer Securities held for the benefit of a Director. Such Procedures, which are hereby incorporated into the Plan shall constitute for all purposes a part of the Plan. In the event that the Procedures conflict with any other provision of the Plan, the Procedures shall override such other provision and shall be controlling. For purposes of this Section, the following terms shall have the meaning hereinafter set forth. (a) The term "Employer Security" shall mean any qualifying employer security as defined in Section 407(d)(5) of ERISA which is also an equity security as defined under the Securities Exchange Act of 1934, as amended. (b) The term "Officer" shall mean any person who is designated as an "Officer" of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. (c) The term "Section 16b Procedures" or "Procedures" shall mean the Administrative Procedures Applicable to Officers and Directors Under Employee Benefit Plans Maintained by Applied Industrial Technologies, Inc., effective as of January 1, 1997, with all amendments and thereafter made. 6.8 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. -12- <PAGE> 16 6.9 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. Executed at Cleveland, Ohio, this 11th day of February, 1997. APPLIED INDUSTRIAL TECHNOLOGIES, INC. By: /S/ John C. Robinson -------------------------------- Title: Vice Chairman And: /S/ Fred D. Bauer -------------------------------- Title: Assistant Secretary -13- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.C <SEQUENCE>6 <DESCRIPTION>EXHIBIT 10(C) <TEXT> <PAGE> 1 Exhibit 10(c) APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (JANUARY 1, 1997 RESTATEMENT) <PAGE> 2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (JANUARY 1, 1997 RESTATEMENT) TABLE OF CONTENTS ----------------- <TABLE> <CAPTION> Section Page ------- ---- ARTICLE I DEFINITIONS <S> <C> <C> 1.1 Definitions............................................2 1.2 Construction...........................................3 ARTICLE II ELECTIONS BY DIRECTORS 2.1 Election to Defer......................................4 2.2 Effectiveness of Elections.............................4 2.3 Amendment and Termination of Elections.................4 ARTICLE III ACCOUNTS AND INVESTMENTS 3.1 Establishment of Accounts..............................6 3.2 Amount of Deferrals....................................6 3.3 Adjustment of Accounts.................................6 ARTICLE IV DISTRIBUTION OF ACCOUNTS 4.1 Method of Distribution.................................7 4.2 Time of Payments.......................................7 4.3 Hardship Distribution..................................7 4.4 Distributions Upon Death...............................8 4.5 Taxes..................................................8 ARTICLE V BENEFICIARIES 9 ARTICLE VI MISCELLANEOUS 6.1 Amendment and Termination of the Plan.................10 6.2 Non-Alienation........................................10 6.3 Payment of Benefits to Others.........................10 6.4 Plan Non-Contractual..................................10 6.5 Taxability of Plan Benefits...........................11 </TABLE> -i- <PAGE> 3 <TABLE> <S> <C> <C> 6.6 Funding.............................................11 6.7 Section 16b Procedures..............................11 6.8 Severability........................................12 6.9 Governing Law.......................................12 </TABLE> -ii- <PAGE> 4 APPLIED INDUSTRIAL TECHNOLOGIES, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (JANUARY 1, 1997 RESTATEMENT) WHEREAS, the Bearings, Inc. Deferred Compensation Plan for Non-Employee Directors was established, effective as of July 1, 1991, by Bearings, Inc. to provide non-employee members of the Board of Directors of Bearings, Inc. the option to defer receipt of all or a portion of the compensation payable to them for services as Directors; and WHEREAS, the Bearings, Inc. Deferred Compensation Plan for Non- Employee Directors was amended subsequently on two occasions; and WHEREAS, effective as of January 1, 1997, Bearings, Inc. changed its name to Applied Industrial Technologies, Inc.; and WHEREAS, it is desired to amend and restate the Bearings, Inc. Deferred Compensation Plan for Non-Employee Directors to reflect such plan name sponsor change; NOW, THEREFORE, effective as of January 1, 1997, the Bearings, Inc. Deferred Compensation Plan for Non-Employee Directors is hereby renamed the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors and is amended and restated in the manner hereinafter set forth. <PAGE> 5 ARTICLE I DEFINITIONS ----------- 1.1 DEFINITIONS As used herein, the following words shall have the meanings hereinafter set forth unless otherwise specifically provided. (1) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article V, is entitled to receive a distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full. (2) The term "BOARD" shall mean the Board of Directors of the Company. (3) The term "COMMITTEE" shall mean the Executive Organization and Compensation Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Plan. The Committee shall be constituted so as to satisfy any applicable legal requirements including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any similar rule which may subsequently be in effect. The members shall be appointed by, and serve at the pleasure of, the Board and any vacancy on the Committee shall be filled by the Board. (4) The term "COMMON SHARES" shall mean the common stock of the Company. (5) The term "COMPANY" shall mean, for any period prior to January 1, 1997, Bearings, Inc., and for any period after December 31, 1996, Applied Industrial Technologies, Inc., its corporate successors, and any corporation into or with which it is merged or consolidated. (6) The term "DEFERRAL" shall mean that portion of the compensation a Participant elects to defer pursuant to the terms of the Plan. (7) The term "DEFERRAL ACCOUNT" shall mean the bookkeeping account established under the Plan in the name of each Participant to reflect the Deferrals of such Participant. (8) The term "DIRECTOR" shall mean any non-employee director of the Company. -2- <PAGE> 6 (9) The term "FAIR MARKET VALUE" shall mean the average of the high and low prices of a Common Share as reported on the composite tape for securities listed on the New York Stock Exchange for the date in question, provided that if no sales of Common Shares were made on said exchange on that date, the average of the high and low prices of a Common Share as reported on said composite tape for the preceding day on which sales of Common Shares were made on said Exchange. (10) The term "FISCAL YEAR" shall mean the fiscal year of the Company, which as of January 1, 1997, begins on each July 1 and ends on the subsequent June 30. (11) The term "FUND" shall mean any investment fund designated by the Committee in which Deferrals can be deemed to be invested; provided, however, that one such Fund shall be deemed to be invested in Common Shares. (12) The term "PARTICIPANT" shall mean a Director who elects to defer all or any portion of his compensation under the Plan pursuant to the provisions of Article II. (13) The term "PLAN" shall mean Applied Industrial Technologies, Inc. Deferred Compensation Plan For Non-Employee Directors (formerly known as the Bearings, Inc. Deferred Compensation Plan For Non-Employee Directors), as amended and restated herein, effective as of January 1, 1997, with all amendments, supplements, and modifications hereafter made. (14) The term "TRUST" shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Trust Agreement (formerly known as the Bearings, Inc. Supplemental Executive Retirement Benefits Trust Agreement). (15) The term "VALUATION DATE" shall mean June 30 of each Fiscal Year and any other date as may be designated as such by the Committee. 1.2 CONSTRUCTION. Where necessary or appropriate to the meaning herein, the singular shall be deemed to include the plural and the masculine pronoun to include the feminine. -3- <PAGE> 7 ARTICLE II ELECTIONS BY DIRECTORS ---------------------- 2.1 ELECTION TO DEFER. Prior to the first day of any Fiscal Year quarter (July 1, October 1, January 1, and April 1) a Director may elect to defer receipt of all or a portion of the compensation payable to him for future services as a Director as a Deferral under the Plan. If a Director becomes a Director after the beginning of any Fiscal Year quarter, the Director may elect to defer receipt of all or a portion of the compensation payable to him for future services as a Director as a Deferral under the Plan. Any election under this Section 2.1 shall be made on in the form (an "Election Form") and manner specified by the Committee and acceptable to the Company. In addition, such election shall indicate the allocation of the Deferral to be deemed invested in the Funds. 2.2 EFFECTIVENESS OF ELECTIONS. Subject to the provisions of Sections 2.3 and 4.3, elections shall be effective and irrevocable upon the delivery of an Election Form to the Committee. Subject to the provisions of Article IV and Section 6.7, amounts deferred pursuant to any election hereunder shall be invested and distributed in the manner and at the time set forth in such election. 2.3 AMENDMENT AND TERMINATION OF ELECTIONS. A Director may terminate or amend his election to defer receipt of compensation as a Deferral under the Plan with respect to subsequent Fiscal Year quarters in a written notice delivered to the Committee prior to commencement of the Fiscal Year quarter with respect to which such compensation will be earned and such notice will be effective. Amendments which serve only to change the designation of a Beneficiary shall be permitted at any time and as often as necessary. Amounts credited to a Participant's Deferral Account pursuant to Section 3.1 prior to the -4- <PAGE> 8 effective date of any termination or amendment shall not be affected thereby and shall be paid at a time and in the manner specified in the Election Form in effect when the Deferral occurred. -5- <PAGE> 9 ARTICLE III ACCOUNTS AND INVESTMENTS ------------------------ 3.1 ESTABLISHMENT OF ACCOUNTS. The Deferral Account of each Participant shall have subaccounts which shall reflect the Funds into which Deferrals are deemed invested and credited pursuant to the applicable Election Form filed by the Participant with the Committee. 3.2 AMOUNT OF DEFERRALS. If a Participant elects to have compensation deferred under the Plan as a Deferral invested in a Fund, other than a Fund comprised of Common Shares, 100% of the amount of such Deferral deemed so invested in Fund shall be credited to his Deferred Account and subaccounts in accordance with his duly filed Election Form. If the Participant elects to have some or all of his compensation deferred under the Plan as a Deferral invested in a Fund comprised of Common Shares, 125% of the amount of such Deferral deemed so invested in such a Fund shall be credited to his Deferred Account and subaccounts in accordance with the terms of his duly filed Election Form. In the event any Deferral or portion thereof is deemed to be invested in a Fund, such crediting shall be made within 30 days after the date on which the Deferral would otherwise have been payable to the Participant. Common Shares of a Fund so credited to a Deferral Account shall be valued at Fair Market Value. 3.3 ADJUSTMENT OF ACCOUNTS. As of each Valuation Date, the value of each Deferral Account shall be adjusted to reflect deemed earnings, losses and dividends determined by the Committee. Common Shares of a Fund credited to any Deferral Account shall be valued at Fair Market Value. -6- <PAGE> 10 ARTICLE IV DISTRIBUTION OF ACCOUNTS ------------------------ 4.1 METHOD OF DISTRIBUTION. The value of a Participant's Deferral Account deemed invested in a fund comprised of Common Shares shall be distributed in Common Shares and the value of a Participant's Deferral Account deemed otherwise invested shall be distributed in cash. Such value shall be determined as of the most recent Valuation Date. Subject to the provisions of Section 4.2, distribution of a Participant's Deferral Account shall be made either in a lump sum or in equal annual installments over a period of not more than ten years as specified in such Participant's Election Form. 4.2 TIME OF PAYMENTS. Except as otherwise provided in this Section 4.2 or Section 4.3, distribution of the value of a Participant's Deferral Account shall commence on the date specified in his Election Form. Notwithstanding any other provision of the Plan to the contrary, a Participant may elect to change the manner and the time of distribution of the value of his Deferral Account during the period which commences no earlier than 90 days prior to his termination as a Director and ends no later than 30 days prior to his termination as a Director; provided, however, that in the event a Participant is terminated as a Director with less than 30 days notice, such Participant may elect to change the manner and time of distribution of the value of his Deferral Account during the period which commences as of the day he receives notice of his termination as a Director and ends ten days thereafter. 4.3 HARDSHIP DISTRIBUTION. Prior to the time the Deferral Account of a Participant becomes payable under Section 4.2, the Committee, in its sole discretion, may elect to distribute all or a portion of the a Participant's Deferral Account on account of severe financial hardship of the Participant. For purposes of the Plan, severe financial -7- <PAGE> 11 hardship shall be deemed to exist in the event the Committee determines that the Participant requires a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of his or her family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and the income taxes resulting from such distribution. 4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a Participant, the balance of his or her Deferral Account shall be paid to his Beneficiary pursuant to the provisions of Article V. 4.5 TAXES. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Committee shall cause such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. -8- <PAGE> 12 ARTICLE V BENEFICIARIES ------------- In the event a Participant dies before his interest under the Plan in his or her Deferral Account has been distributed in full, any remaining interest shall be distributed pursuant to Article IV to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Company. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his beneficiary shall be his estate. -9- <PAGE> 13 ARTICLE VI MISCELLANEOUS ------------- 6.1 AMENDMENT AND TERMINATION OF THE PLAN. The Company reserves the right to amend or terminate the Plan at any time; provided, however, that no amendment or termination shall affect the rights of Participants to amounts previously credited to their Deferral Accounts pursuant to Section 3.2. 6.2 NON-ALIENATION. No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his rights or benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise be received by anyone else or would not be enjoyed by him, his interest in all such benefits shall automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Committee may select. 6.3 PAYMENT OF BENEFITS TO OTHERS. If any Participant or Beneficiary to whom a benefit is payable under the Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, sister, adult child, or any other individual deemed by the Company to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 5.3 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid. -10- <PAGE> 14 6.4 PLAN NON-CONTRACTUAL. Nothing contained herein shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. 6.5 TAXABILITY OF PLAN BENEFITS. This Plan is intended to be treated as an unfunded deferred compensation plan under the Internal Revenue Code of 1986, as amended. It is the intention of the Company that the amounts deferred pursuant to the Plan shall not be included in the gross income of the Participants or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. If, at any time, it is determined that amounts deferred pursuant to the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to such Participant's Deferral Account which become so taxable shall be distributed immediately to him; provided, however, that in no event shall amounts so payable under the Plan to a Participant exceed the value of his Deferral Account. 6.6 FUNDING. The Company may cause Plan benefits to be paid from the Trust which is a grantor trust that provides full funding of the Plan benefits in the event of a potential change in control or change in control. Subject to the provisions of the Trust, the obligation of the Company under the Plan to provide a Participant or Beneficiary with a benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company. -11- <PAGE> 15 6.7 SECTION 16B PROCEDURES. In conjunction with rules promulgated by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, the Company has established Section 16b Procedures which affect certain transactions under the Plan involving Employer Securities held for the benefit of a Director. Such Procedures, which are hereby incorporated into the Plan shall constitute for all purposes a part of the Plan. In the event that the Procedures conflict with any other provision of the Plan, the Procedures shall override such other provision and shall be controlling. For purposes of this Section, the following terms shall have the meaning hereinafter set forth. (a) The term "Employer Security" shall mean any qualifying employer security as defined in Section 407(d)(5) of ERISA which is also an equity security as defined under the Securities Exchange Act of 1934, as amended. (b) The term "Officer" shall mean any person who is designated as an "Officer" of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. (c) The term "Section 16b Procedures" or "Procedures" shall mean the Administrative Procedures Applicable to Officers and Directors Under -12- <PAGE> 16 Employee Benefit Plans Maintained by Applied Industrial Technologies, Inc., effective as of January 1, 1997, with all amendments and thereafter made. 6.8 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 6.9 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. Executed at Cleveland, Ohio, this 11th day of February, 1997. APPLIED INDUSTRIAL TECHNOLOGIES, INC. By: /S/ John C. Robinson ---------------------------------- Title: Vice Chairman And: /S/ Fred D. Bauer ---------------------------------- Title: Assistant Secretary -13- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>7 <DESCRIPTION>EXHIBIT 11 <TEXT> <PAGE> 1 EXHIBIT 11 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY BEARINGS, INC.) COMPUTATION OF NET INCOME PER SHARE (UNAUDITED) (THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> --------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> AVERAGE SHARES OUTSTANDING 1. AVERAGE COMMON SHARES OUTSTANDING 12,410 12,307 12,408 12,257 2. NET ADDITIONAL SHARES OUTSTANDING ASSUMING STOCK OPTIONS EXERCISED AND PROCEEDS USED TO PURCHASE TREASURY STOCK 232 294 237 297 ------- ------- ------- ------- 3. ADJUSTED AVERAGE COMMON SHARES OUTSTANDING FOR FULLY DILUTED COMPUTATION 12,642 12,601 12,645 12,554 ======= ======= ======= ======= NET INCOME 4. NET INCOME AS REPORTED IN STATEMENTS OF CONSOLIDATED INCOME $ 6,003 $ 5,176 $11,408 $ 9,705 ======= ======= ======= ======= NET INCOME PER SHARE 5. NET INCOME PER AVERAGE COMMON SHARE OUTSTANDING (4/1) $ 0.48 $ 0.42 $ 0.92 $ 0.79 ======= ======= ======= ======= 6. NET INCOME PER COMMON SHARE ON A FULLY DILUTIVE BASIS (4/3) $ 0.47(A) $ 0.41(A) $ 0.90(A) $ 0.77(A) ======= ======= ======= ======= <FN> (A) FULLY DILUTED NET INCOME PER SHARE IS NOT PRESENTED AS THE DILUTIVE EFFECT IS LESS THAN 3%. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>8 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 6,882 <SECURITIES> 0 <RECEIVABLES> 139,357 <ALLOWANCES> 2,892 <INVENTORY> 133,113 <CURRENT-ASSETS> 280,823 <PP&E> 152,337 <DEPRECIATION> 67,810 <TOTAL-ASSETS> 383,968 <CURRENT-LIABILITIES> 121,700 <BONDS> 0 <COMMON> 10,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 184,893 <TOTAL-LIABILITY-AND-EQUITY> 383,968 <SALES> 274,992 <TOTAL-REVENUES> 274,992 <CGS> 200,025 <TOTAL-COSTS> 200,025 <OTHER-EXPENSES> 62,217 <LOSS-PROVISION> 1,048 <INTEREST-EXPENSE> 1,342 <INCOME-PRETAX> 10,360 <INCOME-TAX> 4,357 <INCOME-CONTINUING> 6,003 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 6,003 <EPS-PRIMARY> 0.48 <EPS-DILUTED> 0.47 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

AMAT

https://www.sec.gov/Archives/edgar/data/6951/0000891618-97-001150.txt

-----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, AUjh+qjXyMOE8TDruircRKDC+0HLmL2TntDmGbXJ+cIvQHG3uekXrqDRRpGWhc26 ALrazd9ny6n1sXinqS5Vyg== <SEC-DOCUMENT>0000891618-97-001150.txt : 19970313 <SEC-HEADER>0000891618-97-001150.hdr.sgml : 19970313 ACCESSION NUMBER: 0000891618-97-001150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970126 FILED AS OF DATE: 19970312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MATERIALS INC /DE CENTRAL INDEX KEY: 0000006951 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 941655526 STATE OF INCORPORATION: DE FISCAL YEAR END: 1026 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06920 FILM NUMBER: 97555466 BUSINESS ADDRESS: STREET 1: 3050 BOWERS AVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4087275555 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MATERIALS TECHNOLOGY INC DATE OF NAME CHANGE: 19730319 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED JANUARY 26, 1997 <TEXT> <PAGE> 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 JANUARY 26, 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 0-6920 APPLIED MATERIALS, INC. (Exact name of registrant as specified in its charter) Delaware 94-1655526 - ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3050 Bowers Avenue, Santa Clara, California 95054-3299 - ------------------------------------------------------------------------------- Address of principal executive offices (Zip Code) Registrant's telephone number, including area code (408) 727-5555 ----------------------------- 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 . --- --- Number of shares outstanding of the issuer's common stock as of January 26, 1997: 181,086,654 <PAGE> 2 PART I. FINANCIAL INFORMATION APPLIED MATERIALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Three Months Ended Jan. 26, Jan. 28, (In thousands, except per share amounts) 1997 1996 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net sales $ 835,776 $1,040,580 Cost of products sold 464,120 543,780 ---------- ---------- Gross margin 371,656 496,800 Operating expenses: Research, development and engineering 116,492 110,352 Marketing and selling 66,271 77,282 General and administrative 59,608 49,555 Acquired in-process research and development 59,500 - ---------- ---------- Income from operations 69,785 259,611 Interest expense 5,800 5,168 Interest income 13,557 9,597 ---------- ---------- Income from consolidated companies before taxes 77,542 264,040 Provision for income taxes 47,965 92,414 ---------- ---------- Income from consolidated companies 29,577 171,626 Equity in net income/(loss) of joint venture - - ---------- ---------- Net income $ 29,577 $ 171,626 ---------- ---------- Earnings per share $ 0.16 $ 0.93 ---------- ---------- Average common shares and equivalents 185,432 184,001 - ----------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated condensed financial statements. 2 <PAGE> 3 Applied Materials, INC. CONSOLIDATED CONDENSED BALANCE SHEETS* <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Jan. 26, Oct. 27, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 369,358 $ 403,888 Short-term investments 697,081 633,744 Accounts receivable, net 765,569 822,384 Inventories 441,681 478,552 Deferred income taxes 279,254 281,586 Other current assets 67,264 72,915 ------------ ------------ Total current assets 2,620,207 2,693,069 Property, plant and equipment, net 912,729 919,038 Other assets 245,549 25,880 ------------ ------------ Total assets $ 3,778,485 $ 3,637,987 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 35,787 $ 77,522 Current portion of long-term debt 7,585 22,640 Accounts payable and accrued expenses 826,259 791,897 Income taxes payable 133,347 43,168 ------------ ------------ Total current liabilities 1,002,978 935,227 Long-term debt 233,677 275,485 Deferred income taxes and other non-current obligations 109,636 56,850 ------------ ------------ Total liabilities 1,346,291 1,267,562 ------------ ------------ Stockholders' equity: Common stock 1,811 1,802 Additional paid-in capital 798,528 763,376 Retained earnings 1,629,141 1,599,564 Cumulative translation adjustments 2,714 5,683 ------------ ------------ Total stockholders' equity 2,432,194 2,370,425 ------------ ------------ Total liabilities and stockholders' equity $ 3,778,485 $ 3,637,987 ------------ ------------ </TABLE> * Amounts as of January 26, 1997 are unaudited. Amounts as of October 27, 1996 were obtained from the October 27, 1996 audited financial statements. See accompanying notes to consolidated condensed financial statements. 3 <PAGE> 4 APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ Three Months Ended Jan. 26, Jan. 28, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash flows from operating activities: Net income $ 29,577 $ 171,626 Adjustments required to reconcile net income to cash provided by operations: Acquired in-process research & development 59,500 - Deferred taxes 4,192 258 Depreciation and amortization 48,507 29,724 Equity in net income/(loss) of joint venture - - Changes in assets and liabilities, net of amounts acquired: Accounts receivable 69,393 (127,742) Inventories 58,157 (55,111) Other current assets 10,321 14,692 Other assets (141) (1,399) Accounts payable and accrued expenses 9,615 108,956 Income taxes payable 90,438 12,304 Other non-current obligations 6,509 11,560 ----------- ----------- Cash provided by operations 386,068 164,868 ----------- ----------- Cash flows from investing activities: Capital expenditures, net of retirements (30,665) (117,746) Cash paid for acquisitions, net of cash acquired (246,365) - Proceeds from sales of short-term investments 83,976 104,962 Purchases of short-term investments (147,313) (167,200) ----------- ----------- Cash used for investing (340,367) (179,984) ----------- ----------- Cash flows from financing activities: Short-term debt activity, net (44,508) (574) Long-term debt activity, net (53,819) 3,660 Common stock transactions, net 18,014 (7,007) ----------- ----------- Cash used for financing (80,313) (3,921) ----------- ------------ Effect of exchange rate changes on cash 82 72 ----------- ----------- Decrease in cash and cash equivalents (34,530) (18,965) Cash and cash equivalents - beginning of period 403,888 285,845 ----------- ----------- Cash and cash equivalents - end of period $ 369,358 $ 266,880 - ------------------------------------------------------------------------------------------------------------------ </TABLE> For the three months ended January 26, 1997, cash payments for interest were $1,841 and net income tax refunds were $40,734. For the three months ended January 28, 1996, cash payments for interest and income taxes were $897 and $61,351, respectively. See accompanying notes to consolidated condensed financial statements. 4 <PAGE> 5 APPLIED MATERIALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED JANUARY 26, 1997 (IN THOUSANDS) 1) Basis of Presentation In the opinion of management, the unaudited consolidated condensed financial statements included herein have been prepared on a consistent basis with the October 27, 1996 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These interim financial statements should be read in conjunction with the October 27, 1996 audited consolidated financial statements and notes thereto. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 2) Acquisitions During the first quarter of fiscal 1997, the Company acquired two companies (Opal, Inc. and Orbot Instruments, Ltd.) in separate transactions for approximately $293 million, consisting primarily of cash. Opal, Inc. ("Opal") is a supplier of CD- SEM (critical dimension scanning electron microscope) systems for use in semiconductor manufacturing. Orbot Instruments, Ltd. ("Orbot") supplies wafer and reticle inspection systems for use in the production of semiconductors. The acquisitions were completed by the early part of January 1997, and have been accounted for using the purchase method of accounting; accordingly, the Company's consolidated results of operations for the quarter include the operating results of Opal and Orbot subsequent to their acquisition dates. In connection with the acquisitions, the Company incurred a $59.5 million pre-tax charge, or $0.32 per share after tax, for acquired in-process research and development. The Company also recorded approximately $219 million of net intangible assets (see note 5) and $46 million of deferred tax liabilities. With the exception these items, the Company's financial condition and results of operations for the quarter ended January 26, 1997 were not materially impacted by the acquisitions. The Company's pro forma net sales, income from operations, net income and earnings per share, assuming the acquisitions occurred at the beginning of the quarter, would not have been materially different from the actual amounts reported for the quarter. 3) Earnings Per Share Earnings per share has been computed using the weighted average number of common shares and equivalents outstanding during the period. 5 <PAGE> 6 4) Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. The components of inventories are as follows: <TABLE> <CAPTION> January 26, 1997 October 27, 1996 ---------------- ---------------- <S> <C> <C> Customer service spares $ 178,376 $ 182,320 Systems raw materials 64,243 70,959 Work-in-process 144,778 140,964 Finished goods 54,284 84,309 ----------- ----------- $ 441,681 $ 478,552 =========== =========== </TABLE> 5) Other Assets The components of other assets are as follows: <TABLE> <CAPTION> January 26, 1997 October 27, 1996 ---------------- ---------------- <S> <C> <C> Purchased technology, net $ 204,255 $ - Goodwill, net 14,844 - Other 26,450 25,880 ----------- ----------- $ 245,549 $ 25,880 =========== =========== </TABLE> Purchased technology and goodwill are presented at cost, net of accumulated amortization, and are being amortized using the straight-line method over their estimated useful lives of eight years. The Company will periodically analyze these assets to determine whether an impairment in carrying value has occurred. 6) Accounts Payable and Accrued Expenses The components of accounts payable and accrued expenses are as follows: <TABLE> <CAPTION> January 26, 1997 October 27, 1996 ---------------- ---------------- <S> <C> <C> Accounts payable $ 207,190 $ 192,607 Compensation and benefit 135,475 170,881 Installation and warranty 187,260 187,873 Other 296,334 240,536 ----------- ----------- $ 826,259 $ 791,897 =========== =========== </TABLE> 7) Early Retirement of Debt During the first quarter of fiscal 1997, the Company repaid its unsecured senior notes prior to their scheduled maturities. The noteholders received approximately $56 million, representing principal, accrued interest and prepayment charges, on December 19, 1996. The prepayment charge was not material. 6 <PAGE> 7 APPLIED MATERIALS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- ACQUISITIONS During the first quarter of fiscal 1997, the Company acquired Opal, Inc. ("Opal") and Orbot Instruments, Ltd. ("Orbot") in separate transactions for approximately $293 million, consisting primarily of cash. Opal is a supplier of CD-SEM (critical dimension scanning electron microscope) systems for use in semiconductor manufacturing. Orbot supplies wafer and reticle inspection systems for use in the production of semiconductors. These acquisitions marked the Company's entry into the metrology and inspection semiconductor equipment markets. The acquisitions were completed by the early part of January 1997, and have been accounted for using the purchase method of accounting; accordingly, the Company's consolidated results of operations for the quarter include the operating results of Opal and Orbot subsequent to their acquisition dates. In connection with the acquisitions, the Company recorded a one-time, pre-tax charge of $59.5 million, or $0.32 per share after tax, for acquired in-process research and development. With the exception of this charge, the acquisitions did not materially impact the Company's results of operations for the first fiscal quarter of 1997. RESULTS OF OPERATIONS During the latter half of the Company's fiscal 1996, the semiconductor industry began a period of transition during which sharply lower memory device prices and excess production capacity caused the Company's customers to reduce their purchases of semiconductor manufacturing equipment and push out delivery of previously ordered systems. The Company's results of operations for the last two quarters of fiscal 1996 and the first quarter of fiscal 1997 were negatively impacted by this transition. However, in the first quarter of fiscal 1997, new orders received by the Company of $905 million exceeded revenues for the quarter, and also exceeded new orders of $683 million received in the fourth quarter of fiscal 1996. The Company expects that quarterly revenues will grow modestly during the remainder of fiscal 1997, and that new orders will exceed revenues for the remainder of fiscal 1997. 7 <PAGE> 8 New orders of $905 million were received during the first quarter of fiscal 1997, versus new orders of $683 million in the fourth quarter of fiscal 1996. The significant increase in new orders resulted from selected strategic purchases by customers in Japan, Korea and Taiwan of the Company's leading-edge technology in multi-level interconnect structures. North America new orders decreased to $252 million from $288 million; Europe decreased to $94 million from $115 million; Japan increased to $214 million from $175 million; Korea increased to $135 million from $35 million; and Asia-Pacific (Taiwan, China and Southeast Asia) increased to $210 million from $70 million. Backlog at January 26, 1997 was $1,448 million, versus $1,423 million at October 27, 1996. The Company's net sales for the three months ended January 26, 1997 decreased 19.7 percent from the corresponding period of fiscal 1996. Sales in all regions except Asia-Pacific decreased in the first quarter of fiscal 1997 when compared to sales in the corresponding period of fiscal 1996. Sales by region as a percentage of total sales were as follows: <TABLE> <CAPTION> Three Months Ended Jan. 26, Jan. 28, 1997 1996 ------------------------------ <S> <C> <C> North America 35% 38% Europe 24% 21% Japan 15% 21% Korea 6% 8% Asia-Pacific 20% 12% --- --- 100% 100% </TABLE> The Company's gross margin for the first quarter of fiscal 1997 was 44.5 percent, compared to 47.7 percent for the corresponding quarter of fiscal 1996. This decrease can be attributed primarily to reduced business volume and product pricing pressures associated with reduced demand for semiconductor manufacturing equipment. Excluding acquired in-process research and development costs incurred in connection with the acquisitions of Opal and Orbot, operating expenses as a percentage of sales for the three months ended January 26, 1997 were 29.0 percent, versus 22.8 percent for the three months ended January 28, 1996. This increase is primarily attributable to reduced business volume, research and development costs for 300mm wafer technology and costs incurred for the protection of intellectual property rights. 8 <PAGE> 9 Significant operations of the Company are conducted in foreign currencies, primarily Japanese yen. Forward exchange contracts and options are purchased to hedge certain existing firm commitments and foreign currency denominated transactions expected to occur during the next year. Gains and losses on hedge contracts are reported in income when the related transactions being hedged are recognized. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the underlying items being hedged, these financial instruments are not expected to subject the Company to risks that would otherwise result from changes in currency exchange rates. Exchange gains and losses did not have a significant effect on the Company's results of operations for the three months ended January 26, 1997 or January 28, 1996. The Company's effective income tax rate for the first quarter of fiscal 1997 was higher than the expected rate of 35 percent, due to the non-deductible nature of the $59.5 million acquisition related charge discussed above. Management anticipates that the Company's effective income tax rate for the remainder of fiscal 1997 will be 35 percent. The Company's results of operations for the three months ended January 26, 1997 are not necessarily indicative of future operating results. 9 <PAGE> 10 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong at January 26, 1997, with a ratio of current assets to current liabilities of 2.6:1, compared to 2.9:1 at October 27, 1996. The Company ended the quarter with cash and short-term investments of $1.1 billion, slightly above the amount at the end of fiscal 1996, despite significant outflows related to the aforementioned acquisitions and early retirement of certain debt. This can be attributed primarily to the Company's continued focus on asset management, which, excluding assets acquired in connection with the acquisitions, resulted in decreases in accounts receivable and inventories of 9.8 percent and 12.6 percent, respectively. The Company generated $386 million of cash from operations in the first quarter of fiscal 1997. This resulted primarily from net income (plus non-cash charges for depreciation, amortization and acquired in-process research and development) of $138 million, decreases in accounts receivable and inventory of $69 million and $58 million, respectively, and an increase in income taxes payable of $90 million. Cash used for investing activities of $340 million was primarily for acquisitions ($246 million, net of cash acquired), net purchases of short-term investments ($63 million) and net property, plant and equipment acquisitions ($31 million). Cash used for financing activities of $80 million was primarily for the early retirement of certain long-term debt and net short-term debt repayments. At January 26, 1997, the Company's principal sources of liquidity consisted of $1,066 million of cash, cash equivalents and short-term investments, $194 million of unissued notes registered under the Company's medium-term note program and $340 million of available credit facilities. The Company's liquidity is affected by many factors, some of which are based on the normal on-going operations of the business, and others of which relate to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with existing sources of liquidity, will be sufficient to satisfy the Company's liquidity requirements for the remainder of the fiscal year. Capital expenditures are expected to approximate $250 million in fiscal 1997. This amount includes funds for the continuation and completion of facilities improvement and investments in demonstration and test equipment, information systems and other capital equipment. 10 <PAGE> 11 As of January 26, 1997, the Company is authorized to repurchase additional shares of its common stock in the open market through February 1999 in amounts that will substantially offset the dilution resulting from its stock-based employee benefit and incentive plans. No shares were repurchased in the first quarter of fiscal 1997. TRENDS, RISKS AND UNCERTAINTIES The semiconductor industry has historically been cyclical and subject to periodic downturns associated with changes in supply and demand. During 1996, the semiconductor industry weakened, principally as a result of excess memory capacity and significant memory price reductions. This excess capacity and weakness in memory pricing in turn led to product pricing pressures and reduced demand for the Company's products and services. The Company's ability to predict customer investment decisions is impaired by the continuing uncertainty within the semiconductor industry. It is possible that a continued industry downturn and further reductions or delays in semiconductor manufacturers' capital spending and investment could further increase pricing pressures, decrease orders, and adversely affect the Company's revenue and operating results. The Company ended the quarter with a backlog of approximately $1,448 million as of January 26, 1997, consistent with approximately $1,423 million as of October 27, 1996. The Company schedules production of its systems based upon order backlog and customer commitments. The backlog includes orders for which written authorizations have been accepted and shipment dates within 12 months have been assigned. During the current industry downturn, semiconductor manufacturers have rescheduled or canceled certain orders. Due to possible customer changes in delivery schedules and cancellation of orders, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period could adversely affect the Company's results of operations. The Company's results of operations are subject to significant fluctuations from period to period, in part because of the cyclical nature of the semiconductor industry and its changes in supply and demand. Moreover, each region in the global semiconductor equipment market exhibits unique characteristics which cause capital equipment investment patterns to vary from period to period. While international markets provide the Company with significant growth opportunities, periodic economic downturns, trade balance issues, political instability and fluctuations in interest and foreign currency exchange rates are all risks which could affect global product and service demand. Although the Company actively manages its exposure to 11 <PAGE> 12 changes in foreign currency exchange rates, there can be no assurance that future changes in foreign currency exchange rates will not have a material effect on its results of operations or financial condition. The Company operates in a highly competitive industry characterized by increasingly rapid technological changes. The Company's competitive advantage and future success are therefore dependent on its ability to develop new products, to qualify these new products with its customers, to successfully introduce these products to the marketplace on a timely basis, to commence production to meet customer demands and to develop new markets in the semiconductor industry for its products and services. The successful introduction of new technology and products is increasingly difficult. If the Company is unable, for whatever reason, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, its results of operations could be adversely impacted. To better address the issues and opportunities presented by the industry downturn that began in 1996, the Company has implemented a number of programs to reduce costs and improve productivity, primarily through increased manufacturing efficiencies, reduced cycle times and material cost reductions. The inability to satisfactorily achieve the goals of these cost reduction and productivity programs could adversely affect the Company's results of operations. The Company has entered the metrology and inspection semiconductor equipment market with its acquisitions of Opal and Orbot. If the Company is, for any reason, unable to successfully integrate these two companies within the desired time frame, the results of its operations could be adversely affected. The Company is currently involved in litigation regarding patents and other intellectual property rights and could become involved in additional litigation in the future. In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. There can be no assurance about the outcome of current or future litigation or patent infringement inquiries. When used in this Management's Discussion and Analysis, the words "anticipate," "estimate," "expect" and similar expressions are intended to identify forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, 12 <PAGE> 13 delays (especially in the personal computer market) in increased demand for semiconductors, which could result in delayed or reduced equipment purchases by the Company's customers; continuation of semiconductor device price declines; product pricing pressures and other challenges from the Company's competition; insufficient Company cost reduction programs; and the inability of the Company to assimilate the two companies it acquired during the first quarter of fiscal 1997. The Company undertakes no obligation to update the information, including the forward-looking statements, in this Form 10-Q. 13 <PAGE> 14 PART II OTHER INFORMATION Item 1. Legal Proceedings In the first of two lawsuits filed by the Company, captioned Applied Materials, Inc. v. Advanced Semiconductor Materials America, Inc., Epsilon Technology, Inc. (doing business as ASM Epitaxy) and Advanced Semiconductor Materials International N.V. (collectively "ASM") (case no. C-91-20061-RMW), Judge William Ingram of the United States District Court for the Northern District of California ruled on April 26, 1994 that ASM's Epsilon I epitaxial reactor infringed three of the Company's United States patents and issued an injunction against ASM's use or sale of the atmospheric versions of ASM Epsilon I in the United States. On October 28, 1996, the U.S. Court of Appeals for the Federal Circuit decided ASM's appeal of this decision, affirming the trial court's judgment that one of the Company's patents is valid and infringed. A permanent injunction is now effective which prohibits ASM's use and sale of its epitaxial reactors in the United States. The trial of the Company's second patent infringement lawsuit against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-92-20643-RMW), was concluded before Judge Whyte in May 1995. On November 1, 1995, the Court issued its judgment holding that two of the Company's United States patents were valid and infringed by reduced pressure versions of ASM's Epsilon I epitaxial reactors. ASM appealed this decision. On December 17, 1996, the U.S. Court of Appeals for the Federal Circuit rejected ASM's appeal, and affirmed the District Court's ruling. A permanent injunction was entered on March 7, 1996 prohibiting ASM's manufacture, use or sale of reduced pressure versions of its Epsilon I epitaxial reactors within the United States. Trial in the District Court has been set for July 28, 1997 to determine ASM's liability, damages and willfulness, for both case no. C- 91-20061-RMW and C-92-20643-RMW. In a separate lawsuit filed by ASM against the Company involving one patent relating to the Company's single wafer epitaxial product line, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-93-20853-RMW), the Court granted three motions for summary judgment in favor of the Company which eliminate the Company's liability on this patent. ASM has not indicated whether it intends to appeal this matter. The Company's counterclaims against ASM for inequitable conduct were tried by the Court in July 1996. The Company is awaiting a decision. A separate action severed from ASM's case, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-95-20169-RMW), involves one United States patent which relates to the Company's Precision 5000 product. A previously set trial date has been vacated; no trial date is currently set. In these cases, ASM seeks injunctive relief, damages and such other relief as the Court may find appropriate. 14 <PAGE> 15 Further, the Company has filed a Declaratory Judgment action against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting that an ASM United States patent be held invalid and not infringed by the Company's single wafer epitaxial product line. No trial date has been set. On April 10, 1996, the Court denied ASM's motion for summary judgment and granted the Company's motion for summary judgment finding several independent grounds why the Company's reactors do not literally infringe ASM's patent. With this ruling, the Company's liability has been substantially eliminated on this patent. ASM has not indicated whether it intends to appeal this decision. On July 7, 1996, ASM filed a lawsuit, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C95-20586-RMW), concerning alleged infringement of a United States patent by susceptors in chemical vapor deposition chambers. Discovery is proceeding, and no trial date has been set. On January 13, 1997, the Company filed a patent infringement suit against ASM's newly announced Epsilon 2000 reactor. Discovery has not yet commenced. In September 1994, General Signal Corporation filed a lawsuit against the Company (case no. 94-461-JJF) in the United States District Court, District of Delaware. General Signal alleges that the Company infringes five of General Signal's United States patents by making, using, selling or offering for sale multi-chamber wafer fabrication equipment, including for example, the Precision 5000 series machines. General Signal seeks an injunction, multiple damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. This lawsuit is currently in active discovery and pre-trial preparation. A previously set trial date has been vacated; no trial date is currently set. In January 1995, the Company filed a lawsuit against Novellus Systems, Inc. in the United States District Court, Northern District of California (case no. C-95-0243-MMC). This lawsuit alleges that Novellus' Concept One, Concept Two, and Maxxus F TEOS systems infringe the Company's United States patent relating to the TEOS-based, plasma enhanced CVD process for silicon oxide deposition. The lawsuit seeks an injunction, damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. Damages and counterclaims have been bifurcated for separate trial. A jury trial is scheduled for March 24, 1997 before Judge Charles A. Legge. The Court recently ruled on a number of substantive motions finding, on the issues raised, that the Company's patent in suit is valid and definite. On September 15, 1995, the Company filed another lawsuit against Novellus alleging that Novellus' then newly announced blanket tungsten interconnect process infringes the Company's United States patent relating to a tungsten CVD process. The Company also sought 15 <PAGE> 16 a declaration that a Novellus United States patent for a gas purge mechanism is not infringed by the Company and/or is invalid. Novellus answered by denying the allegations and counterclaimed by alleging that the Company's systems infringe Novellus' United States patents concerning gas purge and gas debubbler mechanisms. Novellus also filed a separate lawsuit as a plaintiff before the same court which contains the same claims as those stated in Novellus' defense of the Company's lawsuit. Both cases have been assigned to Judge Legge. Discovery has commenced, and trial which had been scheduled for August 1997 has been postponed and will be rescheduled. As a result of the Company's acquisition of Orbot, the Company is involved in a lawsuit captioned KLA Instruments Corporation v. Orbot (case no. C93-20886-JW) in the United States District Court, Northern District of California, alleging infringement of one patent regarding equipment for the inspection of masks or reticles, and seeking an injunction, damages and such other relief as the Court may find appropriate. There has been discovery, but no trial date has been set. In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. Management believes that it has meritorious defenses and intends to vigorously pursue these matters. 16 <PAGE> 17 Item 5. Other Information The ratio of earnings to fixed charges for the three months ended January 26, 1997 and January 28, 1996, and for each of the last five fiscal years, was as follows: <TABLE> <CAPTION> Three Months Ended ----------------------- Fiscal Year Jan. 26, Jan. 28, --------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> 7.56x 23.33x 20.14x 21.25x 13.37x 7.61x 3.63x ===== ====== ====== ====== ====== ===== ===== </TABLE> Item 6. Exhibits and Reports on Form 8-K a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K: 2.1 Agreement and Plan of Merger, by and among Applied Materials, Inc., Orion Corp. I, and Opal, Inc. dated as of November 24, 1996, previously filed with the Company's Annual Report on Form 10-K for the year ended October 27, 1996, and incorporated herein by reference. 2.2 Stock Purchase Agreement dated as of November 24, 1996 by and among Applied Materials, Inc., Orbot Instruments, Ltd. and the Stockholders of Orbot Instruments, Ltd., previously filed with the Company's Annual Report on Form 10-K for the year ended October 27, 1996, and incorporated herein by reference. 3(ii) Bylaws of Applied Materials, Inc., as amended to December 13, 1996, previously filed with the Company's Annual Report on Form 10-K for the year ended October 27, 1996, and incorporated herein by reference. 27.0 Financial Data Schedule: filed electronically 17 <PAGE> 18 b) Report on Form 8-K was filed on February 11, 1997. The report contained the Company's financial statements for the period ended January 26, 1997, as attached to its press release dated February 11, 1997. 18 <PAGE> 19 SIGNATURE 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. APPLIED MATERIALS, INC. March 10, 1997 By: /s/ Gerald F. Taylor ----------------------------------- Gerald F. Taylor Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Michael K. O'Farrell ----------------------------------- Michael K. O'Farrell Vice President and Corporate Controller (Principal Accounting Officer) 19 <PAGE> 20 EXHIBIT INDEX Exhibit No. Document 27.0 Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the consolidated financial statements for the quarter ended January 26, 1997. </LEGEND> <MULTIPLIER> 1,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> YEAR <FISCAL-YEAR-END> OCT-26-1996 <PERIOD-END> JAN-26-1997 <EXCHANGE-RATE> 1 <CASH> 369,358 <SECURITIES> 697,081 <RECEIVABLES> 765,569 <ALLOWANCES> 0 <INVENTORY> 441,681 <CURRENT-ASSETS> 2,620,207 <PP&E> 1,312,144 <DEPRECIATION> 399,415 <TOTAL-ASSETS> 3,778,485 <CURRENT-LIABILITIES> 1,002,978 <BONDS> 233,677 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,811 <OTHER-SE> 2,430,383 <TOTAL-LIABILITY-AND-EQUITY> 3,778,485 <SALES> 835,776 <TOTAL-REVENUES> 835,776 <CGS> 464,120 <TOTAL-COSTS> 464,120 <OTHER-EXPENSES> 301,871 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 5,800 <INCOME-PRETAX> 77,542 <INCOME-TAX> 47,965 <INCOME-CONTINUING> 29,577 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 29,577 <EPS-PRIMARY> 0.16 <EPS-DILUTED> 0.16 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

ANDW

https://www.sec.gov/Archives/edgar/data/317093/0000317093-97-000002.txt

-----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, Kr5yh5mtzFru5cNKGnju0qj57jc+EcySZaEgw3r2PM8RBRzEsYQpdlaZhohh3UrZ AZThhP/oH/MqmCdaM1x6Tw== <SEC-DOCUMENT>0000317093-97-000002.txt : 19970128 <SEC-HEADER>0000317093-97-000002.hdr.sgml : 19970128 ACCESSION NUMBER: 0000317093-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDREW CORP CENTRAL INDEX KEY: 0000317093 STANDARD INDUSTRIAL CLASSIFICATION: DRAWING AND INSULATING NONFERROUS WIRE [3357] IRS NUMBER: 362092797 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09514 FILM NUMBER: 97511299 BUSINESS ADDRESS: STREET 1: 10500 W 153RD ST CITY: ORLAND PARK STATE: IL ZIP: 60462 BUSINESS PHONE: 7083493300 MAIL ADDRESS: STREET 1: 10500 WEST 153RD ST CITY: ORLANDO PARK STATE: IL ZIP: 60462 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM-10Q (12/31/96) <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark-One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996. 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 0-9514 ANDREW CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 36-2092797 (State or other jurisdiction of (IRS Employer incorporation or organization) identification No.) 10500 W. 153rd Street, Orland Park, Illinois 60462 (Address of principal executive offices and zip code) (708) 349-3300 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value--60,605,668 shares as of December 31, 1996 <PAGE> INDEX ANDREW CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets--December 31, 1996 and September 30, 1996. Consolidated statements of income--Three months ended December 31, 1996 and 1995. Consolidated statements of cash flows--Three months ended December 31, 1996 and 1995. Notes to consolidated financial statements--December 31, 1996. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Exhibit 11 Computation of Earnings per Share. Exhibit 27 Financial Data Schedule. SIGNATURES <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <CAPTION> December 31 September 30 1996 1996 ---------- ---------- (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 64,781 $ 31,295 Accounts receivable, less allowances 186,115 197,589 (Dec. $4,008; Sept. $3,648) Inventories Finished products 55,618 56,947 Materials and work in process 113,480 109,662 --------- --------- 169,098 166,609 Miscellaneous current assets 9,099 6,491 --------- --------- TOTAL CURRENT ASSETS 429,093 401,984 OTHER ASSETS Costs in excess of net assets of businesses acquired, less accumulated amortization (Dec. $20,714; Sept. $19,732) 41,758 42,667 Investments in and advances to affiliates 43,944 42,510 Investments and other assets 11,381 11,368 PROPERTY, PLANT AND EQUIPMENT Land and land improvements 11,510 11,103 Building 69,038 68,248 Equipment 266,102 254,737 Allowances for depreciation and amortization (209,808) (201,388) ---------- --------- 136,842 132,700 ---------- --------- TOTAL ASSETS $ 663,018 $ 631,229 ========== ========= <FN> The balance sheet at September 30, 1996 has been derived from the audited financial statements at that date. See Notes to Consolidated Financial Statements. </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Continued) <CAPTION> December 31 September 30 1996 1996 ----------- ---------- (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,813 $ -- Accounts payable 38,321 38,887 Accrued expenses and other liabilities 28,891 26,170 Compensation and related expenses 17,605 27,006 Income taxes 27,368 20,367 Current portion of long-term debt 4,984 4,952 ------------ ---------- TOTAL CURRENT LIABILITIES 119,982 117,382 ------------ ---------- DEFERRED LIABILITIES 8,126 7,919 LONG-TERM DEBT, less current portion 40,377 40,423 MINORITY INTEREST 9,421 9,291 STOCKHOLDERS' EQUITY Common stock (par value, $.01 a share: 100,000,000 shares authorized; 68,479,398 shares issued, including treasury) 685 685 Additional paid-in capital 44,863 43,257 Foreign currency translation 2,457 349 Retained earnings 483,254 458,914 Treasury stock, at cost (7,873,730 shares in Dec 1996; 8,047,229 shares in Sept 1996) (46,147) (46,991) ------------ ---------- 485,112 456,214 ------------ ---------- TOTAL LIABILITIES AND EQUITY $ 663,018 $ 631,229 ============ ========== <FN> The balance sheet at September 30, 1996 has been derived from the audited financial statements at that date. See Notes to Consolidated Financial Statements. </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) <CAPTION> Three Months Ended December 31 ----------------------- 1996 1995 ---------- ---------- <S> <C> <C> SALES $ 231,664 $ 177,924 Cost of products sold 141,692 106,071 ---------- ---------- GROSS PROFIT 89,972 71,853 OPERATING EXPENSES Research and development 9,849 7,411 Sales and administrative 42,011 36,972 ---------- ---------- 51,860 44,383 ---------- ---------- OPERATING INCOME 38,112 27,470 OTHER Interest expense 1,259 1,277 Interest income (704) (658) Other expense 111 427 ---------- ---------- 666 1,046 ---------- ---------- INCOME BEFORE INCOME TAXES 37,446 26,424 Income taxes 13,106 9,513 ---------- ---------- NET INCOME $ 24,340 $ 16,911 ========== ========== NET INCOME PER AVERAGE SHARE OF COMMON STOCK OUTSTANDING $ 0.40 $ 0.28 ========== ========== AVERAGE SHARES OUTSTANDING 61,394 60,966 ========== ========== <FN> See Notes to Consolidated Financial Statements. </FN> </TABLE> <PAGE> <TABLE> ANDREW CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) <CAPTION> Three Months Ended December 31 ---------------------- 1996 1995 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATIONS Net Income $ 24,340 $ 16,911 ADJUSTMENTS TO NET INCOME Depreciation and amortization 9,304 7,082 Decrease (Increase) in accounts receivable 11,692 (4,852) Increase in inventories (820) (7,685) (Increase) Decrease in miscellaneous current and other assets (2,501) 113 Increase in receivables from affiliates (145) (532) Decrease in accounts payable and other liabilities (1,788) (415) Other 95 (72) --------- --------- NET CASH FROM OPERATIONS 40,177 10,550 INVESTING ACTIVITIES Capital expenditures (11,519) (14,094) Acquisition of businesses, net of cash acquired -- (14,453) Investments in and advances to affiliates (1,434) (4,990) Proceeds from sale of property, plant and equipment 118 120 --------- --------- NET CASH USED IN INVESTING ACTIVITIES (12,835) (33,417) FINANCING ACTIVITIES Short-term borrowings (payments)-net 2,807 (362) Stock purchase and option plans 2,714 356 --------- --------- NET CASH FROM (USED IN) FINANCING ACTIVITIES 5,521 (6) Effect of exchange rate changes on cash 623 (298) --------- --------- INCREASE (DECREASE) IN THE PERIOD 33,486 (23,171) Cash and equivalents at beginning of period 31,295 46,064 --------- --------- CASH AND EQUIVALENTS AT END OF PERIOD $ 64,781 $ 22,893 ========= ========= <FN> See Notes to Consolidated Financial Statements. </FN> </TABLE> <PAGE> ANDREW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 1996 are not necessarily indicative of the results that may be expected for the year ending September 30, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report on Form 10-K for the year ended September 30, 1996. <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Andrew Corporation set first quarter records in orders, sales, net income and net income per share. Net sales for the quarter ended December 31, 1996 were $231.7 million, an increase of 30% over the first three months of fiscal year 1996. Both U.S. and international markets drove this increase. Infrastructure construction of personal communications services (PCS) and sales of wireless hand set accessories contributed to the domestic sales growth, while the South American market lead the international growth. The company's recent acquisitions of The Antenna Company and Mapra Industria e Comercio, Ltda. and Gerbo Telecommunicacoes, Ltda. have also contributed to the overall sales growth for the quarter. Cost of products sold, as a percentage of sales, was 61.2% for the first three months of fiscal year 1997 compared to 59.6% for the first quarter of fiscal year 1996. Increased customer demand for lower margin commercial products, increased sales of wireless accessories products and increased price competition were partially offset by decreased copper prices causing the growth in cost of products sold, as a percentage of sales. Operating expenses, as a percentage of sales, decreased 2.5% compared to prior year. As a percentage of sales, research and development expenses remained relatively stable, while sales and administrative expenses decreased 2.7% compared to the same period last year, mainly due to productivity improvements in the commercial segment. Total research and development spending increased $2.4 million compared to the first quarter of fiscal year 1996, while sales and administrative spending increased $5.0 million. Net interest expense remained relatively unchanged compared to the first quarter of fiscal year 1996. Other expense for the first quarter of fiscal year 1997 totaled $.1 million compared to $.4 million for the first three months of fiscal year 1996. Recording the minority interest's share in the income of the company's operations in Brazil and South Africa partially offset foreign exchange gains resulting in a slight improvement in other expense for the first quarter of fiscal year 1997 when compared to the same period last year. <PAGE> LIQUIDITY AND CAPITAL RESOURCES Cash from operations increased $29.6 million compared to the first quarter of fiscal year 1996. Collections of strong fourth quarter fiscal year 1996 sales, higher first quarter net income and decreased inventory levels in the commercial business segment were responsible for the increased liquidity. Cash used in investing activities decreased $20.6 million to $12.8 million for the quarter. Capital spending for the first quarter of fiscal year 1997 totaled $11.5 million compared to $14.1 million for the same period last year. In the first quarter of fiscal year 1996, the company purchased a majority interest in Mapra Industria e Comercio, Ltda. and Gerbo Telecommunicacoes e Servicos, Ltda. for $14.5 million, net of cash received. Cash from financing activities, for the quarter, increased $5.5 million compared to the same period last year. This increase is attributable to increased stock option activity and funds borrowed for the construction of a cable manufacturing plant in Sorocaba, Brazil. <PAGE> PART II--OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K a) Exhibit Index <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 11 Computation of Earnings per Share 27 Financial Data Schedule </TABLE> (b) Reports on Form 8-K On November 26, 1996, the Registrant filed under Item 5 of Form 8-K a description of actions taken by the Board of Directors of the company (i) to terminate the company's stockholder rights plan and to redeem all rights outstanding thereunder and (ii) to implement a new stockholder rights plan and to declare a dividend of one common stock purchase right for each outstanding share of Common Stock of the company. <PAGE> 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. Date January 27, 1997 F. L. English --------------------- ------------- F. L. English Chairman, President and Chief Executive Officer Date January 27, 1997 C. R. Nicholas --------------------- -------------- C. R. Nicholas Executive Vice President and Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> EXHIBIT 11 ANDREW CORPORATION Computation of Earnings Per Share (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended December 31 ---------------------- 1996 1995 -------- -------- <S> <C> <C> PRIMARY EARNINGS PER SHARE Average shares outstanding 60,482 60,071 Net effect of dilutive stock options-- based on the treasury stock method using average market price 910 895 ======== ======== Total 61,392 60,966 ======== ======== Net income $24,340 $16,911 ======== ======== Per share amount $ 0.40 0.28 ======== ======== FULLY DILUTED EARNINGS PER SHARE Average shares outstanding 60,482 60,071 Net effect of dilutive stock options-- based on the treasury stock method using quarter end market price 912 895 ======== ======== Total 61,394 60,966 ======== ======== Net income $24,340 16,911 ======== ======== Per share amount $ 0.40 0.28 ======== ======== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>ART. 5 FDS FOR 12-31-96 10Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 64,781 <SECURITIES> 0 <RECEIVABLES> 190,123 <ALLOWANCES> 4,008 <INVENTORY> 169,098 <CURRENT-ASSETS> 429,093 <PP&E> 346,650 <DEPRECIATION> 209,808 <TOTAL-ASSETS> 663,018 <CURRENT-LIABILITIES> 119,982 <BONDS> 40,377 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 685 <OTHER-SE> 484,427 <TOTAL-LIABILITY-AND-EQUITY> 663,018 <SALES> 231,664 <TOTAL-REVENUES> 231,664 <CGS> 141,692 <TOTAL-COSTS> 141,692 <OTHER-EXPENSES> 51,860 <LOSS-PROVISION> 296 <INTEREST-EXPENSE> 1,259 <INCOME-PRETAX> 37,446 <INCOME-TAX> 13,106 <INCOME-CONTINUING> 24,340 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 24,340 <EPS-PRIMARY> .40 <EPS-DILUTED> .40 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

APD

https://www.sec.gov/Archives/edgar/data/2969/0000950123-97-001075.txt

-----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, IF9ZbR2T7+24p5TnCtrEntnFRdza9pGlce3TGVjY8hiCIDQ2EODCSrDBz5l706ch svQHBBZyUSgW9z/+ViRAGg== <SEC-DOCUMENT>0000950123-97-001075.txt : 19970222 <SEC-HEADER>0000950123-97-001075.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950123-97-001075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR PRODUCTS & CHEMICALS INC /DE/ CENTRAL INDEX KEY: 0000002969 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 231274455 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04534 FILM NUMBER: 97526544 BUSINESS ADDRESS: STREET 1: 7201 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18195-1501 BUSINESS PHONE: 2154814911 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q QUARTERLY REPORT <TEXT> <PAGE> 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 31 December 1996 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 1-4534 AIR PRODUCTS AND CHEMICALS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 23-1274455 (State of Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 610-481-4911 Indicate by check /x/ whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at 7 February 1997 - -------------------------- --------------------------------- Common Stock, $1 par value 120,026,911 <PAGE> 2 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. Financial Information Consolidated Balance Sheets - 31 December 1996 and 30 September 1996 ..................................................................... 3 Consolidated Income - Three Months Ended 31 December 1996 and 1995 ............................................................... 4 Consolidated Cash Flows - Three Months Ended 31 December 1996 and 1995 ............................................................... 5 Notes to Consolidated Financial Statements .................................................................... 6 Management's Discussion and Analysis .......................................................................... 7 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ..................................................................... 11 Signatures .................................................................................................... 12 </TABLE> REMARKS: The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (the "Company" or "Registrant") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying statements reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Such adjustments are of a normal, recurring nature unless otherwise disclosed in the notes to consolidated financial statements. However, the results for the periods indicated herein reflect certain adjustments, such as the valuation of inventories on the LIFO cost basis, which can only be finally determined on an annual basis. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. Results of operations for any three month period are not necessarily indicative of the results of operations for a full year. 2 <PAGE> 3 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Millions of dollars, except per share) <TABLE> <CAPTION> 31 December 30 September ASSETS 1996 1996 ------ ----------- ------------ <S> <C> <C> CURRENT ASSETS Cash and cash items $ 160.7 $ 78.7 Trade receivables, less allowances for doubtful accounts 817.1 670.0 Inventories 405.4 371.1 Contracts in progress, less progress billings 152.0 115.2 Other current assets 185.0 139.7 -------- -------- TOTAL CURRENT ASSETS 1,720.2 1,374.7 -------- -------- INVESTMENTS 624.6 833.6 -------- -------- PLANT AND EQUIPMENT, at cost 8,577.7 8,102.6 Less - Accumulated depreciation 4,186.4 4,144.1 -------- -------- PLANT AND EQUIPMENT, net 4,391.3 3,958.5 -------- -------- GOODWILL 285.8 83.5 -------- -------- OTHER NONCURRENT ASSETS 294.7 272.1 -------- -------- TOTAL ASSETS $7,316.6 $6,522.4 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Payables, trade and other $ 637.8 $ 526.4 Accrued liabilities 246.4 241.1 Accrued income taxes 64.5 39.7 Short-term borrowings 566.3 423.2 Current portion of long-term debt 73.7 33.1 -------- -------- TOTAL CURRENT LIABILITIES 1,588.7 1,263.5 -------- -------- LONG-TERM DEBT 2,101.9 1,738.6 -------- -------- DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 404.2 363.5 -------- -------- DEFERRED INCOME TAXES 643.0 582.2 -------- -------- TOTAL LIABILITIES 4,737.8 3,947.8 -------- -------- SHAREHOLDERS' EQUITY Common stock, par value $1 per share 124.7 124.7 Capital in excess of par value 457.5 461.2 Retained earnings 2,756.9 2,687.2 Unrealized gain on investments 29.8 40.4 Cumulative translation adjustments (69.8) (70.2) Treasury stock, at cost (262.8) (211.2) Shares in trust (457.5) (457.5) -------- -------- TOTAL SHAREHOLDERS' EQUITY 2,578.8 2,574.6 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,316.6 $6,522.4 ======== ======== </TABLE> 3 <PAGE> 4 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED INCOME (Millions of dollars, except per share) <TABLE> <CAPTION> Three Months Ended 31 December ----------------------- 1996 1995 ---- ---- <S> <C> <C> SALES AND OTHER INCOME Sales $ 1,120.9 $ 947.5 Other income, net 9.4 3.8 --------- --------- 1,130.3 951.3 --------- --------- COSTS AND EXPENSES Cost of sales 692.7 559.4 Selling, distribution and administrative 241.5 220.1 Research and development 26.7 27.6 --------- --------- OPERATING INCOME 169.4 144.2 Income from equity affiliates, net of related expenses 18.7 15.8 Interest expense 39.9 28.7 --------- --------- INCOME BEFORE TAXES 148.2 131.3 Income taxes 48.3 42.3 --------- --------- NET INCOME $ 99.9 $ 89.0 ========= ========= MONTHLY AVERAGE OF COMMON SHARES OUTSTANDING (in millions) 110.3 111.8 --------- --------- EARNINGS PER COMMON SHARE $ .91 $ .80 ========= ========= DIVIDENDS DECLARED PER COMMON SHARE - Cash $ .28 $ .26 ========= ========= </TABLE> 4 <PAGE> 5 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES CONSOLIDATED CASH FLOWS (Millions of dollars) <TABLE> <CAPTION> Three Months Ended 31 December --------------------------- 1996 1995 ------ ------ <S> <C> <C> OPERATING ACTIVITIES Net Income $ 99.9 $ 89.0 Adjustments to reconcile income to cash provided by operating activities: Depreciation 108.1 99.4 Deferred income taxes 15.1 22.0 Impairment loss 9.3 -- Other 4.6 .9 Working capital changes that provided (used) cash, net of effects of acquisitions: Trade receivables (50.8) (6.5) Other receivables 50.9 (.5) Inventories and contracts in progress (54.0) (25.3) Payables, trade and other 82.1 (32.4) Accrued liabilities (53.1) (24.8) Other 17.0 3.9 ------ ------ CASH PROVIDED BY OPERATING ACTIVITIES 229.1 125.7 ------ ------ INVESTING ACTIVITIES Additions to plant and equipment* (303.0) (184.1) Acquisitions, less cash acquired** (292.2) -- Investment in and advances to unconsolidated affiliates (20.1) (126.4) Proceeds from sale of assets and investments 36.4 24.2 Other 4.6 (.2) ------ ------ CASH USED FOR INVESTING ACTIVITIES (574.3) (286.5) ------ ------ FINANCING ACTIVITIES Long-term debt proceeds* 325.5 125.2 Payments on long-term debt (2.9) (8.3) Net increase in commercial paper 193.0 64.4 Net increase in other short-term borrowings 6.1 8.8 Dividends paid to shareholders (30.2) (29.1) Purchase of Treasury Stock (75.0) -- Other 9.6 7.6 ------ ------ CASH PROVIDED BY FINANCING ACTIVITIES 426.1 168.6 ------ ------ Effect of Exchange Rate Changes on Cash 1.1 (.3) ------ ------ Increase in Cash and Cash Items 82.0 7.5 Cash and Cash Items - Beginning of Year 78.7 87.5 ------ ------ Cash and Cash Items - End of Period $160.7 $ 95.0 ====== ====== </TABLE> *Excludes capital leases of $1.0 million and $.8 million for the three months ended 31 December 1996 and 1995. **Excludes debt of $1.1 million to former shareholders of company acquired in fiscal 1997. 5 <PAGE> 6 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company completed the sale of the landfill gas recovery business, GSF Energy Inc., during the three months ended 31 December 1996. A gain of $9.5 million ($5.9 million after tax, or $.05 per share) was recorded. Sales of the landfill gas business were $20.3 million in fiscal year 1996 with an operating loss of $3.0 million and net income of $4.0 million, including the net income benefit from nonconventional fuel tax credits. The gain on sale is included in the other income line of the income statement. During the three months ended 31 December 1996, an impairment loss of $9.3 million ($6.0 million after tax, or $.05 per share) was recorded in the chemicals segment. The write-down was related to production assets and the related goodwill in the polyurethane release agents product line. The impairment loss is calculated based on an offer to purchase these assets and is included in the other income line of the income statement. On 22 October 1996, the Company obtained control of Carburos Metalicos S.A. (Carburos). The company now owns 96.7% of the outstanding shares in Carburos. The acquisition of the additional 70.8% ownership was completed through a series of planned tender offers over a three year period at a total cost of $408.4 million. The acquisition was funded through the issuance of U.S. dollar debt effectively converted to Spanish Peseta liabilities through the use of interest rate and currency swap contracts and foreign exchange contracts. Carburos is a leading supplier of industrial gases in Spain. This transaction was accounted for as a step acquisition purchase and the results for the three months ended 31 December 1996 contained approximately six weeks of consolidated operating results for Carburos. Previously, the Company accounted for its investment using the equity method. The Company has recorded a total of $212.2 million as cumulative goodwill, which will be amortized on a straight-line basis over forty years. The following table shows unaudited pro forma consolidated financial information for the three months ended 31 December 1996 and 1995 and the fiscal year ended 30 September 1996. This information reflects the acquisition as if it had occurred on 1 October 1995 and includes adjustments for asset valuation depreciation expense, goodwill amortization, and interest expense from acquisition debt. This information is not necessarily indicative of future consolidated results or what actual results would have been had the acquisition occurred during the periods presented. PRO FORMA INFORMATION (Unaudited) <TABLE> <CAPTION> (Millions of dollars, except per share) - -------------------------------------------------------------------------------- Three Months Ended Twelve Months Ended 31 December 30 September 1996 1995 1996 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Sales $ 1,165.8 $ 1,025.0 $ 4,309.7 Net Income $ 100.9 $ 92.9 $ 423.1 Earnings Per Share $ .91 $ .83 $ 3.79 - -------------------------------------------------------------------------------- </TABLE> 6 <PAGE> 7 AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS FIRST QUARTER FISCAL 1997 VS. FIRST QUARTER FISCAL 1996 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS CONSOLIDATED Sales in the first quarter of fiscal 1997 of $1,120.9 million were 18% higher than in the same quarter of last year while operating income was up $25.2 million, or 17%, to $169.4 million. Profits of equity affiliates increased $2.9 million to $18.7 million for the three months ended 31 December 1996. Net income was $99.9 million, or $.91 per share, compared to net income of $89.0 million, or $.80 per share, in the year-ago quarter. The earnings for the quarter included two special items. During the three months ended 31 December 1996, the Company recorded a gain of $9.5 million ($5.9 million after tax, or $.05 per share) on the sale of the landfill gas recovery business. The results of the first quarter also included an impairment loss of $9.3 million ($6.0 million after tax or $.05 per share). Sales and operating income increased due primarily to volume gains in both domestic tonnage gases and the chemicals segment coupled with the Carburos acquisition. Equipment and services contributed to the sales growth through the initial booking of several large projects. Operating income also increased from margin improvement in domestic merchant gases and favorable foreign exchange impacts in the corporate segment. Income from equity affiliates increased due mainly to favorable foreign exchange impacts and tax adjustments. SEGMENT ANALYSIS The segment results for the three months ended 31 December 1995 have been restated. The business to be divested (American Ref-Fuel) and the landfill gas recovery business sold in November 1996 are included in the corporate and other segment, while the continuing businesses from the environmental and energy segment (power generation and Pure Air(TM)), are now included in the equipment and services segment. INDUSTRIAL GASES - Sales of $614.5 million in the first quarter of fiscal 1997 were up 12% while operating income increased 14% to $118.3 million. On 22 October 1996, the Company obtained control of Carburos. The results for the three months ended 31 December 1996 contained approximately six weeks of consolidated operating results for Carburos. Previously, the Company accounted for its investment using the equity method. This completed acquisition provided sales growth of $35.3 million and approximately half of the operating profit improvement. Additional factors driving the growth were strong volume gains in domestic tonnage gases and lower production and distribution costs in domestic merchant gases. Excluding Carburos, European results were lower due to competitive pressures in Northern Europe and planned maintenance outages at two major tonnage facilities. Unfavorable European currency effects decreased both sales and operating income by 1%. 7 <PAGE> 8 Equity affiliates' income for the first quarter of fiscal 1997 was $12.0 million compared to $9.2 million in the prior year. The increase of $2.8 million was due primarily to favorable foreign exchange effects and tax adjustments. CHEMICALS- Sales in the first quarter of 1997 of $346.2 million increased $36.5 million while operating income decreased $3.6 million to $44.5 million. The 12% sales increase resulted from strong volume growth in most product lines, especially polyurethane intermediates. The prior year period was impacted by an extended customer outage. The results for the first quarter of 1997 included an impairment loss of $9.3 million related to production assets and the related goodwill in the polyurethane release agents product line. Excluding this writedown, operating income increased 12% or $5.7 million. Operating income increased mainly on the volume gains in polyurethane intermediates. EQUIPMENT AND SERVICES - Sales of $159.0 million increased $77.1 million from the year-ago quarter while operating income was up $1.0 million to $5.6 million. This year's results included the initial sales booking for several large projects being sold to unconsolidated affiliates. Sales backlog for the equipment product line continues to grow at $431.3 million at 31 December 1996. This high quality backlog compares to $305.7 million at 30 September 1996 and $266.4 million at 31 December 1995. Equity affiliates' income for the first quarter of fiscal 1997 increased $1.5 million to $3.5 million. The improved results reflect improved operating performance at the power generation facilities. CORPORATE AND OTHER - Sales in the first quarter of 1997 of $1.2 million decreased from $5.0 million due to the sale of the landfill gas recovery business. Operating income was up $13.2 million to income of $1.0 million. The results for the first quarter included a gain of $9.5 million related to the sale of the landfill gas recovery business, GSF Energy Inc. Excluding this gain, operating income was up $3.7 million due to favorable foreign exchange impacts. Equity affiliates' income for the first quarter of fiscal 1997 decreased $1.7 million to $3.1 million. INTEREST Interest expense was $39.9 million compared to $28.7 million in the first quarter of fiscal 1996. The increase in expense was due primarily to a higher level of debt outstanding due to the share repurchase program and the capital investment program which included the Carburos acquisition. INCOME TAXES The effective tax rate on income was 32.6% for the quarter ended 31 December 1996 compared with 32.2% for the same quarter in fiscal 1996. The slight increase in the effective tax rate was due to the Company no longer receiving nonconventional fuel tax credits due to the sale of the landfill gas recovery business. 8 <PAGE> 9 LIQUIDITY AND CAPITAL RESOURCES Capital expenditures during the first three months of fiscal 1997 totaled $617.4 million compared to $311.3 million in the corresponding period of the prior year. Additions to plant and equipment increased from $184.1 million during the first three months of fiscal 1996 to $303.0 million during the current period primarily in support of growth in the worldwide industrial gas business. Investments in unconsolidated affiliates were $20.1 million during the first three months of fiscal 1997 versus $126.4 million last year. Prior year numbers included the acquisition of an additional 21.5% of the outstanding shares of Carburos at a cost of $120.0 million. On 22 October 1996, the company obtained control of Carburos through the acquisition of an additional 49.1% shares at a cost of $288.4 million. Including this acquisition, capital expenditures are expected to be approximately $1.3 billion in fiscal 1997. It is anticipated that these expenditures will be funded with cash from operations supplemented with proceeds from financing activities. Cash provided by operating activities during the first three months of fiscal 1997 ($229.1 million) combined with cash provided by debt financing ($524.6 million), and proceeds from the sale of assets and investments ($36.4 million) were used largely for capital expenditures ($617.4 million), purchase of the Company's common stock for treasury ($75.0 million), and cash dividends ($30.2 million). Cash and cash items increased $82.0 million from $78.7 million at the beginning of the fiscal year to $160.7 million at 31 December 1996. The net increase in commercial paper outstanding was $193.0 million. Total debt at 31 December 1996 and 30 September 1996, expressed as a percentage of the sum of total debt and shareholders' equity, was 52% and 46%, respectively. Total debt increased from $2,194.9 million at 30 September 1996 to $2,741.9 million at 31 December 1996. During the first quarter of fiscal 1997, the Company issued $231 million in debt securities with maturities ranging from three to seven years and fixed coupon rates of 6.01% to 6.86% or variable rates tied to LIBOR. Additionally, $53.0 million of 7.03%, nine year U.S. dollar debt was issued by a foreign subsidiary. The Carburos acquisition was financed primarily through the issuance of U.S. dollar debt effectively converted to Spanish Peseta liabilities through the use of interest rate and currency swap contracts and foreign exchange contracts. There was $563.0 million of commercial paper outstanding at 31 December 1996. The Company's revolving credit commitments amounted to $600.0 million at 31 December 1996 with funding available in 13 currencies. No borrowings were outstanding under these commitments. Additional commitments totaling $15.8 million are maintained by the Company's foreign subsidiaries, of which $2.4 million was utilized at 31 December 1996. At 31 December 1996, the Company had an unutilized shelf registration for $408.0 million of debt securities. Subsequent to 31 December 1996, the Company issued $100.0 million in notes due in 2009, with a one-time put option exercisable by the investor after two years. The coupon rate on this note is indexed to LIBOR for the first two years. The Company enters into interest rate swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain the percentage of fixed and variable debt within certain parameters set by management. In accordance with these parameters, the agreements are used to reduce interest rate risks and costs inherent in the Company's debt portfolio. Accordingly, the Company enters into agreements to both effectively convert variable-rate debt to fixed-rate debt and to effectively convert fixed-rate debt to variable-rate debt which is indexed principally to LIBOR rates. The Company has also entered into interest rate swap contracts to effectively convert the stated variable rates to interest rates based on LIBOR. The fair value gain (loss) on the variable to variable swaps is equally offset by a fair value loss (gain) on the related debt agreement. 9 <PAGE> 10 The notional principal and fair value of interest rate swap agreements at 31 December 1996 and 30 September 1996 were as follows: (Millions of dollars) <TABLE> <CAPTION> 31 December 1996 30 September 1996 ----------------------------- ------------------------------------ Notional Fair Value Notional Fair Value Amount Gain (Loss) Amount Gain (Loss) ----------------------------- ------------------------------------ <S> <C> <C> <C> <C> Fixed to Variable $279.1 $ 6.6 $243.5 $ 1.3 Variable to Fixed 57.5 (.2) 54.0 (.5) Variable to Variable 60.0 50.2 60.0 27.9 ----------------------------- ------------------------------------ Total $396.6 $56.6 $357.5 $ 28.7 ============================= ==================================== </TABLE> The Company is also party to interest rate and currency swap contracts. These contracts effectively convert the currency denomination of a debt instrument into another currency in which the Company has a net equity position while changing the interest rate characteristics of the instrument. The notional principal of interest rate and currency swap agreements outstanding at 31 December 1996 was $273.6 million. The fair value of the agreements was a loss of $17.5 million, of which a $12.5 million gain related to the currency component was recognized in the financial statements. The remaining $30.0 million loss was related to the interest component (reflecting that current interest rates are generally lower than the interest rates paid under the interest rate and currency swap agreements) and has not been recognized in the financial statements. As of 30 September 1996 interest rate and currency swap agreements were outstanding with a notional principal amount and fair value of $273.6 million and a loss of $15.5 million, respectively. The estimated fair value of the Company's long-term debt, including current portion, as of 31 December 1996 is $2,330.7 million compared to a book value of $2,175.6 million. During the first quarter of fiscal 1997, 1.1 million shares of the Company's outstanding common stock were repurchased at a cost of $75.0 million. The remainder of the program will be paced by the disposition of American Ref-Fuel and ongoing capital investment requirements. 10 <PAGE> 11 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. (b) Current Reports on Form 8-K dated 23 October 1996 and 25 October 1996 were filed by the registrant during the quarter ended 31 December 1996 in which Item 5 of such form was reported. 11 <PAGE> 12 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. Air Products and Chemicals, Inc. (Registrant) Date: February 12, 1997 By: /s/ A. H. Kaplan --------------------------------- A. H. Kaplan Vice President - Finance (Chief Financial Officer) 12 <PAGE> 13 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- EXHIBITS To FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended 31 December 1996 Commission File No. 1-4534 ------------------- AIR PRODUCTS AND CHEMICALS, INC. (Exact name of registrant as specified in its charter) <PAGE> 14 INDEX TO EXHIBITS (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATIOS <TEXT> <PAGE> 1 Exhibit (a)(12) AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Unaudited) <TABLE> <CAPTION> Three Months Ended Year Ended 30 September 31 December -------------------------------------------------------- ----------- 1992 1993 1994 1995 1996 1996 ---- ---- ---- ---- ---- ---- EARNINGS: (Millions of dollars) <S> <C> <C> <C> <C> <C> <C> Income before extraordinary item and the cumulative effect of accounting changes: $277.0 $200.9 $233.5 $368.2 $416.4 $ 99.9 Add (deduct): Provision for income taxes 130.8 103.0 95.2 186.2 195.5 48.8 Fixed charges, excluding capitalized interest 133.4 127.3 127.1 148.8 184.0 57.8 Capitalized interest amortized during the period 7.5 7.7 8.0 9.1 9.4 2.0 Undistributed earnings of less-than- fifty-percent-owned affiliates (12.5) (8.1) (2.8) (25.4) (40.6) (9.8) ------ ------ ------ ------ ------ ------ Earnings, as adjusted $536.2 $430.8 $461.0 $686.9 $764.7 $198.7 ====== ====== ====== ====== ====== ====== FIXED CHARGES: Interest on indebtedness, including capital lease obligations $125.1 $118.6 $118.2 $139.4 $171.7 $ 54.1 Capitalized interest 4.1 6.3 9.7 18.5 20.0 5.5 Amortization of debt discount premium and expense .8 .7 .8 .2 1.5 .4 Portion of rents under operating leases representative of the interest factor 7.5 8.0 8.1 9.2 10.8 3.3 ------ ------ ------ ------ ------ ------ Fixed charges $137.5 $133.6 $136.8 $167.3 $204.0 $ 63.3 ====== ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES: 3.9 3.2 3.4 4.1 3.7 3.1 ====== ====== ====== ====== ====== ====== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. </LEGEND> <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-START> OCT-01-1996 <PERIOD-END> DEC-31-1996 <EXCHANGE-RATE> 1 <CASH> 161 <SECURITIES> 0 <RECEIVABLES> 833 <ALLOWANCES> 16 <INVENTORY> 405 <CURRENT-ASSETS> 1,720 <PP&E> 8,578 <DEPRECIATION> 4,186 <TOTAL-ASSETS> 7,317 <CURRENT-LIABILITIES> 1,589 <BONDS> 2,102 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 125 <OTHER-SE> 2,454 <TOTAL-LIABILITY-AND-EQUITY> 7,317 <SALES> 1,121 <TOTAL-REVENUES> 1,121 <CGS> 693 <TOTAL-COSTS> 693 <OTHER-EXPENSES> 27 <LOSS-PROVISION> 1 <INTEREST-EXPENSE> 40 <INCOME-PRETAX> 148 <INCOME-TAX> 48 <INCOME-CONTINUING> 100 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 100 <EPS-PRIMARY> .91 <EPS-DILUTED> .91 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

AZO

https://www.sec.gov/Archives/edgar/data/866787/0000950144-97-000074.txt

-----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, QpvmXNGWMBaoJmFCyTgI/YvuDaSx9cFPJ1pBQNxmsoKNidyep8o++D0rNvZeCCyR ZShqdA3Uiyg/UtkVV1oMng== <SEC-DOCUMENT>0000950144-97-000074.txt : 19970107 <SEC-HEADER>0000950144-97-000074.hdr.sgml : 19970107 ACCESSION NUMBER: 0000950144-97-000074 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961123 FILED AS OF DATE: 19970106 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOZONE INC CENTRAL INDEX KEY: 0000866787 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 621482048 STATE OF INCORPORATION: NV FISCAL YEAR END: 0828 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10714 FILM NUMBER: 97501592 BUSINESS ADDRESS: STREET 1: 123 SOUTH FRONT ST CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9014956500 MAIL ADDRESS: STREET 1: P O BOX 2198 STREET 2: DEPT 8074 CITY: MEMPHIS STATE: TN ZIP: 38101-9842 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>AUTOZONE, INC. 10-Q 11-23-96 <TEXT> <PAGE> 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 23, 1996, 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 1-10714 AUTOZONE, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> Nevada 62-1482048 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) </TABLE> 123 South Front Street Memphis, Tennessee 38103 (Address of principal executive offices) (Zip Code) (901) 495-6500 Registrant's telephone number, including area code (not applicable) Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] [No] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value - 150,384,839 shares as of December 31, 1996 - ------------------------------------------------------------------------------- <PAGE> 2 PART 1. FINANCIAL INFORMATION AUTOZONE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> Nov. 23, Aug. 31, 1996 1996 ---- ---- (Unaudited) (in thousands) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents .......................................... $ 3,878 $ 3,904 Accounts receivable ............................................... 18,280 15,466 Merchandise inventories ........................................... 610,480 555,894 Prepaid expenses .................................................. 24,939 19,225 Deferred income taxes ............................................. 19,140 18,608 ----------- ----------- Total current assets ............................................ 676,717 613,097 Property and equipment: Property and equipment ............................................ 1,115,282 1,061,166 Less accumulated depreciation and amortization .................... (215,531) (198,292) ----------- ----------- 899,751 862,874 Other assets: Cost in excess of net assets acquired ............................. 17,044 17,187 Deferred income taxes ............................................. 3,488 2,938 Other assets ...................................................... 3,410 2,301 ----------- ----------- 23,942 22,426 ----------- ----------- $ 1,600,410 $ 1,498,397 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 417,337 $ 381,304 Accrued expenses .................................................. 97,879 104,909 Checks outstanding, net ........................................... 1,936 20,005 Income taxes payable .............................................. 23,982 12,260 Revolving credit agreements ....................................... - 94,400 ----------- ----------- Total current liabilities ....................................... 541,134 612,878 Long-term debt .................................................... 133,000 - Other liabilities ................................................. 19,788 19,937 Stockholders' equity .............................................. 906,488 865,582 ----------- ----------- $ 1,600,410 $ 1,498,397 =========== =========== </TABLE> See Notes to Condensed Consolidated Financial Statements. <PAGE> 3 AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Twelve Weeks Ended ---------------------------- Nov. 23, Nov. 18, 1996 1995 ------- ------- (in thousands, except per share amounts) <S> <C> <C> Net sales ................................................ $ 569,145 $ 463,029 Cost of sales, including warehouse and delivery expenses .................................. 328,847 269,809 Operating, selling, general and administrative expenses ................................ 178,400 137,823 ----------- ----------- Operating profit ......................................... 61,898 55,397 Interest income (expense)-net ............................ (1,173) - ----------- ----------- Income before income taxes ............................... 60,725 55,397 Income taxes ............................................. 22,750 20,600 ----------- ----------- Net income ........................................... $ 37,975 $ 34,797 =========== =========== Net income per share ..................................... $ 0.25 $ 0.23 =========== =========== Average shares outstanding, including common stock equivalents ............................... 152,394 149,847 =========== =========== </TABLE> See notes to Condensed Consolidated Financial Statements. <PAGE> 4 AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Twelve Weeks Ended --------------------------- Nov. 23, Nov. 18, 1996 1995 ------------- ----------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net income .......................................................... $ 37,975 $ 34,797 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 17,482 12,679 Net increase in merchandise inventories ......................... (54,586) (26,754) Net increase in current liabilities ............................. 22,656 41,706 Other - net ..................................................... (10,874) (5,334) ----------- ----------- Net cash provided by operating activities ..................... 12,653 57,094 Cash flows from investing activities: Cash outflows for property and equipment, net ................................................ (54,210) (69,100) Cash flows from financing activities: Net proceeds from debt .............................................. 38,600 4,959 Proceeds from sale of Common Stock, including related tax benefit ... 2,931 3,530 ----------- ----------- Net cash provided by financing activities ..................... 41,531 8,489 ----------- ----------- Net decrease in cash and cash equivalents ............................. (26) (3,517) Cash and cash equivalents at beginning of period ...................... 3,904 6,411 ----------- ----------- Cash and cash equivalents at end of period ............................ $ 3,878 $ 2,894 =========== =========== </TABLE> See notes to Condensed Consolidated Financial Statements. <PAGE> 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twelve weeks ended November 23, 1996, are not necessarily indicative of the results that may be expected for the fiscal year ending August 30, 1997. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 1996. NOTE B--INVENTORIES Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. NOTE C--DEBT Effective September 19, 1996, the Company increased its unsecured revolving credit agreement with a bank by $10 million resulting in lines of credit totaling $135 million which extend until February 1, 1998. The rate of interest payable under the agreements is a function of the London Interbank Offered Rate (LIBOR), or the lending bank's base rate (or prime rate as such term may be used by the individual bank), at the option of the Company. At November 23, 1996, the Company's borrowings under the agreements were $133 million and the weighted average interest rate was 5.6%. The revolving credit agreements contain a covenant limiting the amount of debt the Company may incur relative to its net worth. During December 1996, the Company executed an agreement with a group of banks for a $275 million five-year revolving credit facility to replace the existing revolving credit agreements. Based on the terms of the Company's new five-year credit facility, amounts outstanding under the revolving credit facility at November 23, 1996 have been classified as long-term. <PAGE> 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TWELVE WEEKS ENDED NOVEMBER 23, 1996, COMPARED TO TWELVE WEEKS ENDED NOVEMBER 18, 1995 Net sales for the twelve weeks ended November 23, 1996 increased by $106.1 million, or 22.9%, over net sales for the comparable period of fiscal 1996. This increase was due to a comparable store sales increase of 7%, (which was primarily due to sales growth in the Company's newer stores and the added sales of the Company's commercial program), and increases in net sales for stores opened since the beginning of fiscal 1996. At November 23, 1996 the Company had 1,477 stores in operation compared with 1,193 stores at November 18, 1995. Gross profit for the twelve weeks ended November 23, 1996, was $240.3 million, or 42.2% of net sales, compared with $193.2 million, or 41.7% of net sales, during the comparable period for fiscal 1996. The increase in the gross profit percentage was due primarily to efficiencies in distribution and inventory control costs and the added sales of higher margin ALLDATA products. Operating, selling, general and administrative expenses for the twelve weeks ended November 23, 1996 increased by $40.6 million over such expenses for the comparable period for fiscal 1996, and increased as a percentage of net sales from 29.8% to 31.3%. The increase in the expense ratio was due primarily to start up costs of the Company's commercial program, which was fully implemented at the end of the first fiscal quarter of 1997, and operating costs of ALLDATA. Although the commercial sales program is currently unprofitable, the Company anticipates that optimum operating efficiencies will be achieved after consolidating the commercial business of certain stores. Ultimately, the Company expects that the program will be in 80 to 90 percent of its stores. The number of stores participating in the commercial program was 1,436 at November 23, 1996. The Company's effective income tax rate was 37.5% of pre-tax income for the twelve weeks ended November 23, 1996 and 37.2% for the twelve weeks ended November 18, 1995. LIQUIDITY AND CAPITAL RESOURCES For the twelve weeks ended November 23, 1996, net cash of $12.7 million was provided by the Company's operations versus $57.1 million for the comparable period of fiscal year 1996. The comparative decrease in cash provided by operations is due primarily to increased inventory requirements. Capital expenditures for the twelve weeks ended November 23, 1996 were $54.2 million. The Company anticipates that capital expenditures for fiscal 1997 as a whole will be approximately $335 to $350 million. Year-to-date, the Company opened 54 net new stores and 5 stores that replaced existing stores. The Company expects to open approximately 335 new stores and approximately 30 replacement stores during fiscal 1997. <PAGE> 7 The Company anticipates that it will rely on internally generated funds to support a majority of its capital expenditures and working capital requirements; the balance of such requirements will be funded through borrowings. The Company has revolving credit agreements with several banks providing for lines of credit in an aggregate maximum amount of $135 million, including an increase of $10 million in September 1996. At November 23, 1996, the Company had borrowings outstanding under these credit agreements of $133 million. During December 1996, the Company executed an agreement with a group of banks for a new $275 million five year revolving credit facility to replace the existing revolving credit agreements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this report: 3.1 Articles of Incorporation of AutoZone, Inc. Incorporated by reference to Exhibit 3.1 to the Form10-K for the fiscal year ended August 27, 1994. 3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated December 16, 1993, to increase its authorized shares of common stock to 200,000,000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for the fiscal year ended August 27, 1994. 3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.2 to the February 1992 Form S-1. 4.1 Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992 Form S-1. 4.2 Registration Rights Agreement, dated as of February 18, 1987, by and among Auto Shack, Inc. and certain stockholders. Incorporated by reference to Exhibit 4.9 to the Form S-1 Registration Statement filed by the Company under the Securities Act (No. 33-39197), (the "April 1991 Form S-1"). 4.3 Amendment to the Registration Rights Agreement dated as of August 1, 1993. Incorporated by reference to Exhibit 4.1 to the Form S-3 Registration Statement filed by the Company under the Securities Act (No. 33-67550). <PAGE> 8 10.1 Management Contract or Compensatory Plan or Arrangement. ------------------------------------------------------ Employment Agreement; Covenant Not to Compete; Not to Solicit and Agreement Concerning Confidential Information and Trade Secrets between the Company and Thomas S. Hanemann dated November 8, 1996. 11.1 Statement re: Computation of earnings per share. 27.1 Financial Data Schedule. (SEC Use Only) (b) Reports on Form 8-K During the twelve weeks ended November 23, 1996, the Company filed a report on Form 8-K dated November 8, 1996, stating: On November 8, 1996, the Company announced that Thomas S. Hanemann, President, would retire December 12, 1996. Johnston C. Adams, Jr. currently the Company's Vice Chairman and Chief Operating Officer, will be elected President upon Mr. Hanemann's retirement. 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. AUTOZONE, INC. By: /s/ Robert J. Hunt ----------------------------------------------- Robert J. Hunt Executive Vice President and Chief Financial Officer-Customer Satisfaction (Principal Financial Officer) By: /s/ Michael E. Butterick ------------------------------------------------ Michael E. Butterick Vice President, Controller-Customer Satisfaction (Principal Accounting Officer) Dated: January 6, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> <PAGE> 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT; COVENANT NOT TO COMPETE; NOT TO SOLICIT AND AGREEMENT CONCERNING CONFIDENTIAL INFORMATION AND TRADE SECRETS THIS AGREEMENT is made and entered into in duplicate originals and effective this 8th day of November, 1996, by and between AUTOZONE, INC., a Nevada corporation with headquarters in Memphis, Tennessee, (AutoZone, Inc. and its direct and indirect subsidiaries are hereafter collectively referred to as "Company") and THOMAS S. HANEMANN, an individual who is a resident of Shelby County, Tennessee, (hereafter referred to as "Hanemann"). RECITALS WHEREAS, the Company is a leading specialty retailer, engaged in the business of pricing and buying at wholesale and selling, promoting, marketing and distributing automotive parts and automotive accessories for automobiles, trucks, and miscellaneous vehicular equipment throughout a substantial portion of the United States with reasonable expectations in the foreseeable future of extending its business operations to include Hawaii and Alaska as well as Puerto Rico, Canada and Mexico. The Company carries out its business operations through the development and implementation of business plans and strategies developed through the expenditure of substantial time and expense; and WHEREAS, Hanemann, as an officer of the Company, has participated in discussing and developing the Company's expectations of expanding its business operations throughout the United States, including Hawaii and Alaska, Puerto Rico, Canada and Mexico, and understands and acknowledges the importance of these strategies to the Company's business interest; and WHEREAS, the Company has developed and compiled highly valuable and confidential business plans which include applications of its expertise in connection with its business operations, its list of customers and suppliers of goods and services (sometimes hereinafter collectively referred to as "Vendors") and its purchasing, marketing and computer software systems, computer programs and designs, processes, procedures and techniques; and WHEREAS, Hanemann is now and for some time has been employed by the Company as an executive officer of the Company, the principal duties of which have included overall managerial responsibility for the operation of the Company's retail stores and the Human Resource Department of the Company, as well as involvement on the highest corporate level 1 <PAGE> 2 with the overall business operations of the Company, including its strategic planning and business forecasts; and WHEREAS, Hanemann has requested the Company of his own free will and accord to accept his resignation as an officer of the Company effective as of the close of business on December 12, 1996 (the "Resignation Date"), for the purpose of providing him time to pursue other personal interests, and to allow him to remain as an employee of the Company on a leave of absence during the term of this Agreement, but to remain as a member of the Board of Directors of the Company subject to removal, annual election, and resignation in the same manner as other members of the Board; and WHEREAS, the Company has agreed to accept Hanemann's resignation as an officer of the Company effective as of the Resignation Date, and has agreed to enter into this Agreement with Hanemann to employ him as an employee of the Company and to accept his request that he be granted a leave of absence pursuant to the provisions of this Agreement, subject, however, to Hanemann's agreement to fully perform and abide by each and every covenant, condition and agreement set forth herein; and WHEREAS, during the course of performing the duties of his position up through the date of this Agreement, Hanemann participated in the establishment and execution of the Company's business policies and operations and by doing so has created a substantial similarity of identification between the Company and Hanemann with respect to the Company's Vendors, suppliers, customers and retail outlets; and WHEREAS, as a result of such responsibilities, and similarity of identification, and because of Hanemann's knowledge of the identity of the Company's strategic business operations and plans, present as well as future, it is essential that the Company protect its business interests; and WHEREAS, Hanemann, in connection with his employment by and with the Company has gained broad experience and has otherwise become familiar with the nature and extent of the business of the Company, both present and planned, its business secrets, its methods and systems of doing business and Confidential Information (as hereinbelow defined); and WHEREAS, in view of all of the foregoing it is necessary and essential that the Company in order to maintain its competitive position in the automotive parts and automotive accessories after market, protect the confidentiality of all of the aforementioned systems and methods, techniques, forms, materials, procedures pertinent thereto, customer lists, Vendor lists and future business plans, and secure the interest of the Company by entering into this 2 <PAGE> 3 Agreement with Hanemann who acknowledges that the securing of this protection by the Company is a reasonable requirement of protecting the Company's business interest; and WHEREAS, Hanemann recognizes and acknowledges that the confidential business planning, computer software systems, computer programs and designs, processes and techniques developed by the Company over the years to which he has become privy, are unique and of significant value to the Company; and WHEREAS, Hanemann recognizes, acknowledges and agrees that the intent of this Agreement is to protect and preserve the confidentiality of the Company's unique, special and valuable expertise in the sale of automotive parts and automotive accessories as well as the Company's business operations including by way of illustration, but not limitation, its sales, marketing, and distribution processes, plans and techniques, inventory costs, Vendor and distribution lists and customer lists, all toward the end that the Company's business and competitive position are not impaired as they would be if not protected and preserved by this Agreement; and WHEREAS, Hanemann acknowledges and agrees that this Agreement is reasonably necessary to protect the Company's interest throughout the geographic area and period of time defined below without imposing undue hardship on Hanemann and that the public interest is not adversely affected by the Agreement and that it is in all respects warranted and appropriate given the modern facilities of travel and communication as well as the breadth of the Company's business and Hanemann's responsibility, authority and involvement in the business of the Company; and WHEREAS, the Company and Hanemann jointly acknowledge and agree that this Agreement supersedes all prior employment and non-competition agreements, if any, between the parties and all such agreements, if any, are hereby terminated by this Agreement; and WHEREAS, the Company and Hanemann further jointly acknowledge and agree that without agreeing to the terms hereof, Hanemann would not receive the consideration set forth hereinbelow. NOW, THEREFORE, in consideration of the above and the foregoing promises and the consideration set forth hereinbelow and other good and valuable consideration, the receipt of which is hereby acknowledged, Hanemann does hereby covenant and agree as follows: 1. Definitions. 3 <PAGE> 4 (a) "Area" shall mean the entire geographic area encompassed within the borders of the continental United States and Hawaii and Alaska; and it shall also mean the entire geographic area encompassed within the boundaries of Puerto Rico, Canada and Mexico. (b) "Business Ideas" shall mean all ideas, inventions and other developments or improvements conceived or reduced to practice by Hanemann, alone or with others, during the term of his employment with the Company, whether or not during working hours that are within the scope of the Business of the Company or that relate to Business of the Company, all of which shall be the exclusive property of the Company. (c) "Business of the Company" shall mean and include the business of pricing and buying at wholesale and selling, marketing, promoting and distributing at retail and wholesale automotive parts and automotive accessories for automobiles, trucks and other automotive vehicles in any and all segments of the automotive after market, including but not limited to the "DIY" and commercial segments. The parties agree that the sale of automotive parts in conjunction with their installation by a company solely engaged in the sale of automotive parts in conjunction with the installation of such automotive parts by such company shall not be deemed to be a part of the Business of the Company, and the sale of automotive parts in conjunction with their installation shall not be deemed a "Competing Business" under Section 1(d) hereof. By way of illustration and not limitation, the following shall not be considered "Competing Businesses": Jiffy Lube, Midas Muffler and Brake Shop, Precision Tune, Goodyear Auto Service Centers, and Firestone Tire and Service Centers. The parties also agree that a company not engaged in the direct sale or indirect sale through subsidiaries (whether direct or indirect) or affiliates (whether direct or indirect) of automotive parts or accessories to (i) retail outlets (including, but not limited to outlets with sales to "DIY" customers or installers of automotive parts or accessories) (ii) end users of the automotive parts or accessories, or (iii) installers of automotive parts or accessories, shall not be a "Competing Business" under Section 1(d) hereof. Notwithstanding, it is agreed that TBC as it presently conducts business, shall not be considered a "Competing Business". (d) "Competing Business" shall mean any entity of any kind which is engaged in any manner in the same business or substantially the same business as the Business of the Company; or any entity of any kind which has any organizational unit, part, subpart, subsidiary or affiliate engaged in the same or substantially the same business as the Business of the Company. Hanemann and the Company expressly agree that the wholesale distribution of automotive parts through a network of "jobbers" or through company-owned or company-controlled outlets such as Genuine Parts - NAPA shall be a "Competing Business". Provided, however, solely for purposes of excluding any retail business with retail stores that sell automotive parts and automotive accessories as a minor portion of the retail business in each of its retail stores from the term "Competing Business", any such retail business engaged in the same business or 4 <PAGE> 5 substantially the same business as the Business of the Company either directly or through an operating division or subsidiary of such retail business shall not be deemed to be a "Competing Business" if both (a) the average sales per store per annum of the business or the average sales per store per annum of any organizational unit, part, subpart, subsidiary or affiliate of such business from the sale of automotive parts and automotive accessories (excluding sales at stores which do not sell automotive parts and automotive accessories) shall be less than 10% of the average sales per store per annum of the Company for the same year and (b) the total sales of automotive parts and accessories for any such retail business (including the sales of automotive parts and automotive accessories by any organizational unit, part, subpart, subsidiary or affiliate of such business) shall be, in the aggregate, less than 10% of such business' total gross sales. By way of illustration and not limitation, Competing Business" is consequently intended to include (i) all public or independently owned automotive parts and automotive accessory specialty retailing chains such as, for example, Pep-Boys, Advance, and Hi-Lo; (ii) all chains with divisions or subsidiaries selling automotive parts and automotive accessories from separate business units such as, for example, Western Auto or Auto Palace; (iii) all wholesalers (other than those excluded by the last sentence of Section 1(c)) of automotive parts or automotive accessories such as Genuine Parts - NAPA; and (iv) all other retail businesses with sales of automotive parts and/or automotive accessories exceeding either of the minimum sales volume limitations set forth in clauses (a) or (b) of this Section 1(d). (e) "Confidential Information" shall mean all Business Ideas, customer lists, sales promotion, distribution and marketing information, trade secrets (as hereinafter defined), analysis or other information relating to the Business of the Company; listings of the Company's Vendors and/or their prices; all ideas, designs, inventions, data and developments including strategic plans, whether or not copyrightable or patentable, whether originated or developed by or with Hanemann or others while working on behalf of the Company and which are related to the Business of the Company; all customer account records, training and operations material and memoranda, personnel records, pricing policies and information, financial information concerning or related to the Business of the Company, including, but not limited to, its accounts, customers, distributors, employees and affairs, obtained by or furnished, disclosed or disseminated to Hanemann, or obtained, assembled or compiled by Hanemann during the course of his employment by the Company and all physical embodiments of the foregoing, all of which are hereby agreed to be the property of and confidential to the Company, but Confidential Information shall not include any of the foregoing to the extend the same is or becomes publicly known through no fault or beach of this Agreement by Hanemann or through no fault or breach of a confidential relationship between the Company and a third party. The term trade secrets shall mean the singular and plural, whole or any part of or phase of any and all scientific or technical information, design, drawing, diagram, process, procedure, computer software systems, computer programs and designs, formula, improvement, invention, plan, apparatus, fixture, tool, equipment, mechanism, technique of production or method of manufacture or assembly, or 5 <PAGE> 6 method of marketing, distribution or sale which is used or has been used by the Company and is secret and of value to the Company or which gives the Company an advantage over competitors who do not know or use it and which is known only by the Company and those of the Company's employees to whom it has been confided in order to apply it to its intended uses. For purposes hereof, "Confidential Information" shall not include the general knowledge and management abilities of Hanemann as long as his knowledge and management abilities are utilized in or imparted to any business which is not a Competing Business. 2. Term of Agreement. This Agreement shall remain in full force and effect beginning with the date of this Agreement and continuing thereafter for the remainder of the Company's 1997 fiscal year and, in addition, for the following two (2) consecutive fiscal years of the Company thereafter through August 2630, 1999. 3. Effective Date. This Agreement shall be effective as of the date of this Agreement. 4. Recitals. The recitals set forth above are fully incorporated into and made a part of this Agreement. 5. Resignation as Officer. Hanemann hereby resigns as an officer of the Company effective as of the Resignation Date, and the Company accepts his resignation. 6. Employment. The Company hereby agrees to continue to employ Hanemann as an employee of the Company during the term of this Agreement, and Hanemann hereby accepts employment pursuant to the terms and conditions set forth herein. Upon the earlier to occur of either (i) the expiration of the term of this Agreement or (ii) Hanemann's breach of any term or provision of this Agreement, including the covenants, conditions and agreements set forth in Sections 8, 9, 10 and 11, Hanemann and the Company agree that Hanemann's employment with the Company shall automatically terminate, and the Company shall have no further obligation to pay to him the consideration set forth in Section 19 hereof; provided, however, the covenants, conditions and agreements of Hanemann, including each of those set forth in Sections 8, 9, 10 and 11 hereof, shall remain in full force and effect during the term of this Agreement ending August 2630, 1999. 7. Leave of Absence/Duties of Hanemann. Effective as of the date of this Agreement, the Company agrees to accept Hanemann's request that he be granted a leave of absence from the Company while remaining in the employ of the Company at the salary and with such benefits as are expressly set forth herein. Hanemann agrees that he shall take no action for or on behalf of or in the name of the Company or otherwise represent himself by either words, conduct or both as having any authority to act for it, on its behalf or in its name. 6 <PAGE> 7 Hanemann agrees to be available for such duties as reasonably requested by the Chairman of the Board of the Company such duties to not interfere with any new employment or business ventures of Hanemann. The Company agrees that Hanemann shall be entitled to seek and accept such additional employment as he may desire during the term of this Agreement, but only to the extent such additional employment does not in any manner violate any of the provisions of this Agreement, including specifically the provisions of Sections 7 through 11 hereof. 8. Covenant Not to Compete. For and in consideration of the covenants and agreements of the Company set forth herein, including the consideration described in Sections 19 and 20 hereof, Hanemann hereby covenants and agrees that during the term of this Agreement as set forth hereinabove, Hanemann shall not directly or indirectly, as an owner, partner, shareholder (other than as an owner of less than 5% of the issued and outstanding voting securities of an entity whose voting securities are traded on a national securities exchange or reported on the NASDAQ Stock Market's National Market System), officer, executive, board member, director, trustee, employee, consultant, or otherwise, whether directly or indirectly, engage in, work for, consult, provide advice or assistance or otherwise participate in, engage in, or be employed by any Competing Business as hereinabove defined. This foregoing covenant not to compete shall be effective within the Area as hereinabove defined during the entire term of this Agreement. 9. Agreement Not to Solicit Employees. For and in consideration of the covenants and agreements of the Company set forth herein, including the consideration described in Sections 19 and 20 hereof, Hanemann agrees that during the term of this Agreement as hereinabove set forth without the prior express written consent of the Company, he will not on his own behalf or on behalf of others, solicit, entice, or hire away or participate in any attempt to solicit, entice, or hire away, nor will he employ or seek to employ or participate in any attempt to employ any person who is then employed by the Company in a managerial or supervisory position. 10. Non-Disclosure and Non-Use of Confidential Information. For and in consideration of the covenants and agreements of the Company set forth herein, including the consideration described in Sections 19 and 20 hereof, Hanemann acknowledges and agrees that all Confidential Information as hereinabove defined and all physical embodiments thereof are confidential to and shall be and remain the sole and exclusive property of the Company and whether original or any copy form thereof, shall not be removed by Hanemann or by anyone acting for or on his behalf from the possession or custody of the Company. Furthermore, Hanemann agrees that he will not, during the term of this Agreement, without the prior express written consent of the Company, disclose or make available any Confidential Information to any 7 <PAGE> 8 person or entity, nor shall he make or cause to be made, or permit, either on his own behalf or on behalf of others, any use of such Confidential Information. 11. Agreement Not to Solicit Customers or Vendors. For and in consideration of the covenants and agreements of the Company set forth herein, including the consideration described in Sections 19 and 20 hereof, Hanemann agrees that during the term of this Agreement, he will not, without the prior written consent of the Company, within the Area, either directly or indirectly, on his own behalf or in the service or on behalf of others, as a partner, shareholder, officer, executive or managerial employee, consultant, director or trustee, solicit, divert or appropriate, to or for any Competing Business any customer or Vendor, including any person or entity from whom the Company acquired or sought to acquire any product or services for the Business of the Company during the term of employment of Hanemann by the Company and to whom any automotive parts and automotive accessories for automobiles, trucks and other automotive vehicles were sold at any time during the same time period. 12. Severability. In the event any portion of this Agreement is determined by a court of competent jurisdiction to be unenforceable, then the remaining portions and provisions of this Agreement shall in all respects remain unaffected and in full force and effect. 13. Reasonable Restrictions. Hanemann understands and agrees that this Agreement and its terms and provisions including, but not limited to the provisions of paragraphs 8, 9, 10 and 11 above, are reasonable and necessary for the proper protection of the Business of the Company and the Company's interest therein and will neither impose undue hardship upon Hanemann nor otherwise unduly deprive Hanemann of the means or opportunity to support and maintain suitably himself or for obtaining other or different employment after the termination of this employment with the Company. 14. Essence of the Agreement. The Company and Hanemann understand and agree that paragraphs 8, 9, 10 and 11 are the essence of this Agreement. 15. Remedy. Hanemann recognizes and agrees that monetary damages for breach of this Agreement cannot adequately compensate the Company for any breach of this Agreement, and in the event of any breach or threatened breach hereof, the Company shall be entitled to injunctive relief, both temporary and permanent, as well as and in addition to all other available remedies, including such damages as may be permitted by law, all of which remedies shall be cumulative and non-exclusive. Notwithstanding, in no event shall the Company be entitled to recover from Hanemann monetary damages in excess of two million five hundred thousand dollars ($2,500,000) (provided that this damage limitation shall have no effect on the injunctive relief provided for herein and shall not apply to amounts paid to or for Hanemann's benefit on 8 <PAGE> 9 account of any violation of this Agreement, by any person or entity other than Hanemann personally). Hanemann shall have thirty (30) days from receipt of written notice from the Company in which to cure any unintentional violation of this agreement by Hanemann and in the event such unintentional violation by Hanemann is not or cannot be cured by Hanemann in such thirty day (30) day period, the Company shall have all rights set forth herein. 16. Judicial Modification. In the event that a court of competent jurisdiction declares any provision of this Agreement unenforceable or void with respect to subject matter, time or geographic scope as sought to be enforced, the parties hereby authorize such court to enforce the Agreement as if it had been executed by both parties subsequent to the expungement of the provisions found by said court to be unenforceable or void. The parties further agree that if such court finds this Agreement unreasonable, the court shall modify this Agreement to make it reasonable in the opinion of the court and in light of the intentions of the parties as set forth in this Agreement. 17. No Waiver. The failure of either party to this Agreement to insist upon the immediate performance of any of the terms and condition of this Agreement or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions or any other terms and conditions of this Agreement or the breach thereof, and the entire Agreement shall continue and remain in full force and effect as if no such forbearance or waiver had occurred, unless the same shall be in writing and signed by Hanemann and a duly authorized executive officer of the Company. 18. Amendments. No alteration, modification or amendment of this Agreement shall be effective or binding unless in writing and signed by both Hanemann and a duly authorized executive officer of the Company. 19. Consideration. In consideration for the promises, undertakings and covenants of Hanemann including those set forth in Sections 8 - - 11 hereof, and in consideration of Hanemann's employment by the Company, the Company agrees to pay to Hanemann the compensation hereinafter set forth and to provide him with the following benefits; (a) Compensation. (1) Hanemann will receive his scheduled bonus for the 1996 fiscal year of the Company (ending August 31, 1996), based upon the same formula that would have been used had this Agreement not been executed. Hanemann shall not be entitled to any bonus payments thereafter. The bonus shall be paid at the same time as other officer bonuses are paid for the 1996 fiscal year. 9 <PAGE> 10 (2) Thereafter, (i) beginning on the date of the effective date of this Agreement and continuing for the remainder of the Company's 1997 fiscal year and ending upon the end of the 1997 fiscal year, Hanemann shall continue to receive his current base salary in bi-weekly installments of $14,558.66 (which would total $378,525 per annum if such payments were to continue for a complete fiscal year) (ii) commencing with the beginning of the 1998 fiscal year and ending upon the end of the Company's 1998 fiscal year, Hanemann shall receive an amount in bi-weekly installments of $9,615.38 totaling $250,000 per annum for the Company's 1998 fiscal year and (iii) commencing with the beginning of the Company's 1999 fiscal year and ending upon the end of the Company's 1999 fiscal year, Hanemann shall receive an amount in bi-weekly installments of $9,615.38 totaling $250,000 per annum for the Company's 1999 fiscal year. All payments stated herein are stated before deductions required by law or then Company policy are made and all such deductions shall be made by the Company before payment to Hanemann. All such payments shall be made at the same time as the Company's normal bi-weekly payroll for salaried employees. As used in this Section 19 paragraph (a), the term bi-weekly shall mean once every two weeks. (3) Hanemann acknowledges and agrees that the payments he is to receive from the Company pursuant to paragraphs (a)(1) and (2) above are conditioned upon and subject to the full and complete performance of this Agreement by Hanemann throughout the term of this Agreement. In the event Hanemann shall be in breach of this Agreement, including any covenant or agreement set forth in Sections 8, 9, 10 and 11 hereof, the Company shall have no other or further obligations to pay any amounts to him under paragraphs (a)(1) and (2) hereof, and the Company shall be entitled to seek as a part of the damages it has incurred on account of Hanemann's breach of this Agreement, full and complete restitution of all amounts paid to Hanemann pursuant to paragraphs (a)(1) and (2) hereof from and after the date of this Agreement in addition to any and all other damages suffered by the Company, subject to the limitations contained in Paragraph 15 of this Agreement. Notwithstanding anything to the contrary contained herein, in the event Hanemann shall die prior to final and complete payments of all amounts set forth in paragraphs (a)(1) and (2) above, any amounts which would otherwise be due subsequent to the date of his death shall automatically cease and terminate and the Company shall be obligated under paragraphs (a)(1) and (2) only to pay the amounts accruing as of the date of Hanemann's death. (b) Pension Plan Benefits, Health and Medical Insurance and Other Company Benefits. For so long as Hanemann shall remain an employee of the Company, Hanemann shall continue to accrue such pension benefits as he shall be entitled to accrue in accordance with the terms and provisions of the applicable Company pension benefit plans, as they may be amended from time to time by the Company. For purposes of medical and hospitalization coverage, the Company will continue to provide Hanemann with the same medical and hospitalization insurance and on the same basis as its other employees receive from time to time from the 10 <PAGE> 11 Company as long as Hanemann shall remain an employee of the Company and upon the termination of this employment, Hanemann shall have the rights he is entitled to receive under COBRA. Hanemann waives any rights he may have to life insurance customarily provided by the Company to employees and life insurance available to be purchased at the option of employees. 20. Lump Sum Payment for Covenants. As additional consideration for each and every covenant, condition and agreement of Hanemann's contained herein, including specifically those set forth in Section 8 - 11 hereof, the Company shall pay to Hanemann, and Hanemann agrees to accept as full and adequate consideration, a lump-sum payment of Fifty Thousand Dollars ($50,000.00), less deductions required by law or Company policy, to be paid within thirty-one (31) days of the effective date hereof. 21. Options. Except as set forth herein, all non-qualified stock options granted to Hanemann by the Company, whether vested or unvested, shall continue to be governed by the applicable non-qualified stock option agreements relating thereto. Hanemann and the Company acknowledge and agree that 100,000 of the 200,000 unvested stock options granted to Hanemann by the Company pursuant to the Non-Qualified Stock Option Agreement dated April 30, 1994, shall terminate and be canceled as of the Resignation Date with 50,000 options that would have vested on each of April 30, 2000 and April 30, 2001 terminating and being canceled on the Resignation Date. Hanemann shall have no further rights and benefits thereunder. 22. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee, and the parties hereto acknowledge and agree that any litigation, cause of action or proceeding arising hereunder shall be brought in a court of competent jurisdiction in Shelby County, Tennessee. 23. Enforcement. In the event either party shall bring any action or otherwise institute any proceeding against the other party for the enforcement of all or any part of this Agreement, including but not limited to the enforcement of the provisions of this paragraph, the prevailing party shall be entitled to receive from the other party all of the reasonable costs, expenses and attorney's fees incurred by the prevailing party in enforcing this Agreement. 24. Captions. The captions to the various paragraphs in this Agreement are for convenience only and are not otherwise a part of the Agreement. 25. Entire Agreement. This Agreement constitutes the sole and entire Agreement and understanding between the parties with respect to the matters expressly covered hereby, there being no other promises, agreements, representations, warranties or other statements between them in respect to such matters not expressly set forth in this Agreement. 11 <PAGE> 12 26. Consultation with Counsel. With the assistance and advice of his attorney, Hanemann hereby acknowledges that he has had ample opportunity to read and review this Agreement and that he fully understands its content and intent, and that he enters into and executes this Agreement with such understanding and advice of counsel that in all respects this Agreement is enforceable and valid. 27. Release. Except for the obligations of the Company set forth in this Agreement (including Hanemann's rights and benefits to certain stock options as more fully described in the applicable stock option agreement of the Company), Hanemann hereby absolutely and unconditionally fully releases the Company from all claims, demands, losses, liability, actions, or rights of action whether arising out of contract, local ordinance, or state or federal law, in any way arising out of or related to any compensation or benefits he is entitled to receive as an officer and employee of the Company including, but not limited to, claims under the Federal Age Discrimination in Employment Act ("ADEA") or its state counterpart; Title VII of the Civil Rights Act of 1964, as amended, or its state counterpart; the Tennessee Human Rights Commission Act, or any other claims or causes of action arising out of common law, any contract, or any local, state or federal statute, regulation or ordinance arising out of or accruing during the course of or in any way related to Hanemann's employment with the Company or his service as one of its officers. In the event Hanemann shall have the right under any applicable law to withdraw any release or waiver of rights set forth in this Agreement or if Hanemann should seek to revoke or withdraw any release or waiver of rights set forth in this Agreement, the Company shall have the right to immediately terminate Hanemann's employment with the Company and discontinue all of its obligations under this Agreement to pay Hanemann for such employment, provided that all of the covenants, conditions and agreements of Hanemann, including those set forth in Sections 8 - 11 hereof, shall remain in full force and effect during the term of this Agreement. Except for the obligations of Hanemann set forth in this Agreement, the Company hereby absolutely and unconditionally fully releases Hanemann from all claims, demands, losses, liabilities, actions or rights of action, whether arising out of contract, local ordinance, or state or federal law in any way arising out of or related to his employment with the Company or any other claims or causes of action arising out of common law, any contract, or any local, state or federal statute, regulation or ordinance arising out of or accruing during the course of or in any way related to Hanemann's employment with the Company or his service as one of its officers. 28. Older Workers Benefit Protection Act. To comply with the Older Workers Benefit Protection Act of 1990, the Company advises Hanemann of the legal requirements of the Act, and fully incorporates the legal requirements into this Agreement as follows: (a) Hanemann understands the terms and conditions of this Agreement; 12 <PAGE> 13 (b) Hanemann has been advised of his right to consult with an attorney to review this Agreement; (c) Hanemann does not waive any rights or claims under the ADEA that may arise after the date the waiver is executed; (d) Hanemann is receiving additional consideration over and above anything of value to which he is already entitled; and (e) Hanemann has been given a period of twenty-one (21) days within which to consider his release and waiver of ADEA claims as set forth above. Hanemann hereby waives such period of time. (f) Hanemann has the right to revoke the foregoing release and waiver of any claims arising under the ADEA within seven (7) days after the effective date of this Agreement by written notice addressed to the Company and delivered to the Company's general counsel. Such right of revocation does not apply to any other provisions of this Agreement. 29. No Set-Off. The existence of any claim, demand, action or cause of action by Hanemann against the Company, or any parent, subsidiary or affiliate of the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of its rights hereunder. 30. Assignment. This Agreement may be assigned by the Company to any successors to the business of the Company through purchase, merger, reorganization or any similar corporate transaction and shall inure to the benefit of and may be enforced directly by any such assignee. Neither this Agreement nor any right of Hanemann hereunder may be assigned by Hanemann, nor may Hanemann in any way delegate the performance of his covenants and obligations hereunder. 31. Notices. Any notice required or permitted to be given to Hanemann pursuant to this Agreement shall be in writing, and deemed given and effective when personally delivered or delivered by courier, or when deposited in the United States mail, mailed to Hanemann by certified mail, return receipt requested, at the address set forth below or at such other address as he shall designate by written notice to the Company given in accordance with this Section 26, and any notice required or permitted to be given to the Company shall be in writing, and deemed given when personally delivered or delivered by courier or when deposited in the United States mails, mailed to the Company by certified mail, return receipt requested, addressed to the Company at the Address set forth below or at such other address as the Company shall designate by written notice to Hanemann given in accordance with this paragraph. 13 <PAGE> 14 If to Hanemann: If to the Company: AutoZone, Inc. 123 South Front Street Memphis, TN 38103 Attention: Chairman of the Board with a copy to: AutoZone, Inc. 123 South Front Street Memphis, TN 38103 Attention: General Counsel IN WITNESS WHEREOF, the Company and Hanemann have each duly executed and delivered this Agreement in duplicate originals as of the date first shown above. /s/ Thomas S. Hanemann --------------------------------- THOMAS S. HANEMANN, an individual AUTOZONE, INC. By: /s/ J.R. Hyde, III ---------------------------- Name Title: Chairman and CEO -------------------------- By: /s/ Harry L. Goldsmith ----------------------------- Name Title: Vice President and Secretary ---------------------------- 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11.1 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Unaudited) (in thousands, except per share data) <TABLE> <CAPTION> Twelve Weeks Ended --------------------------- Nov. 23, Nov. 18, 1996 1995 ----------- ------------ <S> <C> <C> PRIMARY: Average shares outstanding .......................................... 150,243 147,170 Net effect of dilutive stock options, based on the treasury stock method, using average fair market value ................................................. 2,151 2,677 ----------- ----------- Total shares used in computation .................................... 152,394 149,847 =========== =========== Net income .......................................................... $ 37,975 $ 34,797 =========== =========== Per share amount .................................................... $ 0.25 $ 0.23 =========== =========== FULLY DILUTED: Average shares outstanding .......................................... 150,243 147,170 Net effect of dilutive stock options, based on the treasury stock method, using higher of average or ending fair market value ................................................. 2,151 3,000 ----------- ----------- Total shares used in computation .................................... 152,394 150,170 =========== =========== Net income .......................................................... $ 37,975 $ 34,797 =========== =========== Per share amount .................................................... $ 0.25 $ 0.23 =========== =========== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE QUARTER ENDED NOVEMBER 23, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> AUG-30-1997 <PERIOD-START> SEP-01-1996 <PERIOD-END> NOV-23-1996 <CASH> 3,878 <SECURITIES> 0 <RECEIVABLES> 18,280 <ALLOWANCES> 0 <INVENTORY> 610,480 <CURRENT-ASSETS> 676,717 <PP&E> 1,115,282 <DEPRECIATION> 215,531 <TOTAL-ASSETS> 1,600,410 <CURRENT-LIABILITIES> 541,134 <BONDS> 133,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,503 <OTHER-SE> 904,985 <TOTAL-LIABILITY-AND-EQUITY> 1,600,410 <SALES> 569,145 <TOTAL-REVENUES> 569,145 <CGS> 328,847 <TOTAL-COSTS> 328,847 <OTHER-EXPENSES> 178,400 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 1,173 <INCOME-PRETAX> 60,725 <INCOME-TAX> 22,750 <INCOME-CONTINUING> 37,975 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 37,975 <EPS-PRIMARY> 0.25 <EPS-DILUTED> 0.25 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

BDX

https://www.sec.gov/Archives/edgar/data/10795/0000950130-97-000559.txt

-----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, IxzSoFOZReJJw3ZC9TbvB+5Cdi1PtQbrpuPAa17bDrXvA7bkqiotGiWdIkFb/7ng I+MurUmgCzv+VvfXdszniw== <SEC-DOCUMENT>0000950130-97-000559.txt : 19970222 <SEC-HEADER>0000950130-97-000559.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950130-97-000559 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BECTON DICKINSON & CO CENTRAL INDEX KEY: 0000010795 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 220760120 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20669 FILM NUMBER: 97530930 BUSINESS ADDRESS: STREET 1: ONE BECTON DR CITY: FRANKLIN LAKES STATE: NJ ZIP: 07417-1880 BUSINESS PHONE: 2018476800 MAIL ADDRESS: STREET 1: ONE BECTON DR CITY: FRANKLIN LAKE STATE: NJ ZIP: 07417 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 ----------------------------------------------- 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 1-4802 ---------- Becton, Dickinson and Company - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-0760120 - ---------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (201)847-6800 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange At of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No ____. - Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Shares Outstanding as of January 31, 1997 --------------------- ----------------------------------------- Common stock, par value $1.00 122,957,853 <PAGE> PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements. --------------------- Condensed Consolidated Balance Sheets at December 31, 1996 and September 30, 1996 Condensed Consolidated Statements of Income for the three months ended December 31, 1996 and 1995 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 1996 and 1995 Notes to Condensed Consolidated Financial Statements 2 <PAGE> ITEM 1. FINANCIAL STATEMENTS BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS Thousands of Dollars <TABLE> <CAPTION> December 31, September 30, Assets 1996 1996 - ------ ---------- ---------- (Unaudited) <S> <C> <C> Current Assets: Cash and equivalents $ 152,677 $ 135,151 Short-term investments 17,773 29,949 Trade receivables, net 508,383 580,313 Inventories (Note 2): Materials 89,198 91,154 Work in process 63,268 66,005 Finished products 251,077 245,323 --------- --------- 403,543 402,482 Prepaid expenses, deferred taxes and other 141,372 128,946 --------- --------- Total Current Assets 1,223,748 1,276,841 Investments in Marketable Securities 23,800 23,800 Property, plant and equipment 2,482,706 2,462,235 Less allowances for depreciation and amortization 1,248,622 1,218,087 --------- --------- 1,234,084 1,244,148 Intangibles, Net Patents and other 82,290 81,992 Goodwill 86,419 93,873 Other 171,777 169,098 --------- --------- Total Assets $ 2,822,118 $ 2,889,752 ========= ========= Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 161,487 $ 227,424 Payables and accrued expenses 514,700 538,698 --------- --------- Total Current Liabilities 676,187 766,122 Long-Term Debt 468,249 468,223 Long-Term Employee Benefit Obligations 302,730 295,122 Deferred Income Taxes and Other 38,946 35,102 Commitments and Contingencies 0 0 Shareholders' Equity: Preferred stock 52,493 52,927 Common stock 169,424 170,484 Capital in excess of par value 61,711 58,378 Cumulative currency translation adjustments (5,171) (14,959) Retained earnings 2,159,040 2,160,279 Unearned ESOP compensation (32,778) (32,787) Shares in treasury - at cost (1,068,713) (1,069,139) --------- --------- Total Shareholders' Equity 1,336,006 1,325,183 --------- --------- Total Liabilities and Shareholders' Equity $ 2,822,118 $ 2,889,752 ========= ========= </TABLE> See notes to condensed consolidated financial statements 3 <PAGE> BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Thousands of Dollars, Except Per Share Data (Unaudited) Three Months Ended December 31, -------------------- 1996 1995 -------- --------- REVENUES $ 655,799 $ 639,935 Cost of products sold 343,132 348,746 Selling and administrative 186,530 181,909 Research and development 39,656 37,334 ------- ------- TOTAL OPERATING COSTS AND EXPENSES 569,318 567,989 ------- ------- OPERATING INCOME 86,481 71,946 Interest expense, net (9,447) (9,287) Other income (expense), net 4,808 (823) ------- ------- INCOME BEFORE INCOME TAXES 81,842 61,836 Income tax provision 23,734 17,314 ------- ------- NET INCOME $ 58,108 $ 44,522 ======= ======= EARNINGS PER SHARE $ .44 $ .32 ======= ======= DIVIDENDS PER SHARE $ .13 $ .115 ======= ======= Average common and common equivalent shares outstanding 129,365 134,686 ======= ======= See notes to condensed consolidated financial statements 4 <PAGE> BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Thousands of Dollars (UNAUDITED) <TABLE> <CAPTION> Three Months Ended December 31, ------------------------------- 1996 1995 ---------- ---------- <S> <C> <C> Operating Activities: Net income $ 58,108 $ 44,522 Adjustments to net income to derive net cash provided by operating activities: Depreciation and amortization 49,659 51,035 Change in working capital 9,926 (14,695) Other, net 21,297 7,981 ---------- ---------- Net cash provided by operating activities 138,990 88,843 ---------- ---------- Investing Activities: Capital expenditures (30,775) (30,643) Acquisitions of businesses 0 (10,418) Proceeds from divestitures of businesses 20,860 0 Change in investments, net 12,185 7,891 Other, net (12,849) 5,379 ---------- ---------- Net cash used for investing activities (10,579) (27,791) ---------- ---------- Financing Activities: Change in short-term debt (64,272) 17,717 Proceeds of long-term debt 97,838 0 Payments of long-term debt (101,071) (1,604) Issuance of common stock 3,554 5,020 Repurchase of common stock (44,994) (79,852) Dividends paid (858) (881) ---------- ---------- Net cash used for financing activities (109,803) (59,600) ---------- ---------- Effect of exchange rate changes on cash and equivalents (1,082) (753) ---------- ---------- Net increase in cash and equivalents 17,526 699 Opening Cash and Equivalents 135,151 198,506 ========== ========== Closing Cash and Equivalents $ 152,677 $ 199,205 ========== ========== </TABLE> See notes to condensed consolidated financial statements 5 <PAGE> BECTON, DICKINSON AND COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 1 - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in the Company's 1996 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. Note 2 - Inventory Valuation - ---------------------------- An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. Note 3 - Debt Issuance - ---------------------- In October 1996, the Company issued $100 million of 6.90% Notes which mature on October 1, 2006. The effective interest rate of the notes was 7.34%. Interest on the notes is payable on April 1 and October 1 of each year, commencing with April 1, 1997. The notes are not redeemable prior to maturity and will not be entitled to any sinking fund. The Company used the net proceeds to repay a portion of its outstanding commercial paper. 6 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------- Results of Operations - --------------------- First quarter revenues of $656 million exceeded prior year revenues by 3%. Reported revenue growth for the quarter was unfavorably impacted by the effect of a stronger dollar versus the prior year which reduced revenues by an estimated $11 million, and the absence of approximately $27 million of revenues associated with divested businesses, all of which occurred in the Medical Supplies and Devices segment. Adjusting for the effects of these items, revenue growth would have been approximately 9%. Medical Supplies and Devices segment revenues of $348 million were slightly higher than last year. Adjusting for the absence of sales related to divested businesses, and the estimated unfavorable effect of foreign currency translation, Medical Supplies and Devices segment revenues would have increased approximately 11%. Diagnostic Systems segment revenues of $308 million increased 5%, or 7% after excluding the estimated unfavorable impact of foreign currency translation. Domestic Medical segment revenues of $171 million decreased 2%. Excluding the unfavorable impact from the absence of sales of divested businesses, Domestic Medical segment revenues increased approximately 9%. International Medical segment revenues of $178 million increased 3%, or 12%, adjusting for both the estimated unfavorable impact of foreign currency translation and the absence of sales of divested businesses. Good growth rates were experienced worldwide by both the injection systems and infusion therapy businesses which continue to benefit from the conversion to safety products. Strong international sales growth also continued in the pharmaceutical systems business. Domestic Diagnostic segment revenues of $160 million increased 4%. Diagnostic segment revenue growth continues to be unfavorably impacted by U.S. cost containment initiatives in the infectious disease diagnostics business. International Diagnostic segment revenues of $147 million increased 6%, or 10% after excluding the estimated unfavorable effect of foreign currency translation. Strong sales growth was achieved worldwide in the sample collection and flow cytometry businesses. The gross profit margin of 47.7% improved more than two percentage points over last year's first quarter rate of 45.5%. The improvement reflects a more profitable mix of products sold, including the absence of lower margins on divested businesses as well as continuing productivity improvements. Selling and administrative expense of $187 million was 28.4% of revenues which was the same as last year's first quarter ratio. Investment of $40 million in research and development increased 6% over last year's first quarter expenditures, reflecting the acceleration of investment in strategic areas of the Company's core businesses. 7 <PAGE> Operating income of $86 million increased 20% from last year's first quarter amount of $72 million. The improvement in the operating margin from 11.2% to 13.2% primarily reflects the improved gross profit margin. Net interest expense of $9 million was about the same as last year's first quarter amount. Other income (expense), net was $6 million favorable to last year's first quarter amount primarily due to a $4 million gain on the sale of the infusion pump business in the first quarter of this year. The first quarter income tax rate was 29.0%, compared with last year's first quarter rate of 28.0%, reflecting the forecasted mix in income among tax jurisdictions. Net income was $58 million compared with $45 million last year, an increase of 31%. Earnings per share of $.44 increased 38% over last year's $.32. Strong growth in operating income as well as a continuation of the Company's share repurchase program contributed to this favorable earnings per share growth. Financial Condition - ------------------- During the first quarter of 1997, cash provided by operations was $139 million, compared with $89 million during the first quarter of last year principally due to improvement in net income and lower working capital requirements. Capital expenditures for the quarter of $31 million were about the same as last year. For the full year, capital expenditures are expected to be slightly higher than last year's full year amount of $146 million. In the first quarter, the Company also collected $21 million in proceeds from the sale of the European infusion pump business. In the first quarter of 1997, the Company issued $100 million of 6.90% Notes (see Note 3 to Condensed Consolidated Financial Statements), the proceeds of which were used to repay a portion of the Company's outstanding commercial paper, which had been classified as long-term debt at September 30, 1996. The percentage of debt to capitalization (wherein capitalization is defined as the sum of shareholders' equity, net non-current deferred income tax liabilities, and debt) was 31.9%, compared with 36.5% a year ago. Also in the first quarter of 1997, the Company entered into a $500 million five year revolving credit facility with a group of banks. Restrictive covenants under this agreement include a minimum tangible net worth level. Because of its strong credit ratings, the Company believes it has the capacity to arrange significant additional borrowings should the need arise. During the first quarter of 1997, the Company repurchased 1.1 million shares of its common stock for a total expenditure of $45 million. At December 31, 1996, authorization from the Board of Directors remained outstanding to acquire an additional 13.7 million shares. 8 <PAGE> At its November 1996 meeting, the Board of Directors increased the Company's quarterly dividend from $.115 to $.13 per common share. The Company has operations in Mexico which represented approximately $88 million of the Company's $2.8 billion revenues in fiscal 1996. As a result of the three year cumulative inflation rate for Mexico exceeding 100%, effective January 1, 1997, the Company will consider its Mexican business to be operating in a highly inflationary economy in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation and, accordingly, translation gains and losses will be included in the determination of net income. The results of this change are not expected to have a material impact on the Company's results of operations or financial condition. 9 <PAGE> PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K. --------------------------------- a) Exhibits 11 - Computation of Earnings Per Share. 27 - Financial Data Schedule b) Reports on Form 8-K The following reports on Form 8-K were filed by the registrant with the Securities and Exchange Commission: (i) Form 8-K dated October 7, 1996 reported Item 7 in connection with the registrant's anticipated offering of up to $100 million principal amount of notes pursuant to a Prospectus Supplement dated October 8, 1996 under the registrant's Registration Statement on Form S-3 (Registration No. 33- 47957). The registrant filed the following exhibits on Form 8-K: 12 - Calculation of Ratio of Earnings to Fixed Charges. (ii) Form 8-K dated October 15, 1996 reported Item 7 in connection with the registrant's sale of $100 million principal amount of notes pursuant to a Prospectus Supplement dated October 8, 1996 under the Registrant's Registration Statement on Form S- 3 (Registration No. 33-47957). The registrant filed the following exhibits on Form 8-K: 1 - Pricing Agreement dated October 8, 1996 between the Registrant and Goldman, Sachs & Co. 4(d) - Form of Definitive Global 6.90% Note Due October 1, 2006. 10 <PAGE> SIGNATURE 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. Becton, Dickinson and Company ----------------------------- (Registrant) Date February 13, 1997 -------------------- /s/ Edward J. Ludwig ---------------------------- Edward J. Ludwig Senior Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 11 <PAGE> EXHIBIT INDEX ------------- Exhibit Method of Number Description Filing - ------- ----------- -------------- 11 Computation of Earnings Filed with Per Share this report 27 Financial Data Schedule Filed with this report </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> Exhibit 11 BECTON, DICKINSON AND COMPANY COMPUTATION OF EARNINGS PER SHARE (All amounts in thousands, except per share data) Three Months Ended December 31, PRIMARY EARNINGS PER SHARE 1996 1995 ------------------------- ------- ------ Net Income $58,108 $44,522 Less preferred stock dividends (853) (882) ------- ------- Net income applicable to common stock $57,255 $43,640 ======= ======= Shares: Average shares outstanding 123,159 129,006 Add dilutive stock equivalents from stock plans 6,206 5,680 ------- ------- Weighted average number of common and common equivalent shares outstanding during the year 129,365 134,686 ======= ======= Earnings per share $0.44 $0.32 ======= ======= FULLY DILUTED EARNINGS PER SHARE -------------------------------- Net income applicable to common stock $57,255 $43,640 Add preferred stock dividends using the "if converted" method 853 882 Less additional ESOP contribution,using the "if converted" method (285) (326) ------- ------- Net income for fully diluted earnings per share $57,823 $44,196 ======= ======= Shares: Average shares outstanding 123,159 129,006 Add: Dilutive stock equivalents from stock plans 6,302 6,262 Shares issuable upon conversion of preferred stock 2,847 2,944 ------- ------- Weighted average number of common shares used in calculating fully diluted earnings per share 132,308 138,212 ======= ======= Fully diluted earnings per share $0.44 $0.32 ======= ======= </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> This Schedule contains summary financial information extracted from the Company's Consolidated Financial Statements for the three months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 152,677 <SECURITIES> 17,773 <RECEIVABLES> 508,383 <ALLOWANCES> 0 <F1> <INVENTORY> 403,543 <CURRENT-ASSETS> 1,223,748 <PP&E> 2,482,706 <DEPRECIATION> 1,248,622 <TOTAL-ASSETS> 2,822,118 <CURRENT-LIABILITIES> 676,187 <BONDS> 468,249 <COMMON> 169,424 <PREFERRED-MANDATORY> 0 <PREFERRED> 52,493 <OTHER-SE> 1,114,089 <TOTAL-LIABILITY-AND-EQUITY> 2,822,118 <SALES> 655,799 <TOTAL-REVENUES> 655,799 <CGS> 343,132 <TOTAL-COSTS> 343,132 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <F1> <INTEREST-EXPENSE> 12,711 <INCOME-PRETAX> 81,842 <INCOME-TAX> 23,734 <INCOME-CONTINUING> 58,108 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 58,108 <EPS-PRIMARY> 0.44 <EPS-DILUTED> 0.44 <FN> <F1> These items are consolidated only at year-end. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

BGG

https://www.sec.gov/Archives/edgar/data/14195/0000950137-97-000460.txt

-----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, An2ZqmQcJnkhGNDqbYq6xCKTgqO+9qtWlLOyg5VB2Rg3eud7PSwpJ5UZ0JwfFTys qW/0rQEBvRxsJWxRx6/kjg== <SEC-DOCUMENT>0000950137-97-000460.txt : 19970221 <SEC-HEADER>0000950137-97-000460.hdr.sgml : 19970221 ACCESSION NUMBER: 0000950137-97-000460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGGS & STRATTON CORP CENTRAL INDEX KEY: 0000014195 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 390182330 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01370 FILM NUMBER: 97525009 BUSINESS ADDRESS: STREET 1: 12301 W WIRTH ST CITY: WAUWATOSA STATE: WI ZIP: 53222 BUSINESS PHONE: 4142595333 MAIL ADDRESS: STREET 1: P O BOX 702 CITY: MILWAUKEE STATE: WI ZIP: 53201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> <PAGE> 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 29, 1996 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 1-1370 BRIGGS & STRATTON CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) A Wisconsin Corporation 39-0182330 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12301 West Wirth Street, Wauwatosa, Wisconsin 53222 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 414/259-5333 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class February 10, 1997 - -------------------------------------------------------------------------------- COMMON STOCK, par value $0.01 per share 28,927,000 Shares -1- <PAGE> 2 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets - December 29, 1996, June 30, 1996 and December 31, 1995 3 Consolidated Condensed Statements of Earnings - Three Months and Six Months Ended December 29, 1996 and December 31, 1995 5 Consolidated Condensed Statements of Cash Flow - Six Months Ended December 29, 1996 and December 31, 1995 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 -2- <PAGE> 3 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands of dollars) ASSETS <TABLE> <CAPTION> Dec. 29 June 30 Dec. 31 1996 1996 1995 ------- ------- ------- (Unaudited) (Unaudited) <S> <C> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 3,254 $150,639 $ 6,323 Receivables, net 234,525 119,346 270,142 Inventories - Finished products and parts 179,857 96,078 156,117 Work in process 45,426 36,932 44,087 Raw materials 5,141 4,393 4,560 -------- -------- -------- Total inventories 230,424 137,403 204,764 Future income tax benefits 32,870 29,589 31,744 Prepaid expenses 14,782 15,725 11,062 -------- -------- -------- Total current assets 515,855 452,702 524,035 -------- -------- -------- OTHER ASSETS: Prepaid pension cost 7,458 4,682 727 Deferred income tax asset 5,363 2,883 4,157 Purchased software 9,045 3,685 3,734 -------- -------- -------- Total other assets 21,866 11,250 8,618 -------- -------- -------- PLANT AND EQUIPMENT - Cost 788,453 776,638 759,178 Less - Accumulated depreciation 403,777 402,426 387,056 -------- -------- -------- Total plant and equipment, net 384,676 374,212 372,122 -------- -------- -------- $922,397 $838,164 $904,775 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these statements. -3- <PAGE> 4 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (In thousands of dollars) LIABILITIES & SHAREHOLDERS' INVESTMENT <TABLE> <CAPTION> Dec. 29 June 30 Dec. 31 1996 1996 1995 ----------- ------- ----------- (Unaudited) (Unaudited) <S> <C> <C> <C> CURRENT LIABILITIES: Accounts payable $ 62,091 $ 65,642 $ 62,251 Domestic notes payable 43,970 5,000 101,558 Foreign loans 16,440 14,922 20,066 Current maturities on long-term debt 15,000 15,000 - Accrued liabilities 99,146 82,932 94,602 Dividends payable 7,810 - 7,521 Federal and state income taxes 17,252 6,683 12,815 -------- -------- -------- Total current liabilities 261,709 190,179 298,813 -------- -------- -------- OTHER LIABILITIES: Deferred revenue on sale of plant and equipment 15,996 - - Accrued employee benefits 19,465 18,431 17,260 Accrued postretirement health care obligation 69,034 69,049 69,143 Long-Term debt 60,000 60,000 75,000 -------- -------- -------- Total other liabilities 164,495 147,480 161,403 -------- -------- -------- SHAREHOLDERS' INVESTMENT: Common stock- Authorized 60,000,000 shares, $.01 par value Issued and outstanding 28,927,000 shares 289 289 289 Additional paid-in capital 40,705 40,898 41,327 Retained earnings 455,477 459,666 403,209 Cumulative translation adjustments (278) (348) (266) -------- -------- -------- Total shareholders' investment 496,193 500,505 444,559 -------- -------- -------- $922,397 $838,164 $904,775 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these statements. -4- <PAGE> 5 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands of dollars except amounts per share) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- Dec. 29 Dec. 31 Dec. 29 Dec. 31 1996 1995 1996 1995 ------- ------- ------- ------- <S> <C> <C> <C> <C> NET SALES $299,664 $329,357 $461,395 $518,834 COST OF GOODS SOLD 242,807 263,594 386,569 433,930 -------- -------- -------- -------- Gross profit on sales $ 56,857 $ 65,763 $ 74,826 $ 84,904 ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 28,071 24,801 54,132 49,284 -------- -------- -------- -------- Income from operations $ 28,786 $ 40,962 $ 20,694 $ 35,620 INTEREST EXPENSE (2,408) (2,919) (4,360) (4,976) OTHER INCOME, net 536 541 2,098 2,620 -------- -------- -------- -------- Income before provision for income taxes $ 26,914 $ 38,584 $ 18,432 $ 33,264 PROVISION FOR INCOME TAXES 10,220 14,660 7,000 12,640 -------- -------- -------- -------- Net income $ 16,694 $ 23,924 $ 11,432 $ 20,624 ======== ======== ======== ======== PER SHARE DATA* - Net income $ .58 $ .82 $ .40 $ .71 ====== ====== ====== ====== Cash dividends $ .27 $ .26 $ .54 $ .52 ====== ====== ====== ====== </TABLE> * Based on 28,927,000 shares outstanding. The accompanying notes are an integral part of these statements. -5- <PAGE> 6 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW Increase(Decrease) in Cash and Cash Equivalents (In thousands of dollars) (Unaudited) <TABLE> <CAPTION> Six Months Ended -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dec. 29, 1996 Dec. 31, 1995 ------------- -------------- <S> <C> <C> Net income $ 11,432 $ 20,624 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 21,578 20,938 Loss on disposition of plant and equipment 1,537 680 (Increase)decrease in operating assets - Accounts receivable (115,179) (176,026) Inventories (93,021) (64,090) Other current assets (2,338) 1,400 Other assets (10,616) (3,066) Increase(decrease) in liabilities - Accounts payable and accrued liabilities 31,042 6,337 Other liabilities 1,019 (357) --------- --------- Net cash used in operating activities $(154,546) $(193,560) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment $ (33,687) $ (51,423) Proceeds received on sale of plant and equipment 112 928 Proceeds received on sale of Menomonee Falls, Wisconsin facility 15,996 - --------- --------- Net cash used in investing activities $ (17,579) $ (50,495) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from domestic and foreign loans $ 40,488 $ 95,221 Dividends (15,621) (15,042) Purchase of common stock for treasury (301) (547) Proceeds from exercise of stock options 108 176 --------- --------- Net cash provided from financing activities $ 24,674 $ 79,808 --------- --------- EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS $ 66 $ (78) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS $(147,385) $(164,325) CASH AND CASH EQUIVALENTS, beginning 150,639 170,648 --------- --------- CASH AND CASH EQUIVALENTS, ending $ 3,254 $ 6,323 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 4,217 $ 4,596 ========= ========= Income taxes paid $ 2,075 $ 2,576 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. -6- <PAGE> 7 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, in the opinion of the Company, adequate disclosures have been presented to make the information not misleading, and all adjustments necessary to present fair statements of the results of operations and financial position have been included. All of these adjustments are of a normal recurring nature. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The new balance sheet caption entitled "Purchased Software" represents costs of software purchased for use in the Company's business. Amortization of Purchased Software is computed on an item-by-item basis over a period of three to ten years, depending on the estimated useful life of the software. Accumulated amortization amounted to $3,562,000, $3,367,000, and $2,666,000 as of December 29, 1996, June 30, 1996 and December 31, 1995. Purchased Software on prior period balance sheets was reclassified from Prepaid Expense to the current caption. The sale of the Company's Menomonee Falls, Wisconsin facility for $16.3 million (less costs to sell) was completed at the beginning of the second fiscal quarter. The provisions of the contract state that the Company will continue to own and occupy the warehouse portion of the facility for a period of up to ten years (the "Reservation Period"). The contract also contains a buyout clause, at the buyer's option and under certain circumstances, of the remaining Reservation Period. Given the provisions of the contract, the Company is required to account for this as a financing transaction. Under this method, the cash received is reflected as a deferred liability, and the assets and the accumulated depreciation remain on the Company's books. Depreciation expense continues to be recorded each period, and imputed interest expense is also recorded and added to the deferred liability. Offsetting this is the fair value lease income on the non-Company occupied portion of the building. A pretax gain, which will be recognized at the earlier of the exercise of the buyout option or the expiration of the Reservation Period, is estimated to be $10 million to $12 million. -7- <PAGE> 8 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is Management's discussion and analysis of certain significant factors which have affected the Company's results of operations and financial condition during the periods included in the accompanying consolidated condensed financial statements. RESULTS OF OPERATIONS SALES Net sales for the second fiscal quarter of 1997 decreased 9% or $29,693,000 compared to the same period in the preceding year. The primary reason for this decline in sales dollars was a 15% decrease in engine shipments. The unit decrease is the result of lawn and garden equipment manufacturers building products later and as close as possible to the time they are needed by retailers. The Company's largest customers have increased their peak production capacity, which allows them to concentrate more of their production in winter and early spring. The result was less demand for engines in the second quarter. The decrease in unit volume was primarily in small engines which have lower selling prices. Accordingly, the Company experienced a favorable mix impact which partially offset the unit volume decline. Net sales for the six months ended December 1996 decreased 11% or $57,439,000 compared to the same period in the prior year. Unit engine sales were down 16%. The same reasons as described above apply to this six-month period. GROSS PROFIT Gross profit decreased 14% or $8,906,000 between comparable quarters, primarily because of the reduced volume described above. The gross profit rate declined from 20% last year to 19% in the current year. This decrease was principally due to a change of an accounting estimate totaling $3,477,000 for employees who had accepted an early retirement window in fiscal 1995 and subsequently canceled their acceptance in the second quarter of fiscal 1996. Gross profit for the six months ended December 1996 decreased 12% or $10,078,000, also due to the reduction in sales. The gross profit rate was 16% in each six-month period. If the credit for the retirement window is removed from the comparison, the gross profit rate would have shown a 1% improvement in the current year, primarily due to net lower costs in the current year related to the Company's new engine plants because of labor rate savings. -8- <PAGE> 9 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES This category of expenses increased 13% or $3,270,000 between the second fiscal quarter of 1997 and 1996. This was due to increases in salaries and planned increases in manpower and other costs relating to new venture activities. The 10% or $4,848,000 increase in this category for the six-month comparison was due to the same factors as described above, partially offset by a reduction in marketing costs due to timing during the year. INTEREST EXPENSE Interest expense decreased in both the three-month period and six-month period. This was due to lower borrowings offset, in part, by higher average interest rates. PROVISION FOR INCOME TAXES The effective income tax rate used in all periods was 38.0%, which reflects management's estimate of the rate for the entire year. OUTLOOK The changing seasonal pattern of sales described earlier should result in increased demand in the second half of the year. Based on customer expectations, orders actually placed, and favorable econometric forecasts, and assuming normal spring weather, management expects unit shipments for the full fiscal year to be somewhat higher than for the preceding year. The Company will offer a final early retirement window in late fiscal 1997, in accordance with the current union contract with its Milwaukee hourly employees. It is unknown how many employees will accept this offer. All elections under this window must be completed in June 1997. If all eligible employees elect to take this window, the charge to earnings could total a maximum of $53 million before taxes. -9- <PAGE> 10 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) FINANCIAL CONDITION Cash used in operating activities was $154,546,000. This resulted from increased accounts receivable of $115,179,000 and increased inventories of $93,021,000 due to the normal seasonality of the business. This was offset by depreciation of $21,578,000 and an increase in accrued liabilities as a result of the timing of payments. Cash used in investing activities was $17,579,000 which was comprised of additions to plant and equipment, offset by proceeds received on the disposition of our Menomonee Falls facility as previously discussed. Additions to plant and equipment totaled $33,687,000 through December 1996. Management expects capital expenditures for reinvestment in equipment and new products to total approximately $65,000,000 in the current fiscal year--all to be financed from internal resources and the Company's lines of credit. During the six-month period the Company increased its short-term borrowings by $40,488,000 under its lines of credit, primarily to finance seasonal increases in working capital. The Company also paid $15,621,000 of dividends during the period. The Company will make the first of five annual installments on its long-term debt in June 1997. These payments will total $15,000,000 and are shown as Current Maturities on Long-Term Debt in the accompanying balance sheet. OTHER MATTERS The sale of the Company's Menomonee Falls, Wisconsin plant was completed at the beginning of the second quarter. The required accounting for this transaction is described in a footnote on page 7. The move from the manufacturing portion of this building to available space in the Company's Wauwatosa plant was completed by the end of the quarter. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." This standard establishes financial accounting and reporting standards for stock-based employee compensation. The Company adopted the pro forma disclosure requirements of the statement which will be presented in the fiscal year-end 1997 annual report, and will continue to apply the accounting provisions of Accounting Principles Board Opinion No. 25, as allowed by the new standard. -10- <PAGE> 11 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) EMISSION STANDARDS The U.S. Environmental Protection Agency (EPA) and several engine manufacturers, including Briggs & Stratton Corporation, recently announced an agreement in principle to further cut pollution emitted by gasoline engines. These reductions are expected to be incorporated into the EPA's Phase Two emission standards to be issued later in 1997 and to be phased in from 2001 to 2005. While it is impossible to precisely quantify the cost of compliance until the standards are actually issued, the Company believes compliance with the new standards will not have a material effect on its financial position or results of operations. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain statements in the Outlook, Financial Condition and Emission Standards sections of Management's Discussion and Analysis and the Notes to Consolidated Condensed Financial Statements may contain forward-looking information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty. The words "anticipate", "believe", "estimate", "expect", "objective", and "think" or similar expressions are intended to identify forward-looking statements. Company results may differ materially from those projected in the forward-looking statements. Any forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could significantly affect final results. These uncertainties could include, among other things, the effects of weather; actions of competitors; changes in laws and regulations, including accounting standards; customer demand; prices of purchased raw materials and parts; domestic economic conditions, including housing starts and changes in consumer disposable income; and foreign economic conditions, including currency rate fluctuations. Some or all of the factors are beyond the Company's control. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description ------ ----------- 11 Computation of Earnings Per Share of Common Stock (Filed herewith) 27 Financial Data Schedule (Filed herewith) (b) Reports on Form 8-K. There were no reports on Form 8-K for the second quarter ended December 29, 1996. -11- <PAGE> 12 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION (Continued) 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. BRIGGS & STRATTON CORPORATION (Registrant) Date: February 10, 1997 /s/ R. H. Eldridge ----------------------------------- R. H. Eldridge Executive Vice President & Chief Financial Officer, Secretary-Treasurer Date: February 10, 1997 /s/ J. E. Brenn ----------------------------------- J. E. Brenn Vice President and Controller -12- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMP. OF EARNINGS <TEXT> <PAGE> 1 EXHIBIT 11 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK <TABLE> <CAPTION> Quarter Ended --------------------------------------------------- December 29, 1996 December 31, 1995 ----------------- ----------------- <S> <C> <C> COMPUTATIONS FOR STATEMENTS OF INCOME Primary earnings per share of common stock: Net income $ 16,694,000 $ 23,924,000 ================ =============== Average shares of common stock outstanding 28,927,000 28,927,000 Incremental common shares applicable to common stock options based on the average market price during the period 127,253 144,817 ---------------- --------------- Average common shares, as adjusted 29,054,253 29,071,817 ================ =============== Earnings per share of common stock: $ 0.57 $ 0.82 ================ =============== Fully diluted earnings per share of common stock: Average shares of common stock outstanding 28,927,000 28,927,000 Incremental common shares applicable to common stock options based on the more dilutive of the common stock ending or average market price during the period 132,469 151,254 ---------------- --------------- Average common shares assuming full dilution 29,059,469 29,078,254 ================ =============== Fully diluted earnings per average share of common stock, assuming conversion of all applicable securities $ 0.57 $ 0.82 ================ =============== </TABLE> <TABLE> <CAPTION> Six Months Ended ------------------------------------------ December 29, 1996 December 31, 1995 ----------------- ----------------- <S> <C> <C> COMPUTATIONS FOR STATEMENTS OF INCOME Primary earnings per share of common stock: Net income $ 11,432,000 $ 20,624,000 ============== =============== Average shares of common stock outstanding 28,927,000 28,927,000 Incremental common shares applicable to common stock options based on the average market price during the period 127,324 138,576 -------------- --------------- Average common shares, as adjusted 29,054,324 29,065,576 ============== =============== Earnings per share of common stock: $ 0.39 $ 0.71 ============== =============== Fully diluted earnings per share of common stock: Average shares of common stock outstanding 28,927,000 28,927,000 Incremental common shares applicable to common stock options based on the more dilutive of the common stock ending or average market price during the period 132,469 151,254 -------------- --------------- Average common shares assuming full dilution 29,059,469 29,078,254 ============== =============== Fully diluted earnings per average share of common stock, assuming conversion of all applicable securities $ 0.39 $ 0.71 ============== =============== </TABLE> Note: The dilutive effect of stock options is less than 3% and, accordingly, assuming conversion of all applicable securities presentation is not required under Accounting Principles Board Opinion No. 15. The above is presented to comply with Securities and Exchange Commission regulations. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FDS <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF BRIGGS & STRATTON CORPORATION FOR THE QUARTER ENDED DECEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-29-1997 <PERIOD-START> JUL-1-1996 <PERIOD-END> DEC-29-1996 <CASH> 3,254,000 <SECURITIES> 0 <RECEIVABLES> 234,525,000 <ALLOWANCES> 0 <INVENTORY> 230,424,000 <CURRENT-ASSETS> 515,855,000 <PP&E> 788,453,000 <DEPRECIATION> 403,777,000 <TOTAL-ASSETS> 922,397,000 <CURRENT-LIABILITIES> 261,709,000 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 289,000 <OTHER-SE> 495,904,000 <TOTAL-LIABILITY-AND-EQUITY> 922,397,000 <SALES> 461,395,000 <TOTAL-REVENUES> 461,395,000 <CGS> 386,569,000 <TOTAL-COSTS> 386,569,000 <OTHER-EXPENSES> 52,034,000 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 4,360,000 <INCOME-PRETAX> 18,432,000 <INCOME-TAX> 7,000,000 <INCOME-CONTINUING> 11,432,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 11,432,000 <EPS-PRIMARY> .40 <EPS-DILUTED> .40 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

BMET

https://www.sec.gov/Archives/edgar/data/351346/0000351346-97-000001.txt

-----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, FEJBZipcPfIaJfxRw0PUSWTTGYJDttM1iMy3VFopPS/ewRZgtp8MfSRus94+K2a/ 3X62OHRpXFX2SvUdvW82Jw== <SEC-DOCUMENT>0000351346-97-000001.txt : 19970115 <SEC-HEADER>0000351346-97-000001.hdr.sgml : 19970115 ACCESSION NUMBER: 0000351346-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMET INC CENTRAL INDEX KEY: 0000351346 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 351418342 STATE OF INCORPORATION: IN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12515 FILM NUMBER: 97505247 BUSINESS ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 BUSINESS PHONE: 2192676639 MAIL ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> 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 November 30, 1996. 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 0-12515. BIOMET, INC. (Exact name of registrant as specified in its charter) Indiana 35-1418342 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587 (Address of principal executive offices) (219) 267-6639 (Registrant's telephone number, including area code) 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 The number of shares outstanding of each of the issuer's classes of common stock, as of August 31, 1996: Common Shares - No Par Value 114,417,695 Shares (Class) (Number of Shares) Rights to Purchase Common Shares 114,417,695 Rights (Class) (Number of Shares) BIOMET, INC. CONTENTS Pages Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets 1-2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II. Other Information 10 Signatures 11 Index to Exhibits 12 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1996 and May 31, 1996 (in thousands) ASSETS November 30, May 31, 1996 1996 ------------ ------- Current assets: Cash and cash equivalents $ 112,469 $ 106,068 Marketable securities 31,634 30,834 Accounts and notes receivable, net 160,514 154,055 Inventories 153,119 151,465 Prepaid expenses and other 27,358 20,494 ------- ------- Total current assets 485,094 462,916 ------- ------- Property, plant and equipment, at cost 144,350 132,697 Less, Accumulated depreciation 58,558 52,533 ------- ------- Property, plant and equipment, net 85,792 80,164 ------- ------- Marketable securities 27,074 31,159 Intangible assets, net 6,675 7,665 Excess acquisition cost over fair value of acquired net assets, net 20,549 14,947 Other assets 2,546 1,618 ------- ------- Total assets $ 627,730 $ 598,469 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1996 and May 31, 1996 (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1996 1996 ------------ ------- Current liabilities: Short-term borrowings $ 4,575 $ 3,358 Accounts payable 14,486 16,667 Accrued income taxes 17,132 11,295 Accrued wages and commissions 10,727 11,460 Other accrued expenses 22,257 19,319 ------- ------- Total current liabilities 69,177 62,099 Long-term liabilities: Deferred federal income taxes 3,609 1,509 Other liabilities 543 791 ------- ------- Total liabilities 73,329 64,399 ------- ------- Contingencies (Note 6) Shareholders' equity: Common shares 74,876 68,376 Additional paid-in capital 14,403 14,410 Retained earnings 464,614 458,193 Net unrealized appreciation of certain equity securities 1,770 584 Cumulative translation adjustment (1,262) (7,493) ------- ------- Total shareholders' equity 554,401 534,070 ------- ------- Total liabilities and shareholders' equity $ 627,730 $ 598,469 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the six and three month periods ended November 30, 1996 and 1995 (in thousands, except earnings per share) Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $281,187 $260,273 $144,009 $133,046 Cost of sales 90,833 84,829 46,405 43,550 ------- ------- ------- ------- Gross profit 190,354 175,444 97,604 89,496 Selling, general and administrative expenses 101,990 99,498 52,101 48,901 Research and development expense 12,579 12,049 6,061 5,852 ------- ------- ------- ------- Operating income 75,785 63,897 39,442 34,743 Other income, net 4,504 5,599 2,153 1,803 ------- ------- ------- ------- Income before income taxes 80,289 69,496 41,595 36,546 Provision for income taxes 30,017 26,012 15,410 13,811 ------- ------- ------- ------- Net income $ 50,272 $ 43,484 $ 26,185 $ 22,735 ======= ======= ======= ======= Earnings per share, based on the weighted average number of shares outstanding during the periods presented $ .44 $ .38 $ .23 $ .20 ==== ==== ==== ==== Weighted average number of shares 115,349 115,303 114,962 115,353 ======= ======= ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended November 30, 1996 and 1995 (in thousands) 1996 1995 ---- ---- Cash flows from (used in) operating activities: Net income $ 50,272 $ 43,484 Adjustments to reconcile net income to net cash from operating activities: Depreciation 5,892 5,997 Amortization 4,524 4,115 Gain on sale of marketable securities, net (108) (2,824) Changes in current assets and current liabilities, excluding effects of acquisitions: Accounts and notes receivable, net (1,708) (7,630) Inventories 3,535 (9,240) Prepaid expenses and other (3,829) (1,662) Accounts payable (4,716) (9,648) Accrued income taxes 2,594 2,659 Accrued wages and commissions (722) (2,294) Other accrued expenses 872 (372) ------- ------ Net cash from operating activities 56,606 22,585 ------- ------ Cash flows from (used in) investing activities: Cash proceeds from sales and maturities of marketable securities 16,836 47,087 Purchases of marketable securities (12,121) (8,984) Capital expenditures (8,715) (5,877) Business acquisition, net of cash acquired (4,667) -- Increase in other assets (2,859) (2,399) Other (239) (952) ------- ------ Net cash from (used in) investing activities (11,765) 28,875 ------- ------ Cash flows from (used in) financing activities: Increase (decrease) in short-term borrowings 1,200 (581) Issuance of common shares 4,436 507 Purchase of common shares (33,875) (10,406) Cash dividend paid (11,476) -- ------- ------ Net cash used in financing activities (39,715) (10,480) ------- ------ Effect of exchange rate changes on cash 1,275 (968) ------- ------ Increase in cash and cash equivalents 6,401 40,012 Cash and cash equivalents, beginning of year 106,068 34,091 ------- ------ Cash and cash equivalents, end of period $112,469 $ 74,103 ======= ====== The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: OPINION OF MANAGEMENT. The accompanying consolidated financial statements include the accounts of Biomet, Inc. and its wholly-owned subsidiaries (individual and collectively referred to as the "Company"). The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended November 30, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on From 10-K for the fiscal year ended May 31. 1996. The accompanying consolidated balance sheet at May 31, 1996, has been derived from the audited Consolidated Financial Statements at that date, but does not include all disclosures required by generally accepted accounting principles. NOTE 2: INVENTORIES. Inventories at November 30, 1996 and May 31, 1996 are as follows: November 30, May 31, 1996 1996 ------------ ------- (in thousands) Raw materials $ 22,748 $ 19,643 Work in process 17,420 15,677 Finished goods 66,681 71,974 Consigned inventory 46,270 44,171 ------- ------- $153,119 $151,465 ======= ======= NOTE 3: INCOME TAXES. The difference between the reported provision for income taxes and a provision computed by applying the federal statutory rate to pre-tax accounting income is primarily attributable to state income taxes, tax exempt income and tax credits. NOTE 4: COMMON SHARES. During the six months ended November 30, 1996, the Company issued 343,212 Common Shares upon the exercise of outstanding stock options for proceeds aggregating $2,080,000, issued 177,461 Common Shares for proceeds aggregrating $2,356,000, issued 200,385 Common Shares in connection with a business acquisition (See Note 5) and purchased 2,129,747 outstanding Common Shares for $33,875,000. NOTE 5: ACQUISITIONS. On August 1, 1996, the Company completed the acquisition of one of its foreign distributors. The purchase price consisted of 200,385 Common Shares of the Company, $4.7 million cash and $3.8 million of assumed liabilities. The excess acquisition cost over fair value of acquired net assets at the acquisition date approximated $6.8 million. The acquisition has been accounted for using the purchase method of accounting. Pro forma consolidated results of operations are not presented as the amounts are not materially different from the Company's historical results. NOTE 6: CONTINGENCIES. In August 1996 the United States District Court for the Southern District of Florida entered a judgment on certain state law claims of Raymond G. Tronzo that were the subject of a previous jury verdict of approximately $55 million against the Company. The judgment awarded Tronzo damages of approximately $33.7 million, including compensatory damages of approximately $7.1 million, punitive damages of $20 million and prejudgment interest of approximately $6.6 million. The trial court dismissed, with prejudice, Tronzo's claim based upon unjust enrichment. In November 1996, the trial court upheld the jury's findings that the Tronzo patent is both valid and infringed and awarded Tronzo approximately $6.3 million for patent infringement, including prejudgment interest and a 50% enhancement of the jury verdict based upon willfulness. The trial court also reduced the award of prejudgment interest on the state law claims by approximately $3.5 million. Accordingly, the total damages assessed against the Company as a result of the trial court's final judgments on the patent and state law claims is approximately $36.5 million which the Company has appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"). The trial court also entered an injunction prohibiting the Company from the future manufacture and sale of the finned version of the Mallory/Head acetabular cup in the United States, but stayed that injunction pending disposition of the Company's motion before the Federal Circuit to stay the injunction until the conclusion of the appeal. The Mallory/Head finned acetabular cup accounts for a relatively small portion of the total sales of Biomet's Mallory/Head System, and represents less than 1% of the Company's annual sales. The Company is vigorously pursuing its appeal before the Federal Circuit on both the patent and state law claims. Based on information and advice currently available, management believes the Company has adequate accruals to cover the legal costs and estimated loss exposure, if any, with respect to this matter, and the Company's cash and cash equivalents are more than adequate to address the payment of any loss that may ultimately be incurred. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AS OF NOVEMBER 30, 1996 The Company's cash and investments increased $3,116,000 to $171,177,000 at November 30, 1996, despite the $33,875,000 and $11,476,000 cash outlays for Common Shares purchases and the dividend paid during the first six months. Cash flows provided by operating activities were $56,606,000 for the first six months of fiscal 1997 compared to $22,585,000 for the same period in fiscal 1996. Net income plus depreciation and amortization were the principal sources of cash from operating activities. Cash flows provided by (used in) investing activities were $(11,765,000) for the first six months of fiscal 1997 compared to $28,875,000 for the comparable period in fiscal 1996. The primary uses of cash flows from investing activities were purchases of marketable securities, purchases of capital equipment and a business acquisition (See Note 5 of the Notes to Consolidated Financial Statements) offset by the proceeds from sales and maturities of marketable securities. Cash flows used in financing activities were $39,715,000 for the first six months of fiscal 1997 compared to $10,480,000 for the first six months of fiscal 1996. The primary uses of cash flows from financing activities were the payment of a cash dividend and purchases of the Company's Common Shares as part of the Common Share Repurchase Program. In June 1996, the Company's Board of Directors authorized the purchase of up to 4,000,000 Common Shares of the Company in open market or privately negotiated transactions through the close of business on June 23, 1997. During the first six months, the Company purchased 2,129,747 Common Shares at an aggregate cost of $33,875,000. Future purchases, if any, will be dependent on market conditions. In September 1996, the Company's Board of Directors declared the Company's first ever cash dividend of ten cents ($.10) per share to shareholders of record at the close of business on October 25, 1996. Currently available funds, together with anticipated cash flows generated from future operations, are believed to be adequate to cover the Company's anticipated cash requirements, including the Common Share Repurchase Program, capital expenditures, research and development costs and the ultimate liabilities, if any, resulting from the Tronzo litigation. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1995 Net sales increased 8% to $281,187,000 for the six-month period ended November 30, 1996, from $260,273,000 for the same period last year. The Company's U.S.-based revenue increased 6% to $208,399,000 during the first six months, while foreign sales increased 13% to $72,788,000. Foreign currency exchange rates did not have a material impact on sales or earnings during the first six months. Biomet's worldwide reconstructive device sales during the first six months of fiscal 1997 were $170,285,000, representing an 8% increase compared to the first six months of last year. This increase was primarily a result of Biomet's continued penetration of the reconstructive device market led by the Maxim Total Knee System and the Alliance Hip System. Sales of EBI's products were $56,307,000 for the first six months of fiscal 1997, representing a 5% increase as compared to the same period in 1996. The Company's "other products" revenues totaled $54,595,000, representing a 10% increase over the first six months of fiscal year 1996, primarily as a result of increased sales of Lorenz and fixation products. Cost of sales decreased as a percentage of net sales to 32.3% for the first six months of 1997 compared to 32.6% for the same period last year. Selling, general and administrative expenses decreased as a percentage of net sales to 36.3%, compared to 38.2% (37.2% after deducting for the following two items) for the first six months of last year. Last year's general and administrative expenses included $1.6 million related to the Ramos judgment and $1.0 million in connection with the restructuring and consolidation of the operations of Kirschner's reconstructive implant division. This reduction is principally the result of the consolidation of the operations of Kirschner, offset by increased legal expenses. The increase in research and development expenditures during the first six months reflects Biomet's commitment to remain competitive through technological advancements and to capitalize on future opportunities available within the orthopedic market. Operating income rose 19% from $63,897,000 for the first six months of fiscal 1996, to $75,785,000 for the first six months of fiscal 1997, corresponding to the increase in net sales. Other income decreased $1,095,000 for the first six months of fiscal year 1997 compared to the prior year's first six months. Last year's other income included a gain of $2,500,000 which was realized on the sale of the Company's holdings in American Medical Electronics, Inc. in connection with the closing of the Orthofix International NV and American Medical Electronics, Inc. merger offset by interest expense of $400,000 related to the Ramos judgment. The effective income tax rate remained the same at 37.4% for the six-month periods. These factors resulted in a 16% increase in net income to $50,272,000 from $43,484,000 for the first six months of fiscal 1997 as compared to the same period in fiscal 1996 . Earnings per share increased 16%, from $.38 to $.44 for the periods presented. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1995 Net sales increased 8% to $144,009,000 for the second quarter of fiscal year 1997, as compared to $133,046,000 for the same period last year. Operating income rose 14% from $34,743,000 for the second quarter of fiscal 1996, to $39,442,000 for the second quarter of fiscal 1997. During the second quarter, net income increased 15% to $26,185,000 as compared to $22,735,000 for the same period last year. Earnings per share increased 15% from $.20 per share for the second quarter of fiscal 1996, to $.23 per share for the same period of fiscal 1997. The business factors resulting in these changes and relevant trends affecting the Company's business during the periods in question are comparable to those described in the preceding discussion for the six-month period. OTHER SIGNIFICANT EVENTS. Based on the information and advice currently available to it, management believes that the Company has adequate accruals to cover legal costs and estimated loss exposure, if any, with respect to the Tronzo litigation (see Note 6 of Notes to Consolidated Financial Statements), and that the Company's cash and cash equivalents are more than adequate to address the payment of any loss that may ultimately be incurred thereto. PART II. OTHER INFORMATION Item 1: Legal Proceedings. In August 1996 the United States District Court for the Southern District of Florida entered a judgment on certain state law claims of Raymond G. Tronzo that were the subject of a previous jury verdict of approximately $55 million against the Company. The judgment awarded Tronzo damages of approximately $33.7 million, including compensatory damages of approximately $7.1 million, punitive damages of $20 million and prejudgment interest of approximately $6.6 million. The trial court dismissed, with prejudice, Tronzo's claim based upon unjust enrichment. In November 1996, the trial court upheld the jury's findings that the Tronzo patent is both valid and infringed and awarded Tronzo approximately $6.3 million for patent infringement, including prejudgment interest and a 50% enhancement of the jury verdict based upon willfulness. The trial court also reduced the award of prejudgment interest on the state law claims by approximately $3.5 million. Accordingly, the total damages assessed against the Company as a result of the trial court's final judgments on the patent and state law claims is approximately $36.5 million which the Company has appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"). The trial court also entered an injunction prohibiting the Company from the future manufacture and sale of the finned version of the Mallory/Head acetabular cup in the United States, but stayed that injunction pending disposition of the Company's motion before the Federal Circuit to stay the injunction until the conclusion of the appeal. The Mallory/Head finned acetabular cup accounts for a relatively small portion of the total sales of Biomet's Mallory/Head System, and represents less than 1% of the Company's annual sales. The Company is vigorously pursuing its appeal before the Federal Circuit on both the patent and state law claims. Based on information and advice currently available, management believes the Company has adequate accruals to cover the legal costs and estimated loss exposure, if any, with respect to this matter, and the Company's cash and cash equivalents are more than adequate to address the payment of any loss that may ultimately be incurred. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Index to Exhibits. (b) Reports on Form 8-K. None. 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. BIOMET, INC. - ------------ (Registrant) DATE: 1/14/97 BY: /s/ GREGORY D. HARTMAN -------- ------------------------- Gregory D. Hartman Vice President - Finance (Principal Financial Officer) (Signing on behalf of the Registrant and as Principal Financial Officer) BIOMET, INC. FORM 10-Q INDEX TO EXHIBITS Sequential Number Assigned Numbering System in Regulation S-K Page Number Item 601 Description of Exhibit of Exhibit - ----------------- -------------------------------- ---------------- (2) No exhibit. (4) 4.1 Specimen certificate for Common Shares. (Incorporated by reference to Exhibit 4.1 to the registrant's Report on Form 10-K for the fiscal year ended May 31, 1985). 4.2 Rights Agreement between Biomet, Inc. and Lake City Bank, as Rights Agent, dated as of December 2, 1989. (Incorporated by reference to Exhibit 4 to Biomet, Inc. Form 8-K Current Report dated December 22, 1989, File No. 0-12515). (10) No exhibit. (11) No exhibit. (15) No exhibit. (18) No exhibit. (19) No exhibit. (22) No exhibit. (23) No exhibit. (24) No exhibit. (27) Financial data schedules. (99) No exhibit. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-END> NOV-30-1996 <CASH> 112469000 <SECURITIES> 31634000 <RECEIVABLES> 166889000 <ALLOWANCES> 6375000 <INVENTORY> 153119000 <CURRENT-ASSETS> 485094000 <PP&E> 144350000 <DEPRECIATION> 58558000 <TOTAL-ASSETS> 627730000 <CURRENT-LIABILITIES> 76917700 <BONDS> 0 <COMMON> 74876000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 479525000 <TOTAL-LIABILITY-AND-EQUITY> 627730000 <SALES> 271187000 <TOTAL-REVENUES> 281187000 <CGS> 90833000 <TOTAL-COSTS> 114569000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 105000 <INCOME-PRETAX> 80289000 <INCOME-TAX> 30017000 <INCOME-CONTINUING> 50272000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 50272000 <EPS-PRIMARY> .44 <EPS-DILUTED> .44 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CA

https://www.sec.gov/Archives/edgar/data/356028/0000356028-97-000001.txt

-----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, MME78M4tS8gjCmBck5MhcDGcXzm/wHC3DC2/koVjO8lm+bBI7NwQkFIUUvDqWLoA lhM38iFjq/1WSI6gRkU42w== <SEC-DOCUMENT>0000356028-97-000001.txt : 19970225 <SEC-HEADER>0000356028-97-000001.hdr.sgml : 19970225 ACCESSION NUMBER: 0000356028-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970205 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER ASSOCIATES INTERNATIONAL INC CENTRAL INDEX KEY: 0000356028 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 132857434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09247 FILM NUMBER: 97518065 BUSINESS ADDRESS: STREET 1: ONE COMPUTER ASSOCIATES PLAZA CITY: ISLANDIA STATE: NY ZIP: 11788 BUSINESS PHONE: 5163425224 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period ended from _____ to _____ Commission File Number 0-10180 Computer Associates International, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2857434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Computer Associates Plaza Islandia, New York 11788-7000 (Address of principal executive offices) (Zip Code) (516) 342-5224 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Title of Class Shares Outstanding Common Stock as of January 31, 1997 par value $.10 per share 363,123,487 <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES INDEX PART I. Financial Information: Page No. Item 1. Consolidated Condensed Balance Sheets - December 31, 1996 and March 31, 1996 1 Consolidated Statements of Income - Three Months Ended December 31, 1996 and 1995 2 Consolidated Statements of Income - Nine Months Ended December 31, 1996 and 1995 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended December 31, 1996 and 1995 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. Other Information: Item 6. Exhibits and Reports on Form 8-K 12 <PAGE> 1 <TABLE> Item 1: Part I. FINANCIAL INFORMATION COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In millions) <CAPTION> December 31 March 31, 1996 1996 ----------- --------- (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents $ 199 $ 97 Marketable securities 41 105 Trade and installment accounts receivable 1,341 1,182 Inventories and other current assets 74 64 -------- -------- TOTAL CURRENT ASSETS 1,655 1,448 Installment accounts receivable,due after one 2,187 1,701 Property and equipment 451 420 Purchased software products 497 580 Excess of cost over net assets acquired 1,176 786 Investments and other noncurrent assets 75 81 -------- -------- TOTAL ASSETS $ 6,041 $ 5,016 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Loans payable - banks $ 495 $ 495 Other current liabilities 1,163 1,006 Long-term debt 1,666 945 Deferred income taxes 897 721 Deferred maintenance revenue 308 367 Stockholders' equity 1,512 1,482 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,041 $ 5,016 ======== ======== <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> 2 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In millions, except per share amounts) <CAPTION> For the Three Months Ended December 31, -------------------- 1996 1995 ---- ---- <S> <C> <C> Product revenue and other related income $ 869 $ 822 Maintenance fees 184 182 ------- ------- TOTAL REVENUE 1,053 1,004 Costs and expenses: Selling, marketing and administrative 345 371 Product development and enhancements 81 76 Commissions and royalties 51 52 Depreciation and amortization 97 114 Interest expense - net 27 27 Purchased research and development 598 ------- ------- TOTAL COSTS AND EXPENSES 1,199 640 ------- ------- (Loss) income before income taxes (146) 364 Provision for income taxes 167 137 ------- ------- NET (LOSS) INCOME $ (313) $ 227 ------- ------- NET (LOSS) INCOME PER COMMON SHARE * $ (.86) $ .60 ------- ------- Weighted average common shares used in computation * 365 381 <FN> * Shares and per share amounts adjusted for three-for-two stock splits effective June 19, 1996 and August 21, 1995. <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> 3 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In millions, except per share amounts) <CAPTION> For the Nine Months Ended December 31, ------------------- 1996 1995 ---- ---- <S> <C> <C> Product revenue and other related income $ 2,272 $ 1,849 Maintenance fees 563 545 -------- -------- TOTAL REVENUE 2,835 2,394 Costs and expenses: Selling, marketing and administrative 1,070 961 Product development and enhancements 232 205 Commissions and royalties 143 118 Depreciation and amortization 323 286 Interest expense - net 70 46 Purchased research and development 598 1,303 -------- -------- TOTAL COSTS AND EXPENSES 2,436 2,919 -------- -------- Income (loss) before income taxes 399 (525) Income tax expense (benefit) 369 (203) -------- -------- NET INCOME (LOSS) $ 30 $ (322) -------- -------- NET INCOME (LOSS) PER COMMON SHARE * $ .08 $ (.89) -------- -------- Weighted average common shares used in computation * 380 362 <FN> * Shares and per share amounts adjusted for three-for-two stock splits effective June 19, 1996 and August 21, 1995. <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> 4 <TABLE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) <CAPTION> For the Nine Months Ended December 31, ------------------- 1996 1995 ---- ---- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ 30 $ (322) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 323 286 Provision for deferred income taxes (benefit) 168 (385) Charge for purchased research and development 598 1,303 Increase in noncurrent installment accounts receivable (491) (399) (Decrease) increase in deferred maintenance revenue (59) 14 Changes in other operating assets and liabilities, excludes effects of acquisitions (71) (163) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 498 334 INVESTING ACTIVITIES: Acquisitions, primarily purchased software, marketing rights and intangibles (1,136) (1,772) Purchase of property and equipment (22) (18) Decrease in current marketable securities 63 80 Capitalized development costs (14) (10) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (1,109) (1,720) FINANCING ACTIVITIES: Borrowings and repayments - net 722 1,354 Dividends paid (17) (16) Exercise of common stock options/other 39 16 Purchases of treasury stock (32) (27) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 712 1,327 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH 101 (59) Effect of exchange rate changes on cash 1 (3) ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 102 (62) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 97 117 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 199 $ 55 ======= ======= <FN> See Notes to Consolidated Condensed Financial Statements. </TABLE> <PAGE> 5 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in Computer Associates International, Inc.'s (the "Registrant" or the "Company") Annual Report on Form 10-K for the fiscal year ended March 31, 1996. Cash Dividends: In December 1996, the Company's Board of Directors declared its regular, semi-annual cash dividend of $.05 per share. The dividend was paid on January 7, 1997 to stockholders of record on December 17, 1996. Net Income per Share: Net income per share of Common Stock is computed by dividing net income by the weighted average number of common shares and any dilutive common share equivalents outstanding. Common share equivalents for the three month period ended December 31, 1996 and for the nine month period ended December 31, 1995 were excluded because of their anti-dilutive effect. Fully diluted net income per share is the same or not materially different from net income per share. Stock Split: On May 30, 1996 the Company declared a three-for-two stock split in the form of a stock dividend, distributed July 15, 1996 to stockholders of record as of June 19, 1996. Shares and per share amounts have been adjusted to reflect this stock split as well as the previous three-for-two stock split effective August 21, 1995. Statements of Cash Flows: For the nine months ended December 31, 1996 and 1995, interest payments were $55 million and $48 million, respectively, and income taxes paid were $165 million and $101 million, respectively. <PAGE> 6 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE B -- ACQUISITIONS On November 11, 1996, the Company acquired 98% of the issued and outstanding shares of Common Stock of Cheyenne Software, Inc. ("Cheyenne"), and on December 2, 1996 merged Cheyenne into one of its wholly owned subsidiaries. The aggregate purchase price of approximately $1.2 billion was funded from drawings under the Company's $2 billion credit agreements. Cheyenne was engaged in the design, development, marketing, and support of storage, management, security and communications software for desktops and distributed enterprise networks. The acquisition was accounted for as a purchase. The results of Cheyenne's operations have been combined with those of the Company since the date of acquisition. The Company recorded a $598 million after-tax charge against earnings for the write-off of purchased Cheyenne research and development technology that had not reached the working model stage and has no alternative future use. Had this charge not been taken during the quarter ended December 31, 1996, net income and net income per share for the three and nine month periods ended December 31, 1996 would have been $285 million, or $.75 per share, and $628 million, or $1.65 per share, respectively. On August 1, 1995, the Company acquired 98% of the issued and outstanding shares of Common Stock of Legent Corporation ("Legent"), and on November 6, 1995 merged Legent into one of its wholly owned subsidiaries. The aggregate purchase price of approximately $1.8 billion was funded from drawings under the Company's $2 billion credit agreement. Legent was engaged in the design, development, marketing, and support of a broad range of computer software products for the management of information systems used to manage mainframe, midrange, server, workstation and PC systems deployed throughout a business enterprise. The acquisition was accounted for as a purchase. The results of Legent's operations have been combined with those of the Company since the date of acquisition. The Company recorded an $808 million after-tax charge against earnings for the write-off of purchased Legent research and development technology that had not reached the working model stage and has no alternative future use. Had this charge not been taken during the quarter ended September 30, 1995, net income for the nine month period ended December 31, 1995 would have been $487 million, or $1.28 per share. <PAGE> 7 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE B -- ACQUISITIONS (continued) The following table reflects pro forma combined results of operations (unaudited) of the Company, Legent and Cheyenne on the basis that the acquisition of Legent had taken place at the beginning of fiscal year 1996, and the acquisition of Cheyenne had taken place at the beginning of the fiscal year for all periods presented. The after-tax charges in fiscal years 1997 and 1996 of $598 million and $808 million, respectively, were recorded at the beginning of the fiscal year for each of the periods presented: <TABLE> (In millions, except per share amounts) <CAPTION> For the Nine Months For the Three Months Ended December 31, Ended December 31, ------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenue $ 2,970 $ 2,617 $ 1,066 $ 1,061 Net Income (822) (1,031) 270 218 Net Income per common share $ (2.25) $ (2.85) $ .71 $ .57 Shares used in computation 365 362 382 381 </TABLE> The following table reflects pro forma combined results of operations (unaudited) of the Company, Legent and Cheyenne on the basis that the acquisition of Legent had taken place at the beginning of fiscal year 1996, and the acquisition of Cheyenne had taken place at the beginning of the fiscal year for all periods presented, and excludes the effect of the after-tax charges in fiscal years 1997 and 1996 of $598 million and $808 million: <TABLE> (In millions, except per share amounts) <CAPTION> For the Nine Months For the Three Months Ended December 31, Ended December 31, ------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenue $ 2,970 $ 2,617 $ 1,066 $ 1,061 Net Income 584 375 270 218 Net Income per common share $ 1.54 $ .99 $ .71 $ .57 Shares used in computation 380 380 382 381 </TABLE> In management's opinion, the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal year 1996 or of future operations of the combined entities under the ownership and operation of the Company. <PAGE> 8 COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE C -- THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN Under the 1995 Key Employee Stock Employee Ownership Plan (the "1995 Plan") the Stock Option and Compensation Committee of the Board of Directors (the "Committee") is authorized to grant, subject to the attainment of certain Common Stock price objectives, up to 13,500,000 shares of the Company's restricted Common Stock to three key executives. The Committee has initially reserved for grant 4,500,000 shares of Common Stock ("Initial Grant") and may reserve for grant up to an additional 9,000,000 shares (the "Additional Grants") based on achievement of certain target price levels for the Company's Common Stock. At December 31, 1996, all 9,000,000 shares of the Additional Grants had been reserved or qualify to be reserved for grant due to the achievement of the specified target prices. In January 1996, 900,000 shares of Common Stock reserved under the Initial Grant vested, subject to the continued employment of the key executives. Accordingly, the Company began accruing the compensation expense associated with the 900,000 shares over the employment period ending March 31, 2000. The Initial Grant and Additional Grants are non-transferable, are subject to risk of forfeiture through March 31, 2000 and are further subject to significant limitations on transfer during the seven years following vesting. All references to the number of shares available and reserved for grant have been adjusted to reflect three-for -two stock splits effective June 19, 1996 and August 21, 1995. <PAGE> 9 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Form 10-Q concerning the company's future prospects are "forward looking statements" under the federal securities laws. There can be no assurances that future results will be achieved and actual results could differ materially from forecasts and estimates. Important factors that could cause actual results to differ materially are discussed below in the section "Operations". RESULTS OF OPERATIONS Revenue: Total revenue for the quarter ended December 31, 1996 increased by 5%, or $49 million, over the prior year's comparable quarter. Revenue in North America exhibited strong growth representing 61% of the revenue in the December 1996 quarter compared to just 48% of revenue in the December 1995 quarter. North American revenue in fiscal 1997's third quarter increased 33% over last fiscal year's comparable quarter. The increase reflects acceptance of the Company's attractive enterprise pricing options, as well as continued growth of licensing fees from the Company's expanding client/server products. However, revenue from European units in this fiscal year's third quarter was down substantially over that realized in last year's third quarter. This decrease is a result of difficulties encountered in our transition from mainframe to midrange product offerings in the European markets. Cheyenne product revenues contributed less than 5% to December 1996 quarterly revenue. Quarterly maintenance revenues increased $2 million, or 1% from last year's comparable quarter. Growth was dampened by the ongoing trend of site consolidations and expanding client/server revenues which yield lower maintenance. Price changes did not have a material impact in either quarter. Costs and Expenses: Selling, marketing and administrative expenses as a percentage of total revenue for the December 1996 quarter decreased to 33% from 37% for the December 1995 quarter. The percentage decrease reflects continued Company wide efforts to contain and control expenses. Net research and development expenditures increased $5 million, or 6%, over the December 1995 quarter. The addition of Cheyenne product development personnel, continued emphasis on adapting products for the client/server environment, broadened Internet/Intranet product offerings and the updating of various products to be year 2000 compliant were largely responsible for the increase. The absolute increase was mitigated by the Company's cost containment actions. Commissions and royalties as a percentage of revenue were 5% for both the December 1996 and 1995 quarters. Depreciation and amortization expense decreased $17 million in the December 1996 quarter over the December 1995 quarter, primarily due to the expected completion of amortization associated with the Online and Pansophic acquisitions, partially offset by the additional and accelerated purchased software <PAGE> 10 Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Costs and Expenses: (continued) amortization associated with the Cheyenne acquisition. Net interest expense was $27 million for both the December 1996 and 1995 quarters. Operating Margins: The net loss for the December 1996 quarter was $313 million, or $.86 per share compared to a net income of $227 million, or $.60 per share in the December 1995 quarter. The net loss for the December 1996 quarter was entirely attributable to the $598 million after-tax charge for the write- off of Cheyenne purchased research and development technology that had not reached the working model stage and had no alternative future use. Net income in the December 1996 quarter excluding the after tax charge would have been $285 million, an increase of 25% over the December 1995 quarter. Operations: The Company's products are designed to improve the productivity and efficiency of its clients' data processing resources. Accordingly, in a recessionary environment, the Company's products are often a reasonable economic alternative to customers faced with the prospect of incurring expenditures to increase their existing data processing resources. However, a general or global slowdown in the world economy could adversely affect the Company's operations. The Company has traditionally reported lower profit margins in the first two quarters of each fiscal year than those experienced in the third and fourth quarters. As part of the annual budget process, management establishes higher discretionary expense levels in relation to projected revenue for the first half of the year. Historically, the Company's combined third and fourth quarter revenues have been greater than the first half of the year, as these two quarters coincide with the clients' calendar year budget period and the culmination of the Company's annual sales plan. Historically higher second half revenues have resulted in significantly higher profit margins since total expenses have not increased in proportion to revenue. However, past financial performance should not be considered to be a reliable indicator of future performance. The Company's future operating results may be affected by a number of other factors, including, but not limited to: uncertainties relative to global economic conditions; prolonged regional slowdowns; market acceptance of competing technologies; the availability and cost of new solutions; the Company's ability to successfully manage the transition from a majority of revenue derived from the mainframe environment to client/server solutions; the strength of its distribution channels; the Company's ability to manage fixed and variable expense growth relative to revenue growth; and the Company's ability to effectively integrate acquired products and operations. <PAGE> 11 Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES For the quarter ended December 31, 1996, the Company's cash, cash equivalents and marketable securities balance increased by $39 million. This increase will be used to reduce bank debt during the next fiscal quarter and to repurchase shares of the Company's stock as part of its ongoing Common Stock repurchase program. During the quarter, outlays of approximately $1.1 billion for the acquisition of Cheyenne Software, Inc. were funded by drawings on the Company's debt facilities described below and cash generated from operations. The Company has available a $700 million 364 day credit facility and a $1.3 billion 5 year credit facility. Borrowing costs and facility fees are based upon the achievement of certain financial ratios. At December 31, 1996, $1,795 million was outstanding under the aforementioned two facilities. In addition, $320 million is outstanding under the 6.77% Senior Notes issued April 4, 1996. The total purchased under the Company's various open market Common Stock repurchase programs was approximately 71.5 million shares as of December 31, 1996. The total shares available for repurchase at December 31, 1996 is approximately 37 million. These amounts reflect both the June 1996 and the August 1995 three-for-two stock splits. The Company's capital resource requirements as of December 31, 1996 consisted of lease obligations for office space, computer equipment, mortgage or loan obligations and amounts due as a result of product and company acquisitions. It is expected that existing cash, cash equivalents, short term marketable securities, the availability of borrowings under committed and uncommitted credit lines, as well as cash provided from operations, will be sufficient to meet ongoing cash requirements. <PAGE> 12 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K. The Registrant filed a report on Form 8-K on November 22, 1996 reporting an event under Item 2 and providing financial statements and pro forms financial information in accordance with Item 7(a) and (b). The date of such report was November 11, 1996. 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. COMPUTER ASSOCIATES INTERNATIONAL, INC. Dated: February 4, 1997 By: /s/ Sanjay Kumar -------------------------------- Sanjay Kumar, President and Chief Operating Officer Dated: February 4, 1997 By: /s/ Peter Schwartz -------------------------------- Peter Schwartz Sr. Vice President - Finance (Chief Financial and Accounting Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>ART. 5 FDS FOR COMPUTER ASSOCIATES 2ND QTR 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1996 <PERIOD-START> APR-01-1996 <PERIOD-END> DEC-31-1996 <CASH> 199 <SECURITIES> 41 <RECEIVABLES> 1341 <ALLOWANCES> 0 <INVENTORY> 74 <CURRENT-ASSETS> 1655 <PP&E> 451 <DEPRECIATION> 0 <TOTAL-ASSETS> 6041 <CURRENT-LIABILITIES> 1658 <BONDS> 1666 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 1512 <TOTAL-LIABILITY-AND-EQUITY> 6041 <SALES> 2272 <TOTAL-REVENUES> 2835 <CGS> 0 <TOTAL-COSTS> 2436 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 70 <INCOME-PRETAX> 399 <INCOME-TAX> 369 <INCOME-CONTINUING> 30 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 30 <EPS-PRIMARY> .08 <EPS-DILUTED> .08 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CAG

https://www.sec.gov/Archives/edgar/data/23217/0000023217-97-000002.txt

-----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, GXV/ycYtn2LxG6vWOAbLu6HOac88/g9COuYqmJ4pGS9iGC/zIhDf4ZUceutgyLRX Kh7SDnPMqH0XCyU09F5yEA== <SEC-DOCUMENT>0000023217-97-000002.txt : 19970109 <SEC-HEADER>0000023217-97-000002.hdr.sgml : 19970109 ACCESSION NUMBER: 0000023217-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961124 FILED AS OF DATE: 19970108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONAGRA INC /DE/ CENTRAL INDEX KEY: 0000023217 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 470248710 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07275 FILM NUMBER: 97502579 BUSINESS ADDRESS: STREET 1: ONE CONAGRA DR CITY: OMAHA STATE: NE ZIP: 68102 BUSINESS PHONE: 4025954000 FORMER COMPANY: FORMER CONFORMED NAME: NEBRASKA CONSOLIDATED MILLS CO DATE OF NAME CHANGE: 19721201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> 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 November 24, 1996 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 1-7275 ___________________________________________ CONAGRA, INC. __________________________________________________________________ (Exact name of registrant, as specified in charter) Delaware 47-0248710 __________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One ConAgra Drive, Omaha, Nebraska 68102-5001 __________________________________________________________________ (Address of Principal Executive Offices) (Zip Code) (402) 595-4000 __________________________________________________________________ (Registrant's telephone number, including area code) NA __________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ _______ Number of shares outstanding of issuer's common stock, as of December 22, 1996 was 240,116,885. PART I - FINANCIAL INFORMATION CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions) NOV 24, MAY 26, NOV 26, 1996 1996 1995 __________ __________ __________ ASSETS Current assets: Cash and cash equivalents $ 78.4 $ 113.7 $ 46.4 Receivables, less allowance for doubtful accounts of $69.8, $52.1 and $68.0 2,469.1 1,428.4 2,530.7 Inventory: Hedged commodities 1,338.4 1,369.4 1,350.2 Other 2,741.6 2,204.0 2,610.8 __________ __________ __________ Total inventory 4,080.0 3,573.4 3,961.0 Prepaid expenses 433.7 451.4 384.5 __________ __________ __________ Total current assets 7,061.2 5,566.9 6,922.6 __________ __________ __________ Property, plant and equipment: Cost 5,192.6 4,971.3 5,175.3 Less accumulated depreciation 2,010.5 1,915.0 1,935.9 Less valuation reserve related to restructuring 164.8 235.8 - __________ __________ __________ Property, plant and equipment, net 3,017.3 2,820.5 3,239.4 Brands, trademarks and goodwill, at cost less accumulated amortization 2,460.2 2,405.6 2,564.9 Other assets 415.8 403.6 449.3 __________ __________ __________ $ 12,954.5 $ 11,196.6 $ 13,176.2 __________ __________ __________ __________ __________ __________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions) NOV 24, MAY 26, NOV 26, 1996 1996 1995 __________ __________ __________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,864.9 $ 416.3 $ 3,112.6 Current installments of long-term debt 356.4 142.5 129.0 Accounts payable 1,977.1 1,856.9 1,706.9 Advances on sales 244.0 1,390.9 209.1 Other accrued liabilities 1,378.3 1,387.1 1,452.7 __________ __________ __________ Total current liabilities 6,820.7 5,193.7 6,610.3 __________ __________ __________ Senior long-term debt, excluding current installments 1,557.2 1,512.9 1,727.0 Other noncurrent liabilities 938.4 959.5 904.4 Subordinated debt 750.0 750.0 750.0 Preferred securities of subsidiary company 525.0 525.0 525.0 Preferred shares subject to mandatory redemption - - 27.9 Common stockholders' equity: Common stock of $5 par value, authorized 1,200,000,000 shares, issued 253,058,213, 252,990,917 and 252,957,072 1,265.3 1,264.9 1,264.8 Additional paid-in capital 568.9 423.1 410.8 Retained earnings 1,851.9 1,683.5 1,858.9 Foreign currency translation adjustment (11.9) (39.1) (29.3) Less treasury stock, at cost, common shares 12,828,189, 9,834,464 and 4,846,730 (526.0) (390.0) (166.7) __________ __________ __________ 3,148.2 2,942.4 3,338.5 Less unearned restricted stock and value of 14,383,996, 16,014,644 and 17,541,528 common shares held in EEF (785.0) (686.9) (706.9) __________ __________ __________ Total common stockholders' equity 2,363.2 2,255.5 2,631.6 __________ __________ __________ $ 12,954.5 $11,196.6 $ 13,176.2 __________ __________ __________ __________ __________ __________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and shares in millions except per share amounts) THIRTEEN WEEKS ENDED NOV 24, NOV 26, 1996 1995 __________ __________ Net sales $ 6,764.5 $ 6,629.9 __________ __________ Costs and expenses: Cost of goods sold 5,806.3 5,677.4 Selling, administrative and general expenses 569.2 591.6 Interest expense, net 72.7 77.6 __________ __________ 6,448.2 6,346.6 __________ __________ Income before income taxes 316.3 283.3 Income taxes 129.0 116.2 __________ __________ Net income 187.3 167.1 Less preferred dividends - 3.5 __________ __________ Net income available for common stock $ 187.3 $ 163.6 __________ __________ __________ __________ Earnings per common and common equivalent share $ 0.82 $ 0.72 __________ __________ __________ __________ Weighted average number of common and common equivalent shares outstanding 229.7 226.9 __________ __________ __________ __________ Cash dividends declared per common share $ 0.272 $ 0.237 __________ __________ __________ __________ CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and shares in millions except per share amounts) TWENTY-SIX WEEKS ENDED NOV 24, NOV 26, 1996 1995 __________ __________ Net sales $ 13,168.8 $ 13,066.1 __________ __________ Costs and expenses: Cost of goods sold 11,418.7 11,311.8 Selling, administrative and general expenses 1,128.2 1,169.9 Interest expense, net 142.8 153.5 __________ __________ 12,689.7 12,635.2 __________ __________ Income before income taxes 479.1 430.9 Income taxes 195.7 176.7 __________ __________ Net income 283.4 254.2 Less preferred dividends - 8.6 __________ __________ Net income available for common stock $ 283.4 $ 245.6 __________ __________ __________ __________ Earnings per common and common equivalent share $ 1.24 $ 1.08 _________ __________ __________ __________ Weighted average number of common and common equivalent shares outstanding 229.3 227.2 __________ __________ __________ __________ Cash dividends declared per common share $ 0.510 $ 0.445 __________ __________ __________ __________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) TWENTY-SIX WEEKS ENDED NOV 24, NOV 26, Decrease in Cash and Cash Equivalents 1996 1995 __________ __________ Cash flows from operating activities: Net income $ 283.4 $ 254.2 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and other amortization 170.5 163.8 Goodwill amortization 34.7 36.0 Other noncash items (includes nonpension postretirement benefits) (7.9) 27.7 Change in assets and liabilities before effects from business acquisitions (2,487.2) (2,374.7) __________ __________ Net cash flows from operating activities (2,006.5) (1,893.0) __________ __________ Cash flows from investing activities: Sale of property, plant and equipment 17.9 31.9 Additions to property, plant and equipment (289.0) (285.7) Payment for business acquisitions (192.5) (454.0) Monfort Finance Company notes receivable and other items (51.2) 56.2 __________ __________ Net cash flows from investing activities (514.8) (651.6) __________ __________ Cash flows from financing activities: Net short-term borrowings 2,433.3 3,084.2 Proceeds from issuance of long-term debt 397.5 - Cash dividends paid (107.3) (105.9) Repayment of long-term debt (140.2) (54.3) Treasury stock purchases (131.1) (399.1) Employee Equity Fund stock transactions 8.7 7.5 Other items 25.1 (1.4) _________ __________ Net cash flows from financing activities 2,486.0 2,531.0 __________ __________ Net decrease in cash & cash equivalents (35.3) (13.6) Cash and cash equivalents at beginning of year 113.7 60.0 __________ __________ Cash and cash equivalents at end of period $ 78.4 $ 46.4 __________ __________ __________ __________ The accompanying notes are an integral part of the consolidated financial statements. CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOVEMBER 24, 1996 (1) The information furnished herein relating to interim periods has not been examined by independent Certified Public Accountants. In the opinion of management, all adjustments necessary for a fair statement of the results for the periods covered have been included. All such adjustments are of a normal recurring nature. The accounting policies followed by the Company, and additional footnotes, are set forth in the financial statements included in the Company's 1996 annual report, which report was incorporated by reference in Form 10-K for the fiscal year ended May 26, 1996. (2) The composition of inventories is as follows (in millions): NOV 24, MAY 26, NOV 26, 1996 1996 1995 __________ __________ __________ Hedged commodities $ 1,338.4 $ 1,369.4 $ 1,350.2 Food products and livestock 1,390.2 1,219.9 1,341.3 Agricultural chemicals, fertilizer and feed 538.3 399.4 465.8 Retail merchandise 118.5 122.7 173.7 Other, principally ingredients and supplies 694.6 462.0 630.0 __________ __________ __________ $ 4,080.0 $ 3,573.4 $ 3,961.0 __________ __________ __________ __________ __________ __________ (3) On August 29, 1996, the Company purchased certain assets of Gilroy Foods from McCormick & Company, Inc. for approximately $132 million in cash. Gilroy Foods, based in Gilroy, California, manufactures dehydrated garlic and onion products principally for industrial markets. Gilroy Foods' sales in 1995 were approximately $200 million. (4) Following is a condensed statement of common stockholders' equity (in millions): <TABLE> <captions> Unearned Add'l Foreign Restricted Common Paid-In Retained Curr Treasury & EEF Stock Capital Earnings Trns Adj Stock Stock Total ___________ ___________ ___________ ___________ ___________ ___________ ___________ <S> <C> <C> <C> <C> <C> <C> <C> Balance 5/26/96 $1,264.9 $423.1 $1,683.5 ($39.1) ($390.0) ($686.9) $2,255.5 Shares issued Stock option and incentive plans 0.3 1.0 1.3 EEF*: stock option, incentive and other employee benefit plans 5.4 42.5 47.9 Fair market valuation of EEF shares 139.0 (139.0) - Acquisitions 0.1 0.4 0.5 Shares acquired Incentive plans (4.9) (1.6) (6.5) Treasury shares purchased (131.1) (131.1) Foreign currency translation adjustment 27.2 27.2 Cash dividends declared - common stock (115.0) (115.0) Net income 283.4 283.4 __________ _________ __________ ___________ ___________ _____________________ Balance 11/24/96 $1,265.3 $ $568.9 $1,851.9 ($11.9) ($526.0) ($785.0) $2,363.2 __________ _________ ___________ ___________ ___________ ___________ ___________ __________ _________ ___________ ___________ ___________ ___________ ___________ *Employee Equity Fund </TABLE> (5) In fiscal 1991, ConAgra acquired Beatrice Company (Beatrice). As a result of the acquisition and the significant pre-acquisition tax and other contingencies of the Beatrice businesses and its former subsidiaries, the consolidated post-acquisition financial statements of ConAgra have reflected significant liabilities and valuation allowances associated with the estimated resolution of these contingencies. As a result of a settlement reached with the Internal Revenue Service in fiscal 1995, ConAgra released $230.0 million of a valuation allowance and reduced noncurrent liabilities by $135.0 million, with a resulting reduction of goodwill associated with the Beatrice acquisition of $365.0 million. Federal income tax returns of Beatrice for its fiscal 1990 and various state tax returns remain open. However, after taking into account the foregoing adjustments, management believes that the ultimate resolution of all remaining pre-acquisition Beatrice tax contingencies should not exceed the reserves established for such matters. Beatrice is also engaged in various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by ConAgra. The environmental proceedings include litigation and administrative proceedings involving Beatrice's status as a potentially responsible party at 44 Superfund, proposed Superfund or state-equivalent sites. Beatrice has paid or is in the process of paying its liability share at 42 of these sites. Beatrice has established substantial reserves for these matters. The environmental reserves are based on Beatrice's best estimate of its undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required cleanup, the known volumetric contribution of Beatrice and other potentially responsible parties and Beatrice's prior experience in remediating sites. Management believes the ultimate resolution of such Beatrice legal and environmental contingenices should not exceed the reserves established for such matters. ConAgra is party to a number of other lawsuits and claims arising out of the operation of its businesses. After taking into account liabilities recorded for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on ConAgra's financial condition, results of operation or liquidity. (6) Earnings per common and common equivalent share are calculated on the basis of the weighted average outstanding common shares and, when applicable, those outstanding options that are dilutive and after giving effect to the preferred stock dividend requirements. Fully diluted earnings per share did not differ significantly from primary earnings per share in any period presented. (7) On October 3, 1996, the Company issued $400 million of senior notes with an interest rate of 7.125% due October 1, 2026 and redeemable at the option of the holders on October 1, 2006. The notes were priced at 99.375% of par. (8) In December, 1996, the Company's Board of Directors authorized ConAgra to purchase up to five million shares of the Company's outstanding common stock from time to time in the open market in continuation of the Company's systematic pattern of common stock purchase designed to avoid the dilutive effect on earnings per share of stock based compensation programs and acquisitions using stock accounted for as purchases. CONAGRA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and operating results for the periods included in the accompanying consolidated condensed financial statements. Results for the fiscal 1997 second quarter and first half are not necessarily indicative of results which may be attained in the future. FINANCIAL CONDITION Versus fiscal year end 1996, the Company's capital investment (working capital plus noncurrent assets) increased $130.9 million. Working capital decreased $132.7 million and noncurrent assets increased $263.6 million. The decrease in working capital resulted from an increase in short-term debt due to business acquisitions, normal property, plant and equipment additions, from treasury stock purchases and a normal seasonal increase in accounts receivable. The Company's objective is that senior long-term debt normally will not exceed 30 percent of total long-term debt plus equity. At November 24,1996, senior long-term debt was 30 percent of total long-term debt plus equity compared to 30 percent at May 26,1996 and 31 percent at November 26, 1995. OPERATING RESULTS A summary of the period to period increases (decreases) in the principal components of operations is shown below (dollars in millions, except per share amounts). COMPARISON OF THE PERIODS ENDED NOV. 24, 1996 & NOV. 26, 1995 THIRTEEN WEEKS TWENTY-SIX WEEKS DOLLARS % DOLLARS % ________________________________ Net sales 134.6 2.0 102.7 0.8 Cost of goods sold 128.9 2.3 106.9 0.9 Gross profit 5.7 0.6 (4.2) (0.2) Selling, administrative and general expenses (22.4) (3.8) (41.7) (3.6) Interest expense, net (4.9) (6.3) (10.7) (7.0) Income before income taxes 33.0 11.6 48.2 11.2 Income taxes 12.8 11.0 19.0 10.8 Net income 20.2 12.1 29.2 11.5 Preferred Dividends (3.5) (100.0) (8.6) (100.0) Net Income available for common stock 23.7 14.5 37.8 15.4 Earnings per common and common equivalent share 0.10 13.9 0.16 14.8 Two of ConAgra's industry segments, Food Inputs & Ingredients and Grocery/Diversified Products increased operating profit in the second quarter and first half of fiscal 1997 versus the same periods in fiscal 1996. The increase in those segments was somewhat offset by a decrease in the Refrigerated Foods segment second quarter and first half operating profit. ConAgra's total sales and cost of sales were both up 2% in the second quarter and up 1% in the first half of fiscal 1997 compared to the same periods last year, while selling, general and administrative expenses were down 4% in the second quarter and 3% for the first half of fiscal 1997 versus fiscal 1996. Sources of increased sales and related cost of goods sold during the second quarter and first half of fiscal 1997 were the Grocery/Diversified Products segment and the inputs and grain processing businesses in the Food Inputs & Ingredients segment. Refrigerated Foods segment sales and related cost of sales declined in the second quarter and first half. Selling, general and administrative expenses for all segments in the first half of fiscal 1997 were lower than the same period in fiscal 1996. For the second quarter of fiscal 1997 versus the second quarter of fiscal 1996, selling, general and administrative expenses were lower in the Refrigerated Foods and Food Inputs & Ingredients segments and up slightly in the Grocery/Diversified Products segment. Net income increased $20.2 million in the second quarter and $29.2 million in the first half of fiscal 1997 versus the same periods last year. In the Grocery/Diversified Products segment, operating profit increased 30 percent in the second quarter and 26 percent in the first half of fiscal 1997 versus the same periods last year. Sales increased 12 percent in fiscal 1997's second quarter and 10% in the first half versus the same periods in fiscal 1996. Unit volume growth in two Grocery Products businesses, Hunt-Wesson and ConAgra Frozen Foods, contributed to increased operating profit. The Lamb-Weston potato products business, the Golden Valley Microwave Foods and the seafood businesses all contributed to increased operating profit in the second quarter and first half of fiscal 1997. In ConAgra's Food Inputs & Ingredients segment, operating profit increased 15 percent in the second quarter and 19 percent in the first half of fiscal 1997 compared to the same periods in fiscal 1996. Segment sales increased 4 percent in the second quarter and 3 percent in the first half. Excluding business dispositions and acquisitions, first half segment sales increased nearly 5 percent over the same period last year. Major sources of the segment's second quarter and first half operating profit growth included flour milling, grain merchandising and specialty food ingredients. Commodity services, Europe processing operations, the dry edible bean business, specialty retailing and a private label business all contributed to segment operating profit growth in both periods. Crop inputs operating profit increased in the second quarter but was flat in the first half. In ConAgra's Refrigerated Foods segment, operating profit decreased 28 percent in the second quarter and 20 percent in the first half of fiscal 1997 versus the same periods in fiscal 1996. Segment sales decreased 3 percent in the second quarter and 4 percent in the first half of fiscal 1997 primarily due to beef and poultry operations divested or restructured during and after last year's second quarter. Branded processed meats operating profit was up in the second quarter and first half. U.S. beef operating profit declined in the second quarter and first half of fiscal 1997 while Australia beef operating profit improved in both periods. Second quarter and first half operating profit decreased in the pork business. However, the Company considers this earnings level to be satisfactory given the industry's current high cost of raw materials. Pressured by high feed ingredients costs, poultry products operating profit was down in both periods. Cheese business operating profits were down slightly in the second quarter and up slightly in the first half. Operating profit is based on net sales less all identifiable operating expenses and includes the related equity in earnings of companies included on the basis of the equity method of accounting. General corporate expense, interest expense (except financial businesses), income taxes and goodwill amortization are excluded from segment operating profit. For financial businesses, operating profit includes the effect of interest, which is a large element of their operating costs. Summarizing ConAgra's results for fiscal 1997's second quarter compared to fiscal 1996's second quarter: earnings per share 82 cents, up 14 percent from 72 cents; net income available for common stock (net income minus preferred dividends) $187.3 million, up 14.5 percent from $163.6 million; net sales $6.76 billion up 2 percent from $6.63 billion. For fiscal 1997's first half: earnings per share $1.24, up 15 percent from $1.08; net income available for common stock $283.4 million, up 15 percent from $245.6 million; net sales $13.17 billion up 1 percent from $13.07 billion. As mentioned, first half and second quarter sales growth was constrained by business divestitures and restructuring initiatives. Fiscal 1997 second quarter and first half earnings per share growth of 14 percent and 15 percent is consistent with growth of 14.5 percent and 15 percent in net income available for common stock, the net earnings measure which includes comparable financing expense. ConAgra redeemed the company's Class E preferred stock during fiscal 1996's second quarter, the last quarter in which preferred dividends were paid. Preferred dividends of $3.5 million and $8.6 million in fiscal 1996's second quarter and first half are approximately offset in fiscal 1997's second quarter and first half by the expense of financing the Class E preferred stock redemption. Weighted average shares outstanding increased in fiscal 1997's second quarter and first half over the same periods in fiscal 1996 primarily as a result of common stock repurchases in fiscal 1996's first half for conversion of the Class E preferred stock which occurred in the latter part of fiscal 1996's second quarter. CONAGRA, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. On December 12, 1996, Mogens C. Bay and Kenneth E. Stinson were elected to ConAgra's board of directors. Mr. Bay, age 47, is President and Chief Executive Officer of Valmont Industries, Inc. Mr. Stinson, age 54, is Chairman and Chief Executive Officer of Kiewit Construction Group, Inc. and Executive Vice President of parent company Peter Kiewit Sons', Inc. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS. 12 - Statement regarding computation of ratio of earnings to fixed charges. (B) REPORTS ON FORM 8-K. None. CONAGRA, INC. By: /s/ James P. O'Donnell _________________________ James P. O'Donnell Senior Vice President and Chief Financial Officer By: /s/ Kenneth W. DiFonzo _________________________ Kenneth W. DiFonzo Vice President and Controller Dated this 8 day of January, 1997. EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE 12 - Statement regarding computation of ratio of earnings to fixed charges............. 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <TEXT> EXHIBIT 12 CONAGRA, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN MILLIONS) Six Months Ended November 24, 1996 ____________ Fixed charges: Interest expense $ 165.7 Capitalized interest 4.0 Interest in cost of goods sold 9.9 One third of non-cancellable lease rent 18.8 ------------ Total fixed charges (A) 198.4 ============ Earnings: Pretax income 479.1 Adjustment for unconsolidated subidiaries (0.4) ------------ Pretax income of the Company as a whole 478.7 Add fixed charges 198.4 Less capitalized interest (4.0) ------------ Earnings and fixed charges (B) 673.1 ============ Ratio of earnings to fixed charges (B/A) 3.4 EXHIBIT 12 (Continued) For the purpose of computing the above ratio of earnings to fixed charges, earnings consist of income before taxes and fixed charges. Fixed charges, for the purpose of computing earnings are adjusted to exclude interest capitalized. Fixed charges include interest on both long and short-term debt (whether said interest is expensed or capitalized and including interest charged to cost of goods sold), and a portion of noncancellable rental expense representative of the interest factor. The ratio is computed using the amounts for ConAgra as a whole, including its majority-owned subsidiaries, whether or not consolidated, and its proportionate share of any 50% owned subsidiaries, whether or not ConAgra guarantees obligations of these subsidiaries. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-25-1997 <PERIOD-END> NOV-24-1996 <CASH> 78400 <SECURITIES> 0 <RECEIVABLES> 2538900 <ALLOWANCES> 69800 <INVENTORY> 4080000 <CURRENT-ASSETS> 7061200 <PP&E> 5192600 <DEPRECIATION> 2175300 <TOTAL-ASSETS> 12954500 <CURRENT-LIABILITIES> 6820700 <BONDS> 2307200 <PREFERRED-MANDATORY> 0 <PREFERRED> 525000 <COMMON> 1265300 <OTHER-SE> 1097900 <TOTAL-LIABILITY-AND-EQUITY> 12954500 <SALES> 13168800 <TOTAL-REVENUES> 13168800 <CGS> 11418700 <TOTAL-COSTS> 11418700 <OTHER-EXPENSES> 1128200 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 142800 <INCOME-PRETAX> 479100 <INCOME-TAX> 195700 <INCOME-CONTINUING> 283400 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 283400 <EPS-PRIMARY> 1.24 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/896159/0000902561-97-000037.txt

-----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, NIAU9QL4UuKZBWZKpNvJGQLfD7uzBk2LAo65G1CK7Nq+gYc9H8gmlQ9ZM+Cqz+rX ym7JqJrJy+7Lc2Z8WEFinw== <SEC-DOCUMENT>0000902561-97-000037.txt : 19970221 <SEC-HEADER>0000902561-97-000037.hdr.sgml : 19970221 ACCESSION NUMBER: 0000902561-97-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE LTD CENTRAL INDEX KEY: 0000896159 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11778 FILM NUMBER: 97524336 BUSINESS ADDRESS: STREET 1: ACE BLDG STREET 2: P O BOX HM 1015 CITY: HAMILTON HM 08 BERMU STATE: D0 BUSINESS PHONE: 8092955200 MAIL ADDRESS: STREET 1: P O BOX HM 1015 CITY: HAMITON BERMUDA STATE: D0 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE> <PAGE> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1996 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 No. 1-11778 I.R.S. Employer Identification No. N/A ACE LIMITED (Incorporated in the Cayman Islands) The ACE Building 30 Woodbourne Avenue Hamilton HM 08 Bermuda Telephone 441-295-5200 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 _________ The number of registrant's Ordinary Shares ($0.125 par value) outstanding as of February 6, 1997 was 57,176,085. 1 <PAGE> ACE LIMITED INDEX TO FORM 10-Q Part I. FINANCIAL INFORMATION ------------------------------- Page No. -------- Item 1. Financial Statements: Consolidated Balance Sheets December 31, 1996 (Unaudited) and September 30, 1996 3 Consolidated Statements of Operations (Unaudited) Three Months Ended December 31, 1996 and December 31, 1995 4 Consolidated Statements of Shareholders' Equity (Unaudited) Three Months Ended December 31, 1996 and December 31, 1995 5 Consolidated Statements of Cash Flows (Unaudited) Three Months Ended December 31, 1996 and December 31, 1995 6 Notes to Interim Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Results of Operations 10 and Financial Condition Part II. OTHER INFORMATION --------------------------- Item 4. Submission of matters to a vote of security holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 2 <PAGE> <TABLE> <CAPTION> ACE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 September 30 1996 1996 ----------- ------------ (unaudited) (in thousands of U.S. Dollars, except share and per share data) <S> <C> <C> ASSETS Investments and cash Fixed maturities available for sale, at fair value (amortized cost - $3,345,862 and $3,394,437) $3,370,700 $3,389,762 Equity securities, at fair value (cost - $353,846 and $257,049) 416,090 323,005 Short-term investments, at fair value (amortized cost - $363,334 and $376,680) 363,252 376,680 Other investments, at cost 12,453 12,453 Cash 93,504 53,374 --------- --------- Total investments and cash 4,255,999 4,155,274 Goodwill on Tempest acquisition 200,473 201,742 Accrued investment income 39,088 42,728 Deferred acquisition costs 30,732 34,546 Premiums and insurance balances receivable 84,601 85,033 Prepaid reinsurance premiums 24,269 15,421 Other assets 112,283 39,614 --------- --------- Total assets $4,747,445 $4,574,358 ========== ========== LIABILITIES Unpaid losses and loss expenses $1,870,619 $1,836,113 Unearned premiums 354,793 398,731 Premiums received in advance 49,101 26,381 Reinsurance balances payable 15,154 3,471 Accounts payable and accrued liabilities 78,707 54,913 Dividend payable 10,702 10,471 ---------- ---------- Total liabilities 2,379,076 2,330,080 ========== ========== Commitments and contingencies SHAREHOLDERS' EQUITY Ordinary Shares ($0.125 par value, 100,000,000 shares authorized; 57,937,585 and 58,170,755 shares issued and outstanding) 7,241 7,271 Additional paid-in capital 1,151,572 1,156,194 Unearned stock grant compensation (3,524) (1,299) Net unrealized appreciation on investments 87,000 61,281 Cumulative translation adjustments (318) 131 Retained earnings 1,126,398 1,020,700 ---------- ---------- Total shareholders' equity 2,368,369 2,244,278 ---------- ---------- Total liabilities and shareholders' equity $4,747,445 $4,574,358 ========== ========== See accompanying notes to interim consolidated financial statements 3 <PAGE> <CAPTION> ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended December 31, 1996 and 1995 (Unaudited) 1996 1995 -------- -------- (in thousands of U.S. Dollars, except share and per share data) <S> <C> <C> REVENUES Gross premiums written $ 132,512 $ 131,481 Reinsurance premiums ceded (21,898) (2,686) --------- --------- Net premiums written 110,614 128,795 Change in unearned premiums 53,786 (12,811) --------- --------- Net premiums earned 164,400 115,984 Net investment income 59,738 47,126 Net realized gains on investments 41,723 44,602 --------- --------- Total revenues 265,861 207,712 --------- -------- EXPENSES Losses and loss expenses 110,150 92,924 Acquisition costs 14,129 12,114 Administrative expenses 15,841 9,138 ---------- -------- Total expenses 140,120 114,176 ---------- -------- NET INCOME $ 125,741 $ 93,536 ========== ========= Earnings per share $ 2.14 $ 2.02 ========== ========== Weighted average shares outstanding 58,886,255 46,327,982 ========== ========== See accompanying notes to interim consolidated financial statements 4 <PAGE> <CAPTION> ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Months Ended December 31, 1996 and 1995 (Unaudited) 1996 1995 ---------- ---------- (in thousands of U.S. Dollars) <S> <C> <C> Ordinary Shares Balance - beginning of period $ 7,271 $ 5,764 Exercise of stock options 2 -- Repurchase of shares (32) (1) ---------- --------- Balance - end of period 7,241 5,763 ---------- --------- Additional paid-in capital Balance - beginning of period 1,156,194 548,513 Exercise of options for Ordinary Shares 393 -- Repurchase of Ordinary Shares (5,015) (72) ---------- --------- Balance - end of period 1,151,572 548,441 ---------- --------- Unearned stock grant compensation Balance - beginning of period (1,299) (1,796) Stock grants awarded (2,626) (17) Stock grants forfeited -- 60 Amortization 401 254 ---------- --------- Balance - end of period (3,524) (1,499) ---------- --------- Net unrealized appreciation (depreciation) on investments Balance - beginning of period 61,281 94,694 Net appreciation during period 25,719 37,756 ---------- --------- Balance - end of period 87,000 132,450 ---------- --------- Cumulative translation adjustments Balance - beginning of period 131 -- Net adjustment for period (449) -- ---------- --------- Balance - end of period (318) -- ---------- --------- Retained earnings Balance - beginning of period 1,020,700 795,488 Net income 125,741 93,536 Dividends declared (10,430) (6,455) Repurchase of Ordinary shares (9,613) (96) ---------- --------- Balance - end of period 1,126,398 882,473 ---------- --------- TOTAL SHAREHOLDERS' EQUITY $2,368,369 $1,567,628 ========== ========== See accompanying notes to interim consolidated financial statements 5 <PAGE> <CAPTION> ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended December 31, 1996 and 1995 (Unaudited) 1996 1995 --------- -------- (in thousands of U.S. Dollars) <S> <C> <C> Cash flows from operating activities Net income $ 125,741 $ 93,536 Adjustments to reconcile net income to net cash provided by operating activities Unearned premiums (43,938) 12,811 Unpaid losses and loss expenses 34,506 70,918 Prepaid reinsurance premiums (8,848) -- Net realized gains on investments (41,723) (44,602) Amortization of premium/discount (1,595) (2,450) Deferred acquisition costs 3,814 (2,313) Insurance balances receivable 432 (4,834) Premiums received in advance 22,720 22,806 Reinsurance balances payable 11,683 -- Accounts payable and accrued liabilities (16,384) 2,550 Other 353 (3,247) ---------- -------- Net cash flows from operating activities 86,761 145,175 ---------- -------- Cash flows from investing activities Purchases of fixed maturities (1,890,148) (2,080,726) Purchases of equity securities (239,903) (52,783) Sales of fixed maturities 1,979,112 1,960,987 Sales of equity securities 141,500 54,323 Maturities of fixed maturities -- 12,000 Net realized gains on financial futures contracts 17,688 14,844 Acquisition of subsidiaries, net of cash acquired (30,416) -- ---------- --------- Net cash used in investing activities (22,167) (91,355) ---------- -------- Cash flows from financing activities Repurchase of Ordinary Shares (14,658) (169) Proceeds from exercise of options for Ordinary Shares 395 -- Dividends paid (10,201) (6,456) ---------- --------- Net cash used for financing activities (24,464) (6,625) ---------- --------- Net increase in cash 40,130 47,195 Cash - beginning of period 53,374 16,929 ---------- --------- Cash - end of period $ 93,504 $ 64,124 ========== ========= See accompanying notes to interim consolidated financial statements </TABLE> 6 <PAGE> ACE LIMITED AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The interim consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared on the basis of accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company's 1996 Annual Report on Form 10-K. On November 26, 1996, the Company, through its wholly-owned subsidiary ACE UK Limited, acquired Ace London Holdings Ltd. ("Ace London") (formerly Ockham Worldwide Holdings PLC) a wholly owned subsidiary of Ockham Holdings PLC. Ace London owns two Lloyd's of London ("Lloyd's") managing agencies, ACE London Aviation Limited ("ALA") (formerly Ockham Sturge Aviation Agency Ltd.) and ACE London Underwriting Limited ("ALU") (formerly Ockham Worldwide Agency Ltd.). Together these two agencies manage six syndicates with total underwriting capacity for the 1997 year of account of 361 million pounds (approximately $614 million). Ace London also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. The Company is providing funds at Lloyd's of approximately 7.5 million pounds (approximately $13 million), which is primarily in the form of a letter of credit, supporting approximately 15 million pounds (approximately $25 million) of premium writing capacity to the syndicates managed by ALA and ALU for the 1997 year of account. The acquisition has been recorded using the purchase method of accounting. On November 26, 1996, the Company through its wholly-owned subsidiary ACE UK Limited, also acquired the remaining 49 percent interest in Methuen Group Limited ("Methuen"), the holding company for Methuen Underwriting Limited, which it did not already own. The Company had originally acquired a 51 percent interest in Methuen on March 27, 1996. The acquisition of the remaining 49 percent interest has been recorded using the purchase method of accounting. At December 31, 1996 approximately 61 percent of the Company's written premiums came from North America with approximately 33 percent coming from the United Kingdom and continental Europe and approximately 6 percent from other countries. 2. Commitments and Contingencies A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation ("MDL") to a Federal District Court in Alabama. 7 <PAGE> On April 1, 1994, the judge presiding over the MDL proceeding gave preliminary approval to a global settlement agreement in the approximate amount of $4.2 billion and conditional certification to a settlement class ("Global I"). On May 15, 1995, the Dow Corning Corporation, a significant participant in the Global I settlement, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of June 1, 1995, over 440,000 registrations were received by the Global I Claims Administrator. Approximately 248,500 of these were filed by domestic class members by the September 16, 1994 deadline for making claims under the Current Disease Compensation Program. Based on an analysis of about 3,000 of these registrations, the judge concluded that a severe racheting (or reduction) of the settlement amounts shown in the notice of settlement would occur if current claims were evaluated under the existing criteria and if funding of the Current Disease Compensation Program remained at the $1.2 billion level. Because of the anticipated racheting of benefit amounts and the defendants' right to withdraw under the Global I settlement, the judge entered an order on October 9, 1995 declaring that class members had new opt-out rights and that, in general, class members and their attorneys should not expect to receive any benefits under Global I. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for domestic class members with at least one implant from any of those manufacturers ("Settlement II"). In general, under Settlement II, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of class members electing to opt out from the new plan. Also, in general, the compensation would be fixed rather than subject to potential further racheting, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all claims. By November 13, 1995, Settlement II was approved by the three major defendants. In addition, two other defendants became part of Settlement II, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the judge approved Settlement II and the materials for giving notice to claimants although several appeals concerning Settlement II have been lodged with the Eleventh Circuit Court of Appeals. In mid-January 1996, the three major defendants each made a payment of $125 million to a court-established fund as an initial reserve for payments to be made under Settlement II. The Claims Administrator is sending out notifications of status and advance payments to claimants who submitted implant manufacturer proof. The estimated total cost of Settlement II and the number of opt-outs is not presently known. Although the Company has underwritten the coverage for a number of the defendant companies including four of the companies involved in the revised Settlement II described above, the Company anticipates that insurance 8 <PAGE> coverage issued prior to the time the Company issued policies will be available for a portion of the defendants' liability. In addition, the Company's policies only apply when the underlying liability insurance policies or per occurrence retentions are exhausted. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in conjunction with Global I (including information relating to opt-outs) and information made available from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. In August 1996, the Company settled with one of its policyholders, a breast implant manufacturer, for a sum of money to be paid out over a number of years in the future. The settlement is consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of Settlement II and the number and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at December 31, 1996. 3. Shares Issued and Outstanding On August 9, 1996, the Board of Directors terminated the then existing share repurchase program and authorized a new program for up to $100.0 million of the Company's Ordinary Shares. During the quarter ended December 31, 1996, the Company repurchased 255,000 Ordinary Shares under the share repurchase program for an aggregate cost of $14.7 million. As at December 31, 1996, approximately $51.0 million of the Board authorization had not been utilized. 4. Restricted Stock Awards During the current quarter, 44,725 restricted Ordinary Shares were awarded to officers of the Company and its subsidiaries. These shares vest at various dates through November 1999. 5. Line of Credit The Company has a committed line of credit provided by a syndicate of six major international banks, led by Morgan Guaranty Trust Company of New York ("Morgan") which provides for unsecured borrowings up to an aggregate amount of $50 million. The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $1.25 billion. 9 <PAGE> At December 31, 1996, there were no outstanding loans under this arrangement. With effect from November 22, 1996, the same syndicate of banks have also provided up to approximately 71 million pounds (approximately $120 million) for a five year, collateralized letter of credit ("LOC"), which will primarily be used to provide funds at Lloyd's to support underwriting capacity on Lloyd's syndicates in which the Company participates. Certain assets, amounting to 115 percent of the value of the LOC, have been pledged as collateral for the LOC. At December 31, 1996 there were no drawdowns on the LOC. 6. Reclassification Certain items in the prior period financial statements have been reclassified to conform with the current period presentation. 10 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- General The following is a discussion of the Company's results of operations, financial condition, liquidity and capital resources as of and for the three months ended December 31, 1996. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and the Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's 1996 Annual Report on Form 10-K. ACE Limited ("ACE") is a holding company which, through its Bermuda-based operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance for a diverse group of international clients. In addition, the Company provides funds at Lloyd's of London ("Lloyd's") to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL") ACE London Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), each indirect wholly owned subsidiaries of ACE.. The term "the Company" refers to ACE and its subsidiaries, excluding Methuen (as defined below) and Ace London (as defined below). On July 1, 1996, the Company completed the acquisition of Tempest, a leading Bermuda-based property catastrophe reinsurer. Tempest underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate exposures to man-made and natural disasters. Property catastrophe loss experience is generally characterized by low frequency but high severity short-tail claims which may result in significant volatility in financial results. On March 27, 1996, the Company acquired a controlling interest in Methuen Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's managing agency. On November 26, 1996, the Company acquired the remaining 49 percent interest in Methuen. MUL manages six syndicates with a total underwriting capacity of 366 million pounds (approximately $555 million) for the 1996 year of account and 384 million pounds (approximately $640 million) for the 1997 year of account. Total underwriting capacity is the amount of gross premiums that a syndicate at Lloyd's can underwrite in a given year of account. However, a syndicate is not required to fully utilize all of the capacity and it is not unusual for capacity utilization to be significantly lower than 100 percent. For the 1996 year of account, the Company, through a corporate subsidiary, has participated in the underwriting of these syndicates by providing funds at Lloyd's of 12.25 million pounds (approximately $18 million), which was primarily in the form of a letter of credit, supporting 24.5 million pounds (approximately $37 million) of underwriting capacity. For the 1997 year of account, the Company has provided funds at Lloyd's of approximately 64 million pounds (approximately $109 million) to support up to approximately 128 million pounds (approximately $217 million) of premium writing capacity by syndicates managed by MUL. The syndicates managed by MUL in which the Company participates underwrite aviation, marine and non-marine risks. 11 <PAGE> On November 26, 1996, the Company acquired Ace London Holdings Ltd. ("Ace London") (formerly Ockham Worldwide Holdings PLC) a wholly owned subsidiary of Ockham Holdings PLC. Ace London owns two Lloyd's managing agencies, ALA and ALU. Together these two agencies manage six syndicates with total underwriting capacity for the 1997 year of account of 361 million pounds (approximately $614 million). Ace London also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. The Company is providing funds at Lloyd's of approximately 7.5 million pounds (approximately $13 million), which is primarily in the form of a letter of credit, supporting approximately 15 million pounds (approximately $25 million) of premium writing capacity to the syndicates managed by ALA and ALU for the 1997 year of account. The syndicates managed by ALA and ALU in which the Company participates underwrite aviation and non-marine risks. The Company's excess liability insurance policy generally provides limits of up to a maximum of $200 million per occurrence and annual aggregate, with a minimum attachment point generally of $100 million. For all new and renewal business, effective December 15, 1994, the Company reduced the maximum limits offered for integrated occurrences from $200 million to $100 million. The Company maintains excess of loss clash reinsurance to protect it from losses arising from a single set of circumstances (occurrence) covered by more than one excess liability insurance policy. The reinsurance provides protection to a maximum of $150 million, and in the aggregate excess of $225 million, for each and every loss occurrence involving three or more insureds. Integrated occurrences are specifically excluded. The Company offers up to $75 million of limits in directors and officers liability coverage. The Company does not purchase reinsurance for its directors and officers liability risks. The Company began satellite insurance operations in February 1994. Until February 15, 1996, the Company offered separate limits of up to $25 million per risk for launch insurance, including ascent to orbit and initial operations, and up to $25 million per risk for in-orbit insurance. This risk was fully retained by the Company. Effective for all business written on or after February 15, 1996, the Company entered into a surplus treaty arrangement which provides for up to $25 million of reinsurance for each risk. This reinsurance arrangement enabled the Company to raise the gross limits offered for satellite insurance to $50 million per risk. During fiscal 1995, the Company entered the following new lines of business: aviation insurance, excess property insurance and financial lines. Also during fiscal 1995, the Company commenced its participation in the reinsurance of "First Line". Aviation insurance provides coverage for various aviation products, including aircraft manufacturers hull and liability, as well as airport liability, aircraft refueling operations and associated aircraft liability risks. The Company offers limits of up to $100 million per insured, with no minimum attachment point. The Company reduces its net exposure to approximately $50 million per insured with a dedicated reinsurance program. The Company offers global excess property "all risk" insurance , providing limits of up to a maximum of $50 million per occurrence with a minimum attachment point of $25 million. Coverage includes such perils as windstorm, earthquake and fire, as well as explosion. Consequential business interruption coverage is also offered. In certain circumstances, 12 <PAGE> the Company uses reinsurance to establish the retained net limit per risk. In addition, the Company has purchased catastrophe reinsurance to control the possible effects of cumulative natural peril exposure. The Company's financial lines product group offers specifically designed financial, insurance and reinsurance solutions to address complex risk management problems. The programs offered typically have the following common characteristics: multi-year contract terms, broad coverage that includes stable capacity and pricing for the insured, aggregate policy limits and insured participation in the results of their own loss experience. Each contract is unique because it is tailored to the insurance or reinsurance needs, specific loss history and financial strength of the insured. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to co on the amount of underwriting risk and investment risk assumed on each contract. With effect from November 20, 1996, the Company participates in the reinsurance of Shipowners Insurance and Guaranty Company Ltd. (SIGCo), a Bermuda-based company approved by the United States Coast Guard to provide financial guarantees required by the U.S. Coast Guard to issue Certificates of Financial Responsibility under the Oil Pollution Act of 1990 to owners of vessels operating in U.S. waters. SIGCo underwrites the risks previously written by the "First Line" program which the Company has participated in since December 1994. The Company has purchased excess of loss reinsurance to limit its exposure in this line. The Company will continue to evaluate potential new product lines and other opportunities in the insurance and reinsurance markets. Results of Operations - Three Months ended December 31, 1996 ---------------------------------------------------------------------------- Net Income Three Months ended % Change December 31 from 1996 1995 prior year ------- -------- ---------- (in millions) Income excluding net realized gains on investments $ 84.0 $48.9 74.7% Net realized gains on investments 41.7 44.6 N.M. ------ ----- ----- Net income $125.7 $93.5 N.M. ------ ----- ----- (N.M. - Not meaningful) ----------------------------------------------------------------------------- Higher net investment income and income from insurance operations were the main contributors to the 71.7 percent increase in income excluding net realized gains on investments for the first quarter of fiscal 1997, compared with the corresponding fiscal 1996 quarter. The increase in 13 <PAGE> investment income and income from insurance operations were primarily attributable to the inclusion of the results of Tempest in the current quarter. Tempest contributed $9.3 million to net investment income and $31.4 million to income excluding net realized gains on investments. These increases were partially offset by an increase in general and administrative expenses. Both net income for the current quarter and the first quarter of fiscal 1996 benefitted from positive movements in the investment markets which produced significant net realized gains on investments in each of these quarters. 14<PAGE> <TABLE> <CAPTION> Results of Operations - Three Months ended December 31, 1996 (continued) Premiums Three Months ended % Change December 31 from 1996 1995 prior year ------- ------- ---------- (in millions) <S> <C> <C> <C> Gross premiums written: Excess liability $ 38.3 $ 56.3 (32.0)% Financial Lines 19.9 -- N.M. Directors and officers liability 34.8 34.7 0.4 Satellite 19.3 24.0 (19.7) Aviation 5.2 3.1 65.2 Excess property 6.0 6.1 (1.3) SIGCo / First Line 1.0 7.3 N.M. Property catastrophe (Tempest) 1.7 -- N.M. Lloyd's syndicates 6.1 -- N.M. Other 0.2 -- N.M. ------ ----- ------- $132.5 $131.5 1.0% ====== ====== ======= Net premiums written: Excess liability $ 38.8 $ 56.3 (31.1)% Financial Lines 6.6 -- N.M. Directors and officers liability 34.8 34.7 0.4 Satellite 13.7 23.5 (41.5)% Aviation 4.0 2.3 73.5 Excess property 6.0 5.2 15.5 SIGCo / First Line 1.1 6.8 N.M. Property catastrophe (Tempest) 1.7 -- N.M. Lloyd's syndicates 3.7 -- N.M. Other 0.2 -- N.M. ------ ----- ------- $110.6 $128.8 (14.1)% ====== ====== ======= Net premiums earned: Excess liability $ 53.7 $ 61.8 (13.0)% Financial Lines 21.6 1.9 N.M. Directors and officers liability 23.6 27.0 (12.5) Satellite 13.4 18.2 (26.6) Aviation 6.3 2.1 198.1 Excess property 4.2 1.3 229.3 SIGCo / First Line 2.9 3.7 (20.9) Property catastrophe (Tempest) 36.1 -- N.M. Lloyd's syndicates 2.3 -- N.M. Other 0.3 -- N.M. ------ ----- ------- $164.4 $116.0 (41.7)% ====== ====== ======= </TABLE> 15 <PAGE> Results of Operations - Three Months ended December 31, 1996 (continued) For the three months ended December 31, 1996, gross written premiums increased by 1 percent from $131.5 million to $132.5 million despite continuing competitive pressures in most insurance markets. The growth in gross written premiums was mainly a result of the increase in financial lines premiums in the first quarter of fiscal 1997 from nil for the comparable fiscal 1996 quarter, together with the participation in the Lloyd's syndicates managed by MUL. These factors together accounted for a $26.0 million increase in gross written premiums. This increase was offset by declines in excess liability and satellite premiums. The decline in excess liability premiums of $18.0 million was mainly the result of continuing competitive pressures in that market. The decline in satellite premiums of $4.7 million was the result of reduced launch activity in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996, where launch activity was considered high. Net premiums written declined by 14.1 percent to $110.6 million for the three months ended December 31, 1996, compared with $128.8 million for the first quarter of fiscal 1996. As with gross written premiums, the decrease in net written premiums is primarily the result of declines in excess liability premiums and satellite premiums. A portion of the decline in net premiums written is also a result of the Company's decision to purchase reinsurance for the financial lines and satellite product lines. Net premiums earned increased by $48.4 million or 41.7 percent to $164.4 million for the quarter ended December 31, 1996 compared with $116.0 million for the quarter ended December 31, 1995. The growth in net premiums earned was the result of contributions from the new lines of business, particularly financial lines, and the inclusion of Tempest earned premiums for the quarter which amounted to $36.1 million. These increases were offset somewhat by declines in excess liability and directors and officers liability earned premiums. ----------------------------------------------------------------------------- Net Investment Income Three Months ended % Change December 31 from 1996 1995 prior year ------- -------- ---------- (in millions) Net Investment Income $59.7 $47.1 26.8% ===== ===== ==== ----------------------------------------------------------------------------- The increase in net investment income in the current quarter, as compared with the first quarter of fiscal 1996, is primarily attributable to a larger investable asset base. The larger investable asset base is due to positive cash flows from operations and the reinvestment of funds generated by the portfolio. The increase in the current quarter is also the result of the consolidation of the Tempest portfolio. The average yield on the investment portfolio remained relatively unchanged in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. 16 <PAGE> ----------------------------------------------------------------------------- Net Realized Gains on Investments Three Months ended December 31 1996 1995 ------- -------- (in millions) Fixed maturities and short-term investments $21.4 $25.9 Equity securities 4.2 2.8 Financial futures contracts 17.7 14.8 Currency gains (losses) (1.6) 1.1 ----- ----- $41.7 $44.6 ===== ===== ----------------------------------------------------------------------------- The Company's investment strategy takes a long-term view and the portfolio is actively managed to maximize total return within certain specific guidelines which minimize risk. The portfolio is reported at fair value. The effect of market movements on the investment portfolio will directly impact net realized gains (losses) on investments when securities are sold. Changes in unrealized gains and losses, which result from the revaluation of securities held, are reported as a separate component of shareholders' equity. In May 1996, the Company decided to increase the equity exposure of the portfolio from 15 percent to 20 percent. This change to the equity exposure has been fully implemented during this current quarter. The remainder of the portfolio is comprised of fixed maturity securities. The Company uses foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar holdings. The contracts used are not designated as specific hedges and therefore, realized and unrealized gains and losses recognized on these contracts are recorded as a component of net realized gains (losses) in the period in which the fluctuations occur, together with net foreign currency gains (losses) recognized when non-U.S. dollar securities are sold. During the first quarter of fiscal 1997 the fair value of the Company's investment portfolio was positively impacted by a general increase in prices in the U.S. bond markets resulting from the decline in interest rates during the period. The sales proceeds for fixed maturity securities were generally higher than their amortized cost during most of the quarter which resulted in net realized gains of $21.4 million being recognized on fixed maturities and short-term investments. In the first quarter of fiscal 1996, net realized gains of $25.9 million were recognized on fixed maturities and short-term investments. With strong equity markets, net realized gains on sales of equity securities were $4.2 million in the first quarter of fiscal 1997 compared with gains of $2.8 million in the first quarter of fiscal 1996. Net realized gains on financial futures contracts of $17.7 million recorded in the first quarter of fiscal 1997 were primarily generated by the equity index futures contracts held, as a result of an over 8 percent rise in the S&P 500 Stock Index during the quarter. The majority of the $14.8 million of net realized gains on financial futures contracts recorded in the first quarter of fiscal 1996 were also generated by the equity index futures contracts held, as a result of a 6 percent rise in the S&P 500 Stock Index 17 <PAGE> during that period. The remainder of the net realized gains on financial futures contracts in the first quarter of fiscal 1996 arose from gains recognized on futures contracts used by certain of the Company's external managers of fixed income securities. ----------------------------------------------------------------------------- Combined Ratio Three Months ended December 31 1996 1995 ------- -------- (in millions) Losses and Loss Expense Ratio 67.0% 80.1% Acquisition cost Ratio 8.6 10.4 Administrative expense ratio 9.6 7.9 ----- ---- Combined ratio 85.2% 98.4% ===== ==== ----------------------------------------------------------------------------- The underwriting results of a property and casualty insurer are discussed frequently by reference to its losses and loss expense ratio, acquisition cost ratio, administrative expense ratio and combined ratio. Each ratio is derived by dividing the relevant expense amounts by net premiums earned. The combined ratio is the sum of the losses and loss expense ratio, the acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting profits and a combined ratio exceeding 100 percent indicates underwriting losses. Property catastrophe reinsurance companies generally expect to have overall lower combined ratios as compared with other reinsurance companies with long-tail exposures. For the three months ended December 31, 1996, the losses and loss expense ratio was 67.0 percent compared to 80.1 percent for the first quarter of fiscal 1996. The ratio for the current quarter is impacted by the inclusion of Tempest. Property catastrophe loss experience is generally characterized by low frequency but high severity short-tail claims which may result in significant volatility in results. For the current quarter, Tempest's loss and loss expense ratio was 15.0 percent. Excluding Tempest, the loss and loss expense ratio would have been 81.0 percent. Several aspects of the Company's operations, including the low frequency and high severity of losses in the high excess layers in certain lines of business in which the Company provides insurance and reinsurance, complicate the actuarial reserving techniques utilized by the Company. Management believes, however, that the Company's reserves for unpaid losses and loss expenses, including those arising from breast implant litigation, are adequate to cover the ultimate cost of losses and loss expenses incurred through December 31, 1996. Since such provisions are necessarily based on estimates, future developments may result in ultimate losses and loss expenses significantly greater or less than such amounts (see "Breast Implant Litigation"). Although acquisition costs increased by $2.0 million in the quarter, the acquisition cost ratio actually decreased due primarily to the change in the mix of business written in the quarter. Administrative expenses increased by $6.7 million in the current quarter compared to the first quarter of fiscal 1996. These additional expenses are primarily due to the 18 <PAGE> increased cost base resulting from the strategic diversification by the Company over the past two years, including the introduction of the new insurance products during 1994 and 1995 and the recent acquisitions of Tempest, Methuen and Ockham Worldwide. In addition, the increase in the market value of the Company's shares during the quarter resulted in total expenses related to employee stock appreciation rights of $2.5 million compared with $1.4 million for the first quarter of fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES As a holding company, ACE's assets consist primarily of the stock of its subsidiaries as well as other investments. In addition to investment income, its cash flows depend primarily on dividends or other statutorily permissible payments from its Bermuda-based insurance and reinsurance subsidiaries (the "Bermuda subsidiaries"). There are currently no legal restrictions on the payment of dividends from retained earnings by the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. However, the payment of dividends or other statutorily permissible distributions by the Bermuda subsidiaries is subject to the need to maintain shareholder's equity at a level adequate to support the level of insurance and reinsurance operations. The Company's consolidated sources of funds consist primarily of net premiums written, investment income, and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses and dividends and for the purchase of investments. For the three months ended December 31, 1996, the Company's consolidated net cash flow from operating activities was $86.8 million, compared with $145.2 million for the three months ended December 31, 1995. Cash flows are affected by claims payments, which due to the nature of the insurance and reinsurance coverage provided by the Company, may comprise large loss payments on a limited number of claims and can therefore fluctuate significantly. The irregular timing of these large loss payments, for which the source of cash can be from operations, available credit facilities or routine sales of investments, can create significant variations in cash flow from operations between periods. For the three month periods ended December 31, 1996 and 1995, loss and loss expense payments amounted to $75.1 million and $22.0 million respectively. Total loss and loss expense payments amounted to $101.4 million, $73.1 million and $126.6 million in fiscal years 1996, 1995 and 1994, respectively. At December 31, 1996, total investments and cash amounted to approximately $4.3 billion, compared to $4.2 billion at September 30, 1996. The increase in investable assets can be attributed in part to the combined contribution of unrealized appreciation in the portfolio due to the general strength of both fixed income and equity markets, cash flows from operating activities during the quarter as well as the reinvestment of funds generated by the portfolio. The Company's investment portfolio is structured to provide a high level of liquidity to meet insurance related or other obligations. The consolidated investment portfolio is externally managed by independent professional investment managers and is invested in high quality investment grade marketable fixed income and equity securities, the majority of which trade in active, liquid markets. The Company believes that its cash balances, cash flow from operations, routine sales of investments and the liquidity provided under its committed line of credit (discussed below) are adequate to allow the Company to pay claims within the time periods required under its policies. 19 <PAGE> The Company has a $50 million committed unsecured line of credit provided by a syndicate of six major international banks, led by Morgan Guaranty Trust Company of New York ("Morgan"). In accordance with the Company's cash management strategy, this facility is utilized when it is determined that borrowing on a short-term basis is advantageous to the Company. The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $1.25 billion. There were no draw-downs from the line of credit during the three months ended December 31, 1996 and there were no outstanding borrowings at December 31, 1996. The syndicate of banks have also provided up to approximately 71 million pounds (approximately $120 million) for a five year, collateralized letter of credit ("LOC"), which will primarily be used to provide funds at Lloyd's to support underwriting capacity on Lloyd's syndicates in which the Company participates. Certain assets, amounting to 115 percent of the value of the LOC, have been pledged as collateral for the LOC. Morgan has served as the issuing bank for the letter of credit. The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. On August 9, 1996, the Board of Directors terminated the then existing share repurchase program and authorized a new program for up to $100.0 million of the Company's Ordinary Shares. During the quarter ended December 31, 1996, the Company repurchased 255,000 Ordinary Shares under the share repurchase program for an aggregate cost of $14.7 million. As at December 31, 1996, approximately $51.0 million of the Board authorization had not been utilized. During the period January 1, 1997 through February 6, 1997, the Company repurchased an additional 761,500 Ordinary Shares under the share repurchase program for an aggregate cost of $43.7 million, leaving approximately $7.4 million of the Board authorization not utilized. On February 7, 1997, the Board of Directors terminated the existing share repurchase program and authorized a new program for up to $100.9 million of the Company's Ordinary Shares. On October 18, 1996 and January 17, 1997, the Company paid quarterly dividends of 18 cents per share to shareholders of record on September 30, 1996 and December 29, 1996. On February 7, 1997 the Board of Directors declared a quarterly dividend of 18 cents per share payable on April 18, 1997 to shareholders of record on March 31, 1997. The declaration and payment of future dividends is at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of the Company and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. Fully diluted net asset value per share was $40.73 at December 31, 1996, compared with $38.31 at September 30, 1996. The Company maintains loss reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. The ultimate liability is estimated using actuarial and statistical projections. The reserve for unpaid losses and loss expenses of $1.9 billion at December 31, 1996, includes $1.0 billion of case and loss expense reserves. While the Company believes that its reserve for unpaid losses and loss expenses at December 31, 1996 is adequate, future developments may result in ultimate losses and loss expenses significantly greater or less than the reserve provided. A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such y does not have adequate data upon which to anticipate any funding schedule for the payment of these liabilities, and it expects that the amount of time required to determine the financial impact of the options selected by claimants may extend well into 1997 and beyond. Payments may be accelerated for some policyholders in 1997 as a result of settlement of opt-out cases and as additional payments are required to fund Settlement II (see "Breast Implant Litigation"). 20 <PAGE> The Company's financial condition, results of operations and cash flow are influenced by both internal and external forces. Claims settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the settlement of the Company's liability for that loss. The liquidity of its investment portfolio, cash flows and the line of credit are, in management's opinion, adequate to meet the Company's expected cash requirements. Breast Implant Litigation A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits, including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation ("MDL") to a Federal District Court in Alabama. On April 1, 1994 the judge presiding over the MDL proceeding gave preliminary approval to a global settlement agreement in the approximate amount of $4.2 billion and conditional certification to a settlement class ("Global I"). On May 15, 1995, the Dow Corning Corporation, a significant participant in the Global I settlement, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of June 1, 1995, over 440,000 registrations were received by the Global I Claims Administrator. Approximately 248,500 of these were filed by domestic class members by the September 16, 1994 deadline for making claims under the Current Disease Compensation Program. Based on an analysis of about 3,000 of these registrations, the judge concluded that a severe racheting (or reduction) of the settlement amounts shown in the notice of settlement would occur if current claims were evaluated under the existing criteria and if funding of the Current Disease Compensation Program remained at the $1.2 billion level. Because of the anticipated racheting of benefit amounts and the defendants' right to withdraw under the Global I settlement, the judge entered an order on October 9, 1995 declaring that class members had new opt-out rights and that in general class members and their attorneys should not expect to receive any benefits under Global I. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for domestic class members with at least one implant from any of those manufacturers ("Settlement II"). In general, under Settlement II, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of class members electing to opt out from the new plan. Also, in general, the compensation would be fixed rather than subject to potential further racheting, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each settling defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all cases. Participants with implants from one or more of those three defendants who had submitted timely claims under Global I would have two options. 21 <PAGE> Option One: An amount based on disease criteria and severity levels in the Global I settlement ranging from $10,000 to $100,000. Although substantially less than the amounts shown in the initial notices for Global I settlement, they are greater for many claimants than the amounts that, after racheting, would have been offered under Global I and are not subject to a "walkaway" by defendants because of such opt-outs. Option Two: A potentially higher benefit based on having or developing during a 15-year period certain diseases that meet more restrictive criteria. The compensation range for persons qualifying under this option is from $75,000 to $250,000. Qualifying claimants would also be eligible for an advance payment of $1,000 under certain circumstances. In general, the maximum total obligation under this 15-year program allocated among the three defendants plus the additional defendants referred to below is $755 million. Each Current Claimant, regardless of the option selected, would be paid an advance payment of $5,000 and would also be eligible for an additional payment of $3,000 to defray the costs of explantation during that 15-year period should the person choose to do so without regard to the status of any appeals. Current Claimants would be given an extended period of time to identify manufacturers of their implants, to correct any deficiencies in the documentation supporting their prior claims or to provide additional support for claims under the more restrictive criteria. By November 13, 1995, Settlement II was approved by the three major defendants. In addition, two other defendants became part of Settlement II, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the judge approved Settlement II and the materials for giving notice to claimants although several appeals concerning Settlement II have been lodged with the Eleventh Circuit Court of Appeals. In mid-January 1996, the three major defendants each made a payment of $125 million to a court-established fund as an initial reserve for payments to be made under Settlement II. The Claims Administrator is sending out notifications of status and advance payments to claimants who submitted implant manufacturer proof. Although Option One closed on December 16, 1996, information on the estimated total cost of Settlement II and the number of opt -outs is not presently available. Although the Company has underwritten the coverage for a number of the defendant companies including four of the companies involved in the revised Settlement II described above, the Company anticipates that insurance coverage issued prior to the time the Company issued policies will be available for a portion of the defendants' liability. In addition, the Company's policies only apply when the underlying liability insurance policies or per occurrence retentions are exhausted. Declaratory judgment lawsuits, involving four of the Company's insureds, have been filed seeking guidance on the appropriate trigger for their insurance coverage. None of the insureds have named the Company in such lawsuits, although other insurers and third parties have sought to involve the Company in those lawsuits. To date, one court has stayed a lawsuit against the Company by other insurers; a second court has dismissed the claims by other insurers against the Company. Another court in Texas has ruled against the Company's arguments that the court should dismiss the claims by other insurers and certain doctors attempting to bring the Company into coverage litigation there. On appeal in the Texas lawsuit, the appellate court affirmed the lower court's order refusing to dismiss 22 <PAGE> the claims against the Company; further appellate review in the Texas Supreme Court has been sought. In addition, further efforts are contemplated to stay or dismiss the doctor's claims against the Company in the Texas lawsuit. The remaining case is presently stayed; if it is activated, the Company will resist involvement on jurisdictional and other grounds. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in conjunction with Global I (including information relating to opt-outs) and information made available from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. In August 1996, the Company settled with one of its insureds, a breast implant manufacturer, for a sum of money to be paid out over a number of years in the future. The settlement is consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of Settlement II and the number and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as of December 31, 1996. 23 <PAGE> ACE LIMITED PART II - OTHER INFORMATION Item 4. Submission of matters to a vote of security holders ------------------------------------------------------------ 1) The Annual General Meeting was held on February 7, 1997. 2) The following matters were voted on at the Annual General Meeting: a) The following directors were elected. Term Votes Votes Expiring in favour Withheld -------- ----------- -------- Meryl D. Hartzband 1999 47,892,779 55,874 Donald Kramer 1999 47,892,523 56,130 Michael G. Atieh 2000 47,891,453 57,200 Bruce Crockett 2000 47,891,219 57,434 Robert W. Staley 2000 47,892,544 56,100 Gary M. Stuart 2000 47,891,459 57,194 b) The appointment or Coopers & Lybrand L.L.P. as independent public accountant for the Company for the year ended September 30, 1997 was ratified and approved. The holders of 47,910,015 shares voted in favour, 5,954 shares voted against and 32,684 shares abstained. Item 5. Other Information -------------------------- 1) On February 7, 1997 the Company declared a dividend of $0.18 per Ordinary Share payable on April 18, 1997 to shareholders of record on March 31, 1997. 2) The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. On February 7, 1997, the Board of Directors terminated the then existing share repurchase program and authorized a new program for up to $100.0 million of the Company's Ordinary Shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- a) Exhibit 11.1 - Statement regarding computation of earnings per Share. b) There were no reports on Form 8-K filed during the quarter. 24 <PAGE> 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. ACE LIMITED February 10, 1997 ____________________________________ Brian Duperreault Chairman, President and Chief Executive Officer February 10, 1997 ____________________________________ Christopher Z. Marshall Executive Vice President and Chief Financial Officer 25 <PAGE> EXHIBIT INDEX ------------- Exhibit Number Description Numbered Page ------- ------------ ------------- 11.1 Computation of earnings per share 27 27 Financial Data Schedule 28 26 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> <TABLE> <CAPTION> EXHIBIT - 11.1 ACE LIMITED AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Three Months Ended December 31 1996 1995 ------- ------- (in thousands of U.S. dollars, except share and per share data) <S> <C> <C> Earnings per share - Primary Weighted average shares outstanding 58,139,648 46,120,526 Average stock options outstanding (net of repurchased shares under the treasury stock method) 746,607 217,456 ---------- ---------- Weighted average shares and share equivalents outstanding 58,886,255 46,327,982 ========== ========== Net income $ 125,741 $ 93,536 ========== ========== Earnings per share $ 2.14 $ 2.02 ========== ========== Earnings per share - Assuming full dilution Weighted average shares outstanding 58,139,648 46,110,526 Average stock options outstanding (net of repurchased shares under the treasury stock method) 817,063 287,302 ---------- ---------- Weighted average shares and share equivalents outstanding 58,956,711 46,397,828 ========== ========== Net income $ 125,741 $ 93,536 ========== ========== Earnings per share $ 2.13 $ 2.02 ========== ========== </TABLE> 27 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 7 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <DEBT-HELD-FOR-SALE> 3,370,700 <DEBT-CARRYING-VALUE> 0 <DEBT-MARKET-VALUE> 0 <EQUITIES> 416,090 <MORTGAGE> 0 <REAL-ESTATE> 0 <TOTAL-INVEST> 4,162,495 <CASH> 93,504 <RECOVER-REINSURE> 0 <DEFERRED-ACQUISITION> 30,732 <TOTAL-ASSETS> 4,747,445 <POLICY-LOSSES> 1,870,619 <UNEARNED-PREMIUMS> 354,793 <POLICY-OTHER> 64,255 <POLICY-HOLDER-FUNDS> 0 <NOTES-PAYABLE> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 7,241 <OTHER-SE> 2,361,128 <TOTAL-LIABILITY-AND-EQUITY> 4,747,445 <PREMIUMS> 164,400 <INVESTMENT-INCOME> 59,738 <INVESTMENT-GAINS> 41,723 <OTHER-INCOME> 0 <BENEFITS> 110,150 <UNDERWRITING-AMORTIZATION> 14,129 <UNDERWRITING-OTHER> 0 <INCOME-PRETAX> 125,741 <INCOME-TAX> 0 <INCOME-CONTINUING> 125,741 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 125,741 <EPS-PRIMARY> 2.14 <EPS-DILUTED> 2.13 <RESERVE-OPEN> 0 <PROVISION-CURRENT> 0 <PROVISION-PRIOR> 0 <PAYMENTS-CURRENT> 0 <PAYMENTS-PRIOR> 0 <RESERVE-CLOSE> 0 <CUMULATIVE-DEFICIENCY> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CLX

https://www.sec.gov/Archives/edgar/data/21076/0000021076-97-000004.txt

-----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, Qjp21ii8HL+5RgrgBOCebRABnbwekGLrmN7eapUpsmP/toX4vHyUdkzoyofK/AEE NqHDqcGm9DMJ/602P+/G2w== <SEC-DOCUMENT>0000021076-97-000004.txt : 19970222 <SEC-HEADER>0000021076-97-000004.hdr.sgml : 19970222 ACCESSION NUMBER: 0000021076-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLOROX CO /DE/ CENTRAL INDEX KEY: 0000021076 STANDARD INDUSTRIAL CLASSIFICATION: SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS [2842] IRS NUMBER: 310595760 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07151 FILM NUMBER: 97535655 BUSINESS ADDRESS: STREET 1: THE CLOROX COMPANY STREET 2: 1221 BROADWAY CITY: OAKLAND STATE: CA ZIP: 94612-1888 BUSINESS PHONE: 510-271-7000 MAIL ADDRESS: STREET 1: P.O. BOX 24305 CITY: OAKLAND STATE: CA ZIP: 94612-1305 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q TEXT <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 ------------------ 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 1-07151 ------- THE CLOROX COMPANY - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 31-0595760 - ----------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification number) 1221 Broadway - Oakland, California 94612 - 1888 - ----------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, (510)-271-7000 (including area code) --------------- - ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of December 31, 1996 there were 51,711,431 shares outstanding of the registrant's common stock (par value - $1.00), the registrant's only outstanding class of stock. Total pages 10 1 THE CLOROX COMPANY PART 1. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Condensed Statements of Consolidated Earnings Three and Six Months Ended December 31, 1996 and 1995 3 Condensed Consolidated Balance Sheets December 31, 1996 and June 30, 1996 4 Condensed Statements of Consolidated Cash Flows Six Months Ended December 31, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7-9 2 <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Earnings --------------------------------------------- (In thousands, except per share amounts) Three Months Ended Six Months Ended -------------------------------- ------------------------------ 12/31/96 12/31/95 12/31/96 12/31/95 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales $ 530,215 $ 466,789 $1,120,988 $ 985,275 Costs and Expenses Cost of products sold 235,626 213,171 492,987 444,504 Selling, delivery and administration 120,439 102,378 237,033 201,034 Advertising 80,910 66,628 169,884 139,110 Research and development 11,532 11,205 22,030 21,407 Interest expense 11,745 7,588 22,242 15,360 Other (income) expense, net (2,986) 2,196 (4,959) 1,629 -------- -------- -------- -------- Total costs and expenses 457,266 403,166 939,217 823,044 ======== ======== ======== ======== Earnings before income taxes 72,949 63,623 181,771 162,231 Income Taxes 29,034 25,712 72,346 65,541 -------- -------- -------- -------- Net Earnings $ 43,915 $ 37,911 $ 109,425 $ 96,690 ======== ======== ======== ======== Earnings per Common Share $ 0.85 $ 0.73 $ 2.12 $ 1.85 Dividends per Share $ 0.58 $ 0.53 $ 1.16 $ 1.06 Weighted Average Shares Outstanding 51,685 52,089 51,615 52,222 See Notes to Condensed Consolidated Financial Statements. 3 </TABLE> <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Consolidated Balance Sheets ------------------------------------- (In thousands, except per share amounts) 12/31/96 6/30/96 -------------- ------------- <S> <C> <C> ASSETS - ------ Current Assets Cash and short-term investments $ 80,911 $ 90,828 Accounts receivable, less allowance 302,002 315,106 Inventories 189,853 138,848 Deferred income taxes 24,110 10,987 Prepaid expenses 25,362 18,076 -------------- ------------- Total current assets 622,238 573,845 Property, Plant and Equipment - Net 569,186 551,437 Brands, Trademarks, Patents and Other Intangibles 1,140,328 704,669 Investments in Affiliates 98,833 99,033 Other Assets 280,503 249,910 -------------- ------------- Total $ 2,711,088 $ 2,178,894 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 116,910 $ 155,366 Accrued liabilities 336,748 266,192 Income taxes payable 11,264 9,354 Commercial paper and notes payable 183,760 192,683 Current maturities of long-term debt 179 291 -------------- ------------- Total current liabilities 648,861 623,886 Long-term Debt 793,350 356,267 Other Obligations 121,807 100,246 Deferred Income Taxes 148,221 148,408 Stockholders' Equity Common Stock 55,422 55,422 Additional paid-in capital 114,663 111,782 Retained earnings 1,128,694 1,078,789 Treasury shares, at cost (252,692) (251,393) Cumulative translation adjustments and other (47,238) (44,513) -------------- ------------- Stockholders' Equity 998,849 950,087 -------------- ------------- Total $ 2,711,088 $ 2,178,894 ============== ============= See Notes to Condensed Consolidated Financial Statements. 4 </TABLE> <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Cash Flows ----------------------------------------------- (In thousands) Six Months Ended ----------------------------------- 12/31/96 12/31/95 ------------ ------------ <S> <C> <C> Operations: Net earnings $ 109,425 $ 96,690 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 59,783 55,669 Deferred income taxes 2,146 3,300 Other 5,303 12,532 Effects of changes in: Accounts receivable 43,710 91,497 Inventories (41,838) (33,505) Prepaid expenses (7,285) 2,243 Accounts payable (52,574) (33,385) Accrued liabilities 19,194 (44,049) Income taxes payable 817 (5,863) ------------ ------------ Net cash provided by operations 138,681 145,129 Investing Activities: Property, plant and equipment (37,403) (30,658) Disposal of property, plant and equipment 1,921 770 Businesses purchased (452,788) (61,665) Other (23,386) (22,168) ------------ ------------ Net cash used for investment (511,656) (113,721) ------------ ------------ Financing Activities: Short-term borrowings 7,671 - Long-term borrowings 438,196 - Long-term debt and other obligations repayments (4,637) (12,696) Commercial paper, net (16,548) 53,223 Cash dividends (59,868) (55,537) Treasury stock (11,752) (50,150) Employee stock plans 9,996 2,288 ------------ ------------ Net cash provided by (used for) financing 363,058 (62,872) ------------ ------------ Decrease in Cash and Short-Term Investments (9,917) (31,464) Cash and Short-Term Investments: Beginning of period 90,828 137,330 ------------ ------------ End of period $ 80,911 $ 105,866 ============ ============= See Notes to Condensed Consolidated Financial Statements. 5 </TABLE> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements ---------------------------------------------------- (1) The summarized financial information for the three and six months ended December 31, 1996 and 1995 has not been audited but, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations, financial position, and cash flows of The Clorox Company and subsidiaries (the Company) have been made. The results of the three and six months ended December 31, 1996 and 1995 should not be considered as necessarily indicative of the results for the entire year. (2) Inventories at December 31, 1996 and at June 30, 1996 consisted of (in thousands): 12/31/96 6/30/96 --------- --------- Finished goods and work in process $ 122,495 $ 82,261 Raw materials and supplies 67,358 56,587 --------- --------- Total $ 189,853 $ 138,848 (3) The aggregate exercise price of the put options, $17,259,000, which was classified as other long-term obligations at June 30, 1996 have been reclassified to treasury stock at December 31, 1996 as a result of renegotiation of terms which resulted in these transactions being classified as equity. The Company sold 240,000 put options and purchased 240,000 call options during the second quarter of fiscal year 1996 with various strike prices (average of $71.91 per share) that expire on various dates through September 30, 2005. Upon exercise, each put option requires the Company to purchase, and each call option allows the Company to buy one share of its common stock at the strike price. (4) Businesses purchased for the six months ended December 31, 1996 totaled $452,788,000 and included the acquisition of Armor All Products Corporation for $360,144,000. The acquisition occurred on December 30, 1996 with the completion of a tender offer. The acquired business markets the leading line of automotive cleaning products under the brand name Armor All. Net assets acquired include cash of $48,000,000, other net working capital of $1,100,000, property plant and equipment of $9,177,000, and intangible assets of $358,000,000 Intangible assets, principally brands and trademarks, will be amortized over 40 years. Other businesses purchased included the Shell Group's non-core line of household products in Chile, the Pinoluz brand of pine cleaner in Argentina, and the Limpido brand of liquid bleach and an increase in ownership in Tecnoclor, S.A., both in Colombia. All acquisitions were accounted for as purchases and were funded from cash provided by operations, long-term borrowings, and commercial paper. Commercial paper expected to be refinanced has been classified as Long-term Debt. Acquisitions for the six months ended December 31, 1995 of $61,665,000 were funded from cash provided from operations and included the Black Flag line of insecticides, the acquisition of the remaining minority interest of the business in Argentina, and other business interests in Mexico. These acquisitions were accounted for as purchases. 6 PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Results of Operations --------------------- Comparison of the Three Months Ended December 31, 1996 with the Three Months Ended December 31, 1995 --------------------------------------------- Earnings per share increased 16 percent to $.85 from $.73, and net earnings increased 16 percent to $43,915,000 from $37,911,000 a year ago, principally due to a 14 percent increase in net sales driven by a 13 percent increase in volume. Record shipments were recorded for our home cleaning business unit which includes Clean Up, S.O.S, Soft Scrub, and Clorox toilet bowl cleaners. Clorox 2 Color-Safe bleach shipped its highest volume since the second quarter of fiscal 1994. Combat insecticides and Kingsford charcoal shipments were also up strongly. Brita water filtration systems shipped record quarterly volumes reflecting strong growth in all trade channels. Foreign net sales were 18 percent of total Company net sales, up from 15 percent of total Company sales for the year ago quarter. Increased sales levels reflect the results of acquisition activity, principally in Latin America. Cost of products sold as a percentage of net sales was 44.4 and 45.7 percent in the current and year ago quarters, respectively. The improvement reflects the results of certain cost savings measures, including our manufacturing strategy and our initiative in the food business. These margins are anticipated to remain at approximately these levels for the remainder of the fiscal year. Selling, delivery, and administration expense increased 18 percent over the year ago period principally due to continued investment in international infrastructure, foreign acquisitions and costs arising from investments in information technology both domestically and abroad. Advertising expense increased 21 percent over the year ago period principally due to higher media spending as well as sales promotion spending on new product activities, and spending for our Brita business to solidify brand equity and maintain our current category leadership. Interest expense increased $4,157,000 over the year ago period due to higher levels of commercial paper, and additional indebtedness related to long-term borrowings that funded acquisitions. 7 PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Results of Operations --------------------- Comparison of the Six Months Ended December 31, 1996 with the Six Months Ended December 31, 1995 --------------------------------------------- Earnings per share increased 15 percent to $2.12 from $1.85, and net earnings increased 13 percent to $109,425,000 from $96,690,000 a year ago, principally due to a 14 percent increase in net sales driven by a 14 percent increase in volume. Record shipments were recorded for our home cleaning business unit which includes Formula 409, Clean Up, Soft Scrub, S.O.S, Pine-Sol and Clorox toilet bowl cleaners. Combat insecticides and cat litter shipments were both up in volume versus the year ago period. Brita water filtration systems shipped record volumes that reflect continued strong growth in all trade channels. Foreign net sales were 16 percent of total Company net sales, up from 13 percent of total Company sales for the year ago quarter. Increased sales levels reflect the results of acquisition activity, principally in Latin America. Cost of products sold as a percent of net sales was 44 and 45 percent in the current and year ago periods, respectively. The improvement reflects the results of certain cost savings measures, including our manufacturing strategy and our initiative in the food business. These margins are expected to remain at approximately this level for the remainder of the fiscal year. Selling, delivery and administration expense increased 18 percent over the year ago period principally due to continued investment in international infrastructure, international acquisitions and costs related to investments in information technology both domestic and foreign. Advertising expense increased 22 percent versus a year ago. This increase reflects heavier media and sales promotion expenses for new product introductions, and the spending to solidify Brita's brand equity and maintain category leadership. We anticipate that for the full year advertising and sales promotion should increase at about the same rate as the growth of sales. Interest expense increased $6,882,000 over a year ago due to higher levels of commercial paper and additional indebtedness to fund the acquisition activities this year. 8 PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition --------------------------------------------- Liquidity and Capital Resources ------------------------------- The Company's financial position and liquidity remain strong due to cash provided by operations during the period. Decreases in accounts receivable and accounts payable, and increases in inventory balances from June 30, 1996 reflect normal seasonal variations, principally due to the charcoal and insecticides businesses. Accrued expenses increased from June 30, 1996 principally due to higher levels of marketing support and acquisitions. We expect inventories to increase during the next fiscal quarter to support the seasonal charcoal and insecticides businesses. Acquisitions since June 30, 1996 totaled $452,788,000 and were financed from a combination of cash provided by operations, long term borrowing, and commercial paper borrowing anticipated to be refinanced on a long-term basis during the upcoming quarter. These acquisitions, which included the Armor All line of car cleaning products for $360,144,000, and acquisitions in Latin America, were the principal causes for the increase in Brands, Trademarks, Patents and Other Intangibles. The Company has approved the use of interest rate derivative instruments such as interest rate swaps in order to manage the impact of interest rate movements on interest expense. These instruments have the effect of converting fixed rate interest to floating, or floating to fixed. The conditions under which derivatives can be used are set forth in a Company Policy Statement and include a restriction on the amount of such activity to a designated portion of existing debt, a limit on the term of any derivative transaction, and a specific prohibition on the use of any leveraged derivatives. Management believes the Company has access to additional capital through existing lines of credit and from public and private sources should the need arise. The foregoing Management's Discussion and Analysis contains "forward-looking" statements under applicable securities laws. The Company cautions readers that actual results might differ materially from those projected depending on a number of economic and competitive risk factors. For a discussion of some of those risk factors, the Company refers readers to the Company's Form 8-K Current Report which was filed on January 9, 1997. 9 S I G N A T U R E 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. THE CLOROX COMPANY (Registrant) DATE February 13, 1997 BY /s/ Henry J. Salvo, Jr. ----------------- ----------------------- Henry J. Salvo, Jr. Vice-President - Controller 10 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1996, AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-START> JUL-01-1996 <PERIOD-END> DEC-31-1996 <CASH> 80911 <SECURITIES> 0 <RECEIVABLES> 303 <ALLOWANCES> 1521 <INVENTORY> 189853 <CURRENT-ASSETS> 622238 <PP&E> 1017559 <DEPRECIATION> 448373 <TOTAL-ASSETS> 2711088 <CURRENT-LIABILITIES> 648861 <BONDS> 793350 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 55422 <OTHER-SE> 943427 <TOTAL-LIABILITY-AND-EQUITY> 2711088 <SALES> 1120988 <TOTAL-REVENUES> 1120988 <CGS> 492987 <TOTAL-COSTS> 921934 <OTHER-EXPENSES> (4959) <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 22242 <INCOME-PRETAX> 181771 <INCOME-TAX> 72346 <INCOME-CONTINUING> 109425 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 109425 <EPS-PRIMARY> 2.12 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

COMS

https://www.sec.gov/Archives/edgar/data/738076/0000738076-97-000001.txt

-----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, Wg9TLIN6fgDq6c2FbhAdP1iS5lPnJGCmHU/s3cQLJrIdYmt6qkxYrgaxkAys2uC0 Sggns+H/tJFH7PtUz99n3Q== <SEC-DOCUMENT>0000738076-97-000001.txt : 19970114 <SEC-HEADER>0000738076-97-000001.hdr.sgml : 19970114 ACCESSION NUMBER: 0000738076-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3COM CORP CENTRAL INDEX KEY: 0000738076 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942605794 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12867 FILM NUMBER: 97504803 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052 BUSINESS PHONE: 4087645000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> ______________________________________________________________ united states securities and exchange commission Washington, D. C. 20549 FORM 10-Q X quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the Quarterly Period Ended November 30, 1996 Commission File No. 0-12867 or transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from to ____________ 3Com Corporation (Exact name of registrant as specified in its charter) California 94-2605794 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Bayfront Plaza 95052 Santa Clara, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (408) 764-5000 Former name, former address and former fiscal year, if changed since last report: N/A 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 ....XX.... No ................ As of November 30, 1996, 175,961,677 shares of the Registrant's Common Stock were outstanding. ______________________________________________________________ 3Com Corporation Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets November 30, 1996 and May 31, 1996 Consolidated Statements of Income Quarters and Six Months Ended November 30, 1996 and 1995 Consolidated Statements of Cash Flows Six Months Ended November 30, 1996 and 1995 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 3Com, EtherLink, and ONcore are registered trademarks and CELLplex and SuperStack are trademarks of 3Com Corporation. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3Com Corporation Consolidated Balance Sheets (Dollars in thousands) November 30, May 31, 1996 1996 ------------ ------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 350,141 $ 216,759 Temporary cash investments 392,237 282,578 Trade receivables 463,029 359,182 Inventories 235,353 241,018 Deferred income taxes 94,103 79,259 Other 88,342 60,915 ---------- ---------- Total current assets 1,623,205 1,239,711 Property and equipment-net 309,032 246,652 Other assets 48,889 38,754 ---------- ---------- Total $1,981,126 $1,525,117 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 177,275 $ 120,211 Accrued and other liabilities 252,964 211,620 Income taxes payable 131,463 82,690 ---------- ---------- Total current liabilities 561,702 414,521 Long-term debt 110,225 110,000 Other long-term obligations 4,512 5,492 Deferred income taxes 28,950 16,299 Shareholders' Equity: Preferred stock, no par value, 3,000,000 shares authorized; none outstanding - - Common stock, $.01 par value, 400,000,000 shares authorized; shares outstanding: November 30, 1996: 175,961,677; May 31, 1996: 168,799,586 712,320 597,452 Unamortized restricted stock grants (4,963) (4,487) Notes receivable on common stock (139) - Retained earnings 560,071 379,358 Unrealized gain on available-for-sale securities 9,082 7,159 Accumulated translation adjustments (634) (677) ---------- ---------- Total shareholders' equity 1,275,737 978,805 ---------- ---------- Total $1,981,126 $1,525,117 ========== ========== See notes to consolidated financial statements. 3Com Corporation Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Quarter Ended Six Months Ended November 30, November 30, 1996 1995 1996 1995 ---- ---- ---- ---- Sales $820,296 $563,544 $1,530,436 $1,060,833 Cost of sales 371,306 266,719 697,953 502,269 -------- -------- ---------- ---------- Gross Margin 448,990 296,825 832,483 558,564 -------- -------- ---------- ---------- Operating expenses: Sales and marketing 164,086 118,920 306,756 221,131 Research and development 80,228 56,082 151,121 107,630 General and administrative 35,558 22,902 65,596 43,843 Acquisition-related charges 6,600 69,000 6,600 69,000 -------- ------- ---------- ---------- Total 286,472 266,904 530,073 441,604 -------- ------- ---------- ---------- Operating income 162,518 29,921 302,410 116,960 Other income-net 4,788 1,930 7,721 3,183 -------- ------- ---------- ---------- Income before income taxes 167,306 31,851 310,131 120,143 Income tax provision 61,737 15,506 112,990 46,377 -------- ------- ---------- ---------- Net income $ 105,569 $ 16,345 $ 197,141 $ 73,766 ========== ========== ========== ========== Net income per common and equivalent share: Primary $ .57 $ .09 $ 1.07 $ .42 Fully diluted $ .56 $ .09 $ 1.06 $ .42 Common and equivalent shares used in computing per share amounts: Primary 186,215 176,319 184,556 175,077 Fully diluted 187,137 176,396 185,154 175,459 See notes to consolidated financial statements. 3Com Corporation Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Six Months Ended November 30, ------------ 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 197,141 $ 73,766 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 70,503 39,602 Deferred income taxes (3,426) 9,074 Adjustment to conform fiscal year of pooled entity 4,850 (3,048) Non-cash acquisition-related costs - 44,320 Changes in assets and liabilities, net of effects of acquisitions: Trade receivables (102,488) (98,674) Inventories 5,766 (22,741) Other current assets (25,779) (7,485) Accounts payable 56,439 12,238 Accrued and other liabilities 39,338 21,872 Income taxes payable 99,278 9,482 ---------- ---------- Net cash provided by operating activities 341,622 78,406 ---------- ---------- Cash flows from investing activities: Purchase of property and equipment (118,154) (87,073) Purchase of temporary cash investments (211,257) (113,804) Proceeds from temporary cash investments 103,214 147,701 Other-net (17,063) (3,391) ---------- ---------- Net cash used for investing activities (243,260) (56,567) ---------- ---------- Cash flows from financing activities: Sale of stock 37,383 20,719 Repayments of notes payable and capital lease obligations (1,386) (2,749) Other-net (977) (308) ---------- ---------- Net cash provided by financing activities 35,020 17,662 ---------- ---------- Increase in cash and cash equivalents 133,382 39,501 Cash and cash equivalents at beginning of period 216,759 159,908 ---------- ---------- Cash and cash equivalents at end of period $ 350,141 $ 199,409 ========== ========== Non-cash operating, investing and financing activities: Tax benefit on stock option transactions $ 50,505 $ 30,181 Unrealized net gain on available-for-sale securities $ 1,923 $ 24,237 See notes to consolidated financial statements. 3Com Corporation Notes to Consolidated Financial Statements 1. Basis of Presentation On October 31, 1996, 3Com Corporation (the Company) acquired OnStream Networks, Inc. (OnStream) which was accounted for as a pooling-of-interests. All financial data of the Company for the quarter ended August 31, 1996 has been restated to include the financial information of OnStream in accordance with generally accepted accounting principles and pursuant to Regulation S-X. Prior periods have not been restated as the impact was not significant to the Company's operations. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In the opinion of management, these unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the Company's financial position as of November 30, 1996, and the results of operations and cash flows for the quarters and six months ended November 30, 1996 and 1995. The results of operations for the quarter and six months ended November 30, 1996 may not necessarily be indicative of the results to be expected for the fiscal year ending May 31, 1997. These financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report to shareholders and Form 10-K for the fiscal year ended May 31, 1996. 2. Inventories consisted of (in thousands): November 30, May 31, 1996 1996 ---- ---- Finished goods $136,371 $132,363 Work-in-process 16,602 22,310 Raw materials 82,380 86,345 -------- -------- Total $235,353 $241,018 ======== ======== 3. Net Income Per Share Net income per common and equivalent share is computed based on the weighted average number of common shares and the dilutive effects of stock options outstanding during the period using the treasury stock method. The effect of the assumed conversion of the 10.25% convertible subordinated notes was excluded from the computation as it was antidilutive for the periods presented. 4. Business Combination On October 31, 1996, the Company acquired OnStream by issuing approximately 3.4 million shares of its common stock in exchange for all the outstanding stock of OnStream. The Company also assumed and exchanged all options to purchase OnStream stock for options to purchase approximately 400,000 shares of the Company's common stock. The acquisition was accounted for as a pooling-of-interests. No significant adjustments were required to conform the accounting policies of the Company and OnStream. Financial data of the Company has been restated for the quarter ended August 31, 1996 to include the historical financial information of OnStream for that period. As the historical operations of OnStream were not significant to any period presented, the Company's financial statements for prior years have not been restated. The financial effect of the prior year's results of operations of OnStream has been accounted for as a $18.0 million charge against retained earnings in the first quarter of fiscal 1997. Financial information as of November 30, 1996 and for the quarter and six months then ended reflects the Company's and OnStream's operations for those periods. OnStream is a provider of Asynchronous Transfer Mode (ATM) and broadband wide area network (WAN) and access products. The following table shows the effect on the results of operations as restated for the quarter ended August 31, 1996. Quarter ended August 31,1996 -------------- (In thousands) Sales: 3Com $706,968 OnStream 3,172 -------- Combined $710,140 ======== Net income (loss): 3Com $ 93,113 OnStream (1,541) -------- Combined $ 91,572 ======== As a result of the acquisition, the Company recorded acquisition-related charges, primarily transaction costs, totaling $6.6 million in the second quarter of fiscal 1997. 5. Litigation On October 13, 1995, the Company acquired Chipcom, which had already been named as a defendant in the litigation described below. Five complaints were filed between May, 30, 1995 and June 16, 1995 that alleged violations by the defendants of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and sought unspecified damages. The cases were consolidated for pretrial purposes pursuant to an order entered by the Court on June 15, 1995. The consolidated action is entitled In re: Chipcom Securities Litigation, Civil Action No. 95-111114-DPW. A Consolidated Complaint was filed on September 13, 1995, and an Amended Consolidated Complaint was filed on November 30, 1995. The defendants' motion to dismiss the Amended Consolidated Complaint was granted without leave to amend on May 1, 1996. The dismissal covers all five cases. The plaintiffs appealed the order granting the dismissal. On October 1, 1996, the parties to these cases agreed upon what the Company considers to be favorable financial terms for settlement of all five cases, which amount the Company does not consider material to its operations or financial position. Pursuant to the contemplated settlement, which would be subject to the approval of the District Court, it is intended that all claims of all persons which are related to the subject matter of the Consolidated Complaint would be settled and released. 3Com Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Acquisition During the second quarter of fiscal 1997, 3Com (the Company) extended its WAN product solutions for enterprise organizations, network service provider and Internet service provider markets with the acquisition of OnStream Networks, Inc. (OnStream), a provider of ATM and broadband WAN and access products. The acquisition was completed on October 31, 1996. The Company issued approximately 3.4 million shares of its common stock in exchange for all the outstanding stock of OnStream. The Company also assumed and exchanged all options to purchase OnStream stock for options to purchase approximately 400,000 shares of the Company's common stock. The acquisition was accounted for as a pooling-of-interests and financial data of the Company for the quarter ended August 31, 1996 has been restated to include the financial information of OnStream for such periods. See Note 4 of Notes to Consolidated Financial Statements for additional information on the Company's business combination. Results of Operations Quarters Ended November 30, 1996 and 1995 The Company achieved record sales in the second quarter of fiscal 1997 totaling $820.3 million, an increase of $256.8 million or 46 percent from the corresponding quarter a year ago. Compared with the first quarter of fiscal 1997, sales for the second quarter of fiscal 1997 increased $110.2 million or 16 percent. The Company believes that the year-over-year increase in second quarter sales is due to several factors, including continued growth in the data networking market as the Internet, corporate Intranets, client server applications and remote access services stimulate customers to migrate to higher speed technologies such as Fast Ethernet and ATM, the growth in the PC market generated from a strong PC upgrade cycle, and the strength of the Company's product offerings at the edge of the network, including workgroup switches and hubs. The Company also believes that the impact of a strong new product cycle in systems and adapter products, the continuous expansion of 3Com's product offerings, and its ability to deliver complete data networking solutions for different connectivity environments contributed to the increase in second quarter sales over the same period a year ago. Sales of network systems products (i.e., internetworking platforms, remote access servers, hubs, switching products and customer service) in the second quarter of fiscal 1997 increased 41 percent from the same quarter one year ago. The increase was led primarily by the SuperStackTM II stackable systems, the ONcorer intelligent switching system, and the CELLplexTM ATM High-Function switching family. Customer service revenue is included in network systems products (in previous years, this revenue was classified in the other product category), and accordingly, all sales composition and growth percentages reflect this reclassification. In the second quarter of fiscal 1997, network systems products represented 56 percent of total sales, compared to 58 percent in the year-ago quarter. Sales of network adapters in the second quarter of fiscal 1997 increased 55 percent from the year-ago period. The increase in network adapter sales represented a significant increase in unit volume partially offset by a decline in average selling prices. The increase in sales was led primarily by the Fast EtherLinkr PCI adapters, the EtherLink III family of network adapters, and the EtherLink PC Card adapters. In the second quarter of fiscal 1997, sales of network adapters represented 43 percent of total sales, compared to 40 percent in the year-ago quarter. Sales of other products represented one percent of total sales in the second quarter of fiscal 1997, compared with two percent of total sales in the second quarter of fiscal 1996, and is not significant to the Company's operations, as expected. International sales for the second quarter of fiscal 1997 comprised 53 percent of total sales, and increased 41 percent over the same period a year ago. International sales increased in all geographic regions, with especially strong growth in the Asia Pacific and Latin America regions. The Company believes that the growth in international sales is due primarily to the Company's continued global expansion through the opening of new sales offices, and the expansion of its worldwide field sales, service and support programs. Sales in the United States for the second quarter of fiscal 1997, comprised 47 percent of total sales, compared to 46 percent in the same period a year ago. Sales growth in the United States was 51 percent when compared to the second quarter of fiscal 1996. The Company believes the sales growth in the United States can be attributed primarily to increased sales to large enterprises, and the enhancement of the Company's product portfolio. The Company's operations were not significantly impacted by fluctuations in foreign currency exchange rates in the second quarters of fiscal 1997 and 1996. Cost of sales as a percentage of sales was 45.3 percent in the second quarter of fiscal 1997, compared to 47.3 percent for the second quarter of fiscal 1996. The resulting improvement in gross margin in the second quarter of fiscal 1997 primarily reflected an increased shipment mix of higher margin workgroup switching and stackable hub system products, and lower product material costs of certain adapter products. Factors causing the increase in gross margin were partially offset by a higher mix of certain lower margin adapter products and increased provisions for excess and obsolete inventories. Total operating expenses in the second quarter of fiscal 1997 were $286.5 million, compared to $266.9 million, in the second quarter of fiscal 1996. Excluding the acquisition- related charge of $6.6 million for OnStream (see Note 4 of Notes to Consolidated Financial Statements), total operating expenses in the second quarter of fiscal 1997 were $279.9 million or 34.1 percent of sales. Excluding the acquisition- related charge of $69.0 million in connection with the acquisition of Chipcom Corporation (Chipcom), total operating expenses in the second quarter of fiscal 1996 were $197.9 million, or 35.1 percent of sales. Sales and marketing expenses in the second quarter of fiscal 1997 increased $45.2 million or 38 percent compared to the second quarter of fiscal 1996. As a percentage of sales, sales and marketing expenses decreased to 20.0 percent in the second quarter of fiscal 1997, from 21.1 percent in the corresponding fiscal 1996 period. The decrease as a percentage of sales is due in part to gains in efficiency following assimilation of the separate sales, marketing and support organizations initially present as a result of the fiscal 1996 acquisition of Chipcom. One of the Company's initiatives is to increase personnel in field sales, service and support organizations to further serve its customers and channel partners, which the Company anticipates may result in an increase in sales and marketing expense as a percentage of sales in future periods. Research and development expenses in the second quarter of fiscal 1997 increased $24.1 million or 43 percent from the year-ago period. The increase in research and development expenses was primarily attributable to the cost of developing 3Com's new products, primarily switching and network management, and the Company's expansion into new technologies and markets. As a percentage of sales, research and development expenses decreased to 9.8 percent in the second quarter of fiscal 1997, from 10.0 percent in the same period a year ago. The Company believes the timely introduction of new technologies and products is crucial to its success, and plans to continue to make acquisitions to accelerate time to market where appropriate. Most of the in-process research and development projects acquired in connection with the Company's business acquisitions have been completed. The Company estimates that the remaining costs in connection with the completion of outstanding acquired research and development projects are not significant, and are primarily made up of labor costs for design, prototype development and testing. General and administrative expenses in the second quarter of fiscal 1997 increased $12.7 million or 55 percent from the same period a year ago. The increase in general and administrative expenses reflected expansion of the Company's infrastructure and higher provisions for bad debts as a result of the increased volume of sales. As a percentage of sales, such expenses increased to 4.3 percent in the second quarter of fiscal 1997 from 4.1 percent the same period a year ago. Other income (net) was $4.8 million in the second quarter of fiscal 1997, compared to $1.9 million in the second quarter of fiscal 1996. The increase was due primarily to interest income, which increased due to larger cash and investment balances. The Company's effective income tax rate was 36.9 percent in the second quarter of fiscal 1997, compared to 48.7 percent in the second quarter of 1996. Excluding the merger costs associated with the OnStream acquisition, which were not tax deductible, the effective tax rate was 35.5 percent in the second quarter of fiscal 1997. Excluding the merger costs associated with the Chipcom acquisition, which were not fully tax deductible, the effective tax rate was 35.0 percent in the second quarter of fiscal 1996. Net income for the second quarter of fiscal 1997 was $105.6 million, or $.56 per share, compared to net income of $16.3 million, or $.09 per share, for the second quarter of fiscal 1996. Excluding the merger costs associated with the OnStream acquisition, net income was $112.2 million, or $.60 per share for the quarter ended November 30, 1996. Excluding the merger costs associated with the Chipcom acquisition, net income was $65.6 million, or $.37 per share for the quarter ended November 30, 1995. Six Months Ended November 30, 1996 and 1995 The Company achieved record sales for the first six months of fiscal 1997 totaling $1,530.4 million, an increase of $469.6 million or 44 percent from the corresponding period a year ago. Sales of network systems products in the first six months of fiscal 1997 represented 58 percent of total sales and increased 40 percent from the same period one year ago. Sales of network adapters in the first six months of fiscal 1997 represented 42 percent of total sales and increased 54 percent from the same period last year. International sales comprised 51 percent of total sales and increased 38 percent from the first six months of fiscal 1996, while sales in the United States increased 51 percent from the first six months of fiscal 1996. Cost of sales as a percentage of sales was 45.6 percent for the first six months of fiscal 1997, compared to 47.3 percent for the corresponding fiscal 1996 period. The resulting improvement in gross margin in the first six months of fiscal 1997 primarily reflected an increased shipment mix of higher margin workgroup switching and stackable hub system products, and lower product material costs of certain adapter products. Factors causing the increase in gross margin were partially offset by a higher mix of certain lower margin adapter products and increased provisions for excess and obsolete inventories. Total operating expenses in the first six months of fiscal 1997 were $530.1 million compared to $441.6 million in the first six months of fiscal 1996. Excluding the $6.6 million charge associated with the OnStream acquisition, total operating expenses in the first six months of fiscal 1997 were $523.5 million, or 34.2 percent of sales. Excluding the $69.0 million charge associated with the Chipcom acquisition, total operating expenses in the first six months of fiscal 1996 were $372.6 million, or 35.1 percent of sales. The increase in recurring operating expenses of $150.9 million, or 40 percent, reflected increased selling costs related to higher sales volume, the cost of developing and promoting the Company's products and an increase in personnel when compared to the corresponding period in fiscal 1996. In the first six months of fiscal 1997, sales and marketing expenses increased $85.6 million or 39 percent from the prior year and decreased to 20.0 percent of sales, compared to 20.8 percent of sales in fiscal 1996. The decrease as a percentage of sales is due in part to gains in efficiency following assimilation of the separate sales, marketing and support organizations initially present as a result of the fiscal 1996 acquisition of Chipcom. Research and development expenses increased $43.5 million in the first six months of fiscal 1997, but decreased as a percentage of sales to 9.9 percent compared to 10.1 percent in fiscal 1996. General and administrative expenses increased $21.8 million in the first six months of fiscal 1997, and increased as a percentage of sales to 4.3 percent compared to 4.1 percent in the first six months of fiscal 1996. Other income (net) was $7.7 million for the first six months of fiscal 1997, compared to $3.2 million in the corresponding period one year ago. The increase in other income was due primarily to higher interest income, which increased due to larger cash and investment balances. The Company's effective income tax rate was approximately 36.4 percent in the first six months of fiscal 1997 compared to approximately 38.6 percent in the first six months of fiscal 1996. Excluding the merger costs associated with the OnStream acquisition, which were not tax deductible, the effective tax rate was 35.7 percent for the first six months of fiscal 1997. Excluding the merger costs associated with the Chipcom acquisition, which were not fully tax deductible, the effective tax rate was 35.0 percent for the first six months of fiscal 1996. Net income for the first six months of fiscal 1997 was $197.1 million, or $1.06 per share, compared to net income of $73.8 million, or $.42 per share, for the first six months of fiscal 1996. Excluding the aforementioned $6.6 million charge associated with the acquisition of OnStream, net income was $203.7 million, or $1.10 per share, for the first six months of fiscal 1997. Excluding the merger costs associated with the acquisition of Chipcom, net income was $123.0 million, or $.70 per share, for the first six months of fiscal 1996. Business Environment and Risk Factors The Company's future operating results may be affected by various trends and factors which the Company must successfully manage in order to achieve favorable operating results. In addition, there are trends and factors beyond the Company's control which affect its operations. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, the cautionary statements set forth below identify important factors that could cause actual results to differ materially from those in any forward-looking statements which may be contained in this report. Such trends and factors include, but are not limited to, adverse changes in general economic conditions or conditions in the specific markets for the Company's products, governmental regulation or intervention affecting communications or data networking, fluctuations in foreign exchange rates, and other factors, including those listed below. The Company participates in a highly volatile and rapidly growing industry which is characterized by vigorous competition for market share and rapid technological development carried out amidst uncertainty over adoption of industry standards and protection of proprietary intellectual property rights. This could result in aggressive pricing practices and growing competition, both from start-up companies and from well- capitalized computer systems and communications companies. The Company's ability to compete in this environment depends upon a number of competitive and market factors, and is subject to the risks set forth in this report. The market for the Company's products is characterized by rapidly changing technology. The Company's success depends, in substantial part, on the timely and successful introduction of new products. An unexpected change in one or more of the technologies affecting data networking, or in market demand for products based on a particular technology could have a material adverse effect on the Company's operating results if the Company does not respond timely and effectively to such changes. The Company is engaged in research and development activities in certain emerging LAN and WAN high-speed technologies, such as ATM, ISDN, Fast Ethernet, Gigabit Ethernet and data-over-cable. As the industry standardizes on high-speed technologies, there can be no assurance that the Company will be able to respond promptly and cost-effectively to compete in the marketplace. In addition, if the PC industry migrates toward standardizing the integration of network interface capabilities on the PC motherboard, it could have an adverse impact on the Company's adapter business. A Company initiative is to increase the Company's direct sales force and other skilled personnel, such as system and development engineers. Should the Company's growth rate continue at levels commensurate with historical trends, the Company will need to further expand the recruitment of qualified personnel. Recruiting and retaining skilled personnel, especially in certain locations in which the Company operates, is highly competitive. Unless the Company can successfully recruit such personnel, the Company's ability to achieve continued growth in sales and earnings may be adversely affected. Some key components of the Company's products are currently available only from single sources. There can be no assurance that in the future the Company's suppliers will be able to meet the Company's demand for components in a timely and cost-effective manner. The Company's operating results and customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components. The Company distributes a significant portion of its products through third party distributors and resellers. Due to consolidation in the distribution and reseller channels and the Company's increased volume of sales into these channels, the Company has experienced an increased concentration of credit risk. While the Company continually monitors and manages this risk, financial difficulties on the part of one or more of the Company's resellers may have a material adverse effect on the Company. Likewise, the Company's expansion into certain emerging geographic markets, characterized by economic and political instability and currency fluctuations, may subject the Company's resellers to financial difficulties which may have an adverse impact on the Company. The Company will continue to invest during fiscal 1997 in expanding its sales, marketing, service, logistics and manufacturing operations worldwide. The Company's ability to achieve continued sales and earnings growth may be adversely affected unless the Company can successfully and timely implement several projects, including the continued expansion of the Company's direct sales force and the establishment of a new manufacturing and distribution facility in the Asia Pacific region. Acquisitions of complementary businesses and technologies, including technologies and products under development, are an active part of the Company's overall business strategy. Certain of the Company's major competitors have also been engaged in merger and acquisition transactions. Such consolidations by competitors are creating entities with increased market share, customer base, technology and marketing expertise, sales force size, or proprietary technology in segments in which the Company competes. These developments may adversely affect the Company's ability to compete in such segments. The Company has recently consummated the acquisition of OnStream and has completed several other acquisitions in recent years. There can be no assurance that products, technologies, distribution channels, key personnel and businesses of acquired companies will be effectively assimilated into the Company's business or product offerings, or that such integration will not adversely affect the Company's business, financial condition or results of operations. The difficulties of such integration may be increased by the size and number of such acquisitions and the requirements of coordinating geographically separated organizations. There can be no assurance that any acquired products, technologies or businesses will contribute at anticipated levels to the Company's sales or earnings, that the sales, earnings and technologies under development from acquired businesses will not be adversely affected by the integration process or other general factors. If the Company is not successful in the integration of such acquisitions, there could be an adverse impact on the financial results of the Company. The high-growth nature of the computer networking industry, coupled with critical time-to-market factors, has caused increased competition and consolidation. As a result, there has been a significant increase in the acquisition cost of computer networking companies. Future acquisitions are therefore more likely to result in costs that are material to the Company's operations. There can be no assurance that the Company will continue to be able to identify and consummate suitable acquisition transactions in the future. However, should the Company consummate acquisitions in the future, the impact may result in increased dilution of the Company's earnings. The Company's business is characterized by the continuous introduction of new products and the management of the transition of those products from prior generations of technology or product platforms. In each product transition cycle, the Company faces the challenge of managing the inventory of its older products, including materials, work-in- process, and products held by resellers. If the Company is not successful in managing these transitions, there could be an adverse impact on the financial results of the Company. The Company's products are covered by product warranties and the Company may be subject to contractual commitments concerning product features or performance. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse impact on sales and earnings. The market price of the Company's common stock has been, and may continue to be, extremely volatile. Factors such as new product announcements by the Company or its competitors, quarterly fluctuations in the Company's operating results, challenges associated with integration of businesses and general conditions in the data networking market, such as a decline in industry growth rates, may have a significant impact on the market price of the Company's common stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. Notwithstanding the Company's increased geographical diversification, the Company's corporate headquarters and a large portion of its research and development activities and other critical business operations are located in California, near major earthquake faults. The Company's business, financial condition and operating results could be materially adversely affected in the event of a major earthquake. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past trends and performance should not be presumed by investors to be an accurate indicator of future results or trends. Liquidity and Capital Resources Cash, cash equivalents and temporary cash investments at November 30, 1996 were $742.4 million, increasing $243.0 million from May 31, 1996. For the six months ended November 30, 1996, net cash generated from operating activities was $341.6 million. Trade receivables at November 30, 1996 increased $103.8 million from May 31, 1996. Days sales outstanding in receivables was 51 days at November 30, 1996, compared to 49 days at May 31, 1996. Inventory levels at November 30, 1996 decreased $5.7 million from the prior fiscal year-end. Inventory turnover increased to 6.4 turns at November 30, 1996, compared to 5.4 turns at May 31, 1996. During the six months ended November 30, 1996, the Company made approximately $118.2 million in capital expenditures. Major capital expenditures included a purchase of land in Santa Clara, California, upgrades and additions to product manufacturing lines and facilities in Ireland, purchases and upgrades of desktop systems, and the continuing development of the Company's worldwide information systems. During the first six months of fiscal 1997, the Company received cash of $37.4 million from the sale of its common stock to employees through its employee stock purchase and option plans. In the second quarter of fiscal 1997, the Company's board of directors voted to rescind the Company's previously announced share repurchase program, as a result of uncertainties regarding the SEC's Interpretation of Staff Accounting Bulletin No. 96 (SAB 96). SAB 96 raises the possibility that under certain circumstances, companies which have announced share repurchase programs will not have the flexibility to employ the pooling-of-interests method when making acquisitions. During the second quarter of fiscal 1997, 3Com Technologies, a wholly-owned subsidiary of the Company, signed a lease for 7 acres of land in Changi, Republic of Singapore. The Company began construction of 325,000 square feet of office and manufacturing space in December of 1996, and plans to occupy the manufacturing facility in the third quarter of fiscal 1998. During the second quarter of fiscal 1997, the Company purchased a 14.25 acre parcel of land and signed a two-year lease for a 57.75 acre parcel of adjacent land near its existing headquarters in Santa Clara. The lease arrangement provides the Company with an option to purchase the related property or at the end of the lease arrange for the sale of the property to a third party with a maximum obligation of the Company of up to $42.1 million to the seller of the property. The Company plans to enter into a building lease and begin construction of a research and development campus in July 1997, and expects to commence occupancy and begin lease payments in the second quarter of fiscal 1999. During the second quarter of 1997, the Company signed a new lease for 495,000 square feet of office and manufacturing space on its Santa Clara headquarters, which were initially occupied in the first quarter of fiscal 1991. The new lease term extends through November, 2001, with the option to extend for up to two 5-year terms. This arrangement also provides the Company with an option to purchase the related property or at the end of the lease arrange for the sale of the property to a third party with a maximum obligation of the Company of up to $63.6 million to the seller of the property. The Company leases and occupies 225,000 square feet of office and manufacturing space adjacent to its existing headquarters in Santa Clara (Phase I). The Company amended this lease agreement on February 1, 1996 to add 150,000 square feet of office and manufacturing space and a parking garage (Phase II) to be built on adjacent land. The amended lease expires in five years and provides the Company with an option to purchase both Phase I and II properties, or at the end of the lease arrange for the sale of the properties to a third party with a maximum obligation of the Company of up to $57.8 million to the seller of the properties. The Company anticipates that it will commence occupancy of and begin lease payments on a significant portion of the Phase II property in the fourth quarter of fiscal 1997. The three aforementioned leases require the Company to maintain specified financial covenants, all of which the Company was in compliance with as of November 30, 1996. As of November 30, 1996, the Company had outstanding approximately $47 million in commitments primarily associated with the purchase of land, construction and expansion of office and manufacturing space in Singapore, Ireland and Israel. The Company had a $40 million revolving bank credit agreement which expired December 31, 1996. In December 1996, the Company renegotiated the revolving bank credit agreement, which now provides for borrowings of up to $100 million, and expires December 20, 1999. Payment of cash dividends are permitted under the credit agreement, subject to certain limitations based on net income levels of the Company. The Company has not paid and does not anticipate it will pay cash dividends on its Common stock. The credit agreement requires the Company to maintain specified financial covenants. As of November 30, 1996, no amount was outstanding under the credit agreement and the Company was in compliance with all required covenants. Based on current plans and business conditions, the Company believes that its existing cash and equivalents, temporary cash investments, cash generated from operations and the available revolving credit agreement will be sufficient to satisfy anticipated operating cash requirements for at least the next twelve months. PART II. OTHER INFORMATION Item 1. Legal Proceedings On October 13, 1995, the Company acquired Chipcom, which had already been named as a defendant in the litigation described below. Five complaints were filed between May 30, 1995 and June 16, 1995 that alleged violations by the defendants of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and sought unspecified damages. The cases were consolidated for pretrial purposes pursuant to an order entered by the Court on June 15, 1995. The consolidated action is entitled In re: Chipcom Securities Litigation, Civil Action No. 95-111114-DPW. A Consolidated Complaint was filed on September 13, 1995, and an Amended Consolidated Complaint was filed on November 30, 1995. The defendants' motion to dismiss the Amended Consolidated Complaint was granted without leave to amend on May 1, 1996. The dismissal covers all five cases. The plaintiffs appealed the order granting the dismissal. On October 1, 1996, the parties to these cases agreed upon what the Company considers to be favorable financial terms for settlement of all five cases, which amount the Company does not consider material to its operations or financial position. Pursuant to the contemplated settlement, which would be subject to the approval of the District Court, it is intended that all claims of all persons which are related to the subject matter of the Consolidated Complaint would be settled and released. Item 2. Changes in Securities On September 26, 1996, the shareholders approved the amendment of the Articles of Incorporation to designate a par value of $.01 for each share of Common stock. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on September 26, 1996. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected and the proposals listed below were approved. The following are the voting results on each of the proposals: Proposal I ---------- Election of Directors In Favor Withheld --------------------- -------- -------- James L. Barksdale 147,202,309 1,493,215 Eric A. Benhamou 147,209,801 1,485,723 Gordon A. Campbell 147,193,365 1,502,159 Philip C. Kantz 147,193,377 1,502,147 Proposal II ----------- To establish a par value of $.01 per share for the Company's Common Stock In Favor Opposed Abstain No Vote -------- ------- ------- ------- 147,087,983 148,160 323,956 1,135,425 Proposal III ------------ 1983 Stock Option Plan limiting the number of shares that may be granted to any employee in any fiscal year. 139,214,018 7,990,989 355,092 1,135,425 Proposal IV ----------- Ratification of appointment of Deloitte & Touche LLP as the Company's independent auditors for fiscal 1997. 148,383,399 95,243 216,882 -- Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 3.1 Amended and Restated Articles of Incorporation (Exhibit 19.1 to Form 10-Q) (6) 3.2 Certificate of Amendment of the Amended and Restated Articles of Incorporation (Exhibit 3.2 to Form 10-K) (15) 3.3 Bylaws, as amended and restated (Exhibit 4.2 to Form S-8) (10) 3.4 Certificate of Amendment of the Amended and Restated Articles of Incorporation (Exhibit 4.1 to Form S-8) (23) 3.5 Certificate of Amendment of the Amended and Restated Articles of Incorporation, dated October 4, 1996, as filed on October 9, 1996 4.1 Reference is made to Exhibit 3.1 (Exhibit 4.1 to Form 10-K) (15) 4.2 Indenture Agreement between 3Com Corporation and The First National Bank of Boston for the private placement of convertible subordinated notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (18) 4.3 Placement Agreement for the private placement of convertible subordinated notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (18) 4.4 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (19) 10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K) (7)* 10.2 Amended and Restated Incentive Stock Option Plan (4)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 First Amended and Restated 1984 Employee Stock Purchase Plan, as amended (Exhibit 19.1 to Form 10-Q) (8)* 10.5 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q)(24)* 10.6 License Agreement dated as of June 1, 1986 (Exhibit 10.16 to Form 10-K) (3) 10.7 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (8)* 10.8 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q)(24)* 10.9 Bridge Communications, Inc. 1983 Stock Option Plan, as amended (Exhibit 4.7 to Form S-8) (2)* 10.10 3Com Headquarters Lease dated December 1, 1988, as amended (Exhibit 10.14 to Form 10-K) (7) 10.11 Ground Lease dated July 5, 1989 (Exhibit 10.19 to Form 10-K) (5) 10.12 Sublease Agreement dated February 9, 1989 (Exhibit 10.20 to Form 10-K) (5) 10.13 Credit Agreement dated April 21, 1993 (Exhibit 10.11 to Form 10- K) (9) 10.14 Amendment to Credit Agreement (Exhibit 10.20 to Form 10-Q) (14) 10.15 Second Amendment to Credit Agreement (Exhibit 10.21 to Form 10-Q) (14) 10.16 3Com Corporation Restricted Stock Plan dated July 9, 1991 (Exhibit 19.2 to Form 10-Q) (8)* 10.17 Amended 3Com Corporation Restricted Stock Plan (Exhibit 10.17 to Form 10-Q)(24)* 10.18 Form of Escrow and Indemnification Agreement for Directors and Officers (Exhibit 10.15 to Form 10-Q) (11) 10.19 Agreement and Plan of Reorganization dated December 16, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.1 to Form 8-K) (12) 10.20 Side Agreement Regarding Agreement and Plan of Reorganization dated January 14, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.2 to Form 8-K) (12) 10.21 Agreement and Plan of Reorganization dated January 18, 1994 (Exhibit 7.2 to Form 8-K) (13) 10.22 Indemnification and Escrow Agreement dated February 2, 1994 (Exhibit 7.3 to Form 8-K) (13) 10.23 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (15)* 10.24 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 14, 1994 (Exhibit 10.23 to Form 10-Q) (16) 10.25 Second amendment to Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, dated February 1, 1996 (25) 10.26 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, dated July 14, 1994 (Exhibit 10.24 to Form 10-Q) (16) 10.27 First amendment to Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, dated February 1, 1996 (27) 10.28 Asset Purchase Agreement dated September 18, 1994 among 3Com Corporation, NiceCom, Ltd., and Nice Systems, Ltd. (Exhibit 7.1 to Form 8-K) (17) 10.29 First Amendment to Asset Purchase Agreement dated October 17, 1994 among 3Com Corporation, NiceCom, Ltd., and Nice Systems, Ltd. (Exhibit 7.2 to Form 8- K) (17) 10.30 Acquisition and Exchange Agreement dated March 22, 1995 among 3Com Corporation and Shareholders of Sonix Communications Limited (Exhibit 7.1 to Form 8-K) (20) 10.31 Agreement and Plan of Reorganization, dated March 21, 1995, by and among 3Com Corporation, Anuinui Acquisition Corporation and Primary Access Corporation (Appendix A to prospectus included in Form S-4) (21) 10.32 Amendment to Agreement and Plan of Reorganization, dated May 30, 1995 by and among 3Com Corporation, Anuinui Acquisition Corporation and Primary Access Corporation (Appendix A-1 to prospectus included in Form S-4) (21) 10.33 Escrow Agreement, dated June 9, 1995 by and among 3Com Corporation, The First National Bank of Boston and Tench Coxe, Kathryn C. Gould and William R. Stensrud as Shareholders' Agents (Exhibit 10.27 to Form S-4) (21) 10.34 Agreement and Plan of Merger dated as of July 26, 1995 among 3Com Corporation, Chipcom Acquisition Corporation and Chipcom Corporation (Exhibit 2.1 to Form S-4) (22) 10.35 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of October 4, 1996 10.36 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of October 4, 1996 10.37 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 10.38 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of November 20, 1996 * Indicates a management contract or compensatory plan. (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed January 25, 1984 (File No. 2-89045) (2) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8 filed October 13, 1987 (File No. 33-17848) (3) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed August 29, 1987 (File No. 0-12867) (4) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850) (5) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 28, 1989 (File No. 0- 12867) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 2, 1991 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1991 (File No. 0-12867) (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed January 10, 1992 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1993 (File No. 0-12867) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8, filed on November 24, 1993 (File No. 33-72158) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 14, 1994 (File No. 0-12867) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on January 31, 1994 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on February 11, 1994 (File No. 0-12867) (14) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 13, 1994 (File No. 0-12867) (15) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 31, 1994 (File No. 0-12867) (16) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 16, 1994 (File No. 0-12867) (17) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on November 1, 1994 (File No. 0-12867) (18) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on November 16, 1994 (File No. 0-12867) (19) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1995 (File No. 0-12867) (20) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on May 16, 1995 (File No. 0-12867) (21) Incorporated by reference to the Exhibit or other item identified in parentheses previously filed as an Exhibit to or included in Registrant's Registration Statement on Form S-4, originally filed on March 23, 1995 (File No. 33-58203) (22) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4, originally filed on August 31, 1995 (File No. 33-62297) (23) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8, filed on October 19, 1995 (File No. 33-63547) (24) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form 10-Q, filed on January 15, 1996 (File No. 0-12867) (25) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form 10-Q, filed on April 12, 1996 (File No. 0-12867) (b) Reports on Form 8-K The Company filed one report on Form 8-K during the fiscal quarter covered by this report as follows: (i) Report on Form 8-K filed on November 13, 1996, reporting under Item 2 the completion of the acquisition of OnStream Networks, Inc. effective October 31, 1996. 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. 3Com Corporation (Registrant) Dated: January 13, 1997 By: /s/ Christopher B. Paisley --------------------- ------------------------------------- Christopher B. Paisley Senior Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-END> NOV-30-1996 <CASH> 350,141 <SECURITIES> 392,237 <RECEIVABLES> 463,029 <ALLOWANCES> (35,456) <INVENTORY> 235,353 <CURRENT-ASSETS> 1,623,205 <PP&E> 572,895 <DEPRECIATION> (263,863) <TOTAL-ASSETS> 1,981,126 <CURRENT-LIABILITIES> 561,702 <BONDS> 0 <COMMON> 712,320 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 563,417 <TOTAL-LIABILITY-AND-EQUITY> 1,981,126 <SALES> 1,530,436 <TOTAL-REVENUES> 1,530,436 <CGS> 697,953 <TOTAL-COSTS> 1,004,709 <OTHER-EXPENSES> 199,062 <LOSS-PROVISION> 10,645 <INTEREST-EXPENSE> 5,889 <INCOME-PRETAX> 310,131 <INCOME-TAX> 112,990 <INCOME-CONTINUING> 197,141 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 197,141 <EPS-PRIMARY> 1.07 <EPS-DILUTED> 1.06 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>3 <TEXT> EXHIBIT 3.5 CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF 3COM CORPORATION The undersigned, Mark D. Michael, hereby certifies that: 1. He is both a duly elected and acting Vice President and the duly elected and acting Secretary of 3Com Corporation, a California corporation (the "Corporation"). 2. Article III of the amended and Restated Articles of Incorporation of the Corporation is hereby amended to read in full as follows: "ARTICLE III STOCK This corporation is authorized to issue two classes of shares, designated respectively "Common Stock" and "Preferred Stock." Upon amendment of this Article to read as herein set forth, the number of shares of Common Stock which this corporation is authorized to issue is 400,000,000 and the number of shares of Preferred Stock which this corporation is authorized to issue is 3,000,000. All the authorized shares of Common Stock shall have a par value of $0.01. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this Corporation is authorized to determine the designation of any series, to fix the number of shares of any series, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and within the limits or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series." 3. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. 4. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of the shareholders of the Corporation in accordance with Section 902 and 903 of the California Corporations Code. The total number of outstanding shares of the Corporation entitled to vote with respect to the foregoing amendment was 169,570,302 shares of Common Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required, such required vote being more than a majority of the outstanding shares of Common Stock. Executed at Santa Clara, California, on the 4th day of October 1996. /s/ Mark D. Michael ------------------- Mark D. Michael, Vice President and Secretary The undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of his own knowledge. Executed at Santa Clara, California, on the 4th day of October 1996. /s/ Mark D. Michael ------------------- Mark D. Michael, Vice President and Secretary Art1096.doc RCF </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> EXHIBIT 10.35 $74,800,000.00 LEASE AGREEMENT BETWEEN BNP LEASING CORPORATION, AS LANDLORD AND 3COM CORPORATION, AS TENANT EFFECTIVE AS OF OCTOBER 4, 1996 (Great America Site - Phase I) This Agreement is being facilitated by the following banks: Banque Nationale de Paris ABN AMRO Bank N.V. TABLE OF CONTENTS 1. Definitions (a) Active Negligence (b) Additional Rent (c) Administrative Fee (d) Affiliate (e) Applicable Laws (f) Applicable Purchaser (g) Attorneys' Fees (h) Base Rent (i) Base Rent Date (j) Base Rent Period (k) Breakage Costs (l) Business Day (m) Capital Adequacy Charges (n) Closing Costs (o) Change of Control Event (p) Code (q) Collateral (r) Collateral Percentage (s) Debt (t) Default (u) Default Rate (v) Designated Sale Date (w) Effective Rate (x) Environmental Indemnity (y) Environmental Laws (z) Environmental Losses (aa) Environmental Report (ab) ERISA (ac) ERISA Affiliate (ad) ERISA Termination Event (ae) Escrowed Proceeds (af) Eurocurrency Liabilities (ag) Eurodollar Rate Reserve Percentage (ah) Event of Default (ai) Excluded Taxes (aj) Fair Market Value (ak) Fed Funds Rate (al) Funding Advances (am) GAAP (an) Hazardous Substance (ao) Hazardous Substance Activity (ap) Impositions (aq) Improvements (ar) Indemnified Party (as) Initial Funding Advance (at) Landlord's Parent (au) LIBOR (av) Lien (aw) Losses (ax) Ordinary Negligence (ay) Participant (az) Participation Agreement (ba) Permitted Encumbrances (bb) Permitted Hazardous Substance Use (bc) Permitted Hazardous Substances (bd) Permitted Transfer (be) Person (bf) Plan (bg) Pledge Agreement (bh) Prime Rate (bi) Purchase Agreement (bj) Purchase Price (bk) Qualified Payments (bl) Remaining Proceeds (bm) Rent (bn) Responsible Financial Officer (bo) Spread (bp) Stipulated Loss Value (bq) Subsidiary (br) Tenant's Knowledge (bs) Term (bt) Unfunded Benefit Liabilities (bu) Upfront Fee (bv) Voluntary Minimum Pledge Commitment (bw) Other Terms and References 2. Term 3. Rental (a) Base Rent (b) Upfront Fee (c) Administrative Fees (d) Additional Rent (e) Interest and Order of Application (f) Net Lease (g) No Demand or Setoff 4. Insurance and Condemnation Proceeds 5. No Lease Termination (a) Status of Lease (b) Waiver By Tenant 6. Purchase Agreement, Pledge Agreement and Environmental Indemnity 7. Use and Condition of Leased Property (a) Use (b) Condition (c) Consideration of and Scope of Waiver 8. Other Representations, Warranties and Covenants of Tenant (a) Financial Matters (b) Existing Contract (c) No Default or Violation (d) Compliance with Covenants and Laws (e) Environmental Representations (f) No Suits (g) Condition of Property (h) Organization (i) Enforceability (j) Not a Foreign Person (k) Omissions (l) Existence (m) Tenant Taxes (n) Operation of Property (o) Debts for Construction (p) Impositions (q) Repair, Maintenance, Alterations and Additions (r) Insurance and Casualty (s) Condemnation (t) Protection and Defense of Title (u) No Liens on the Leased Property (v) Books and Records (w) Financial Statements; Required Notices; Certificates as to Default (x) Further Assurances (y) Fees and Expenses; General Indemnification; Increased Costs; and Capital Adequacy Charges (z) Liability Insurance (aa) Permitted Encumbrances (ab) Environmental (ac) Affirmative Financial Covenants (ad) Negative Covenants (i) Liens (ii) Transactions with Affiliates (iii) Mergers; Sales of Assets (v) Change of Business (ae) ERISA 9. Representations, Warranties and Covenants of Landlord (a) Title Claims By, Through or Under Landlord (b) Actions Required of the Title Holder (c) No Default or Violation (d) No Suits (e) Organization (f) Enforceability (g) Existence (h) Not a Foreign Person 10. Assignment and Subletting (a) Consent Required (b) Standard for Landlord's Consent to Assignments and Certain Other Matters (c) Consent Not a Waiver (d) Landlord's Assignment 11. Environmental Indemnification (a) Indemnity (b) Assumption of Defense (c) Notice of Environmental Losses (d) Rights Cumulative (e) Survival of the Indemnity 12. Landlord's Right of Access 13. Events of Default (a) Definition of Event of Default (b) Remedies (c) Enforceability (d) Remedies Cumulative (e) Waiver by Tenant (f) No Implied Waiver 14. Default by Landlord 15. Quiet Enjoyment 16. Surrender Upon Termination 17. Holding Over by Tenant 18. Miscellaneous (a) Notices (b) Severability (c) No Merger (d) NO IMPLIED REPRESENTATIONS BY LANDLORD (e) Entire Agreement (f) Binding Effect (g) Time is of the Essence (h) Termination of Prior Rights (i) Governing Law (j) Waiver of a Jury Trial (k) Not a Partnership, Etc (l) Tax Reporting Exhibits and Schedules Exhibit A Legal Description Exhibit B Encumbrance List Exhibit C Permitted Hazardous Substances Exhibit D Resolution of Disputed Insurance Claims Exhibit E Covenant Compliance Certificate Exhibit F Certificate Setting Forth the Calculation of the Spread Exhibit G List of Environmental Reports LEASE AGREEMENT This LEASE AGREEMENT (hereinafter called this "Lease"), made to be effective as of October 4, 1996 (all references herein to the "date hereof" or words of like effect shall mean such effective date), by and between BNP LEASING CORPORATION, a Delaware corporation (hereinafter called "Landlord"), and 3COM CORPORATION, a California corporation (hereinafter called "Tenant"); W I T N E S E T H T H A T: WHEREAS, pursuant to a Real Property Purchase and Sale Agreement dated as of September 30, 1996 (hereinafter called the "Existing Contract") between Tenant and Dairy Associates, L.P., a California limited partnership (hereinafter called "Seller"), concerning the land described in Exhibit A attached hereto (hereinafter called the "Land") and the improvements on such Land, Landlord is acquiring the Land and improvements from Seller contemporaneously with the execution of this Lease; WHEREAS, in anticipation of Landlord's acquisition of the Land, the improvements on the Land and other rights and interests hereinafter described, Landlord and Tenant have reached agreement as to the terms and conditions upon which Landlord is willing to lease the same to Tenant, and by this Lease Landlord and Tenant desire to evidence such agreement; NOW, THEREFORE, in consideration of the rent to be paid and the covenants and agreements to be performed by Tenant, as hereinafter set forth, Landlord does hereby LEASE, DEMISE and LET unto Tenant for the term hereinafter set forth the Land, together with: (i) Landlord's interest in any and all buildings and improvements now or hereafter erected on the Land, including, but not limited to, the fixtures, attachments, appliances, equipment, machinery and other articles attached to such buildings and improvements (hereinafter called the "Improvements"); (ii) all easements and rights-of-way now owned or hereafter acquired by Landlord for use in connection with the Land or Improvements or as a means of access thereto; (iii) all right, title and interest of Landlord, now owned or hereafter acquired, in and to (A) any land lying within the right-of-way of any street, open or proposed, adjoining the Land, (B) any and all sidewalks and alleys adjacent to the Land and (C) any strips and gores between the Land and abutting land (except strips and gores, if any, between the Land and abutting land owned by Landlord, with respect to which this Lease shall cover only the portion thereof to the center line between the Land and the abutting land owned by Landlord). The Land and all of the property described in items (i) through (iii) above are hereinafter referred to collectively as the "Real Property". In addition to conveying the leasehold in the Real Property as described above, Landlord hereby grants and assigns to Tenant for the term of this Lease the right to use and enjoy (and, to the extent the following consist of contract rights, to enforce) any assignable interests or rights in, to or under the following that have been transferred to Landlord by Seller under the Existing Contract: (a) any goods, equipment, furnishings, furniture, chattels and personal property of whatever nature that are located on the Real Property and all renewals or replacements of or substitutions for any of the foregoing; and (b) any general intangibles, permits, licenses, franchises, certificates, and other rights and privileges. All of the property, rights and privileges described above in this paragraph are hereinafter collectively called the "Personal Property". The Real Property and the Personal Property are hereinafter sometimes collectively called the "Leased Property." Provided, however, the leasehold estate conveyed hereby and Tenant's rights hereunder are expressly made subject and subordinate to the Permitted Encumbrances (as hereinafter defined) and to any other claims or encumbrances not asserted by Landlord itself or by third parties lawfully claiming through or under Landlord. The Leased Property is leased by Landlord to Tenant and is accepted and is to be used and possessed by Tenant upon and subject to the following terms, provisions, covenants, agreements and conditions: 2. Definitions. As used herein, the terms "Landlord," "Tenant," "Existing Contract," "Seller," "Land," "Improvements," "Real Property," "Personal Property" and "Leased Property" shall have the meanings indicated above and the terms listed immediately below shall have the following meanings: (a) Active Negligence. "Active Negligence" of an Indemnified Party means, and is limited to, the negligent conduct of activities on the Leased Property by the Indemnified Party in a manner that proximately causes actual bodily injury or property damage to occur. "Active Negligence" shall not include (1) any negligent failure of Landlord to act when the duty to act would not have been imposed but for Landlord's status as owner of the Leased Property or as a party to the transactions described in this Lease, (2) any negligent failure of any other Indemnified Party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to Landlord or participation or facilitation in any manner, directly or indirectly, of the transactions described in this Lease, or (3) the exercise in a lawful manner by Landlord (or any party lawfully claiming through or under Landlord) of any remedy provided herein or in the Purchase Agreement. (b) Additional Rent. "Additional Rent" shall have the meaning assigned to it in subparagraph 3.(d) below. (c) Administrative Fee. "Administrative Fee" shall have the meaning assigned to it in subparagraph 3.(c). (d) Affiliate. "Affiliate" of any Person means any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, the term "control" when used with respect to any Person means the power to direct the management of policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (e) Applicable Laws. "Applicable Laws" shall have the meaning assigned to it in subparagraph 8.(d) below. (f) Applicable Purchaser. "Applicable Purchaser" means any third party designated by Tenant to purchase the Landlord's interest in the Leased Property and in any Escrowed Proceeds as provided in the Purchase Agreement. (g) Attorneys' Fees. "Attorneys' Fees" means the reasonable fees and expenses of counsel to the parties incurring the same, which may include fairly allocated costs of in-house counsel, printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. Such terms shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any manner or proceeding is brought with respect to the matter for which such fees and expenses were incurred. (h) Base Rent. "Base Rent" means the rent payable by Tenant pursuant to subparagraph 3.(a) below. (i) Base Rent Date. "Base Rent Date" means November 1, 1996 and the first Business Day of February, May, August and November of each calendar year thereafter to and including the first Business Day of November, 2001. (j) Base Rent Period. "Base Rent Period" means (1) the period beginning on and including the date hereof and ending on but not including the first Base Rent Period, and (2) each successive period of approximately three (3) months. Each successive Base Rent Period after the first Base Rent Period shall begin on and include the day on which the preceding Base Rent Period ends and shall end on but not include the next following Base Rent Date. (k) Breakage Costs. "Breakage Costs" means any and all costs, losses or expenses incurred or sustained by Landlord's Parent or any other Participant, for which Landlord's Parent or the other Participant shall expect reimbursement from Landlord, because of the resulting liquidation or redeployment of deposits or other funds used to make Funding Advances upon any termination of this Lease by Tenant pursuant to Paragraph 2, if such termination is effective as of any day other than a Base Rent Date. Breakage Costs will include losses attributable to any decline in LIBOR as of the effective date of termination as compared to LIBOR used to determine the Effective Rate then in effect. (However, if Landlord's Parent or another Participant actually receives a profit upon the liquidation or redeployment of deposits or other funds used to make Funding Advances, because of any increase in LIBOR, then such profit will be offset against costs or expenses that would otherwise be charged as Breakage Costs under this Lease.) Each determination by Landlord's Parent of Breakage Costs shall, in the absence of clear and demonstrable error, be conclusive and binding upon Landlord and Tenant. (l) Business Day. "Business Day" means any day that is (1) not a Saturday, Sunday or day on which commercial banks are generally closed or required to be closed in New York City, New York or San Francisco, California, and (2) a day on which dealings in deposits of dollars are transacted in the London interbank market; provided that if such dealings are suspended indefinitely for any reason, "Business Day" shall mean any day described in clause (1). (m) Capital Adequacy Charges. "Capital Adequacy Charges" means any additional amounts Landlord's Parent or any other Participant requires Landlord to pay as compensation for an increase in required capital as provided in subparagraph 8.(y)(iv). (n) Closing Costs. "Closing Costs" means the excess of $74,800,000 over the sums actually paid by Landlord for or in connection with Landlord's acquisition of the Leased Property (including the payment of amounts secured by any lien to which the Real Property may be subject when it is conveyed to Landlord) at the closing under the Existing Contract, which excess will be advanced by or on behalf of Landlord to pay costs incurred in connection with the preparation and negotiation of this Lease, the Purchase Agreement, the Pledge Agreement, the Environmental Indemnity, the Participation Agreement and related documents. To the extent that Landlord does not itself use such excess to pay expenses incurred by Landlord in connection with the preparation and negotiation of such documents, the remainder thereof will be advanced to Tenant, with the expectation that Tenant shall use any such amount advanced for one or more of the following purposes: (1) the payment or reimbursement of expenses incurred by Tenant in connection with the preparation and negotiation of this Lease, the Purchase Agreement, the Pledge Agreement and related documents; (2) the payment or reimbursement of expenses incurred by Tenant in connection with any improvements Tenant may elect to make to the Leased Property in accordance with the requirements and limitations imposed by this Lease, including the planning, design, engineering and permitting of thereof; (3) the maintenance of the Leased Property; (4) the payment of the Upfront Fee and the first Administrative Fee; or (5) the payment of Rents next due. (o) Change of Control Event. "Change of Control Event" means the occurrence of any merger or consolidation or sale of assets involving Tenant that is prohibited by subparagraph 8.(ad)(iii). (p) Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. (q) Collateral. "Collateral" shall have the meaning assigned to it in the Pledge Agreement. (r) Collateral Percentage. "Collateral Percentage" for each Base Rent Period means the Collateral Percentage for such period determined under (and as defined in) the Pledge Agreement; provided, however, for purposes of this Lease, the Collateral Percentage for any Base Rent Period shall not exceed a fraction; the numerator of which fraction shall equal the value (determined as provided in the Pledge Agreement) of all Collateral (a) that is, on the first day of such Base Rent Period, held by the Deposit Takers under (and as defined in) the Pledge Agreement subject to a Qualifying Security Interest (as defined below), (b) that is free from claims or security interests held or asserted by any third party, and (c) that is not in excess of Stipulated Loss Value; and the denominator of which fraction shall equal the Stipulated Loss Value on the first day of such Base Rent Period. "Qualifying Security Interest" means a first priority perfected security interest under the Pledge Agreement which is sufficient, for purposes of the laws and regulations which govern minimum amounts of capital that each of Landlord's Parent and other Participants (or their respective affiliates) must maintain, to permit them to assign a risk weighting of no more than twenty percent to the portion of their respective Funding Advances equal to the Collateral their respective Deposit Takers hold on deposit as provided by the Pledge Agreement. (s) Debt. "Debt" of any Person means (i) indebtedness of such Person for borrowed money, (ii) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations of such Person to pay the deferred purchase price of property or services, (iv) obligations of such Person as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations of such Person, contingent or otherwise, under any lease of real property or related documents (including a separate purchase agreement) which provide that such Person must purchase or cause another to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor; (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above, (vii) liabilities of another Person secured by a Lien on, or payable out of the proceeds of production from, property of such Person even though such obligation shall not be assumed by such Person (but in the case of such liabilities not assumed by such Person, the liabilities shall constitute Debt of such Person only to the extent of the value of such Person's property encumbered by the Lien securing such liabilities) and (viii) Unfunded Benefit Liabilities. (t) Default. "Default" means any event which, with the passage of time or the giving of notice or both, would (if not cured within any applicable cure period) constitute an Event of Default. (u) Default Rate. "Default Rate" means a floating per annum rate equal to three percent (3%) above the Prime Rate. However, in no event will the Default Rate exceed the maximum interest rate permitted by law. (v) Designated Sale Date. "Designated Sale Date" shall have the meaning assigned to it in the Purchase Agreement. (w) Effective Rate. "Effective Rate" means: (i) for each day during the short first Base Rent Period ending on November 1, 1996, the per annum rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate on that day; and (ii) for each Base Rent Period after the first Base Rent Period, the per annum rate determined by dividing (A) LIBOR for such period, by (B) 100% minus the Eurodollar Rate Reserve Percentage for such period. If LIBOR or the Eurodollar Rate Reserve Percentage changes from Base Rent Period to Base Rent Period, then the Effective Rate shall be automatically increased or decreased, as the case may be, as of the date of the change from Base Rent Period to Base Rent Period. If for any reason Landlord's Parent determines that it is impossible or unreasonably difficult to determine the Effective Rate with respect to a given Base Rent Period in accordance with the preceding sentences, then the "Effective Rate" for that Base Rent Period shall equal any published index or per annum interest rate determined reasonably and in good faith by Landlord's Parent to be a comparable rate at the beginning of the first day of that period. A comparable interest rate might be, for example, the then existing yield on short term United States Treasury obligations (as compiled by and published in the then most recently published United States Federal Reserve Statistical Release H.15(519) or its successor publication), plus or minus a fixed adjustment based on Landlord's Parent's comparison of past eurodollar market rates to past yields on such Treasury obligations. Any determination by Landlord's Parent of the Effective Rate hereunder shall, in the absence of clear and demonstrable error, be conclusive and binding. (x) Environmental Indemnity. "Environmental Indemnity" means the separate Environmental Indemnity Agreement dated as of the date hereof executed by Tenant in favor of Landlord covering the Land and certain other property described therein, as such agreement may be extended, supplemented, amended, restated or otherwise modified from time to time. (y) Environmental Laws. "Environmental Laws" means any and all existing and future Applicable Laws pertaining to safety, health or the environment, or to Hazardous Substances or Hazardous Substance Activities, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter called "CERCLA"), and the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended, hereinafter called "RCRA"). (z) Environmental Losses. "Environmental Losses" means Losses suffered or incurred by any Indemnified Party, directly or indirectly, relating to or arising out of, based on or as a result of: (i) any Hazardous Substance Activity; (ii) any violation of Environmental Laws relating to the Leased Property or to the ownership, use, occupancy or operation thereof; (iii) any investigation, inquiry, order, hearing, action, or other proceeding by or before any governmental or quasi-governmental agency or authority in connection with any Hazardous Substance Activity; or (iv) any claim, demand, cause of action or investigation, or any action or other proceeding, whether meritorious or not, brought or asserted against any Indemnified Party which directly or indirectly relates to, arises from, is based on, or results from any of the matters described in clauses (i), (ii), or (iii) of this subparagraph 1.(z), or any allegation of any such matters. ENVIRONMENTAL LOSSES INCURRED BY OR ASSERTED AGAINST A PARTICULAR INDEMNIFIED PARTY SHALL INCLUDE LOSSES RELATING TO OR ARISING OUT OF OR AS A RESULT OF ANY MATTERS LISTED IN THE PRECEDING SENTENCE EVEN WHEN SUCH MATTERS ARE CAUSED BY THE ORDINARY NEGLIGENCE (AS DEFINED BELOW) OF THAT PARTICULAR OR ANY OTHER INDEMNIFIED PARTY. However, Losses incurred by or asserted against a particular Indemnified Party and proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of any Indemnified Party will not constitute Environmental Losses of such Indemnified Party for purposes of this Lease. (aa) Environmental Report. "Environmental Report" means, collectively, the reports listed on Exhibit G attached hereto. (bb) ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations promulgated with respect thereto. (cc) ERISA Affiliate. "ERISA Affiliate" means any Person who for purposes of Title IV of ERISA is a member of Tenant's controlled group, or under common control with Tenant, within the meaning of Section 414 of the Code, and the regulations promulgated and rulings issued thereunder. (dd) ERISA Termination Event. "ERISA Termination Event" means (i) the occurrence with respect to any Plan of a) a reportable event described in Sections 4043(b)(5) or (6) of ERISA or b) any other reportable event described in Section 4043(b) of ERISA other than a reportable event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation under Section 4043(a) of ERISA, or (ii) the withdrawal of Tenant or any Affiliate of Tenant from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate any Plan or the treatment of any Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate any Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. (ee) Escrowed Proceeds. "Escrowed Proceeds" shall mean any proceeds that are received by Landlord from time to time during the Term (and any interest earned thereon), which Landlord is holding for the purposes specified in the next sentence, from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, in determining "Escrowed Proceeds" there shall be deducted all expenses and costs of every type, kind and nature (including Attorneys' Fees) incurred by Landlord to collect such proceeds; and provided, further, "Escrowed Proceeds" shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4). "Escrowed Proceeds" shall include only such proceeds as are held by Landlord (A) pursuant to Paragraph 4 for the payment to Tenant for the restoration or repair of the Leased Property or (B) for application (generally, on the next following Base Rent Date which is at least three (3) Business Days following Landlord's receipt of such proceeds) as a Qualified Payment or as reimbursement of costs incurred in connection with a Qualified Payment. "Escrowed Proceeds" shall not include any proceeds that have been applied as a Qualified Payment or to pay any costs incurred in connection with a Qualified Payment. Until Escrowed Proceeds are paid to Tenant pursuant to Paragraph 4 below or applied as a Qualified Payment or as reimbursement for costs incurred in connection with a Qualified Payment, Landlord shall keep the same deposited in an interest bearing account, and all interest earned on such account shall be added to and made a part of Escrowed Proceeds. (ff) Eurocurrency Liabilities. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. (gg) Eurodollar Rate Reserve Percentage. "Eurodollar Rate Reserve Percentage" means, for purposes of determining the Effective Rate for any Base Rent Period, the reserve percentage applicable two Business Days before the first day of such period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding One Billion Dollars with respect to liabilities or deposits consisting of or including Eurocurrency Liabilities (or with respect to any other category or liabilities by reference to which LIBOR is determined) having a term comparable to such period. (hh) Event of Default. "Event of Default" shall have the meaning assigned to it in subparagraph 13.(a) below. (ii) Excluded Taxes. "Excluded Taxes" shall mean (1) all federal, state and local income taxes upon the Base Rent, the Upfront Fee, the Administrative Fees and any interest paid to Landlord pursuant to subparagraph 3.(e), (2) any taxes imposed by any governmental authority outside the United States, and (3) any transfer or change of ownership taxes assessed because of Landlord's transfer or conveyance to any third party of any rights or interest in this Lease, the Purchase Agreement or the Leased Property, but excluding any such taxes assessed because of any Permitted Transfer. (jj) Fair Market Value. "Fair Market Value" shall have the meaning assigned to it in the Purchase Agreement. (kk) Fed Funds Rate. "Fed Funds Rate" means, for any period, a fluctuating interest rate (expressed as a per annum rate and rounded upwards, if necessary, to the next 1/16 of 1%) equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rates are not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Landlord's Parent from three Federal funds brokers of recognized standing selected by Landlord's Parent. All determinations of the Fed Funds Rate by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (ll) Funding Advances. "Funding Advances" means the Initial Funding Advance and any subsequent advances made by Landlord's Parent or any other Participant to or on behalf of Landlord in replacement of or renewal and extension of all or part of the Initial Funding Advance. For example, if after the date hereof a new Participant advances funds to or on behalf of Landlord to Landlord's Parent or ABN AMRO Bank N.V. in repayment of all or part of the Initial Funding Advance, such advance of funds by the new Participant shall constitute a Funding Advance hereunder. (mm) GAAP. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in subparagraph 8.(w) (except for changes concurred in by Tenant's independent public accountants). (nn) Hazardous Substance. "Hazardous Substance" means (i) any chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, regulated under, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance," "hazardous material," "hazardous waste," "extremely hazardous waste," "infectious waste," "toxic substance," "toxic pollutant," or any other formulation intended to define, list or classify substances by reason of deleterious properties, including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity or reproductive toxicity; (ii) petroleum, any fraction of petroleum, natural gas, natural gas liquids, liquified natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas), and ash produced by a resource recovery facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iii) asbestos and any asbestos containing material; (iv) "waste" as defined in section 13050(d) of the California Water Code; and (v) any other material that, because of its quantity, concentration or physical or chemical characteristics, poses a significant present or potential hazard to human health or safety or to the environment if released into the workplace or the environment. (oo) Hazardous Substance Activity. "Hazardous Substance Activity" means any actual, proposed or threatened use, storage, holding, existence, location, release (including, without limitation, any spilling, leaking, leaching, pumping, pouring, emitting, emptying, dumping, disposing into the environment, and the continuing migration into or through soil, surface water, groundwater or any body of water), discharge, deposit, placement, generation, processing, construction, treatment, abatement, removal, disposal, disposition, handling or transportation of any Hazardous Substance from, under, in, into or on the Leased Property, including, without limitation, the movement or migration of any Hazardous Substance from surrounding property, surface water, groundwater or any body of water under, in, into or onto the Leased Property and any residual Hazardous Substance contamination in, on or under the Leased Property. (pp) Impositions. "Impositions" shall have the meaning assigned to it in subparagraph 8.(p) below. (qq) Improvements. "Improvements," as defined in the recitals at the beginning of this Lease, shall include not only existing improvements to the Land as of the date hereof, if any, but also any new improvements or changes to existing improvements made by Tenant. (rr) Indemnified Party. "Indemnified Party" means each of (1) Landlord and any of Landlord's successors and assigns as to all or any portion of the Leased Property or any interest therein (but excluding Tenant or any Applicable Purchaser under the Purchase Agreement or any Person that claims its interest in the Leased Property through or under Tenant or through or under an assignment from Landlord that does not constitute a Permitted Transfer), (2) the Participants, and (3) any Affiliate, officer, agent, director, employee or servant of any of the parties described in clause (1) or (2) preceding. (ss) Initial Funding Advance. "Initial Funding Advance" means the advance of $74,800,000 made by Landlord's Parent and another Participant to or on behalf of Landlord on or prior to the date of this Lease to cover the cost of Landlord's acquisition of the Leased Property and Closing Costs. (tt) Landlord's Parent. "Landlord's Parent" means Landlord's Affiliate, Banque Nationale de Paris, a bank organized and existing under the laws of France, together with any Affiliates of such bank that directly or indirectly provided or hereafter during the Term provide or maintain any Funding Advances, and any successors of such bank and such Affiliates. (uu) LIBOR. "LIBOR" means, for purposes of determining the Effective Rate for each Base Rent Period, the rate determined by Landlord's Parent to be the average rate of interest per annum (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates at which deposits of dollars are offered or available to Landlord's Parent in the London interbank market at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such period. Landlord shall instruct Landlord's Parent to consider deposits, for purposes of making the determination described in the preceding sentence, that are offered: (i) for delivery on the first day of such Base Rent Period, (ii) in an amount equal or comparable to the total (projected on the applicable date of determination by Landlord's Parent) Stipulated Loss Value on the first day of such Base Rent Period, and (iii) for a period of time equal or comparable to the Base Rent Period. If Landlord's Parent so chooses, it may determine LIBOR for any period by reference to the rate reported by the British Banker's Association on Page 3750 of the Telerate Service at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such period; provided, however, Tenant may notify Landlord that Tenant objects to any future determination of LIBOR in the manner provided by this sentence, in which case any determination of LIBOR required more than three Business Days after Landlord's receipt of such notice shall be made as if this sentence had been struck from this Lease. If for any reason Landlord's Parent determines that it is impossible or unreasonably difficult to determine LIBOR with respect to a given Base Rent Period in accordance with the preceding sentences, or if Landlord's Parent shall determine that it is unlawful (or any central bank or governmental authority shall assert that it is unlawful) for Landlord, Landlord's Parent or any other Participant to provide or maintain any Funding Advances hereunder during any Base Rent Period for which Base Rent is computed by reference to LIBOR, then "LIBOR" for that Base Rent Period shall equal the rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate for that period. All determinations of LIBOR by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (vv) Lien. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any agreement to sell receivables with recourse, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). Customary bankers' rights of set-off arising by operation of law or by contract (however styled, if the contract grants rights no greater than those arising by operation of law) in connection with working capital facilities, lines of credit, term loans and letter of credit facilities and other contractual arrangements entered into with banks in the ordinary course of business are not "Liens" for the purposes of this Lease. (ww) Losses. "Losses" means any and all losses, liabilities, damages (whether actual, consequential, punitive or otherwise denominated), demands, claims, actions, judgments, causes of action, assessments, fines, penalties, costs, and out-of-pocket expenses (including, without limitation, Attorneys' Fees and the fees of outside accountants and environmental consultants), of any and every kind or character, foreseeable and unforeseeable, liquidated and contingent, proximate and remote, known and unknown. (xx) Ordinary Negligence. "Ordinary Negligence" of an Indemnified Party means any negligent acts or omissions of such party that does not for any reason constitute Active Negligence as defined in this Lease. (yy) Participant. "Participant" means any Person, including Landlord's Parent, that agrees with Landlord or another Participant to participate in all or some of the risks and rewards to Landlord of this Lease and the Purchase Agreement. As of the effective date hereof, the only Participants are Landlord's Parent and ABN AMRO Bank N.V., but such Participants and Landlord may agree to share in risks and rewards of this Lease and the Purchase Agreement with other Participants in the future. However, no Person other than Landlord's Parent and ABN AMRO Bank N.V. shall qualify as a Participant for purposes of this Lease, the Purchase Agreement or any other agreement to which 3COM is a party unless, with 3COM's prior written approval (such approval not to be unreasonably withheld) or when an Event of Default had occurred and was continuing, such Person became a party to the Pledge Agreement and to the Participation Agreement by executing supplements to those agreements as contemplated therein. (zz) Participation Agreement. "Participation Agreement" means the Participation Agreement dated the date hereof between Landlord, Landlord's Parent and ABN AMRO Bank N.V., pursuant to which Landlord's Parent and ABN AMRO Bank N.V. have agreed to participate in certain risks and rewards to Landlord of this Lease and the Purchase Agreement, as such Participation Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (aaa) Permitted Encumbrances. "Permitted Encumbrances" means (i) the encumbrances and other matters affecting the Leased Property that are set forth in Exhibit B attached hereto and made a part hereof, and (ii) any provisions of the Existing Contract or any other agreement described therein that survived closing thereunder (but not any deed of trust, mortgage or other agreement given to secure the repayment of borrowed funds), and (iii) any easement agreement or other document affecting title to the Leased Property executed by Landlord at the request of or with the consent of Tenant. (bbb) Permitted Hazardous Substance Use. "Permitted Hazardous Substance Use" means the use, storage and offsite disposal of Permitted Hazardous Substances in strict accordance with applicable Environmental Laws and with due care given the nature of the Hazardous Substances involved; provided, the scope and nature of such use, storage and disposal shall not include the use of underground storage tanks for any purpose other than the storage of water for fire control, nor shall such scope and nature: (1) exceed that reasonably required for the construction of Improvements permitted by this Lease and for the operation of the Leased Property for the purposes expressly permitted under subparagraph 7.(a); or (2) include any disposal, discharge or other release of Hazardous Substances from operations on the Leased Property in any manner that might allow such substances to reach the San Francisco Bay, surface water or groundwater, except (i) through a lawful and properly authorized discharge (A) to a publicly owned treatment works or (B) with rainwater or storm water runoff in accordance with Applicable Laws and any permits obtained by Tenant that govern such runoff; or (ii) any such disposal, discharge or other release of Hazardous Substances for which no permits are required and which are not otherwise regulated under applicable Environmental Laws. Further, notwithstanding anything to the contrary herein contained, Permitted Hazardous Substance Use shall not include any use of the Leased Property as a treatment, storage or disposal facility (as defined by federal Environmental Laws) for Hazardous Substances, including but not limited to a landfill, incinerator or other waste disposal facility. (ccc) Permitted Hazardous Substances. "Permitted Hazardous Substances" means Hazardous Substances used and reasonably required for Tenant's operation of the Leased Property for the purposes expressly permitted by subparagraph 7.(a) in strict compliance with all Environmental Laws and with due care given the nature of the Hazardous Substances involved. Without limiting the generality of the foregoing, Permitted Hazardous Substances shall include, without limitation, usual and customary office and janitorial products, and the materials listed on Exhibit C attached hereto. (ddd) Permitted Transfer. "Permitted Transfer" means any one or more of the following: (1) the creation or conveyance of rights and interests under the Participation Agreement in favor of Landlord's Parent, ABN AMRO Bank N.V. or future Participants; (2) subject to the last sentence of subparagraph 10.(d), any assignment or conveyance by Landlord of any lien or security interest against the Leased Property (in contrast to a conveyance of Landlord's fee estate in the Leased Property) or of any interest in Rent, payments required by the Purchase Agreement or payments to be generated from the Leased Property after the Term, to any present or future Participant or to any Affiliate of Landlord; (3) any agreement to exercise or refrain from exercising rights or remedies hereunder or under the Purchase Agreement, the Pledge Agreement or the Environmental Indemnity made by Landlord with any present or future Participant or Affiliate of Landlord; (4) any assignment or conveyance by Landlord requested by Tenant or required by any Permitted Encumbrance, by the Purchase Agreement or by Applicable Laws; (5) any assignment or conveyance by Landlord when an Event of Default shall have occurred and be continuing; or (6) any assignment or conveyance by Landlord after the Designated Sale Date. (eee) Person. "Person" means an individual, a corporation, a partnership, an unincorporated organization, an association, a joint stock company, a joint venture, a trust, an estate, a government or agency or political subdivision thereof or other entity, whether acting in an individual, fiduciary or other capacity. (fff) Plan. "Plan" means at any time an employee pension benefit plan which is covered under Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by Tenant or any Subsidiary for employees of Tenant or any Subsidiary or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which Tenant or any Subsidiary is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. (ggg) Pledge Agreement. "Pledge Agreement" means the Pledge Agreement dated as of the date hereof between Landlord and Tenant, pursuant to which Tenant may pledge certificates of deposit as security for Tenant's obligations under the Purchase Agreement (and for the corresponding obligations of Landlord to the Participants under the Participation Agreement), as such Pledge Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (hhh) Prime Rate. "Prime Rate" means the prime interest rate or equivalent charged by Landlord's Parent in the United States as announced or published by Landlord's Parent from time to time, which need not be the lowest interest rate charged by Landlord's Parent. If for any reason Landlord's Parent does not announce or publish a prime rate or equivalent, the prime rate or equivalent announced or published by either ABN AMRO Bank N.V. or Credit Commercial de France as selected by Landlord shall be used as the Prime Rate. The prime rate or equivalent announced or published by such bank need not be the lowest rate charged by it. The Prime Rate may change from time to time after the date hereof without notice to Tenant as of the effective time of each change in rates described in this definition. (iii) Purchase Agreement. "Purchase Agreement" means the Purchase Agreement dated as of the date hereof between Landlord and Tenant pursuant to which Tenant has agreed to purchase or to arrange for the purchase by a third party of the Leased Property, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (jjj) Purchase Price. "Purchase Price" shall have the meaning assigned to it in the Purchase Agreement. (kkk) Qualified Payments. "Qualified Payments" means all payments received by Landlord from time to time during the Term from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, that (x) in determining Qualified Payments, there shall be deducted all expenses and costs of every kind, type and nature (including taxes and Attorneys' Fees) incurred by Landlord with respect to the collection of such payments, (y) Qualified Payments shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4) and (z) Qualified Payments shall not include any payments received by Landlord that Landlord has paid to Tenant for the restoration or repair of the Leased Property or that Landlord is holding as Escrowed Proceeds. For purposes of computing the total Qualified Payments (and other amounts dependent upon Qualified Payments, such as Stipulated Loss Value) paid to or received by Landlord as of any date, payments described in the preceding clauses (1) through (4) will be considered as Escrowed Proceeds, not Qualified Payments, until they are actually applied as Qualified Payments by Landlord, which Landlord will do upon the first Base Rent Date which is at least three (3) Business Days after Landlord's receipt of the same unless postponement of such application is required by other provisions of this Lease or consented to by Tenant in writing. Thus, for example, condemnation proceeds actually received by Landlord in the middle of a Base Rent Period will not be considered as having been received by Landlord for purposes of computing the total Qualified Payments unless and until actually applied by Landlord as a Qualified Payment on a subsequent Base Rent Date in accordance with Paragraph 4 below. (lll) Remaining Proceeds. "Remaining Proceeds" shall have the meaning assigned to it in subparagraph 4.(a)(ii). (mmm) Rent. "Rent" means the Base Rent and all Additional Rent. (nnn) Responsible Financial Officer. "Responsible Financial Officer" means the chief financial officer, the controller, the treasurer or the assistant treasurer of Tenant. (ooo) Spread. The "Spread" on any date will depend upon a computation involving (a) the rating by Standard and Poor's Corporation (the "S&P Rating") or the rating by Moody's Investor Service, Inc. (the "Moody's Ratings"), whichever rating is higher, of Tenant's senior, unsecured debt on that date (whether such ratings are express or published, implied ratings), and (b) the Debt to Capital Ratio (as defined below) on that date, such computation to be as follows: (i) If (1) there is no S&P Rating for the senior, unsecured debt of Tenant (express or published, implied) or the S&P Rating is below BBB-, AND (2) there is no Moody's Rating for senior, unsecured debt of Tenant (express or published, implied) or the Moody's Rating is below Baa3, AND (3) the Debt to Capital Ratio is greater than 0.30, then the Spread will be fifty basis points (.500%). (ii) If (1) the S&P Rating is BBB-, OR (2) the Moody's Rating is Baa3, OR (3) the Debt to Capital Ratio is equal to or less than 0.30 and more than 0.15, and if Tenant does not qualify for a lower Spread pursuant to clause (iii) or (iv) below, then the Spread will be forty-five basis points (.450%). (iii) If (1) the S&P Rating is BBB, OR (2) the Moody's Rating is Baa2, OR (3) the Debt to Capital Ratio is equal to or less than 0.15, and if Tenant does not qualify for a lower Spread pursuant to clause (iv) below, then the Spread will be thirty-seven and one-half basis points (.375%). (iv) If (1) the S&P Rating is above BBB, OR (2) the Moody's Rating is above Baa2, then the Spread will be thirty basis points (.300%). For purposes of calculating the Spread, "Debt to Capital Ratio" means the quotient determined by dividing (A) funded Senior Debt (as defined in subparagraph 8.(ac)(ii)), by (B) the total Capitalization (as defined in subparagraph 8.(ac)(ii)), including Subordinated Debt (as defined in subparagraph 8.(ac)(ii)). The parties believe it improbable that the ratings systems used by Standard and Poor's Corporation and by Moody's Investor Service, Inc. will be discontinued or changed, but if such ratings systems are discontinued or changed, Landlord shall be entitled to select and use a comparable ratings systems as a substitute for the S&P Rating or the Moody Rating, as the case may be, for purposes of determining the Spread. All determinations of the Spread by Landlord shall, in the absence of clear and demonstrable error, be binding and conclusive for purposes of this Lease. Further Landlord may, but shall not be required, to rely on the determination of the Spread set forth in any certificate delivered by Tenant pursuant to subparagraph 8.(w)(iv) below, and no reduction in the Spread will be effective because of an improvement in the S&P Rating, the Moody's Rating or the Debt to Capital Ratio before Tenant has notified Landlord thereof by delivery of such a certificate. (ppp) Stipulated Loss Value. "Stipulated Loss Value" means the amount computed from time to time in accordance with the formula specified in this definition. Such amount shall equal the Initial Funding Advance (i.e., $74,800,000), LESS the amount (if any) of Qualified Payments paid to Landlord on or prior to such date. Thus, for example, if a determination of Stipulated Loss Value is required under subparagraph 3.(a) on the first day of the applicable Base Rent Period, but the Leased Property has been damaged by fire or other casualty with the result that $500,000 of net insurance proceeds have been paid to Landlord and retained by Landlord as Qualified Payments, then the Stipulated Loss Value as of the date of the required determination shall be $74,300,000. Under no circumstances will any payment of Base Rent or the Upfront Fee or any Administrative Fee reduce Stipulated Loss Value. (qqq) Subsidiary. "Subsidiary" means any corporation of which Tenant and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors. (rrr) Tenant's Knowledge. "Tenant's knowledge," "to the knowledge of Tenant" and words of like effect means the actual knowledge (with due investigation) of any of the following employees of Tenant: Alan Groves, Vice President and Corporate Controller; Christopher B. Paisley, Chief Financial Officer; Abe Darwish, Director of Site Services; and Walter Patti, Manager of Safety and Security. However, to the extent Tenant's knowledge after the date hereof may become relevant hereunder or under any certificate or other notice provided by Tenant to Landlord in connection with this Lease, "Tenant's knowledge" and words of like effect shall include the then actual knowledge of other employees of Tenant (if any) that have assumed responsibilities of the current employees listed in the preceding sentence or that have replaced such current employees. But none of the employees of Tenant whose knowledge is now or may hereafter be relevant shall be personally liable for the representations of Tenant made herein. (sss) Term. "Term" shall have the meaning assigned to it in Paragraph 2 below. (ttt) Unfunded Benefit Liabilities. "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of Tenant or any ERISA Affiliate of Tenant under Title IV of ERISA. (uuu) Upfront Fee. "Upfront Fee" shall have the meaning assigned to it in subparagraph 3.(b). (vvv) Voluntary Minimum Pledge Commitment. "Voluntary Minimum Pledge Commitment" means an agreement in form and substance reasonably satisfactory to Landlord and the other parties to the Pledge Agreement which Tenant may elect to execute in connection with a casualty, condemnation or sale in lieu of condemnation affecting the Leased Property and which modifies the Pledge Agreement by establishing a Minimum Collateral Percentage sufficient to require Tenant to maintain Collateral under the Pledge Agreement with a value of no less than the insurance, condemnation or sale proceeds paid or to be paid because of the casualty, condemnation or sale in lieu of condemnation until Tenant has completed any related repairs or restoration required by this Lease. (www) Other Terms and References. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural and vice versa, unless the context otherwise requires. References herein to Paragraphs, subparagraphs or other subdivisions shall refer to the corresponding Paragraphs, subparagraphs or subdivisions of this Lease, unless specific reference is made to another document or instrument. References herein to any Schedule or Exhibit shall refer to the corresponding Schedule or Exhibit attached hereto, which shall be made a part hereof by such reference. All capitalized terms used in this Lease which refer to other documents shall be deemed to refer to such other documents as they may be renewed, extended, supplemented, amended or otherwise modified from time to time, provided such documents are not renewed, extended or modified in breach of any provision contained herein or therein or, in the case of any other document to which Landlord is a party or of which Landlord is an intended beneficiary, without the consent of Landlord. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. The words "this Lease", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Lease as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Paragraph" and "this subparagraph" and similar phrases refer only to the Paragraphs or subparagraphs hereof in which the phrase occurs. The word "or" is not exclusive. Other capitalized terms are defined in the provisions that follow. 3. Term. The term of this Lease (herein called the "Term") shall commence on and include the effective date hereof, and end at 8:00 A.M. on the first Business Day of November, 2001, unless extended or sooner terminated as herein provided. Notwithstanding any other provision of this Lease which may expressly restrict the early termination hereof, and provided that Tenant is still in possession of the Leased Property and has not breached its obligation to make or have made any payment required by Paragraph 2 of the Purchase Agreement on any prior Designated Sale Date, Tenant may notify Landlord of Tenant's election to terminate this Lease before the first Business Day of November, 2001 by giving Landlord an irrevocable notice of such election and of the effective date of the termination, which notice must be given (if at all) at least sixty (60) days prior to the effective date of the termination. If Tenant elects to so terminate this Lease, then on the date on which this Lease is to be terminated, not only must Tenant pay all unpaid Rent, Tenant must also pay any Breakage Costs resulting from the termination and must satisfy its obligations under the Purchase Agreement. The payment of any unpaid Rent and Breakage Costs and the satisfaction of Tenant's obligations under the Purchase Agreement shall be conditions precedent to the effectiveness of any early termination of this Lease by Tenant. The Term may be extended at the option of Tenant for two successive periods of five (5) years each; provided, however, that prior to any such extension the following conditions must have been satisfied: (A) at least one hundred eighty (180) days prior to the commencement of any such extension, Landlord and Tenant must have agreed in writing upon, and received the written consent and approval of Landlord's Parent and all other Participants to (1) a corresponding extension of the date specified in clause (iii) of the definition of Designated Sale Date in the Purchase Agreement, and (2) an adjustment to the Rent that Tenant will be required to pay for the extension, it being expected that the Rent for the extension may be different than the Rent required for the original Term, and it being understood that the Rent for any extension must in all events be satisfactory to both Landlord and Tenant, each in its sole and absolute discretion; (B) there must be no Event of Default continuing hereunder at the time of Tenant's exercise of its option to extend; and (C) immediately prior to any such extension, this Lease must remain in effect. With respect to the condition that Landlord and Tenant must have agreed upon the Rent required for any extension of the Term, neither Tenant nor Landlord is willing to submit itself to a risk of liability or loss of rights hereunder for being judged unreasonable. Accordingly, both Tenant and Landlord hereby disclaim any obligation express or implied to be reasonable in negotiating the Rent for any such extension. Subject to the changes to the Rent payable during any extension of the Term as provided in this Paragraph, if Tenant exercises its option to extend the Term as provided in this Paragraph, this Lease shall continue in full force and effect, and the leasehold estate hereby granted to Tenant shall continue without interruption and without any loss of priority over other interests in or claims against the Leased Property that may be created or arise after the date hereof and before the extension. 4. Rental. (a) Base Rent. Tenant shall pay Landlord rent (herein called "Base Rent") in arrears, in currency that at the time of payment is legal tender for public and private debts in the United States of America, in installments on each Base Rent Date through the end of the Term. Each payment of Base Rent must be received by Landlord no later than 12:00 noon (San Francisco time) on the date it becomes due; if received after 12:00 noon it will be considered for purposes of this Lease as received on the next following Business Day. Each installment of Base Rent shall represent rent allocable to the Base Rent Period ending on the date on which the installment is due. Landlord shall notify Tenant in writing of the Base Rent due for each Base Rent Period at least fifteen (15) days prior to the Base Rent Date on which such period ends. Any failure by Landlord to so notify Tenant shall not constitute a waiver of Landlord's right to payment, but absent such notice Tenant shall not be in default for any underpayment resulting therefrom if Tenant, in good faith, reasonably estimates the payment required, makes a timely payment of the amount so estimated and corrects any underpayment within three (3) Business Days after being notified by Landlord of the underpayment. If Tenant or any other Applicable Purchaser purchases Landlord's interest in the Leased Property pursuant to the Purchase Agreement, any Base Rent for the three (3) months ending on the date of purchase (or if the date of Purchase is not a Base Rent Date, then pro rated Base Rent for the Base Rent Period which included the date of purchase) and all outstanding Additional Rent shall be due on the Designated Sale Date in addition to the purchase price and other sums due Landlord under the Purchase Agreement. Base Rent shall accrue for each day of the first Base Rent Period, and the total Base Rent for the first Base Rent Period shall equal the sum of Base Rent for all days during such period. The Base Rent accruing for each day during such period shall equal: (1) (A) $74,800,000, times (B) one minus the Collateral Percentage for the first Base Rent Period, times (C) the sum of (i) the Effective Rate for such day and (ii) the Spread calculated on the date of this Lease, divided by (D) three hundred sixty (360); PLUS (2) (A) $74,800,000, times (B) the Collateral Percentage for the first Base Rent Period, times (C) twenty-two and one-half basis points (22.5/100 of 1%), divided by (D) three hundred sixty (360) The Base Rent for each Base Rent Period after the first Base Rent Period shall equal the sum of: (1) (A) Stipulated Loss Value on the first day of such Base Rent Period, times (B) one minus the Collateral Percentage for such Base Rent Period, times (C) the sum of (i) the Effective Rate for such Base Rent Period and (ii) the Spread calculated on the tenth (10th) Business Day prior to the day upon which such Base Rent Period commences, times (D) the number of days in such Base Rent Period, divided by (E) three hundred sixty (360); PLUS (2) (A) Stipulated Loss Value on the first day of such Base Rent Period, times (B) the Collateral Percentage for such Base Rent Period, times (C) twenty-two and one-half basis points (22.5/100 of 1%), times (D) the number of days in such Base Rent Period, divided by (E) three hundred sixty (360) Assume, only for the purpose of illustration: that a hypothetical Base Rent Period contains exactly ninety (90) days; that prior to the first day of such Base Rent Period a total of $44,800,000 of Qualified Payments have been received by Landlord, leaving a Stipulated Loss Value of $30,000,000 (the Initial Funding Advance of $74,800,000 less the Qualified Payments of $44,800,000); that the Collateral Percentage for such Base Rent Period is forty percent (40%); and that the Effective Rate for the applicable Base Rent Period is 6%. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $30,000,000 x 60% x 6% x 90/360, or $270,000, PLUS $30,000,000 x 40% x .225% x 90/360, or $6,750 = $276,750 To ease the administrative burden of this Lease and the Pledge Agreement, clause (2) in the formulas above for calculating Base Rent reflects a reduction in the Base Rent equal to the interest that would accrue on any Collateral required by the Pledge Agreement from time to time if the Accounts (as defined in the Pledge Agreement) bore interest at the Effective Rate. Landlord has agreed to such reduction in the Base Rent to provide Tenant with the economic equivalent of interest on such Collateral, and in return Tenant has agreed to the provisions of the Pledge Agreement that excuse the actual payment of interest on the Accounts. By incorporating such reduction of Base Rent into the formulas above, and by providing for noninterest bearing Accounts in the Pledge Agreement, the parties will avoid an unnecessary and cumbersome periodic exchange of equal payments. It is not, however, the intent of Landlord or Tenant to understate Base Rent or interest for financial reporting purposes. Accordingly, for purposes of determining Tenant's compliance with the affirmative financial covenants set forth in subparagraph 8.(ac), and for purposes of any financial reports that this Lease requires of Tenant from time to time, Tenant may report Base Rent as if there had been no such reduction and as if the Collateral from time to time required by the Pledge Agreement had been maintained in Accounts bearing interest at the Effective Rate. (b) Upfront Fee. Upon execution and delivery of this Lease by Landlord, Tenant shall pay Landlord an upfront fee (the "Upfront Fee") as provided in the letter dated August 20, 1996 (modifying a letter dated August 9, 1996) from Landlord to Tenant (less the deposit already paid by Tenant pursuant to that letter which will be applied against the Upfront Fee). The Upfront Fee shall represent Additional Rent for the first Base Rent Period. (c) Administrative Fees. Upon execution and delivery of this Lease by Landlord, and again on each anniversary of the date hereof prior to the Designated Sale Date, Tenant shall pay Landlord an administrative fee (an "Administrative Fee") as provided in the letter dated August 9, 1996 from Landlord to Tenant. Each payment of an Administrative Fee shall represent Additional Rent for the Base Rent Period during which it first becomes due. (d) Additional Rent. All amounts which Tenant is required to pay to or on behalf of Landlord pursuant to this Lease, together with every charge, premium, interest and cost set forth herein which may be added for nonpayment or late payment thereof, shall constitute rent (all such amounts, other than Base Rent, are herein called "Additional Rent"). (e) Interest and Order of Application. All Rent shall bear interest, if not paid when first due, at the Default Rate in effect from time to time from the date due until paid; provided, that nothing herein contained will be construed as permitting the charging or collection of interest at a rate exceeding the maximum rate permitted under Applicable Laws. Landlord shall be entitled to apply any amounts paid by or on behalf of Tenant hereunder against any Rent then past due in the order the same became due or in such other order as Landlord may elect. (f) Net Lease. It is the intention of Landlord and Tenant that the Base Rent and all other payments herein specified shall be absolutely net to Landlord. Tenant shall pay all costs, expenses and obligations of every kind relating to the Leased Property or this Lease which may arise or become due, including, without limitation: (i) Impositions, including any taxes payable by virtue of Landlord's receipt of amounts paid to or on behalf of Landlord in accordance with this subparagraph 3.(f), but not including any Excluded Taxes; (ii) any Capital Adequacy Charges; (iii) any amount for which Landlord is or becomes liable with respect to the Permitted Encumbrances; and (iv) any costs incurred by Landlord (including Attorneys' Fees) because of Landlord's acquisition or ownership of the Leased Property or because of this Lease or the transactions contemplated herein. (g) No Demand or Setoff. The Base Rent and all Additional Rent shall be paid without notice or demand and without abatement, counterclaim, deduction, setoff or defense, except as expressly provided herein. 5. Insurance and Condemnation Proceeds. (a) Subject to Landlord's rights under this Paragraph 4, and so long as no Event of Default shall have occurred and be continuing, Tenant shall be entitled to use all casualty insurance and condemnation proceeds payable with respect to the Leased Property during the Term for the restoration and repair of the Leased Property or any remaining portion thereof. Except as provided in the last sentence of subparagraph 8.(r) and the last sentence of subparagraph 8.(s), all insurance and condemnation proceeds received with respect to the Leased Property (including proceeds payable under any insurance policy covering the Leased Property which is maintained by Tenant) shall be paid to Landlord and applied as follows: (i) First, such proceeds shall be used to reimburse Landlord for any costs and expenses, including Attorneys' Fees, incurred in connection with the collection of such proceeds. (ii) Second, the remainder of such proceeds (the "Remaining Proceeds"), shall be held by Landlord as Escrowed Proceeds and applied to reimburse Tenant for the actual cost of the repair, restoration or replacement of the Leased Property. However, any Remaining Proceeds not needed for such purpose shall be applied by Landlord as Qualified Payments after Tenant notifies Landlord that they are not needed for repairs, restoration or replacement. Notwithstanding the foregoing, if an Event of Default shall have occurred and be continuing, then Landlord shall be entitled to receive and collect insurance or condemnation proceeds payable with respect to the Leased Property, and either, at the discretion of Landlord, (A) hold such proceeds as Escrowed Proceeds until paid to Tenant as reimbursement for the actual and reasonable cost of repairing, restoring or replacing the Leased Property when Tenant has completed such repair, restoration or replacement, or (B) apply such proceeds (net of the deductions described in clause (i) above) as Qualified Payments. (b) Any Remaining Proceeds held by Landlord as Escrowed Proceeds shall be deposited by Landlord in an interest bearing account as provided in the definition of Escrowed Proceeds and shall be paid to Tenant upon completion of the applicable repair, restoration or replacement and upon compliance by Tenant with such terms, conditions and requirements as may be reasonably imposed by Landlord, but in no event shall Landlord be required to pay any Escrowed Proceeds to Tenant in excess of the actual cost to Tenant of the applicable repair, restoration or replacement, it being understood that Landlord may retain any such excess as a Qualified Payment. In any event, Tenant will not be entitled to any abatement or reduction of the Base Rent or any other amount due hereunder except to the extent that such excess Remaining Proceeds result in Qualified Payments which reduce Stipulated Loss Value (and thus payments computed on the basis of Stipulated Loss Value) as provided in the definitions set out above. Further, notwithstanding the inadequacy of the Remaining Proceeds held by Landlord as Escrowed Proceeds, if any, or anything herein to the contrary, Tenant must, after any taking of less than all or substantially all of the Leased Property by condemnation and after any damage to the Leased Property by fire or other casualty, restore or improve the Leased Property or the remainder thereof to a value no less than Stipulated Loss Value (computed after the application of any Remaining Proceeds as a Qualified Payment) and to a safe and sightly condition. Any taking of so much of the Leased Property as, in Landlord's reasonable judgment, makes it impracticable to restore or improve the remainder thereof as required by the preceding sentence shall be considered a taking of substantially all the Leased Property for purposes of this Paragraph 4. (c) In the event of any taking of all or substantially all of the Leased Property, Landlord shall be entitled to apply all Remaining Proceeds as a Qualified Payment, notwithstanding the foregoing. In addition, if Stipulated Loss Value immediately prior to any taking of all or substantially all of the Leased Property by condemnation exceeds the sum of the Remaining Proceeds resulting from such condemnation, then Landlord shall be entitled to recover the excess from Tenant upon demand as an additional Qualified Payment, whereupon this Lease shall terminate. (d) Nothing herein contained shall be construed to prevent Tenant from obtaining and applying as it deems appropriate any separate award from any condemning authority or from any insurer for a taking of or damage to Tenant's personal property not included in the Leased Property or for moving expenses or business interruption, provided, such award is not combined with and does not reduce the award for any taking of the Leased Property, including Tenant's interest therein. Further, notwithstanding anything to the contrary herein contained, if Remaining Proceeds held by Landlord during the term of this Lease shall exceed Stipulated Loss Value and any Rent payable by Tenant, then Tenant may get the excess by terminating this Lease in accordance with Paragraph 2 and purchasing such excess (which will then be held by Landlord as Escrowed Proceeds), together with any remaining interest of Landlord in the Leased Property, pursuant to the Purchase Agreement. (e) Landlord and Tenant each waive any right of recovery against the other, and the other's agents, officers or employees, for any damage to the Leased Property or to the personal property situated from time to time in or on the Leased Property resulting from fire or other casualty covered by a valid and collectible insurance policy; provided, however, that the waiver set forth in this subparagraph 4.(e) shall be effective insofar, but only insofar, as compensation for such damage or loss is actually recovered by the waiving party (net of costs of collection) under the policy notwithstanding the waivers set out in this paragraph. Tenant shall cause the insurance policies required of Tenant by this Lease to be properly endorsed, if necessary, to prevent any loss of coverage because of the waivers set forth in this paragraph. If such endorsements are not available, the waivers set forth in this paragraph shall be ineffective to the extent that such waivers would cause required insurance with respect to the Leased Property to be impaired. 6. No Lease Termination. (a) Status of Lease. Except as expressly provided herein, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease, nor shall Tenant be entitled to any abatement of the Rent, nor shall the obligations of Tenant under this Lease be excused, for any reason whatsoever, including without limitation any of the following: (i) any damage to or the destruction of all or any part of the Leased Property from whatever cause, (ii) the taking of the Leased Property or any portion thereof by eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of Tenant's use of all or any portion of the Leased Property or any interference with such use by governmental action or otherwise, (iv) any eviction of Tenant or of anyone claiming through or under Tenant by paramount title or otherwise (provided, if Tenant is wrongfully evicted by Landlord or by any third party lawfully claiming through or under Landlord, other than Tenant or a third party claiming through or under Tenant, then Tenant will have the remedies described in Paragraph 14 below), (v) any default on the part of Landlord under this Lease or under any other agreement to which Landlord and Tenant are parties, (vi) the inadequacy in any way whatsoever of the design or construction of any improvements included in the Leased Property, it being understood that Landlord has not made and will not make any representation express or implied as to the adequacy thereof, or (vii) any other cause whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent of the covenants and agreements of Landlord, that the Base Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated or limited pursuant to an express provision of this Lease. However, nothing in this Paragraph shall be construed as a waiver by Tenant of any right Tenant may have at law or in equity to (i) recover monetary damages for any default under this Lease by Landlord that Landlord fails to cure within the period provided in Paragraph 14, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by Landlord of any of the express covenants, agreements, conditions or provisions of this Lease, or (iii) a decree compelling performance of any of the express covenants, agreements, conditions or provisions of this Lease. (b) Waiver By Tenant. Without limiting the foregoing, Tenant waives to the extent permitted by Applicable Laws, except as otherwise expressly provided herein, all rights to which Tenant may now or hereafter be entitled by law (including any such rights arising because of any implied "warranty of suitability" or other warranty under Applicable Laws) (i) to quit, terminate or surrender this Lease or the Leased Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Base Rent or any other sums payable under this Lease. 7. Purchase Agreement, Pledge Agreement and Environmental Indemnity. Tenant acknowledges and agrees that nothing contained in this Lease shall limit, modify or otherwise affect any of Tenant's obligations under the Purchase Agreement, Pledge Agreement or Environmental Indemnity, which obligations are intended to be separate, independent and in addition to, and not in lieu of, the obligations established by this Lease. In the event of any inconsistency between the terms and provisions of the Purchase Agreement, Pledge Agreement or Environmental Indemnity and the terms and provisions of this Lease, the terms and provisions of the Purchase Agreement, Pledge Agreement or Environmental Indemnity (as the case may be) shall control. 8. Use and Condition of Leased Property. (a) Use. Subject to the Permitted Encumbrances and the terms hereof, Tenant may use and occupy the Leased Property so long as no Event of Default occurs hereunder, but only for the following purposes and other lawful purposes incidental thereto: (i) research and development of computer-related and other electronic products; (ii) administrative and office space; and (iii) distribution and warehouse storage of computer-related and other electronic products; and (iv) assembly of computer-related and other electronic products using components manufactured elsewhere, but not including the manufacture of computer chips on-site; and (v) cafeteria, library, fitness center and other support function uses that Tenant may provide to its employees. Although the term "electronic products" in this subparagraph may include products designed to detect, monitor, neutralize, handle or process Hazardous Substances, the use of the Leased Property by Tenant shall not include bringing Hazardous Substances onto the Leased Property for the purpose of researching, testing or demonstrating any such products. (b) Condition. Tenant accepts the Leased Property (and will accept the same upon any purchase of the Landlord's interest therein) in its present state, AS IS, and without any representation or warranty, express or implied, as to the condition of such property or as to the use which may be made thereof. Tenant also accepts the Leased Property without any representation or warranty, express or implied, by Landlord regarding the title thereto or the rights of any parties in possession of any part thereof, except as set forth in subparagraph 9.(a). Landlord shall not be responsible for any latent or other defect or change of condition in the Land, Improvements, fixtures and personal property forming a part of the Leased Property, and the Rent hereunder shall in no case be withheld or diminished because of any latent or other defect in such property, any change in the condition thereof or the existence with respect thereto of any violations of Applicable Laws. Nor shall Landlord be required to furnish to Tenant any facilities or service of any kind, such as, but not limited to, water, steam, heat, gas, hot water, electricity, light or power. (c) Consideration of and Scope of Waiver. The provisions of subparagraph 7.(b) above have been negotiated by the Landlord and Tenant after due consideration for the Rent payable hereunder and are intended to be a complete exclusion and negation of any representations or warranties of the Landlord, express or implied, with respect to the Leased Property that may arise pursuant to any law now or hereafter in effect, or otherwise. However, such exclusion of representations and warranties by Landlord is not intended to impair any representations or warranties made by other parties, including Seller, the benefit of which is to pass to Tenant during the Term because of the definition of Personal Property and Leased Property above. 9. Other Representations, Warranties and Covenants of Tenant. Tenant represents, warrants and covenants as follows: (a) Financial Matters. Tenant is solvent and has no outstanding liens, suits, garnishments or court actions which could render Tenant insolvent. There has not been filed by or, to Tenant's knowledge, against Tenant a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to Tenant or any significant portion of Tenant's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the federal Bankruptcy Code or any state law. The financial statements and all financial data heretofore delivered to Landlord relating to Tenant have been prepared in accordance with GAAP in all material respects. No material adverse change has occurred in the financial position of Tenant as reflected in Tenant's financial statements covering the fiscal period ended May 31, 1996. (b) Existing Contract. Except to the extent required of Landlord under subparagraph 9.(b), Tenant shall satisfy all surviving obligations of Tenant under the Existing Contract and under other agreements described therein. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all Losses imposed on or asserted against or incurred by Landlord at any time and from time to time by reason of, in connection with or arising out of any obligations imposed by the Existing Contract or the other agreements described therein. THE INDEMNITY SET OUT IN THIS SUBPARAGRAPH SHALL APPLY EVEN IF THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE ORDINARY NEGLIGENCE (AS DEFINED ABOVE) OF LANDLORD; provided, such indemnity shall not apply to Losses proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or willful misconduct of Landlord. Because Tenant hereby assumes and agrees to satisfy all surviving obligations of Tenant under the Existing Contract and the other agreements described therein, no failure by Landlord to take any action required by the Existing Contract or such other agreements (save and except any actions required of Landlord under subparagraph 9.(b)) shall, for the purposes of this indemnity, be deemed to be caused by the Active Negligence, gross negligence or willful misconduct of Landlord. The foregoing indemnity is in addition to the other indemnities set out herein and shall not terminate upon the closing of any sale of Landlord's interest in the Leased Property pursuant to the provisions of the Purchase Agreement or the termination of this Lease. (c) No Default or Violation. The execution, delivery and performance by Tenant of this Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity do not and will not constitute a breach or default under any other material agreement or contract to which Tenant is a party or by which Tenant is bound or which affects the Leased Property or Tenant's use, occupancy or operation of the Leased Property or any part thereof and do not, to the knowledge of Tenant, violate or contravene any law, order, decree, rule or regulation to which Tenant is subject, and such execution, delivery and performance by Tenant will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance on, or security interest in, Tenant's property pursuant to the provisions of any of the foregoing. (d) Compliance with Covenants and Laws. The intended use of the Leased Property by Tenant complies, or will comply after Tenant obtains readily available permits, in all material respects with all applicable restrictive covenants, zoning ordinances and building codes, flood disaster laws, applicable health, safety and environmental laws and regulations, the Americans with Disabilities Act and other laws pertaining to disabled persons, and all other applicable laws, statutes, ordinances, rules, permits, regulations, orders, determinations and court decisions (all of the foregoing are herein sometimes collectively called "Applicable Laws"). Tenant has obtained or will promptly obtain all utility, building, health and operating permits as may be required for Tenant's use of the Leased Property by any governmental authority or municipality having jurisdiction over the Leased Property. (e) Environmental Representations. To Tenant's knowledge and except as otherwise disclosed in the Environmental Report, as of the date hereof: (i) no Hazardous Substances Activity has occurred prior to the date of this Lease; (iii) neither Tenant nor any prior owner or operator of the Leased Property or any surrounding property has reported or been required to report any release of any Hazardous Substances on or from the Leased Property or the surrounding property pursuant to any Environmental Law; (iv) neither Tenant nor any prior owner or operator of the Leased Property or any surrounding property has received any warning, citation, notice of violation or other communication regarding a suspected or known release or discharge of Hazardous Substances on or from the Leased Property or regarding a suspected or known violation of Environmental Laws concerning the Leased Property from any federal, state or local agency; and (v) none of the following are located on the Leased Property: asbestos; urea formaldehyde foam insulation; transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million; any other Hazardous Substances other than Permitted Hazardous Substances; or any underground storage tank or tanks. Further, Tenant represents that to its knowledge the Environmental Report is not misleading or inaccurate in any material respect. (f) No Suits. There are no judicial or administrative actions, suits, proceedings or investigations pending or, to Tenant's knowledge, threatened that will affect Tenant's intended use of the Leased Property or the validity, enforceability or priority of this Lease, or Tenant's use, occupancy and operation of the Leased Property or any part thereof, and Tenant is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority that could materially and adversely affect the business or assets of Tenant and its Subsidiaries taken as a whole or Tenant's use, occupancy or operation of the Leased Property. No condemnation or other like proceedings are pending or, to Tenant's knowledge, threatened against the Leased Property. (g) Condition of Property. The Land as described in Exhibit A is shown on the plat included as part of the A.L.T.A. Survey prepared by Robert A. Smith, dated August 12, 1991, which was delivered to Landlord at the request of Tenant, subject, however, to that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records of Santa Clara County, California. All material improvements on the Land as of the date hereof are as shown on that survey, and except as shown on that survey there are no easements or encroachments visible or apparent from an inspection of the Real Property. Adequate provision has been made for the Leased Property to be served by electric, gas, storm and sanitary sewers, sanitary water supply, telephone and other utilities required for the use thereof. All streets, alleys and easements necessary to serve the Leased Property have been completed and are serviceable. The Leased Property is in a condition satisfactory for its use and occupancy. Tenant is not aware of any latent or patent material defects or deficiencies in the Real Property that, either individually or in the aggregate, could materially and adversely affect Tenant's use or occupancy or could reasonably be anticipated to endanger life or limb. (h) Organization. Tenant is duly incorporated and legally existing under the laws of the State of California. Tenant has all requisite power and has procured or will procure on a timely basis all governmental certificates of authority, licenses, permits, qualifications and other documentation required to lease and operate the Leased Property. Tenant has the corporate power and adequate authority, rights and franchises to own Tenant's property and to carry on Tenant's business as now conducted and is duly qualified and in good standing in each state in which the character of Tenant's business makes such qualification necessary (including, without limitation, the State of California) or, if it is not so qualified in a state other than California, such failure does not have a material adverse effect on the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (i) Enforceability. The execution, delivery and performance of this Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained and are not in contravention of or conflict with any Applicable Laws or any term or provision of Tenant's articles of incorporation or bylaws. This Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity are valid, binding and legally enforceable obligations of Tenant in accordance with their terms, except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application. (j) Not a Foreign Person. Tenant is not a "foreign person" within the meaning Sections 1445 and 7701 of the Code (i.e., Tenant is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (k) Omissions. To Tenant's knowledge, none of Tenant's representations or warranties contained in this Lease or any document, certificate or written statement furnished to Landlord by or on behalf of Tenant contains any untrue statement of a material fact or omits a material fact necessary in order to make the statements contained herein or therein (when taken in their entireties) not misleading. (l) Existence. Tenant shall continuously maintain its existence and its qualification to do business in the State of California. (m) Tenant Taxes. Tenant shall comply with all applicable tax laws and pay before the same become delinquent all taxes imposed upon it or upon its property where the failure to so comply or so pay would have a material adverse effect on the financial condition or operations of Tenant; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any such taxes and pending such contest Tenant shall not be deemed in default under this subparagraph if (1) Tenant diligently prosecutes such contest to completion in an appropriate manner, and (2) Tenant promptly causes to be paid any tax adjudged by a court of competent jurisdiction to be due, with all costs, penalties, and interest thereon, promptly after such judgment becomes final; provided, however, in any event such contest shall be concluded and the tax, penalties, interest and costs shall be paid prior to the date any writ or order is issued under which any of Tenant's property that is material to the business of Tenant and its Subsidiaries taken as a whole may be seized or sold because of the nonpayment thereof. (n) Operation of Property. Tenant shall operate the Leased Property in a good and workmanlike manner and in compliance with all Applicable Laws and will pay all fees or charges of any kind in connection therewith. Tenant shall not use or occupy, or allow the use or occupancy of, the Leased Property in any manner which violates any Applicable Law or which constitutes a public or private nuisance or which makes void, voidable or cancelable any insurance then in force with respect thereto. To the extent that any of the following would, individually or in the aggregate, materially and adversely affect the value of the Leased Property or Tenant's use, occupancy or operations on the Leased Property, Tenant shall not: (i) initiate or permit any zoning reclassification of the Leased Property; (ii) seek any variance under existing zoning ordinances applicable to the Leased Property; (iii) use or permit the use of the Leased Property in a manner that would result in such use becoming a nonconforming use under applicable zoning ordinances or similar laws, rules or regulations; (iv) execute or file any subdivision plat affecting the Leased Property; or (v) consent to the annexation of the Leased Property to any municipality. If a change in the zoning or other Applicable Laws affecting the permitted use or development of the Leased Property shall occur that Landlord determines will materially reduce the then-current market value of the Leased Property, and if after such reduction the Stipulated Loss Value shall substantially exceed the then-current market value of the Leased Property in the reasonable judgment of Landlord, then Tenant shall pay Landlord an amount equal to such excess for application as a Qualified Payment. Tenant shall make any payment required by the preceding sentence within one hundred eighty (180) days after it is requested by Landlord, and in any event shall make any such payment before the end of the Term. Tenant shall not impose any restrictive covenants or encumbrances upon the Leased Property without the prior written consent of the Landlord; provided, that such consent shall not be unreasonably withheld for any encumbrance or restriction that is made expressly subject to this Lease, as modified from time to time, and subordinate to Landlord's interest in the Leased Property by an agreement in form satisfactory to Landlord. Tenant shall not cause or permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Leased Property. Tenant shall not do any act whereby the market value of the Leased Property may be materially lessened. Tenant shall allow Landlord or its authorized representative to enter the Leased Property at any reasonable time to inspect the Leased Property and, after reasonable notice, to inspect Tenant's books and records pertaining thereto, and Tenant shall assist Landlord or Landlord's representative in whatever way reasonably necessary to make such inspections. If Tenant receives a written notice or claim from any federal, state or other governmental entity that the Leased Property is not in compliance in any material respect with any Applicable Law, or that any action may be taken against the owner of the Leased Property because the Leased Property does not comply with Applicable Law, Tenant shall promptly furnish a copy of such notice or claim to Landlord. Notwithstanding the foregoing, Tenant may in good faith, by appropriate proceedings, contest the validity and applicability of any Applicable Law with respect to the Leased Property, and pending such contest Tenant shall not be deemed in default hereunder because of a violation of such Applicable Law, if Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and if Tenant promptly causes the Leased Property to comply with any such Applicable Law upon a final determination by a court of competent jurisdiction that the same is valid and applicable to the Leased Property; provided, that in any event such contest shall be concluded and the violation of such Applicable Law must be corrected and any claims asserted against Landlord or the Leased Property because of such violation must be paid by Tenant, all prior to the date that (i) any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such violation or (ii) any action may be taken by any governmental authority against Landlord or any property owned by Landlord (including the Leased Property) because of such violation. (o) Debts for Construction. Tenant shall cause all debts and liabilities incurred in the construction, maintenance, operation and development of the Leased Property, including without limitation all debts and liabilities for labor, material and equipment and all debts and charges for utilities servicing the Leased Property, to be promptly paid. Notwithstanding the foregoing, Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted mechanic's or materialmen's lien and pending such contest Tenant shall not be deemed in default under this subparagraph (or subparagraphs 8.(t) or 8.(u)) because of the contested lien if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to Landlord's satisfaction any contested liens alleged to secure an amount in excess of $500,000 (individually or in the aggregate) (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the lien, interest and costs shall be paid prior to the date (i) any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (ii) any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. (p) Impositions. Tenant shall reimburse Landlord for (or, if requested by Landlord, will pay or cause to be paid prior to delinquency) all sales, excise, ad valorem, gross receipts, business, transfer, stamp, occupancy, rental and other taxes, levies, fees, charges, surcharges, assessments or penalties which arise out of or are attributable to this Lease or which are imposed upon Landlord or the Leased Property because of the ownership, leasing, occupancy, sale or operation of the Leased Property, or any part thereof, or relating to or required to be paid by the terms of any of the Permitted Encumbrances (collectively, herein called the "Impositions"), excluding only Excluded Taxes. If Landlord requires Tenant to pay any Impositions directly to the applicable taxing authority or other party entitled to collect the same, Tenant shall furnish Landlord with receipts showing payment of such Impositions and other amounts prior to delinquency; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted Imposition, and pending such contest Tenant shall not be deemed in default of this subparagraph (or subparagraphs 8.(t) or 8.(u)) because of the contested Imposition if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to the satisfaction of Landlord any lien asserted against the Leased Property and alleged to secure an amount in excess of $500,000 because of the contested Imposition, (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs, penalties and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the Impositions, penalties, interest and costs shall be paid prior to the date (i) any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (ii) any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. (q) Repair, Maintenance, Alterations and Additions. Tenant shall keep the Leased Property in good order, repair, operating condition and appearance (ordinary wear and tear excepted), causing all necessary repairs, renewals, replacements, additions and improvements to be promptly made, and will not allow any of the Leased Property to be materially misused, abused or wasted or to deteriorate. Tenant shall promptly replace any worn-out fixtures included within the Leased Property with fixtures comparable to the replaced fixtures when new and repair any damage caused by the removal of such fixtures. Further, Tenant shall not, without the prior written consent of Landlord, (i) remove from the Leased Property any fixtures of significant value, except such as are replaced by Tenant by articles of equal value, free and clear of any Lien (and for purposes of this clause "significant value" will mean any fixture that has a value of more than $100,000 or that, when considered together with all other fixtures removed and not replaced by Tenant by articles of equal suitability and value, has an aggregate value of $500,000 or more) or (ii) make any alteration to any Improvements which significantly reduce the fair market value or change the general character of the Leased Property, taken as a whole, or which impair in any significant manner the useful life or utility of the Improvements, taken as whole. Notwithstanding the foregoing provisions of this subparagraph 8.(q), Tenant may construct the following substantial new Improvements to the Leased Property and modify or remove existing Improvements as reasonably required in connection with such construction: (1) a new building and separate parking structure to be used as a data center; (2) an expansion of the cafeteria; and (3) an elevated walkway between Building 100 (which is on the Land) and Building 500 (which is on land adjacent to the Land and is presently leased to Tenant by Landlord pursuant to another lease agreement); provided, however: no Event of Default has occurred and is continuing; Tenant causes the construction to be performed in a good and workmanlike manner and in accordance with Applicable Laws; Tenant causes the construction to be completed in a manner that does not significantly reduce the fair market value of or change the general character of the Leased Property, taken as a whole, or impair in any significant manner the useful life or utility of the Improvements, taken as whole; in the case of the elevated walkway, Landlord must have approved (which approval will not be unreasonably withheld) an agreement which negates any easements or rights that would run with the land or prevent the removal of the walkway, except as expressly set forth in such agreement, if the same Person should cease to own both Building 100 and Building 500; and Tenant causes the construction to be completed prior to any Designated Sale Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than the Purchase Price. Upon request of Landlord made at any time when an Event of Default shall have occurred and be continuing, Tenant shall deliver to Landlord an inventory describing and showing the make, model, serial number and location of all fixtures and personalty, if any, included in the Leased Property with a certification by Tenant that such inventory is a true and complete schedule of all such fixtures and personalty and that all items specified in the inventory are covered hereby free and clear of any Lien other than the Permitted Encumbrances described in Exhibit B. (r) Insurance and Casualty. Throughout the Term, Tenant will keep all Improvements (including all alterations, additions and changes made to the Improvements) which are located within the Leased Property insured under an all-risk property insurance policy (excluding from coverage damage by flood or earthquake, but not excluding other perils normally included within the definitions of extended coverage, vandalism and malicious mischief) in the amount of one hundred percent (100%) of the replacement value with endorsements for contingent liability from operation of building laws, increased cost of construction and demolition costs which may be necessary to comply with building laws. Tenant will be responsible for determining the amount of property insurance to be maintained, but such coverage will be on an agreed value basis to eliminate the effects of coinsurance. Such insurance shall be issued by an insurance company or companies rated by the A.M. Best Company of Oldwick, New Jersey as having a policyholder's rating of A or better and a reported financial information rating of X or better. Any deductible applicable to such insurance shall not exceed $500,000. Such insurance shall cover not only the value of Tenant's interest in the Improvements, but also the interest of Landlord, and such insurance shall include provisions that Landlord must be notified at least ten (10) days prior to any cancellation or reduction of insurance coverage. With this Lease Tenant shall deliver to Landlord a certificate from the applicable insurer or its authorized agent evidencing the insurance required by this subparagraph and any additional insurance which shall be taken out upon any part of the Leased Property. Thereafter, Tenant shall deliver to Landlord certificates from the applicable insurer or its authorized agent of renewals or replacements of all such policies of insurance at least five (5) days before any such insurance shall expire. Tenant further agrees that all such policies shall provide that proceeds thereunder will be payable to Landlord as Landlord's interest may appear. If Tenant fails to obtain any insurance required by this Lease or to provide confirmation of any such insurance as required by this Lease, Landlord shall be entitled (but not required) to obtain the insurance that Tenant has failed to obtain or for which Tenant has not provided the required confirmation and, without limiting Landlord's other remedies under the circumstances, Landlord may require Tenant to reimburse Landlord for the cost of such insurance and to pay interest thereon computed at the Default Rate from the date such cost was paid by Landlord until the date of reimbursement by Tenant. In the event any of the Leased Property is destroyed or damaged by fire, explosion, windstorm, hail or by any other casualty against which insurance shall have been required hereunder, (i) Landlord may, but shall not be obligated to, make proof of loss if not made promptly by Tenant, (ii) each insurance company concerned is hereby authorized and directed to make payment for such loss directly to Landlord for application as required by Paragraph 4, and (iii) Landlord's consent must be obtained for any settlement, adjustment or compromise of any claims for loss, damage or destruction under any policy or policies of insurance (provided, that if any such claim is for less than $2,000,000 and no Event of Default shall have occurred and be continuing, Tenant alone shall have the right to settle, adjust or compromise the claim as Tenant deems appropriate; and, provided further, that any disagreement between Landlord and Tenant about the amount for which any such claim should be settled shall, at the request of either party, be resolved as provided in Exhibit D, unless an Event of Default shall have occurred and be continuing, in which case Landlord alone shall have the right to settle, adjust or compromise the claim as Landlord deems appropriate). If any casualty shall result in damage to or loss or destruction of the Leased Property in excess of $1,000,000, Tenant shall give immediate notice thereof to Landlord and Paragraph 4 shall apply. Notwithstanding the foregoing provisions of this subparagraph 8.(r), following any fire or other casualty involving the Leased Property, if insurance proceeds totaling not more than $2,000,000 are to be recovered as a result thereof, or if in connection therewith Tenant shall have executed a Voluntary Minimum Pledge Commitment and delivered any additional Collateral required to satisfy such Voluntary Minimum Pledge Commitment, Tenant shall be entitled to receive directly and hold such insurance proceeds, so long as no Event of Default shall have occurred and be continuing and so long as Tenant applies such proceeds towards the restoration, replacement and repair of the Leased Property as required by subparagraph 4.(b). (s) Condemnation. Immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Leased Property or any portion thereof, or any other similar governmental or quasi-governmental proceedings arising out of injury or damage to the Leased Property or any portion thereof, Tenant shall notify Landlord of the pendency of such proceedings. Tenant shall, at its expense, diligently prosecute any such proceedings and shall consult with Landlord, its attorneys and experts and cooperate with them as reasonably requested in the carrying on or defense of any such proceedings. All proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Leased Property and all judgments, decrees and awards for injury or damage to the Leased Property shall be paid to Landlord and applied as provided in Paragraph 4 above. Landlord is hereby authorized, in the name of Tenant, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the Leased Property. Landlord shall not be, in any event or circumstances, liable or responsible for failure to collect, or to exercise diligence in the collection of, any such proceeds, judgments, decrees or awards. Notwithstanding the foregoing provisions of this subparagraph 8.(s), following any condemnation or sale in lieu of condemnation involving the Leased Property, if condemnation or sale proceeds totaling not more than $2,000,000 are to be recovered as a result thereof, or if in connection therewith Tenant shall have executed a Voluntary Minimum Pledge Commitment and delivered any additional Collateral required to satisfy such Voluntary Minimum Pledge Commitment, Tenant shall be entitled to receive directly and hold such condemnation or sale proceeds, so long as no Event of Default shall have occurred and be continuing and so long as Tenant applies such proceeds towards the restoration, replacement and repair of the remainder of the Leased Property as required by subparagraph 4.(b). (t) Protection and Defense of Title. If any encumbrance or title defect whatsoever affecting Landlord's fee interest in the Leased Property is claimed or discovered (excluding Permitted Encumbrances, this Lease and any other encumbrance which is claimed by Landlord or lawfully claimed through or under Landlord and which is not claimed by, through or under Tenant) or if any legal proceedings are instituted with respect to title to the Leased Property, Tenant shall give prompt written notice thereof to Landlord and at Tenant's own cost and expense will promptly cause the removal of any such encumbrance and cure any such defect and will take all necessary and proper steps for the defense of any such legal proceedings, including but not limited to the employment of counsel, the prosecution or defense of litigation and the release or discharge of all adverse claims. If Tenant fails to promptly remove any such encumbrance or title defect (other than a Lien Tenant is contesting as expressly permitted by and in accordance with subparagraph 8.(o) or subparagraph 8.(p)), Landlord (whether or not named as a party to legal proceedings with respect thereto) shall be entitled to take such additional steps as in its judgment may be necessary or proper to remove such encumbrance or cure such defect or for the defense of any such attack or legal proceedings or the protection of Landlord's fee interest in the Leased Property, including but not limited to the employment of counsel, the prosecution or defense of litigation, the compromise or discharge of any adverse claims made with respect to the Leased Property, the removal of prior liens or security interests, and all expenses (including Attorneys' Fees) so incurred of every kind and character shall be a demand obligation owing by Tenant. For purposes of this subparagraph 8.(t), Tenant shall be deemed to be acting promptly to remove any encumbrance or to cure any title defect, other than a Lien which Tenant has itself granted or authorized, so long as Tenant (or a title insurance company obligated to do so) is in good faith by appropriate proceedings contesting the validity and applicability of the encumbrance or defect, and pending such contest Tenant shall not be deemed in default under this subparagraph because of the encumbrance or defect; provided, with respect to a contest of any encumbrance or title defect which is the subject of subparagraphs 8.(o) or 8.(p), Tenant (or the applicable title insurance company) must satisfy the conditions and requirements for a permitted contest set forth in those subparagraphs, and with respect to a contest of any other encumbrance or title defect, Tenant (or the applicable title insurance company) must: (1) diligently prosecute the contest to completion in a manner reasonably satisfactory to Landlord; (2) immediately remove the encumbrance or cure the defect, as and to the extent reasonably required to preserve Landlord's indefeasible fee estate in the Leased Property and to prevent any significant adverse impact the encumbrance or defect may have on the value of the Leased Property, upon a final determination by a court of competent jurisdiction that the encumbrance or defect is valid and applicable to the Leased Property; and (3) in any event conclude the contest and remove the encumbrance or cure the defect and pay any claims asserted against Landlord or the Leased Property because of such encumbrance or defect, all prior to (i) any Designated Sale Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than the Purchase Price, (ii) the date any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such encumbrance or defect or (iii) the date any action may be taken against Landlord or any property owned by Landlord (including the Leased Property) by any governmental authority or any other Person who has or claims rights superior to Landlord because of the encumbrance or defect. (u) No Liens on the Leased Property. Tenant shall not, without the prior written consent of Landlord, create, place or permit to be created or placed, or through any act or failure to act, acquiesce in the placing of, or allow to remain, any Lien (except the lien for property taxes or assessments assessed against the Leased Property which are not delinquent and any Lien Tenant is contesting as expressly permitted by and in accordance with subparagraph 8.(o) or subparagraph 8.(p)), against or covering the Leased Property or any part thereof (other than any Lien which is lawfully claimed through or under Landlord and which is not claimed by, through or under Tenant) regardless of whether the same are expressly or otherwise subordinate to this Lease or Landlord's interest in the Leased Property, and should any prohibited Lien exist or become attached hereafter in any manner to any part of the Leased Property without the prior written consent of Landlord, Tenant shall cause the same to be promptly discharged and released to the satisfaction of Landlord. (v) Books and Records. Tenant shall keep books and records that are accurate and complete in all material respects for the construction and maintenance of the Leased Property and will permit all such books and records (including without limitation all contracts, statements, invoices, bills and claims for labor, materials and services supplied for the construction and operation of any Improvements) to be inspected and copied by Landlord and its duly accredited representatives at all times during reasonable business hours; provided that so long as Tenant remains in possession of the Leased Property, Landlord or Landlord's representative will, before making any such inspection or copying any such documents, if then requested to do so by Tenant to maintain Tenant's security: (i) sign in at Tenant's security or information desk if Tenant has such a desk on the premises, (ii) wear a visitor's badge or other reasonable identification provided by Tenant when Landlord or Landlord's representative first arrives at the Leased Property, (iii) permit an employee of Tenant to observe such inspection or work, and (iv) comply with other similar reasonable nondiscriminatory security requirements of Tenant that do not, individually or in the aggregate, interfere with or delay inspections or copying by Landlord authorized by this subparagraph.. This subparagraph shall not be construed as requiring Tenant to regularly maintain separate books and records relating exclusively to the Leased Property; provided, however, that if requested by Landlord at any time when an Event of Default shall have occurred and be continuing, Tenant shall construct or abstract from its regularly maintained books and records information required by this subparagraph relating to the Leased Property. (w) Financial Statements; Required Notices; Certificates as to Default. Tenant shall deliver to Landlord and to each Participant of which Tenant has been notified: (i) as soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of Tenant, a consolidated balance sheet of Tenant and its consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows of Tenant and its consolidated Subsidiaries for such fiscal year, all in reasonable detail and all prepared in accordance with GAAP and accompanied by a report and opinion of accountants of national standing selected by Tenant, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualification or exception which Landlord determines, in Landlord's reasonable discretion, is unacceptable; provided that notwithstanding the foregoing, for so long as Tenant is a company subject to the periodic reporting requirements of Section 12 of the Securities Exchange Act of 1934, as amended, Tenant shall be deemed to have satisfied its obligations under this clause (i) so long as Tenant delivers to Landlord the same annual report and report and opinion of accountants that Tenant delivers to its shareholders; (ii) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Tenant, the consolidated balance sheet of Tenant and its consolidated Subsidiaries as of the end of such quarter and the consolidated income statement and the consolidated statement of cash flows of Tenant and its consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and all prepared in accordance with GAAP and certified by a Responsible Financial Officer of Tenant (subject to year-end adjustments); provided that notwithstanding the foregoing, for so long as Tenant is a company subject to the periodic reporting requirements of Section 12 of the Securities Exchange Act of 1934, as amended, Tenant shall be deemed to have satisfied its obligations under this clause (ii) so long as Tenant delivers to Landlord the same quarterly reports, certified by a Responsible Financial Officer of Tenant (subject to year-end adjustments), that Tenant delivers to its shareholders; (iii) together with the financial statements furnished in accordance with subparagraph 8.(w)(ii) and 8.(w)(i), a certificate of a Responsible Financial Officer of Tenant in substantially the form attached hereto as Exhibit E: (i) certifying that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a brief statement as to the nature thereof and the action which is proposed to be taken with respect thereto, (ii) certifying that the representations of Tenant set forth in Paragraph 8 of this Lease are true and correct in all material respects as of the date thereof as though made on and as of the date thereof or, if not then true and correct, a brief statement as to why such representations are no longer true and correct, and (iii) with computations demonstrating compliance with the financial covenants contained in subparagraph 8.(ac); (iv) promptly after any change in the rating of Tenant's senior, unsecured debt by Standard and Poor's Corporation or Moody's Investor Service, Inc. or in Tenant's Debt to Capital Ratio (as defined in subparagraph 1.(bo)), which will result in a change in the Spread (as defined in subparagraph 1.(bo)), a certificate of a Responsible Financial Officer of Tenant in substantially the form attached hereto as Exhibit F with computations evidencing Tenant's calculation of the Spread after giving effect to such changes; (v) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which Tenant sends to Tenant's stockholders, and copies of all regular, periodic and special reports, and all registration statements (other than registration statements on Form S-8 or any form substituted therefor) which Tenant files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (vi) as soon as possible and in any event within five (5) Business Days after a Responsible Financial Officer of Tenant becomes aware of the occurrence of each Default or Event of Default with respect to the Affirmative Financial Covenants described in subparagraph 9.(ae) or the Negative Covenants described in subparagraph 9.(af), a statement of a Responsible Financial Officer of Tenant setting forth details of such Default or Event of Default and the action which Tenant has taken and proposes to take with respect thereto; (vii) upon request by Landlord, a statement in writing certifying that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications) and the dates to which the Base Rent has been paid and either stating that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default under this Lease has occurred and is continuing, a brief statement as to the nature thereof; it being intended that any such statement by Tenant may be relied upon by any prospective purchaser or mortgagee of the Leased Property and by any Participant; and (viii) such other information respecting the condition or operations, financial or otherwise, of Tenant, of any of its Subsidiaries or of the Leased Property as Landlord or any Participant through Landlord may from time to time reasonably request. Landlord is hereby authorized to deliver a copy of any information or certificate delivered to it pursuant to this subparagraph 8.(w) to any Participant and to any regulatory body having jurisdiction over Landlord that requires or requests it. (x) Further Assurances. Tenant shall, on request of Landlord, (i) promptly correct any defect, error or omission which may be discovered in the contents of this Lease or in any other instrument executed in connection herewith or in the execution or acknowledgment thereof; (ii) execute, acknowledge, deliver and record or file such further instruments and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of this Lease and to subject to this Lease any property intended by the terms hereof to be covered hereby including specifically, but without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Leased Property; (iii) execute, acknowledge, deliver, procure and record or file any document or instrument deemed advisable by Landlord to protect its rights in and to the Leased Property against the rights or interests of third persons; and (iv) provide such certificates, documents, reports, information, affidavits and other instruments and do such further acts as may be necessary, desirable or proper in the reasonable determination of Landlord to enable Landlord, Landlord's Parent and other Participants to comply with the requirements or requests of any agency or authority having jurisdiction over them. (y) Fees and Expenses; General Indemnification; Increased Costs; and Capital Adequacy Charges. (i) Except for any costs paid by Landlord with the proceeds of the Initial Funding Advance as part of the Closing Costs, Tenant shall pay (and shall indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses incurred by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer in connection with or because of (A) the ownership of any interest in or operation of the Leased Property, (B) the negotiation or administration of this Lease, the Purchase Agreement, the Pledge Agreement, the Environmental Indemnity or the Participation Agreement (excluding the negotiation or administration of the Participation Agreement between Landlord and Landlord's Parent), or (C) 3COM's request for assistance in identifying any new Participant pursuant to Paragraph 18 of the Purchase Agreement, whether such Losses are incurred at the time of execution of this Lease or at any time during the Term. Costs and expenses included in such Losses may include, without limitation, all appraisal fees, filing and recording fees, inspection fees, survey fees, taxes (other than Excluded Taxes), brokerage fees and commissions, abstract fees, title policy fees, Uniform Commercial Code search fees, escrow fees, Attorneys' Fees and environmental consulting fees incurred by Landlord with respect to the Leased Property. If Landlord pays or reimburses Landlord's Parent for any such Losses, Tenant shall reimburse Landlord for the same notwithstanding that Landlord may have already received any payment from any other Participant on account of such Losses, it being understood that the other Participant may expect repayment from Landlord when Landlord does collect the required reimbursement from Tenant. (ii) Tenant shall also pay (and indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses, including Attorneys' Fees, incurred or expended by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer or in connection with (A) the breach by Tenant of any covenant of Tenant herein or in any other instrument executed in connection herewith or (B) Landlord's exercise in a lawful manner of any of Landlord's remedies hereunder or under Applicable Law or Landlord's protection of the Leased Property and Landlord's interest therein as permitted hereunder or under Applicable Law. (However, the indemnity in the preceding sentence shall not be construed to make Tenant liable to both Landlord and any Participant or other party claiming through Landlord for the same damages. For example, so long as Landlord remains entitled to recover any past due Base Rent from Tenant, no Participant shall be entitled to collect a percentage of the same Base Rent from Tenant.) Tenant shall further indemnify and hold harmless Landlord and all other Indemnified Parties against, and reimburse them for, all Losses which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or damage to the property of third parties occurring in or upon or in the vicinity of the Leased Property through any cause whatsoever. THE FOREGOING INDEMNITY FOR INJURY, DEATH OR PROPERTY DAMAGE SHALL APPLY EVEN WHEN INJURY, DEATH OR PROPERTY DAMAGE IN, ON OR IN THE VICINITY OF THE LEASED PROPERTY RESULTS IN WHOLE OR IN PART FROM THE ORDINARY NEGLIGENCE (AS DEFINED ABOVE) OF AN INDEMNIFIED PARTY; provided, such indemnity shall not apply to Losses suffered by an Indemnified Party that were proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or wilful misconduct of such Indemnified Party. (iii) If, after the date hereof, due to either (A) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (B) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to Landlord's Parent or any other Participant of agreeing to make or making, funding or maintaining advances to Landlord in connection with the Leased Property, then Tenant shall from time to time, upon demand by Landlord pay to Landlord for the account of Landlord's Parent or such other Participant, as the case may be, additional amounts sufficient to compensate Landlord's Parent or the Participant for such increased cost. An increase in costs resulting from any imposition or increase of reserve requirements applicable to Collateral held from time to time by Landlord's Parent or other Participants pursuant to the Pledge Agreement would be an increase covered by the preceding sentence. A certificate as to the amount of any increased cost covered by this subparagraph, submitted to Landlord and Tenant by Landlord's Parent or the other Participant, shall be conclusive and binding for purposes of determining Tenant's obligations hereunder, absent clear and demonstrable error. (iv) Landlord's Parent or any other Participant may demand additional payments (herein called "Capital Adequacy Charges") if Landlord's Parent or the other Participant determines that any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects the amount of capital to be maintained by it and that the amount of such capital is increased by or based upon the existence of Funding Advances made or to be made to Landlord to permit Landlord to maintain Landlord's investment in the Leased Property. To the extent that Landlord's Parent or the other Participant demands Capital Adequacy Charges as compensation for the additional capital requirements reasonably allocable to such advances, Tenant shall pay to Landlord for the account of Landlord's Parent or the other Participant, as the case may be, the amount so demanded. (v) Any amount to be paid to Landlord, Landlord's Parent or any other Indemnified Party under this subparagraph 8.(y) shall be a demand obligation owing by Tenant. Tenant's indemnities and obligations under this subparagraph 8.(y) shall survive the termination or expiration of this Lease with respect to any circumstance or event existing or occurring prior to such termination or expiration. (z) Liability Insurance. Tenant shall maintain one or more policies of commercial general liability insurance against claims for bodily injury or death and property damage occurring or resulting from any occurrence in or upon the Leased Property, in standard form and with an insurance company or companies rated by the A.M. Best Company of Oldwick, New Jersey as having a policyholder's rating of A or better and a reported financial information rating of X or better, such insurance to afford immediate protection, to the aggregate limit of not less than $10,000,000 combined single limit for bodily injury and property damage in respect of any one accident or occurrence, with not more than $500,000 self- insured retention. Such commercial general liability insurance shall include blanket contractual liability coverage which insures contractual liability under the indemnifications set forth in this Lease (other than the indemnifications set forth in Paragraph 11 concerning environmental matters), but such coverage or the amount thereof shall in no way limit such indemnifications. The policy evidencing such insurance shall name as additional insureds Landlord and all Participants of which Tenant has been notified (including Landlord's Parent and ABN AMRO Bank N.V.). Tenant shall maintain with respect to each policy or agreement evidencing such commercial general liability insurance such endorsements as may be reasonably required by Landlord and shall at all times deliver and maintain with Landlord written confirmation (in form satisfactory to Landlord) with respect to such insurance from the applicable insurer or its authorized agent, which confirmation must provide that insurance coverage will not be canceled or reduced without at least ten (10) days notice to Landlord. Not less than five (5) days prior to the expiration date of each policy of insurance required of Tenant pursuant to this subparagraph, Tenant shall deliver to Landlord a certificate evidencing a paid renewal policy or policies. (aa) Permitted Encumbrances. Except to the extent expressly required of Landlord by subparagraph 9.(b), Tenant shall comply with and will cause to be performed all of the covenants, agreements and obligations imposed upon the owner of the Leased Property in the Permitted Encumbrances in accordance with their respective terms and provisions. Tenant shall not, without the prior written consent of Landlord, modify or permit any modification of any Permitted Encumbrance in any manner that could impose significant monetary obligations upon Landlord or any subsequent owner of the Leased Property, could significantly and adversely affect the value of the Leased Property, could impose any lien to secure payment or performance obligations against any part of the Leased Property or would otherwise be material and adverse to Landlord. (bb) Environmental. (i) Environmental Covenants. Tenant covenants: a) not to cause or permit the Leased Property to be in violation of, or do anything or permit anything to be done which will subject the Leased Property to any remedial obligations under, any Environmental Laws, including without limitation CERCLA and RCRA, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances pertaining to the Leased Property; b) not to conduct or authorize others to conduct Hazardous Substance Activities on the Leased Property, except Permitted Hazardous Substance Use; c) to the extent required by Environmental Laws, to remove Hazardous Substances from the Leased Property (or if removal is prohibited by law, to take whatever action is required by law) promptly upon discovery; and d) not to discharge or authorize the discharge of anything (including Permitted Hazardous Substances) from the Leased Property into groundwater or surface water that would require any permit under applicable Environmental Laws, other than storm water runoff. If Tenant's failure to cure any breach of the covenants listed above in this subparagraph (i) continues beyond the Environmental Cure Period (as defined below), Landlord may, in addition to any other remedies available to it, after notifying Tenant of the remediation efforts Landlord believes are needed, cause the Leased Property to be freed from all Hazardous Substances (or if removal is prohibited by law, to take whatever action is required by law), and the cost of the removal shall be a demand obligation owing by Tenant to Landlord. Further, subject to the provisions of subparagraph 11.(c) below, Tenant agrees to indemnify Landlord against all Losses incurred by or asserted or proven against Landlord in connection therewith. As used in this subparagraph, "Environmental Cure Period" means the period ending on the earlier of: (1) one hundred and eighty days (180) after Tenant is notified of the breach which must be cured within such period, or such longer period as is reasonably required for any cure that Tenant pursues with diligence pursuant to and in accordance with an Approved Plan (as defined below), (2) the date any writ or order is issued for the levy or sale of any property owned by Landlord (including the Leased Property) or any criminal action is instituted against Landlord or any of its directors, officers or employees because of the breach which must be cured within such period, (3) the end of the Term. As used in this subparagraph, an "Approved Plan" means a plan of remediation of a violation of Environmental Laws for which Tenant has obtained, within one hundred and eighty days (180) after Tenant is notified of the applicable breach of the covenants listed above in this subparagraph (i), the written approval of the governmental authority with primary jurisdiction over the violation and with respect to which no other governmental authority asserting jurisdiction has claimed such plan is inadequate. (ii) Environmental Inspections and Reviews. Landlord reserves the right to retain an independent professional consultant to review any report prepared by Tenant or to conduct Landlord's own investigation to confirm whether Hazardous Substances Activities or the discharge of anything into groundwater or surface water has occurred in violation of the preceding subparagraph (i), but Landlord's right to reimbursement for the fees of such consultant shall be limited to the following circumstances: (1) an Event of Default shall have occurred; (2) Landlord shall have retained the consultant to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) Landlord shall have retained the consultant to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) Landlord shall have retained the consultant because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with the preceding subparagraph (i). Tenant grants to Landlord and to Landlord's agents, employees, consultants and contractors the right during reasonable business hours and after reasonable notice to enter upon the Leased Property to inspect the Leased Property and to perform such tests as are reasonably necessary or appropriate to conduct a review or investigation of Hazardous Substances on, or any discharge into groundwater or surface water from, the Leased Property. Without limiting the generality of the foregoing, Tenant agrees that Landlord will have the same right, power and authority to enter and inspect the Leased Property as is granted to a secured lender under Section 2929.5 of the California Civil Code. Tenant shall promptly reimburse Landlord for the cost of any such inspections and tests, but only when the inspections and tests are (1) ordered by Landlord after an Event of Default; (2) ordered by Landlord to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) ordered by Landlord to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) ordered because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with the preceding subparagraph (i). (iii) Notice of Environmental Problems. Tenant shall immediately advise Landlord of (i) any discovery of any event or circumstance which would render any of the representations contained in subparagraph 8.(e) inaccurate in any material respect if made at the time of such discovery, (ii) any remedial action taken by Tenant in response to any (A) discovery of any Hazardous Substances other than Permitted Hazardous Substances on, under or about the Leased Property or (B) any claim for damages resulting from Hazardous Substance Activities, (iii) Tenant's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Leased Property which could cause the Leased Property or any part thereof to be subject to any ownership, occupancy, transferability or use restrictions under Environmental Laws, or (iv) any investigation or inquiry affecting the Leased Property by any governmental authority in connection with any Environmental Laws. In such event, Tenant shall deliver to Landlord within thirty (30) days after Landlord's request, a preliminary written environmental plan setting forth a general description of the action that Tenant proposes to take with respect thereto, if any, to bring the Leased Property into compliance with Environmental Laws or to correct any breach by Tenant of the covenants listed above in subparagraph (i), including, without limitation, any proposed corrective work, the estimated cost and time of completion, the name of the contractor and a copy of the construction contract, if any, and such additional data, instruments, documents, agreements or other materials or information as Landlord may reasonably request. (cc) Affirmative Financial Covenants. (i) Quick Ratio. Tenant shall maintain a ratio of (A) Quick Assets of Tenant and its Subsidiaries (determined on a consolidated basis) to (B) the sum of Current Liabilities of Tenant and its Subsidiaries (determined on a consolidated basis), of not less than 1.00 to 1.00. As used in this subparagraph 8.(ac), "Quick Assets" means the sum (without duplication of any item) of the Collateral held and pledged under the Pledge Agreement, plus unencumbered cash, plus unencumbered short term cash investments, plus other unencumbered marketable securities which are classified as short term investments according to GAAP, plus the fair market value of unencumbered Long-Term Investments, plus unencumbered current net accounts receivable. For purposes of determining Quick Assets, assets will be deemed to be "unencumbered" if they are actually unencumbered or if they are encumbered only by Liens, from which, at the time of the applicable determination of Quick Assets, Tenant is entitled to a release of such assets upon no more than ninety days' notice, without any payment (other than the payment of ministerial fees and costs), without subjecting other assets to any Lien and without otherwise satisfying any condition that is beyond Tenant's control. As used herein "Long-Term Investments" means those investments described below (to the extent that they are not classified as short term investments in accordance with GAAP), provided that such investments shall have maturities of not longer than two years, and shall be rated not less than A- by Standard & Poor's Corporation or less than A by Moody's Investors Service, Inc.: (1) Securities issued or fully guaranteed or fully insured by the United States government or any agency thereof and backed by the full faith and credit of the United States; (2) Certificates of deposit, time deposits, eurodollar time deposits, repurchase agreements, or banker's acceptances that are issued by either one of the 50 largest (in assets) banks in the United States or by one of the 100 largest (in assets) banks in the world; and (3) Notes and municipal bonds. As used in this subparagraph 8.(ac), "Current Liabilities" means, with respect to any Person, all liabilities of such Person treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one year after the date in which the determination is made and (b) installment and sinking fund payments required to be made within one year after the date on which determination is made, but excluding all such liabilities or obligations which are renewable or extendable at the option of such Person to a date more than one year from the date of determination. (ii) Maximum Senior Debt to Capitalization. Throughout the Term Tenant shall maintain a ratio of Senior Debt to Capitalization of not more than 0.35 to 1.00. As used in this subparagraph 8.(ac): "Senior Debt" means the Debt of Tenant and its Subsidiaries (determined on a consolidated basis), minus the aggregate principal amount of the Subordinated Debt. "Capitalization" means the sum of the Debt of Tenant and its Subsidiaries (determined on a consolidated basis), including the aggregate principal amount of the Subordinated Debt, plus Consolidated Tangible Net Worth of Tenant and its Subsidiaries (determined on a consolidated basis). "Subordinated Debt" means the unsecured Debt of Tenant in respect of the $110,000,000 aggregate principal amount at maturity of 10 1/14% Convertible Subordinated Notes due 2001 issued pursuant to the Indenture. However, such unsecured Debt shall be included in Subordinated Debt for purposes hereof only to the extent that it remains expressly subordinated to the payment and performance obligations of Tenant in transactions of the type and structure contemplated by this Lease and the Purchase Agreement. "Consolidated Tangible Net Worth" means, at any date of determination thereof, the excess of consolidated total assets on such date over consolidated total liabilities on such date; provided, however, that Intangible Assets on such date shall be excluded from any determination of consolidated total assets on such date. "Intangible Assets" means, as of the date of any determination thereof, the total amount of all assets of Tenant and its consolidated Subsidiaries that are properly classified as "intangible assets" in accordance with GAAP and, in any event, shall include, without limitation, goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges other than prepaid insurance and prepaid taxes and current deferred taxes which are classified on the balance sheet of Tenant and its consolidated Subsidiaries as a current asset in accordance with GAAP and in which classification Tenant's independent public accountants concur. "Indenture" means the Indenture dated as of November 1, 1994 by and between Tenant and the First National Bank of Boston, as trustee. (iii) Minimum Tangible Net Worth. Tenant shall not permit its Consolidated Tangible Net Worth, on a consolidated basis, at the end of any fiscal quarter to be less than the sum of: (A) eighty percent (80%) of Consolidated Tangible Net Worth as of May 31, 1996; plus (B) fifty percent (50%) of Tenant's net income (but without deducting any net losses for any period) earned in each fiscal quarter, starting with the quarter ended August 31, 1996, and ending with the quarter which, at such time, is the most recently ended fiscal quarter; less (C) the amount of write-offs resulting from acquisitions after May 31, 1996, such amount not to exceed an aggregate, cumulative amount of $150,000,000. (iv) Fixed Charge Ratio. Throughout the Term Tenant shall maintain as of the last day of each fiscal quarter of Tenant a ratio of (A) Adjusted EBIT of Tenant and its Subsidiaries (determined on a consolidated basis) for the twelve (12) month period ending on such date, to (B) Fixed Charges of Tenant and its Subsidiaries (determined on a consolidated basis) for the twelve (12) month period ending on such date, of not less than 2.00 to 1.00. As used in this clause (iv), "Adjusted EBIT" means, for any accounting period, net income (or net loss), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) gross interest expense, (b) income tax expense (c) rent expense under leases of property (excluding rent expense payable under any "Minor Lease", which shall mean a lease under which rent is less than $1,000,000 per annum), (d) depreciation, and (e) non-recurring charges taken in connection with the acquisition of in-process technologies, in each case determined in accordance with GAAP. As used in this clause (iv), "Fixed Charges" means, for any accounting period, the sum of (a) gross interest expense, plus (b) amortization of principal or debt discount in respect of all Debt during such period, plus (c) rent payable under all leases of property during such period (excluding rent payable under any Minor Lease), plus (d) taxes payable during such period. (dd) Negative Covenants. Without the prior written consent of Landlord in each case, neither Tenant nor any of its Subsidiaries shall: (i) Liens. Create, incur, assume or suffer to exist any Lien, upon or with respect to any of its properties, now owned or hereafter acquired; provided, however, that the following shall be permitted except to the extent that they would encumber any interest in the Leased Property in violation of other provisions of this Lease or would encumber Collateral covered by the Pledge Agreement: a) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; b) Liens that secure obligations incurred in the ordinary course of business, that are not past due for more than thirty (30) days (or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established) and that: (1) are imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens; or (2) encumber only equipment or other tangible personal property and any proceeds thereof (including Liens created by equipment leases) and are imposed to secure the payment of the purchase price or other direct costs of acquiring the equipment or other tangible personal property they encumber; c) Liens under workmen's compensation, unemployment insurance, social security or similar legislation (other than ERISA); d) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; e) judgment and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; f) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by Tenant or any such Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; g) Liens securing obligations of such a Subsidiary to Tenant or to another such Subsidiary; h) Liens incurred after the date of this Lease given to secure the payment of the purchase price or other direct costs incurred in connection with the acquisition, construction, improvement or rehabilitation of assets, including Liens existing on such assets at the time of acquisition thereof or at the time of acquisition by Tenant or a Subsidiary of any business entity (including a Subsidiary) then owning such assets, whether or not such existing Liens were given to secure the payment of the purchase price of the assets to which they attach, provided that (i) except in the case of Liens existing on assets at the time of acquisition of a Subsidiary then owning such assets, the Lien shall be created within six (6) months of the later of the acquisition of, or the completion of the construction or improvement in respect of, such assets and shall attach solely to such assets, and (ii) except in the case of Liens existing on assets at the time of acquisition of a Subsidiary then owning such assets, at the time such Liens are imposed, the aggregate amount remaining unpaid on all Debt secured by Liens on such assets whether or not assumed by Tenant or a Subsidiary shall not exceed an amount equal to seventy-five percent (75%) of the lesser of the total purchase price or fair market value, at the time such Debt is incurred, of such assets; i) existing mortgages and deeds of trust as of the date of this Lease; j) Liens created by the Lease Agreement dated as of July 14, 1994 between Landlord and Tenant, evidenced by a short form dated July 15, 1994, recorded in Book N520, Page 1474 of the Official Records of Santa Clara County, California, or by the other agreements executed in connection therewith (including the Pledge Agreement and Custodial Agreement referenced therein); k) Liens created by any real property lease, or related documents (including a separate purchase agreement), executed after the date hereof that requires Tenant or its Subsidiaries to purchase or cause another to purchase any interest in the property covered thereby and thus guarantee a minimum residual value of the property to the landlord; provided, that the value of all such leases (other than this lease and the lease referenced in the preceding clause) shall not exceed an aggregate, cumulative amount of $300,000,000 (for purposes of this clause, the "value" of a lease means the amount, determined as of the date the lease became effective, equal to the greater of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with FASB Statement 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as capital leases] or (2) the fair value of the property covered thereby); l) Liens imposed to secure Debt incurred to finance the acquisition of property which has been leased or sold by Tenant or one of its Subsidiaries to another Person (other than Tenant or a Subsidiary of Tenant) pursuant to a lease or sales agreement providing for payments sufficient to pay such Debt in full, provided such Debt is not a general obligation of Tenant or its Subsidiaries, but rather is payable only from the rentals or other sums payable under the lease or sales agreement or from the property sold or leased thereunder; m) Liens not otherwise permitted by this subsection 8.(ad)(i) (and not encumbering the Leased Property or any Collateral) which secure the payment of Debt, provided that (i) at no time does the sum of the aggregate amount of all outstanding Debt secured by such Liens exceed $50,000,000, and (i) such Liens do not constitute Liens against Tenant's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of Tenant or of any material Subsidiary of Tenant (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of Tenant and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and n) Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the other clauses of this subsection 8.(ad)(i), provided that there is no increase in the aggregate principal amount of Debt secured thereby from that which was outstanding as of the date of such renewal, extension or refunding and no additional property is encumbered. (ii) Transactions with Affiliates. Enter into any transactions that individually or in the aggregate are material to Tenant (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates, except upon fair and reasonable terms no less favorable to Tenant than would be obtained in a comparable arm's length transaction with a Person not an Affiliate. (iii) Mergers; Sales of Assets. a) Except to the extent permitted by the last sentence of this subparagraph 8.(ad), liquidate or dissolve, or merge, consolidate with or into, or convey, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), to any Person, or enter into any joint venture, partnership or other combination which involves the investment, sale, lease, loan, or other disposition of the business or all of the assets of Tenant and its Subsidiaries or so much thereof as, in the reasonable opinion of Landlord, constitutes a substantial portion of such business or assets. b) Except to the extent permitted by the last sentence of this subparagraph 8.(ad), acquire the assets or business of any Person, other than in the ordinary course of Tenant's business as presently conducted. (iv) Sale of Receivables. Sell for less than the full face value of, or otherwise sell for consideration other than cash, any of its notes or accounts receivable. However, this subparagraph (iv) shall not prohibit: a) a sale of receivables for cash at a discount which is less than fifteen percent (15%) of the face value of all receivables then outstanding on the books of Tenant and its consolidated Subsidiaries, if such sale and all other discounted sales of receivables permitted by this clause a) during the same fiscal year of Tenant do not affect more than fifteen percent (15%) of the individual accounts (excluding intercompany accounts) comprising the receivables of Tenant and its Subsidiaries; b) any license or sale of products or services in the ordinary course of business where payment for such transactions is made by credit card, provided that the fees and discounts incurred by the Tenant or the Subsidiary in connection therewith shall not exceed the normal and customary fees and discounts incurred for general credit card transactions through major credit card issuers; or c) the delivery and endorsement to banks in the ordinary course of business by Tenant or any of its Subsidiaries of promissory notes received in payment of trade receivables, where delivery and endorsement are made prior to the date of maturity of such promissory notes, and the retention by such banks of normal and customary fees and discounts therefor, provided such practice is usual and customary in the country where such activity occurs. (v) Change of Business. Permit any significant change in the nature of the business of Tenant and its Subsidiaries, taken as whole, from that presently conducted. Notwithstanding any contrary provisions of subparagraph 8.(ad)(iii), Tenant may engage in any of the following transactions, provided that immediately prior to and immediately after giving effect thereto, no Default or Event of Default exists or would exist: (i) merge with another entity if Tenant is the corporation surviving the merger; (ii) enter into joint ventures; (iii) acquire the assets or business of another Person; or (iv) liquidate or dissolve Subsidiaries to the extent that such liquidations and dissolutions would not, in the aggregate, result in a material adverse effect on the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (ee) ERISA. (i) Each Plan is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law, and as of the date hereof no event or condition is occurring or exists which would require a notice from Tenant under clause 8.(ae)(ii). (ii) Tenant shall provide a notice to Landlord as soon as possible after, and in any event within ten (10) days after Tenant becomes aware that, any of the following has occurred, with respect to which the potential aggregate liability to Tenant relating thereto is $2,000,000 or more, and such notice shall include a statement signed by a senior financial officer of Tenant setting forth details of the following and the response, if any, which Tenant or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to Pension Benefit Guaranty Corporation by Tenant or an ERISA Affiliate with respect to any of the following or the events or conditions leading up it): (A) the assertion, to secure any Unfunded Benefit Liabilities, of any Lien against the assets of Tenant, against the assets of any Plan of Tenant or any ERISA Affiliate of Tenant or against any interest of Landlord or Tenant in the Leased Property or the Collateral covered by the Pledge Agreement, or (B) the taking of any action by the Pension Benefit Guaranty Corporation or any other governmental authority action against Tenant to terminate any Plan of Tenant or any ERISA Affiliate of Tenant or to cause the appointment of a trustee or receiver to administer any such Plan. 10. Representations, Warranties and Covenants of Landlord. Landlord represents, warrants and covenants as follows: (a) Title Claims By, Through or Under Landlord. Except by a Permitted Transfer, Landlord shall not assign, transfer, mortgage, pledge, encumber or hypothecate this Lease or any interest of Landlord in and to the Leased Property during the Term without the prior written consent of Tenant. Landlord further agrees that if any encumbrance or title defect affecting the Leased Property is lawfully claimed through or under Landlord, including any judgment lien lawfully filed against Landlord, Landlord will at its own cost and expense remove any such encumbrance and cure any such defect; provided, however, Landlord shall not be responsible for (i) any Permitted Encumbrances (regardless of whether claimed through or under Landlord) or any other encumbrances not lawfully claimed through or under Landlord, (ii) any encumbrances or title defects claimed by, through or under Tenant, ABN AMRO Bank N.V. or any other Participant (other than Landlord's Parent) which Tenant shall have approved, or (iii) any encumbrance or title defect arising because of Landlord's compliance with subparagraph 9.(b) or any request made by Tenant. (b) Actions Required of the Title Holder. So long as no Event of Default shall have occurred and be continuing, Landlord shall take any and all action required of Landlord by the Permitted Encumbrances or otherwise required of Landlord by Applicable Laws or reasonably requested by Tenant (including granting any utility easements required in connection with construction of Improvements); provided that (i) actions Tenant may require of Landlord under this subparagraph shall be limited to actions that can only be taken by Landlord as the owner of the Leased Property, as opposed to any action that can be taken by Tenant or any third party (and the payment of any monetary obligation shall not be an action required of Landlord under this subparagraph unless Landlord shall first have received funds from Tenant, in excess of any other amounts due from Tenant hereunder, sufficient to pay such monetary obligations), (ii) Tenant requests the action to be taken by Landlord (which request must be specific and in writing, if required by Landlord at the time the request is made) and (iii) the action to be taken will not constitute a violation of any Applicable Laws or compromise or constitute a waiver of Landlord's rights hereunder or under the Purchase Agreement, the Pledge Agreement or Environmental Indemnity or otherwise be reasonably objectionable to Landlord. Any Losses incurred by Landlord because of any action taken pursuant to this subparagraph shall be covered by the indemnification set forth in subparagraph 8.(y). Further, for purposes of such indemnification, any action taken by Landlord will be deemed to have been made at the request of Tenant if made pursuant to any request of Tenant's counsel or of any officer of Tenant (or with their knowledge, and without their objection) in connection with the closing under the Existing Contract. (c) No Default or Violation. The execution, delivery and performance of this Lease do not contravene, result in a breach of or constitute a default under any material contract or agreement to which Landlord is a party or by which Landlord is bound and do not, to the knowledge of Landlord, violate or contravene any law, order, decree, rule or regulation to which Landlord is subject. (d) No Suits. To Landlord's knowledge there are no judicial or administrative actions, suits or proceedings involving the validity, enforceability or priority of this Lease, and to Landlord's knowledge no such suits or proceedings are threatened. (e) Organization. Landlord is duly incorporated and legally existing under the laws of Delaware and is or, if necessary, will become duly qualified to do business in the State of California. Landlord has or will obtain, at Tenant's expense pursuant to the other provisions of this Lease, all requisite power and all material governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to own and lease the Leased Property and to perform its obligations under this Lease. (f) Enforceability. The execution, delivery and performance of this Lease, the Purchase Agreement and the Pledge Agreement by Landlord are duly authorized, are not in contravention of or conflict with any term or provision of Landlord's articles of incorporation or bylaws and do not, to Landlord's knowledge, require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained or conflict with any Applicable Laws. This Lease, the Purchase Agreement and the Pledge Agreement are valid, binding and legally enforceable obligations of Landlord except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application; provided, Landlord makes no representation or warranty that conditions imposed by any state or local Applicable Laws to the purchase, ownership, lease or operation of the Leased Property have been satisfied. (g) Existence. Landlord will continuously maintain its existence and, after qualifying to do business in the State of California if Landlord has not already done so, Landlord will continuously maintain its right to do business in that state to the extent necessary for the performance of Landlord's obligations hereunder. (h) Not a Foreign Person. Landlord is not a "foreign person" within the meaning of the Sections 1445 and 7701 of the Code (i.e., Landlord is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder), and Landlord is not subject to withholding under California Revenue and Taxation Code Sections 18805, 18815, and 26131. 11. Assignment and Subletting. (a) Consent Required. During the term of this Lease, without the prior written consent of Landlord first had and received, Tenant shall not assign, transfer, mortgage, pledge or hypothecate this Lease or any interest of Tenant hereunder and shall not sublet all or any part of the Leased Property, by operation of law or otherwise; provided, that, so long as no Event of Default has occurred and is continuing, Tenant shall be entitled without the consent of Landlord to sublet all or any portion of the space in any then completed Improvements if: (i) any sublease by Tenant is made expressly subject and subordinate to the terms hereof; (ii) no sublease has a term longer than the remainder of the then effective term of this Lease; (iii) the use permitted by such sublease is expressly limited to general office use or other uses approved in advance by Landlord as uses that will not present extraordinary risks of uninsured environmental or other liability; and (iv) no more than 245,000 square feet of the space in any completed Improvements shall be subleased without Landlord's prior consent to any Person that is neither (A) an Affiliate of Tenant nor (B) the operator of a business in the subleased space that is related to the operation of Tenant's own business (such as another venturer in a joint venture with Tenant). (b) Standard for Landlord's Consent to Assignments and Certain Other Matters. Consents and approvals of Landlord which are required by this Paragraph 10 will not be unreasonably withheld, but Tenant acknowledges that Landlord's withholding of such consent or approval shall be reasonable if Landlord determines in good faith that (1) giving the approval may increase Landlord's risk of liability for any existing or future environmental problem, (2) giving the approval is likely to substantially increase Landlord's administrative burden of complying with or monitoring Tenant's compliance with the requirements of this Lease, or (3) any transaction for which Tenant has requested the consent or approval would negate Tenant's representations in this Lease regarding ERISA or cause this Lease or the other documents referenced herein to constitute a violation of any provision of ERISA. (c) Consent Not a Waiver. No consent by Landlord to a sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or Tenant's interest hereunder, and no assignment or subletting of the Leased Property or any part thereof in accordance with this Lease or otherwise with Landlord's consent, shall release Tenant from liability hereunder; and any such consent shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from any requirement of obtaining the prior written consent of Landlord to any further sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or any interest of Tenant hereunder. (d) Landlord's Assignment. Landlord shall have the right to transfer, assign and convey, in whole or in part, the Leased Property and any and all of its rights under this Lease by any conveyance that constitutes a Permitted Transfer. (However, any Permitted Transfer shall be subject to all of the provisions of each and every agreement concerning the Leased Property then existing between Landlord and Tenant, including without limitation this Lease and the Purchase Agreement.) If Landlord sells or otherwise transfers the Leased Property and assigns its rights under this Lease, the Purchase Agreement and the Pledge Agreement pursuant to a Permitted Transfer, then to the extent Landlord's successor in interest confirms its liability for the obligations imposed upon Landlord by this Lease, the Purchase Agreement and the Pledge Agreement on and subject to the express terms and conditions set out herein and therein, the original Landlord shall thereby be released from any obligations thereafter arising under this Lease, the Purchase Agreement and the Pledge Agreement, and Tenant will look solely to each successor in interest of Landlord for performance of such obligations. However, notwithstanding anything to the contrary herein contained, if withholding taxes are imposed on the rents and other amounts payable to Landlord hereunder because of Landlord's assignment of this Lease to any citizen of, or any corporation or other entity formed under the laws of, a country other than the United States, Tenant shall not be required to compensate such assignee for the withholding tax. Further, during the Term and so long as no Event of Default has occurred and is continuing, Landlord shall not decrease the percentage of Base Rent it (and/or its Affiliates) is entitled to receive and retain under the Participation Agreement below ten percent (10%) without Tenant's consent, which consent will not be unreasonably withheld. 12. Environmental Indemnification. (a) Indemnity. Tenant hereby agrees to assume liability for and to pay, indemnify, defend, and hold harmless each and every Indemnified Party from and against any and all Environmental Losses, subject only to the provisions of subparagraph 11.(c) below. (b) Assumption of Defense. (i) If an Indemnified Party notifies Tenant of any claim, demand, action, administrative or legal proceeding, investigation or allegation as to which the indemnity provided for in this Paragraph 11 applies, Tenant shall assume on behalf of the Indemnified Party and conduct with due diligence and in good faith the investigation and defense thereof and the response thereto with counsel selected by Tenant but reasonably satisfactory to the Indemnified Party; provided, that the Indemnified Party shall have the right to be represented by advisory counsel of its own selection and at its own expense; and provided further, that if any such claim, demand, action, proceeding, investigation or allegation involves both Tenant and the Indemnified Party and the Indemnified Party shall have been advised in writing by counsel that there may be legal defenses available to it which are inconsistent with those available to Tenant, then the Indemnified Party shall have the right to select separate counsel to participate in the investigation and defense of and response to such claim, demand, action, proceeding, investigation or allegation on its own behalf, and Tenant shall pay or reimburse the Indemnified Party for all Attorney's Fees incurred by the Indemnified Party because of the selection of such separate counsel. (ii) If any claim, demand, action, proceeding, investigation or allegation arises as to which the indemnity provided for in this Paragraph 11 applies, and Tenant fails to assume promptly (and in any event within fifteen (15) days after being notified of the claim, demand, action, proceeding, investigation or allegation) the defense of the Indemnified Party, then the Indemnified Party may contest (or settle, with the prior written consent of Tenant, which consent will not be unreasonably withheld) the claim, demand, action, proceeding, investigation or allegation at Tenant's expense using counsel selected by the Indemnified Party; provided, that if any such failure by Tenant continues for thirty (30) days or more after Tenant is notified thereof, no such contest need be made by the Indemnified Party and settlement or full payment of any claim may be made by the Indemnified Party without Tenant's consent and without releasing Tenant from any obligations to the Indemnified Party under this Paragraph 11 so long as, in the written opinion of reputable counsel to the Indemnified Party, the settlement or payment in full is clearly advisable. (c) Notice of Environmental Losses. If an Indemnified Party receives a written notice of Environmental Losses that such Indemnified Party believes are covered by this Paragraph 11, then such Indemnified Party will be expected to promptly furnish a copy of such notice to Tenant. The failure to so provide a copy of the notice to Tenant shall not excuse Tenant from its obligations under this Paragraph 11; provided, that if Tenant is unaware of the matters described in the notice and such failure renders unavailable defenses that Tenant might otherwise assert, or precludes actions that Tenant might otherwise take, to minimize its obligations hereunder, then Tenant shall be excused from its obligation to indemnify such Indemnified Party (and any Affiliate of such Indemnified Party) against Environmental Losses, if any, which would not have been incurred but for such failure. For example, if Landlord fails to provide Tenant with a copy of a notice of an obligation covered by the indemnity set out in subparagraph 11.(a) and Tenant is not otherwise already aware of such obligation, and if as a result of such failure Landlord becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if Tenant had been promptly provided with a copy of the notice, then Tenant will be excused from any obligation to Landlord (or any Affiliate of Landlord) to pay the excess. (d) Rights Cumulative. The rights of each Indemnified Party under this Paragraph 11 shall be in addition to any other rights and remedies of such Indemnified Party against Tenant under the other provisions of this Lease or under any other document or instrument now or hereafter executed by Tenant, or at law or in equity (including, without limitation, any right of reimbursement or contribution pursuant to CERCLA). (e) Survival of the Indemnity. Tenant's obligations under this Paragraph 11 shall survive the termination or expiration of this Lease. All obligations of Tenant under this Paragraph 11 shall be payable upon demand, and any amount due upon demand to any Indemnified Party by Tenant which is not paid shall bear interest from the date of such demand at a floating interest rate equal to the Default Rate, but in no event in excess of the maximum rate permitted by law. 13. Landlord's Right of Access. (a) Landlord and Landlord's representatives may enter the Leased Property, after five (5) Business Days advance written notice to Tenant (except in the event of an emergency, when no advance notice will be required), for the purpose of making inspections or performing any work Landlord is authorized to undertake by the next subparagraph. So long as Tenant remains in possession of the Leased Property, Landlord or Landlord's representative will, before making any such inspection or performing any such work on the Leased Property, if then requested to do so by Tenant to maintain Tenant's security: (i) sign in at Tenant's security or information desk if Tenant has such a desk on the premises, (ii) wear a visitor's badge or other reasonable identification provided by Tenant when Landlord or Landlord's representative first arrives at the Leased Property, (iii) permit an employee of Tenant to observe such inspection or work, and (iv) comply with other similar reasonable nondiscriminatory security requirements of Tenant that do not, individually or in the aggregate, interfere with or delay inspections or work of Landlord authorized by this Lease. (b) If Tenant fails to perform any act or to take any action which hereunder Tenant is required to perform or take, or to pay any money which hereunder Tenant is required to pay, and if such failure or action constitutes an Event of Default or renders Landlord or any director, officer, employee or Affiliate of Landlord at risk of criminal prosecution or renders Landlord's interest in the Leased Property or any part thereof at risk of forfeiture by forced sale or otherwise, then in addition to any other remedies specified herein or otherwise available, Landlord may, in Tenant's name or in Landlord's own name, perform or cause to be performed such act or take such action or pay such money. Any expenses so incurred by Landlord, and any money so paid by Landlord, shall be a demand obligation owing by Tenant to Landlord. Further, Landlord, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment. But nothing herein shall imply any duty upon the part of Landlord to do any work which under any provision of this Lease Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default. Landlord may during the progress of any such work permitted by Landlord hereunder on or in the Leased Property keep and store upon the Leased Property all necessary materials, tools, and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage to Tenant or the subtenants of Tenant by reason of making such repairs or the performance of any such work on or in the Leased Property, or on account of bringing materials, supplies and equipment into or through the Leased Property during the course of such work (except for liability in connection with death or injury or damage to the property of third parties caused by the Active Negligence, gross negligence or wilful misconduct of Landlord or its officers, employees, or agents in connection therewith), and the obligations of Tenant under this Lease shall not thereby be affected in any manner. 14. Events of Default. (a) Definition of Event of Default. Each of the following events shall be deemed to be an "Event of Default" by Tenant under this Lease: (i) Tenant shall fail to pay when due any installment of Rent due hereunder and such failure shall continue for three (3) Business Days after Tenant is notified thereof. (ii) Tenant shall fail to cause any representation or warranty of Tenant contained herein that is false or misleading in any material respect when made to be made true and not misleading (other than as described in the other clauses of this subparagraph 13.(a)), or Tenant shall fail to comply with any term, provision or covenant of this Lease (other than as described in the other clauses of this subparagraph 13.(a)), and in either case shall not cure such failure prior to the earlier of (A) thirty (30) days after written notice thereof is sent to Tenant or (B) the date any writ or order is issued for the levy or sale of any property owned by Landlord (including the Leased Property) or any criminal action is instituted against Landlord or any of its directors, officers or employees because of such failure; provided, however, that so long as no such writ or order is issued and no such criminal action is instituted, if such failure is susceptible of cure but cannot with reasonable diligence be cured within such thirty day period, and if Tenant shall promptly have commenced to cure the same and shall thereafter prosecute the curing thereof with reasonable diligence, the period within which such failure may be cured shall be extended for such further period (not to exceed an additional sixty (60) days) as shall be necessary for the curing thereof with reasonable diligence. (iii) Tenant shall fail to comply with any term, provision or condition of the Purchase Agreement or the Pledge Agreement and, if the Purchase Agreement or Pledge Agreement expressly provides a time within which Tenant may cure such failure, Tenant shall not cure the failure within such time. (iv) Tenant shall abandon the Leased Property. (v) Tenant shall fail to make any payment or payments of principal, premium or interest, on any Debt of Tenant described in the next sentence when due (taking into consideration the time Tenant may have to cure such failure, if any, under the documents governing such Debt). As used in this clause 13.(a)(v), "Debt" shall mean only a Debt of Tenant now existing or arising in the future, (A) payable to Landlord or any Participant or any Affiliate of Landlord or any Participant, the outstanding balance of which has become due by reason of acceleration or maturity, or (B) payable to any Person, with respect to which $5,000,000 or more is actually due and payable because of acceleration or otherwise. (vi) Tenant or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Tenant or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of thirty (30) consecutive days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or Tenant or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this clause (vi). (vii) Any order, judgment or decree is entered in any proceedings against Tenant or any Subsidiary decreeing the dissolution of Tenant or such Subsidiary and such order, judgment or decree remains unstayed and in effect for more than sixty (60) days. (viii) Any order, judgment or decree is entered in any proceedings against Tenant or any Subsidiary decreeing a split-up of Tenant or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of Tenant and its Subsidiaries (determined in accordance with GAAP) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of Tenant and its Subsidiaries (determined in accordance with GAAP) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than sixty (60) days. (ix) A final judgment or order for the payment of money in an amount (not covered by insurance) which exceeds $3,000,000 shall be rendered against Tenant or any of its Subsidiaries and within sixty (60) days after the entry thereof, such judgment or order is not discharged or execution thereof stayed pending appeal, or within thirty (30) days after the expiration of any such stay, such judgment is not discharged. (x) Any ERISA Termination Event that Landlord determines might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States district court of a trustee to administer any Plan shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to Tenant by Landlord, or any Plan shall be terminated, or a trustee shall be appointed by an appropriate United States district court to administer any Plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan. (xi) A Change of Control Event not approved in advance by Landlord shall occur. (xii) The subordination provisions of the Indenture (as defined in subparagraph 8.(ac)(ii) of this Lease) or any other agreement or instrument governing the Subordinated Debt (as defined in subparagraph 8.(ac)(ii) of this Lease) shall be for any reason revoked or invalidated, or otherwise cease to be in full force and effect; or the Tenant or any of its Subsidiaries shall contest in any manner the validity or enforceability of such subordination provisions or shall deny that it has any further liability or obligation thereunder; or the obligations of Tenant hereunder or under the Purchase Agreement shall be for any reason subordinated to such Subordinated Debt or shall not have the priority over such Subordinated Debt as contemplated by this Lease or by the Indenture or by such subordination provisions. Notwithstanding the foregoing, any Default that could become an Event of Default under clause 13.(a)(ii) may be cured within the earlier of the periods described in clauses (A) and (B) thereof by Tenant's delivery to Landlord of a written notice irrevocably exercising Tenant's option under the Purchase Agreement to purchase Landlord's interest in the Leased Property and designating as the Designated Sale Date the next following date which is a Base Rent Date and which is at least ten (10) days after the date of such notice; provided, however, Tenant must, as a condition to the effectiveness of its cure, on the date so designated as the Designated Sale Date tender to Landlord the full purchase price required by the Purchase Agreement and all Rent and all other amounts then due or accrued and unpaid hereunder (including reimbursement for any costs incurred by Landlord in connection with the applicable Default hereunder, regardless of whether Landlord shall have been reimbursed for such costs in whole or in part by any Participants) and Tenant must also furnish written confirmation that all indemnities set forth herein (including specifically, but without limitation, the general indemnity set forth in subparagraph 8.(y) and the environmental indemnity set forth in Paragraph 11 shall survive the payment of such amounts by Tenant to Landlord and the conveyance of Landlord's interest in the Leased Property to Tenant. (b) Remedies. Upon the occurrence of an Event of Default which is not cured within any applicable period expressly permitted by subparagraph 13.(a), at Landlord's option and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such default, and without any further demand or notice except as expressly described in this subparagraph 13.(b): (i) By notice to Tenant, Landlord may terminate Tenant's right to possession of the Leased Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a default shall terminate Tenant's right to possession if Tenant fails to cure the default within the time specified in the notice. (ii) Upon termination of Tenant's right to possession and without further demand or notice, Landlord may re-enter the Leased Property and take possession of all improvements, additions, alterations, equipment and fixtures thereon and remove any persons in possession thereof. Any property in the Leased Property may be removed and stored in a warehouse or elsewhere at the expense and risk of and for the account of Tenant. (iii) Upon termination of Tenant's right to possession, this Lease shall terminate and Landlord may recover from Tenant: a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination; b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; c) The worth at the time of award of the amount by which the unpaid Rent for the balance of the scheduled Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the costs and expenses (including Attorneys' Fees, advertising costs and brokers' commissions) of recovering possession of the Leased Property, removing persons or property therefrom, placing the Leased Property in good order, condition, and repair, preparing and altering the Leased Property for reletting, all other costs and expenses of reletting, and any loss incurred by Landlord as a result of Tenant's failure to perform Tenant's obligations under the Purchase Agreement. The "worth at the time of award" of the amounts referred to in subparagraph 13.(b)(iii)a) and subparagraph 13.(b)(iii)b) shall be computed by allowing interest at ten percent (10%) per annum or such other rate as may be the maximum interest rate then permitted to be charged under California law at the time of computation. The "worth at the time of award" of the amount referred to in subparagraph 13.(b)(iii)c) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). e) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. (iv) The Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in force even after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Accordingly, even though Tenant has breached this Lease and abandoned the Leased Property, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Rent as it becomes due under this Lease. Tenant's right to possession shall not be deemed to have been terminated by Landlord except pursuant to subparagraph 13.(b)(i) hereof. The following shall not constitute a termination of Tenant's right to possession: a) Acts of maintenance or preservation or efforts to relet the Leased Property; b) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease; or c) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by Tenant. (c) Enforceability. This Paragraph shall be enforceable to the maximum extent not prohibited by Applicable Law, and the unenforceability of any provision in this Paragraph shall not render any other provision unenforceable. (d) Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing under Applicable Law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by Applicable Law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to any other remedy allowed to Landlord under Applicable Law or in equity. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency of Tenant by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. Without limiting the generality of the foregoing, nothing contained herein shall modify, limit or impair any of the rights and remedies of Landlord under the Purchase Agreement, the Pledge Agreement or the Environmental Indemnity. (e) Waiver by Tenant. To the extent permitted by law, Tenant hereby waives and surrenders for itself and all claiming by, through and under it, including creditors of all kinds, (i) any right and privilege which it or any of them may have under any present or future constitution, statute or rule of law to have a continuance of this Lease for the term hereby demised after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, or under the terms of this Lease, or after the termination of this Lease as herein provided, and (ii) the benefits of any present or future constitution, or statute or rule of law which exempts property from liability for debt or for distress for rent, and (iii) the provisions of law relating to notice and/or delay in levy of execution in case of eviction of a lessee for nonpayment of rent. (f) No Implied Waiver. The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any violation by Tenant of any term, covenant, agreement or condition contained in this Lease shall not prevent a similar subsequent act from constituting a violation. Any express waiver shall affect only the term or condition specified in such waiver and only for the time and in the manner specifically stated therein. A receipt by Landlord of any Base Rent or other payment hereunder with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. 15. Default by Landlord. If Landlord should default in the performance of any of its obligations under this Lease, Landlord shall have the time reasonably required, but in no event less than thirty (30) days, to cure such default after receipt of written notice from Tenant specifying such default and specifying what action Tenant believes is necessary to cure the default. If Tenant prevails in any litigation brought against Landlord because of Landlord's failure to cure a default within the time required by the preceding sentence, then Tenant shall be entitled to an award against Landlord for the damages proximately caused to Tenant by such default. 16. Quiet Enjoyment. Provided no Event of Default has occurred and is continuing, Landlord shall not during the Term disturb Tenant's peaceable and quiet enjoyment of the Leased Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Lease and the Permitted Encumbrances and any other claims or encumbrances not lawfully made through or under Landlord, to which this Lease is subject and subordinate as hereinabove set forth. Any breach by Landlord of the foregoing covenant of quiet enjoyment shall, subject to the other provisions of this Lease, render Landlord liable to Tenant for any monetary damages proximately caused thereby, but as more specifically provided in Paragraph 5 above, no such breach shall entitle Tenant to terminate this Lease or excuse Tenant from its obligation to pay Base Rent and other amounts hereunder. 17. Surrender Upon Termination. Unless Tenant or an Applicable Purchaser purchases Landlord's entire interest in the Leased Property pursuant to the terms of the Purchase Agreement, Tenant shall, upon the termination of Tenant's right to occupancy, surrender to Landlord the Leased Property, including any buildings, alterations, improvements, replacements or additions constructed by Tenant, with all fixtures and furnishings included in the Leased Property, but not including movable furniture and movable personal property not covered by this Lease, free of all Hazardous Substances (including Permitted Hazardous Substances) and tenancies and, to the extent required by Landlord, with all Improvements in the same condition as of the date hereof, excepting only (i) ordinary wear and tear (provided that the Leased Property shall have been maintained as required by the other provisions hereof) and (ii) alterations and additions which are expressly permitted by the terms of this Lease and which have been completed by Tenant in a good and workmanlike manner in accordance with all Applicable Laws. Any movable furniture or movable personal property belonging to Tenant or any party claiming under Tenant, if not removed at the time of such termination and if Landlord shall so elect, shall be deemed abandoned and become the property of Landlord without any payment or offset therefor. If Landlord shall not so elect, Landlord may remove such property from the Leased Property and store it at Tenant's risk and expense. Tenant shall bear the expense of repairing any damage to the Leased Property caused by such removal by Landlord or Tenant. 18. Holding Over by Tenant. Should Tenant not purchase Landlord's right, title and interest in the Leased Property as provided in the Purchase Agreement, but nonetheless continue to hold the Leased Property after the termination of this Lease without Landlord's written consent, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from day to day only, at a daily Base Rent equal to: (i) the unpaid Purchase Price on the day in question, times (ii) the Holdover Rate (as defined below) for such day, divided by (iii) 360; subject, however, to all of the terms, provisions, covenants and agreements on the part of Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue or extend the Term of this Lease and no extension of this Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant; provided, however, following any breach by Landlord of its obligations to tender a deed and other documents on the Designated Sale Date as provided in the Purchase Agreement, Tenant may at its option continue its possession and use of the Leased Property pursuant to this Lease, as if the Term had been extended, for a period not to exceed 180 days after the Designated Sale Date or such longer time as may be proscribed by Applicable Law. As used herein, the "Holdover Rate" means: (1) for any day prior to the date on which Landlord tenders a deed and other documents as required by the Purchase Agreement (or is excused from its obligation to tender by Tenant's breach or anticipatory repudiation of the Purchase Agreement), a rate equal to the Fed Funds Rate on that day plus one hundred basis points; (2) for any day on which or within ninety days after Landlord tenders a deed and other documents as required by the Purchase Agreement (or is excused from its obligation to tender by Tenant's breach or anticipatory repudiation of the Purchase Agreement), the per annum Prime Rate in effect for such day; and (3) for any day after the ninety days described in the preceding clause, a rate which is three percent (3%) above the per annum Prime Rate. 19. Miscellaneous. (a) Notices. Each provision of this Lease, or of any Applicable Laws with reference to the sending, mailing or delivery of any notice or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (i) All Rent required to be paid by Tenant to Landlord hereunder shall be paid to Landlord in immediately available funds by wire transfer to: Federal Reserve Bank of San Francisco Account: Banque Nationale de Paris ABA #: 121027234 Reference: 3COM (Phase I) or at such other place and in such other manner as Landlord may designate in a notice to Tenant (provided Landlord will not unreasonably designate a method of payment other than wire transfer). Time is of the essence as to all payments and other obligations of Tenant under this Lease. (ii) All notices, demands and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below, or in the case of communications to Participants, at the addresses for notice established by the Participation Agreement) and shall be given by any of the following means: (A) personal service, with proof of delivery or attempted delivery retained; (B) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (C) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (A) or (C) hereof shall be deemed received (whether or not actually received) upon first attempted delivery at the proper notice address on any Business Day between 9:00 A.M. and 5:00 P.M., and any notice or other communication sent pursuant to clause (B) hereof shall be deemed received upon dispatch by electronic means. Address of Landlord: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Telecopy: (415) 296-8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of Tenant: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Legal Dept. Telecopy: (408) 764-6434 With copies to: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Real Estate Dept. Telecopy: (408) 764-5718; and 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Treasury Dept. Telecopy: (408) 764-8403; and Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attn: Jonathan E. Rattner, Esq. Telecopy: (415) 328-3029 (b) Severability. If any term or provision of this Lease or the application thereof shall to any extent be held by a court of competent jurisdiction to be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision other than to the extent to which it is invalid or unenforceable, shall not be affected thereby. (c) No Merger. There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Property or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Leased Property or any interest in such fee estate, unless all Persons with an interest in the Leased Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. (d) NO IMPLIED REPRESENTATIONS BY LANDLORD. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO REPRESENTATIONS OR PROMISES WITH RESPECT TO THE LEASED PROPERTY EXCEPT AS EXPRESSLY SET FORTH HEREIN, AND NO RIGHTS, EASEMENTS OR LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR OTHERWISE EXCEPT AS EXPRESSLY SET FORTH IN THE PROVISIONS OF THIS LEASE, THE PURCHASE AGREEMENT AND THE PLEDGE AGREEMENT. (e) Entire Agreement. This Lease and the instruments referred to herein supersede any prior negotiations and agreements between the parties concerning the Leased Property and no amendment or modification of this Lease shall be binding or valid unless expressed in a writing executed by both parties hereto. (f) Binding Effect. All of the covenants, agreements, terms and conditions to be observed and performed by the parties hereto shall be applicable to and binding upon their respective successors and, to the extent assignment is permitted hereunder, their respective assigns. (g) Time is of the Essence. Time is of the essence as to all obligations of Tenant and all notices required of Tenant under this Lease, but this paragraph shall not limit Tenant's opportunity to prevent an Event of Default by curing any breach within the cure period (if any) applicable under subparagraph 13.(a). (h) Termination of Prior Rights. Without limiting the rights and obligations of Tenant under this Lease, Tenant acknowledges that any and all rights or interest of Tenant in and to the Land, the improvements to the Land and to any other property included in the Leased Property (except under this Lease and the Purchase Agreement) are hereby superseded. Tenant quitclaims unto Landlord any rights or interests Tenant has in or to the Land, the improvements to the Land and to any other property included in the Leased Property other than the rights and interests created by this Lease and the Purchase Agreement. (i) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of California. (j) Waiver of a Jury Trial. LANDLORD AND TENANT EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS LEASE OR ANY OTHER DOCUMENT OR DEALINGS BETWEEN THEM RELATING TO THIS LEASE OR THE LEASED PROPERTY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Tenant and Landlord each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Lease and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. Tenant and Landlord each further warrants and represents that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS LEASE OR THE LEASED PROPERTY. In the event of litigation, this Lease may be filed as a written consent to a trial by the court. (k) Not a Partnership, Etc. NOTHING IN THIS LEASE IS INTENDED TO BE OR TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN LANDLORD AND TENANT. NEITHER THE EXECUTION OF THIS LEASE NOR THE ADMINISTRATION OF THIS LEASE OR OTHER DOCUMENTS REFERENCED HEREIN BY LANDLORD, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF LANDLORD UNDER OR PURSUANT TO THIS LEASE OR SUCH DOCUMENTS IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF LANDLORD TO TENANT. (l) Tax Reporting. Landlord and Tenant shall report this Lease and the Purchase Agreement for federal income tax purposes as a conditional sale unless prohibited from doing so by the Internal Revenue Service. Similarly, Tenant shall report all interest earned on Escrowed Proceeds or the Collateral as Tenant's income for federal and state income tax purposes. If the Internal Revenue Service shall challenge Landlord's characterization of this Lease and the Purchase Agreement as a conditional sale for federal income tax reporting purposes, Landlord shall notify Tenant in writing of such challenge and consider in good faith any reasonable suggestions by Tenant about an appropriate response. In any event, Tenant shall indemnify and hold harmless Landlord from and against all liabilities, costs, additional taxes and other expenses that may arise or become due because of such challenge or because of any resulting recharacterization required by the Internal Revenue Service, including any additional taxes that may become due upon any sale under the Purchase Agreement to the extent (if any) that such additional taxes are not offset by tax savings resulting from additional depreciation deductions or other tax benefits to Landlord of the recharacterization. (m) IN WITNESS WHEREOF, this Lease is hereby executed in multiple originals as of the effective date above set forth. "Landlord" BNP LEASING CORPORATION By: /s/ Lloyd G. Cox -------------------- Lloyd G. Cox, Vice President "Tenant" 3COM CORPORATION By: /s/ Christopher B. Paisley ------------------------------ Christopher B. Paisley, Chief Financial Officer Exhibit A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: Parcel One Parcel A, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California. EXCEPTING THEREFROM that portion described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at the Southwest corner of said Parcel "A"; thence on the Westerly and Northerly lines of said Parcel "A" the following 5 courses: 1. North 00 12' 36" East a distance of 665.00 feet; 2. North 45 12' 36" East a distance of 64.00 feet; 3. North 00 12' 36" East a distance of 82.98 feet to a point on a non-tangent curve the center of which bears North 29 17' 50" West a distance of 9000.00 feet; 4. Northeasterly a distance of 79.37 feet on the arc of said curve to the left through a central angle of 00 30' 19" (chord bears North 60 27' 01" East a distance of 79.37 feet, to a point on said curve; 5. North 66 32' 39" East, departing said curve, a distance of 75.89 feet; Thence South 62 07' 20" West a distance of 104.00 feet to a point of curvature; thence Southwesterly a distance of 9.53 feet on the arc of said 10136.00 foot radius curve to the right through a central angle of 00 03' 14" (chord bears South 62 08' 57" West a distance of 9.53 feet) to a point on said curve; thence South 00 12' 36" West a distance of 809.62 feet to a point on the South line of said parcel "A"; thence North 89 47' 24" West, on said South line, a distance of 83.50 feet to the point of beginning. ALSO EXCEPTING THEREFROM that portion of said land as condemned to the State of California by Order recorded March 10, 1993 in Book M660, page 1700, described as follows: Being a portion of Parcel A, as shown on that certain Parcel Map filed for record in Book 602 of Maps at pages 34 and 35 Santa Clara County Records described as follows: Beginning at the Northeast corner of said Parcel A; thence from said point of beginning, along the Northerly line of said Parcel A, S 67 25' 20" W 39.39 feet; thence leaving said Northerly line S 41 34' 47" E 73.60 feet to a point in the Easterly line of said Parcel A; thence along said Easterly line of N 10 04' 48" W 71.28 feet to the point of beginning. Parcel Two That portion of Parcel B, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California and described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at a point on the most Northerly Southeasterly line of said Parcel "B" which bears South 66 32' 39" West a distance of 226.19 feet from the most Easterly corner thereof; thence South 10 57' 34" East a distance of 218.69 feet; thence North 89 47' 24" West a distance of 324.26 feet; thence North 77 17' 24" West a distance of 141.24 feet; thence North 66 32' 39" East a distance of 458.33 feet to the point of beginning. APN: 104-52-006, 16 ARB: 104-01-046, 046.02, 046.02.01 Exhibit B Permitted Encumbrances This conveyance is subject to the following matters, but only to the extent the same are still valid and in full force and effect: 1. EASEMENT shown on map filed for record in Book 460 of Maps, page 44 and 45, and incidents thereto Purpose : Public Utility Easement Affects : A portion of the Southerly 10 feet of (Affects Parcels A and B) 2. DECLARATION of Reciprocal Easements, Covenants, and Restrictions for the purpose stated herein and subject to the terms and conditions therein, executed by Dairy Associates, L.P., a California Limited Partnership, recorded July 7, 1989 in Book L013, page 971 of Official Records. (Affects Parcels A and B) Amendment No. 1 of Declaration of Reciprocal Easements, Covenants and Restrictions recorded August 16, 1991 in Book L826, page 830 of Official Records. 3. AGREEMENT on the terms and conditions contained therein, For : Agreement regarding number of required parking spaces Between : The City of Santa Clara, a municipal corporation And : Dairy Associates, LP., a California Limited Partnership Recorded : March 6, 1990 in Book L278, page 2239, Official Records. (Affects Parcels A and B) 4. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction and reconstructing, installing, operating, maintaining, repairing and/or replacing underground electrical distribution and/or communication systems and appurtenances thereto, including a reasonable right of ingress and egress over adjoining lands of Grantor Granted to : City of Santa Clara, a California municipal corporation Recorded : April 4, 1990 in Book L310, page 1548, Official Records Affects : As follows: Beginning at a point in the Southerly line of Parcel 2 of that Parcel Map filed for record in Book 460 of Maps at pages 44-45, Santa Clara County Records, distant thereon North 89 47' 24" West, 67.50 feet from the Southeasterly corner of said Parcel 2; thence from said point of beginning, the following forty- eight courses: South 89 47' 24" East, 30.00 feet; North 0 12' 36" East, 19.10 feet; South 89 47' 24" West, 10.00 feet; North 29 47' 24" West, 43.00 feet; North 18 32' 24" West, 89.00 feet; North 29 47' 24" West, 119 feet; North 0 12' 36" East, 235 feet; North 11 02' 24" West, 157 feet; South 78 57' 36" West, 6.00 feet; North 21 02' 24" West, 119.00 feet; South 88 57' 36" West, 73.00 feet; South 58 57' 36" West, 51.00 feet; South 88 57' 36" West, 80.00 feet; North 46 02' 24" West, 11.00 feet; South 43 57' 36" West, 15.00 feet; South 46 02' 24" East, 20.00 feet; North 43 57' 36" East, 9.86 feet; North 88 57' 36" East, 69.77 feet; South 1 02' 24" East, 22.00 feet; North 88 57' 36" East, 15.00 feet; North 1 02' 24" West, 24.78 feet; North 58 57' 36" East, 45.43 feet; North 88 57' 36" East, 63.32 feet; South 21 02' 24" East, 145.68 feet; South 11 02' 24" East 121.11 feet; South 0 12' 36" West, 234.02 feet; North 89 47' 24" West, 63.00 feet; North 59 47' 24" West, 10.00 feet; North 89 47' 24" West, 10.00 feet; South 60 12' 36" West, 10.00 feet; North 89 47' 24" West, 286.00 feet; North 0 12' 36" East, 20.00 feet; South 89 47' 24" East, 2.50 feet; North 0 12' 36" East, 15.00 feet; North 89 47' 24" West, 15.00 fee; South 0 12' 36" West, 294.00 feet; North 0 12' 36" East, 20.00 feet; South 89 47' 24" East, 2.50 feet; North 0 12' 36" East, 15.00 feet; North 89 47' 24" West, 15.00 feet; South 0 12' 36" West, 15.00 feet; South 89 47' 24" East, 2.50 feet; South 0 12' 36" West, 170.00 feet; South 44 37' 45" East, 75.00 feet; South 0 12' 36" West, 3.76 feet; thence, from a tangent bearing South 85 11' 34" East, along the arc of a curve concave to the South, having a radius of 1040 feet, through a central angle of 4 30' 30" an arc length of 81.83 feet; and the following nine courses; North 44 47' 24" West, 44.62 feet; North 89 47' 24" West, 53.50 feet; North 44 37' 45" West, 55.39 feet; North 0 12' 36" East, 135.87 feet; South 89 47' 24" East, 684.55 feet; South 29 47' 24" East, 112.24 feet; South 18 32' 24" East, 89.00 feet; South 29 47' 24" East, 21.30 feet; South 0 12' 36" West, 33.67 feet to the point of beginning. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Underground pipes Granted to : Pacific Gas and Electric Company, a California corporation Recorded : October 22, 1990 in Book L515, page 1223, Official Records Affects : Parcel A as shown upon the Parcel Map filed for record in Book 602 of Parcel Maps at page 35, Santa Clara County Records. Reference is hereby made to the record for further particulars and a map of said easement, no description was recorded. 6. AGREEMENT on the terms and conditions contained therein, For : Deferred obligation to construct stoplight Between : City of Santa Clara, California, a municipal corporation And : Dairy Associates, LP. Recorded : December 17, 1990 in Book L568, page 1565, Official Records. (Affects Parcels A and B) 7. LACK OF ABUTTER'S RIGHTS to and from Route 237 - South Bar Freeway, lying adjacent to the Northerly line of Parcels A & B of said land, said rights having been released and relinquished By : Dairy Associates, LP., a California Limited Partnership To : The State of California Recorded : August 16, 1991 in Book L826, page 839, Official Records. 8. EASEMENT for the purposes stated herein and incidents thereto Purpose : An easement for cut and fill slope purposes Granted to : The State of California Recorded : August 16, 1991 in Book L826, page 839, Official Records Affects : As follows: Commencing at the most Southerly corner of Parcel 1 described in that certain Deed recorded August 16, 1991 in Book L826, page 889, Official Records; thence along the general Southerly line of said Parcel 1 the following courses: from a tangent that bears N. 68 57' 08" E., along a curve to the left with a radius of 10,136.00 feet, through an angle of 05 40' 34", an arc length of 1,004.14 feet, N. 01 05' 17" E., 3.47 feet, and from a tangent that bears N. 61 34' 51" E., along a curve to the left with a radius of 8999.52 feet, through an angle of 00 15' 40", an arc length of 41.03 feet; thence leaving last said line S. 26 57' 54" E., 26.28 feet; thence from a tangent that bears S. 63 02' 06" W., on a curve to the right with a radius of 10,158.00 feet, through an angle of 05 58' 01", an arc length of 1,057.88 feet to the Westerly line of the aforesaid Parcel B; thence along last said line N. 00 50' 30" E., 23.71 feet to the point of commencement. Exhibit C PERMITTED HAZARDOUS SUBSTANCES (NOT a Comprehensive List) It is anticipated that the following Hazardous Substances, and others necessary for the use, occupancy, and operation of the Leased Property in accordance with the terms and conditions of this Lease, will be used by Tenant at the Leased Property: Description C.A.S.# Solder bars (lead) 7439-92-1 Solder paste Lead 7439-91-1 Tin 7440-31-5 Solder paste remover Sodium hydroxide 1310-73-2 Isopropyl alcohol Isopropanol 67-63-0 S32-10M Isopropanol 67-63-0 Methanol 67-56-1 Exhibit D RESOLUTION OF DISPUTED INSURANCE CLAIMS If Landlord and Tenant cannot agree upon the amount for which any insurance claim against an insurer should be settled after damage to the Leased Property by fire or other casualty, and so long as neither Tenant nor Landlord is authorized to determine such amount without the consent of the other pursuant to subparagraph 8.(r), then either party may require that the amount be determined as follows: (i) Landlord and Tenant shall each appoint an experienced architect who is familiar with construction costs for comparable properties in the vicinity of the Leased Property. Each party will make the appointment no later than 10 days after receipt of notice from the other party that the dispute resolution process described in this Exhibit has been invoked. The agreement of the two architects as to the appropriate amount of the insurance settlement will be binding upon Landlord and Tenant. If the two architects cannot agree upon the settlement amount within 30 days following their appointment, they shall within another 10 days agree upon a third architect. Immediately thereafter, each of the first two architects will submit his best estimate of the appropriate settlement amount (together with a written report supporting such estimate) to the third architect and the third architect will choose between the two estimates. The estimate chosen by the third architect as the closest to the amount needed to repair and restore the Leased Property will be binding upon Landlord and Tenant as the amount for which the applicable insurance claim should be settled. (However, no such estimate and nothing contained in this Exhibit will limit Tenant's liability under other provisions of this Lease for the repair and restoration of the Leased Property.) Notification in writing of the estimate chosen by the third architect shall be made to Landlord and Tenant within 15 days following the selection of the third architect. (ii) If architects must be selected under the procedure set out above and either Tenant or Landlord fails to appoint an architect or fails to notify the other party of such appointment within 10 days after receipt of notice that the prescribed time for appointing the architects has passed, then the other party's architect will determine the appropriate settlement amount. All architects selected for the dispute resolution process set out in this Exhibit will be disinterested, reputable, qualified architects with at least 15 years experience designing and overseeing the construction of properties comparable to the Leased Property. (iii) If a third architect must be chosen under the procedure set out above, he will be chosen on the basis of objectivity and competence, not on the basis of his relationship with the other architects or the parties to this Lease, and the first two architects will be so advised. Although the first two architects will be instructed to attempt in good faith to agree upon the third architect, if for any reason they cannot agree within the prescribed time, either Landlord or Tenant may require the first two architects to immediately submit its top choice for the third architect to the then highest ranking officer of the San Francisco Bar Association who will agree to help and who has no attorney/client or other significant relationship to either Landlord or Tenant. Such officer will have complete discretion to select the most objective and competent third architect from between the choice of each of the first two architects, and will do so within 20 days after such choices are submitted to him. (iv) Either Landlord or Tenant may notify the architect selected by the other party to demand the submission of an estimate of the appropriate settlement amount or a choice of a third architect as required under the procedure described above; and if the submission of such an estimate or choice is required but the other party's architect fails to comply with the demand within 5 days after receipt of such notice, then the settlement amount or choice of the third architect, as the case may be, selected by the other architect (i.e., the notifying party's architect) will be binding upon Landlord and Tenant. (v) For the purposes of this Exhibit, "appropriate settlement amount" and words of like effect means the amount required to restore the Leased Property, less any insurance deductible that clearly applies under the policy of insurance which provides the coverage to be settled; and all architects and other persons involved in the determination of the settlement amount will be so advised. Exhibit E FINANCIAL COVENANT COMPLIANCE CERTIFICATE BNP Leasing Corporation c/o Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Re: 3Com Lease Agreement Gentlemen: I, the undersigned, the [chief financial officer, controller, treasurer or the assistant treasurer] of 3Com Corporation, do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to subparagraph 8.(w)(iii) of that certain Lease Agreement dated as of October 4, 1996 (the "Lease Agreement," the terms defined therein being used herein as therein defined) between 3Com Corporation (the "Tenant"), and you. 2. Annex 1 attached hereto sets forth financial data and computations evidencing the Tenant's compliance with certain covenants of the Lease Agreement, all of which data and computations are complete, true and correct. 3. To the knowledge of Tenant no Default or Event of Default under the Lease Agreement has occurred and is continuing. 4. The representations of Tenant set forth in the Lease Agreement are true and correct in all material respects as of the date hereof as though made on and as of the date hereof. Executed this _____ day of ______________, ____. 3Com Corporation Name:_________________________ Title:________________________ [cc all Participants] Annex 1 To Compliance Certificate For the _________________ Ended ________________, ____ I. PARAGRAPH 8.(ac)(i): Quick Ratio A. Unencumbered Cash and Cash Equivalents and other "Quick Assets" as defined in Paragraph 8.(ac)(i) of the Lease: $_____________ B. "Current Liabilities" as defined in Paragraph 8.(ac)(i) of the Lease: $_____________ C. Ratio of A to B: _____ to 1.00 F. Minimum ratio computed as provided in Paragraph 8.(ac)(i) of the Lease: 1.00 to 1.00 II. PARAGRAPH 8.(ac)(ii): Maximum Senior Debt to Capitalization A. Total "Debt" as defined in Paragraph 1.(s) of Tenant and its consolidated Subsidiaries: $_____________ B. "Subordinated Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ C. "Senior Debt" as defined in Paragraph 8.(ac)(ii) of the Lease (A - B): $_____________ D. Consolidated Tangible Net Worth (from calculation below): $_____________ E. Capitalization as defined in Paragraph 8.(ac)(ii) of the Lease (A + D): $_____________ F. Ratio of B to E: _____ to 1.00 D. Maximum ratio: 0.35 to 1.00 III. PARAGRAPH 8.(ac)(iii): Minimum Tangible Net Worth A. Reported stockholders equity: $_____________ B. "Intangible Assets" as defined in Paragraph 8.(ac)(iii) of the Lease: $_____________ D. Consolidated Tangible Net Worth (A - B): $_____________ E. Minimum computed as provided in Paragraph 8.(ac)(iii) of the Lease: $_____________ IV. PARAGRAPH 8.(ac)(iv): Fixed Charge Ratio A. "Adjusted EBIT" as defined in Paragraph 8.(ac)(iv) of the Lease: $_____________ B. "Fixed Charges" as defined in Paragraph 8.(ac)(iv) of the Lease: $_____________ C. Ratio of A to B: _____ to 1.00 D. Minimum ratio: 2.00 to 1.00 Exhibit F CERTIFICATE OF TENANT'S CALCULATION OF THE SPREAD BNP Leasing Corporation c/o Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Re: 3Com Lease Agreement Gentlemen: I, the undersigned, the [chief financial officer, controller, treasurer or the assistant treasurer] of 3Com Corporation, do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to subparagraph 8.(w)(iv) of that certain Lease Agreement dated as of October 4, 1996 (the "Lease Agreement," the terms defined therein being used herein as therein defined) between 3Com Corporation, and you. 2. Annex 1 attached hereto sets forth financial data and computations evidencing the Tenant's computation of the Spread, all of which data and computations are complete, true and correct. Executed this _____ day of ______________, ____. 3Com Corporation Name:_________________________ Title:________________________ [cc all Participants] Annex 1 To Certificate of Tenant's Calculation of the Spread As of the ________________, ____ I. S&P'S RATING OF TENANT'S SENIOR UNSECURED DEBT: _____________ II. MOODY'S RATING OF TENANT'S SENIOR UNSECURED DEBT: _____________ III. CALCULATION OF TENANT'S DEBT TO CAPITAL RATIO: _____________ A. Funded "Senior Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ B. Other outstanding Debt as defined in Paragraph 1.(s) of the Lease: $_____________ C. Outstanding "Subordinated Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ D. Debt for purposes of this ratio (A + B - C): $_____________ E. Reported stockholders equity: $_____________ F. "Intangible Assets" as defined in Paragraph 8.(ac)(iii) of the Lease: $_____________ G. Consolidated Tangible Net Worth (E - F): $_____________ H. Capital for purposes of this test (A + B + G): $_____________ I. D divided by H: _____________ III. SPREAD AS DEFINED IN PARAGRAPH 1.(bo) OF THE LEASE: _____________ Exhibit G LIST OF ENVIRONMENTAL REPORTS (Phase I Property) As used in this Lease, "Environmental Reports" means, collectively, the following reports provided to BNPLC by 3COM or acquired by BNPLC from its own consultants: Tetra tech, 1996, Phase I Environmental Site Assessment for 3COM Corporation, 5400 Bayfront Plaza, Santa Clara, California 95052-8145. September 30, 1996. Tetra tech, 1996, Phase II Environmental Site Investigation for 3COM Corporation, 5400 Bayfront Plaza, Santa Clara, California 95052-8145. October 2, 1996. Levine-Fricke, 1989, Remedial Strategy Development for Property at the Former Edelweiss Dairy, Santa Clara, California. April 25, 1989. Levine-Fricke, Installation of Three Ground Water Monitoring Wells at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. August 23, 1994 and DRAFT same title August 19, 1994. Levine-Fricke, Proposed Ground Water Monitoring Sampling and Analysis at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. December, 1991. Levine-Fricke, Analytical Results for four Ground Water Samples and one Composite Soil Sample Collected at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. February 14, 1992. Levine-Fricke, Analytical Results for four Ground Water Samples and one Composite Soil Sample Collected at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. May 18, 1992. Levine-Fricke, Analytical Report on Results of Ground Water Monitoring at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. October 1, 1992. Levine-Fricke, Analytical Report on Results of Ground Water Monitoring for 1992 at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. March 8, 1993. Levine-Fricke, Request for Case Closure at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. August, 1993. Levine-Fricke, Case Closure at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. March 7, 1994. Levine-Fricke, Case Closure at the Former Edelweiss Dairy, 2955 Old Mountain View-Alviso Road, Santa Clara, California. January 21, 1993. Levine-Fricke, Phase I Environmental Site Assessment, 3COM Phase I Parcel, Santa Clara, California. June, 1994. Santa Clara Fire Department, permit removing removal of two gasoline tanks. October 19, 1984. Levine-Fricke, remedial proposal, recommending further characterization of the site including the establishment of a groundwater monitoring system. April 19, 1989. Levine-Fricke, Status Report on Soil Remediation at Former Edelweiss Dairy and Future 3COM Corporate Campus, Santa Clara, California. June 13, 1989. Levine-Fricke, letter to the California Water Quality Control Board regarding its final soil status report. February 5, 1990. Levine-Fricke, Report of Quarterly Ground Water Monitoring at the Former Edelweiss Dairy. January 23, 1993. Santa Clara Valley Water District ("SCVWD"), letter to Regional Water Quality Control Board requesting concurrence on case closure for the site. November 18, 1994. SCVWD, "no action" letter to Dairy Associates, L.P. December 2, 1994. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>5 <TEXT> EXHIBIT 10.36 $74,800,000 PURCHASE AGREEMENT BETWEEN BNP LEASING CORPORATION, ("BNPLC") AND 3COM CORPORATION, ("3COM") EFFECTIVE AS OF OCTOBER 4, 1996 (Great America Site - Phase I) This Agreement is being facilitated by the following banks: Banque Nationale de Paris ABN AMRO Bank N.V. PURCHASE AGREEMENT This PURCHASE AGREEMENT (this "Agreement") is made as of October 4, 1996, by 3COM CORPORATION, a California corporation ("3COM") and BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"). R E C I T A L S A. BNPLC is acquiring the land described in Exhibit A attached hereto and the improvements and certain fixtures located thereon and is leasing the same to 3COM pursuant to that certain Lease Agreement (as from time to time supplemented, amended or restated, the "Lease") between 3COM and BNPLC dated as of the date hereof. (The land described in Exhibit A and any and all other real or personal property from time to time covered by the Lease and included within the "Leased Property" as defined therein are hereinafter collectively referred to as the "Property".) B. BNPLC is also concurrently herewith receiving a separate environmental indemnity from 3COM pursuant to an Environmental Indemnity Agreement (as from time to time supplemented, amended or restated, the "Environmental Indemnity") between 3COM and BNPLC dated as of the date hereof. C. 3COM has requested an option to purchase the Property, which BNPLC is willing to provide on and subject to the terms and conditions set out herein. NOW, THEREFORE, in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. As used herein, the terms "3COM", "BNPLC", "Property", "Lease" and "Environmental Indemnity" shall have the meanings indicated above; terms with initial capitals defined in the Lease and used but not defined herein shall have the meanings assigned to them in the Lease; and the terms listed immediately below shall have the following meanings: "Applicable Purchaser" means any third party designated by 3COM to purchase the interest of BNPLC in the Property as provided in Paragraph 2(a)(ii) below. "Deposit Taker" shall have the meaning assigned to it in the Pledge Agreement. "Deposit Taker Losses" shall have the meaning assigned to it in the Pledge Agreement. "Designated Sale Date" means the earlier of: (1) the effective date of any termination of the Lease by 3COM pursuant to Paragraph 2 thereof; (2) any date designated by BNPLC in a written notice given by BNPLC to 3COM when an Event of Default by 3COM is continuing, provided the notice of the date so designated is given by BNPLC at least thirty (30) days before the date so designated; or (3) the first Business Day in November, 2001. "Direct Payments to Participants" means the amounts paid or required to be paid directly to Participants on the Designated Sale Date as provided in Section 6.2 of the Pledge Agreement at the direction of and for 3COM by the collateral agent appointed pursuant to the Pledge Agreement from all or any part of the Collateral described therein. "Fair Market Value" means the fair market value of the Property on or about the Designated Sale Date (calculated under the assumptions, whether or not then accurate, that 3COM has maintained the Property in compliance with all Applicable Laws [including Environmental Laws]; that 3COM has completed the construction of any Improvements which was commenced prior to the Designated Sale Date; that all such Improvements are self-sufficient in the sense that any easements or offsite facilities needed for their use will be available at no additional cost to the owner of the Improvements; that 3COM has repaired and restored the Property after any damage following fire or other casualty; that 3COM has restored the remainder of the Property after any partial taking by eminent domain; that 3COM has completed any contests of and paid any taxes due [other than Excluded Taxes] or other amounts secured by or allegedly secured by a lien against the Property other than Prohibited Encumbrances; that no conditions or circumstances on or about the Property [such as the presence of an endangered species] is discovered that will impede the use or any development of the Property permitted by the Lease; that any use or development of the Property as permitted by the Lease will not be hindered or delayed because of the limited availability of utilities or water; that without undue cost or delay any purchaser paying fair market value for the Property can obtain any necessary permits or licenses needed to use the Property for the purposes permitted by the Lease; and that 3COM has cured any title defects affecting the Property other than Prohibited Encumbrances, all in accordance with the standards and requirements of the Lease as though the Lease were continuing in force) as determined by an independent MAI appraiser selected by BNPLC, which appraiser must have five (5) years or more experience appraising similar properties in northern California. "Qualified Deposit Taker" means one of the fifty largest (measured by total assets) U.S. banks, or one of the one hundred largest (measured by total assets) banks in the world, with debt ratings of at least (i) A- (in the case of long term debt) and A-1 (in the case of short term debt) or the equivalent thereof by Standard and Poor's Corporation, and (ii) A (in the case of long term debt) and P-1 (in the case of short term debt) or the equivalent thereof by Moody's Investor Service, Inc. The parties believe it improbable that the ratings systems used by Standard and Poor's Corporation and by Moody's Investor Service, Inc. will be discontinued or changed, but if such ratings systems are discontinued or changed, 3COM shall be entitled to select and use a comparable ratings systems as a substitute for the S&P Rating or the Moody Rating, as the case may be, for purposes of determining the status of any bank as a Qualified Deposit Taker. "Purchase Price" means an amount equal to Stipulated Loss Value outstanding on the Designated Sale Date, plus all costs and expenses (including appraisal costs, withholding taxes (if any) and reasonable Attorneys' Fees, as defined in the Lease) incurred in connection with any sale of the Property by BNPLC hereunder or in connection with collecting sales proceeds due hereunder, less the aggregate amounts (if any) of Direct Payments to Participants and Deposit Taker Losses. "Prohibited Encumbrance" means any lien or other title defect encumbering the Property that is claimed by BNPLC itself or lawfully claimed by a third party through or under BNPLC, including any judgment lien lawfully filed against BNPLC and including any tax lien assessed because of BNPLC's failure to pay Excluded Taxes, but excluding the Lease and any lien or other title defect that (i) is a Permitted Encumbrance (as defined in the Lease), regardless of whether claimed by, through or under BNPLC, (ii) is claimed by, through or under 3COM or any of the Participants approved by 3COM (other than Landlord's Parent), or (iii) exists because of any breach by 3COM of the Lease, because of anything done or not done by BNPLC in an effort to satisfy subparagraph 9(b) of the Lease, or because of anything done or not done by BNPLC at the request of 3COM. "Remarketing Notice" shall have the meaning assigned to it in Paragraph 2(b)(1) below. "Required Documents" means the grant deed and other documents that BNPLC must tender pursuant to Paragraph 3 below. "Shortage Amount" means any amount payable to BNPLC by 3COM, rather than by the Applicable Purchaser, pursuant to clause 2(a)(ii) below. 2. 3COM's Options and Obligations on the Designated Sale Date. (a) Choices. On the Designated Sale Date 3COM shall have the right and the obligation to either: (i) purchase BNPLC's interest in the Property and in Escrowed Proceeds, if any, for a net cash price equal to the Purchase Price; or (ii) cause the Applicable Purchaser to purchase BNPLC's interest in the Property and in Escrowed Proceeds, if any, for a net cash price not less than the lesser of (a) the Fair Market Value of the Property, (b) fifteen percent (15%) of Stipulated Loss Value outstanding immediately prior to the purchase or (c) the Purchase Price. If, however, the Fair Market Value is less than fifteen percent (15%) of Stipulated Loss Value and less than the Purchase Price, BNPLC may elect to keep the Property and any Escrowed Proceeds rather than sell to the Applicable Purchaser, in which case 3COM shall pay BNPLC an amount equal to (A) eighty-five percent (85%) of Stipulated Loss Value, less (B) the sum of (x) any Escrowed Proceeds then held and to be retained by BNPLC, (y) any Direct Payments to Participants and (z) any Deposit Taker Losses. Unless BNPLC elects to keep the Property pursuant to the preceding sentence, 3COM must make a supplemental payment to BNPLC on the Designated Sale Date equal to the excess (if any) of the Purchase Price over the net cash price actually paid to BNPLC on the Designated Sale Date by the Applicable Purchaser for BNPLC's interest in the Property and in Escrowed Proceeds, if any. However, provided no Event of Default has occurred and is continuing under the Lease, and provided further that neither 3COM nor any Applicable Purchaser has failed to pay any amount required to be paid by this Agreement on the date such amount first became due, any supplemental payment required by the preceding sentence shall not exceed (1) eighty-five percent (85%) of Stipulated Loss Value on the Designated Sale Date, less (2) any Direct Payments to Participants and any Deposit Taker Losses. Any supplemental payment payable to BNPLC by 3COM, rather than by the Applicable Purchaser, pursuant to this clause (ii) is hereinafter referred to as the "Shortage Amount." If the net cash price actually paid by the Applicable Purchaser to BNPLC exceeds the Purchase Price and all other sums that are then due from 3COM to BNPLC, 3COM shall be entitled to such excess. If any amount payable to BNPLC pursuant to this subparagraph 2(a) is not actually paid to BNPLC on the Designated Sale Date, 3COM shall pay interest on the past due amount computed at the Default Rate from the Designated Sale Date. However, Tenant shall be entitled to a reduction of the interest required by the preceding sentence equal to the Base Rent, if any, paid by Tenant as provided in Paragraph 17 of the Lease for any holdover period after the Designated Sale Date. (b) Election by 3COM. 3COM shall have the right to elect whether it will satisfy the obligations set out in clause (i) or (ii) of the preceding Paragraph 2(a); provided, however, that the following conditions are satisfied: (1) To give BNPLC the opportunity to have the Fair Market Value determined by an appraiser as provided in Paragraph 1(d) before the Designated Sale Date, 3COM must, unless 3COM concedes that Fair Market Value will not be less than fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date, provide BNPLC with a Remarketing Notice. "Remarketing Notice" means a notice given by 3COM to BNPLC (and to each of the Participants) no earlier than one hundred eighty (180) days before the Designated Sale Date and no later than ninety (90) days before the Designated Sale Date, specifying that 3COM does not concede that the Fair Market Value is equal to or greater than fifteen percent (15%) of the Stipulated Loss Value. A Remarketing Notice will be required only if 3COM does not concede that Fair Market Value will equal or exceed fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date. But if for any reason (including but not limited to any acceleration of the Designated Sale Date pursuant to clause (2) of the definition of Designated Sale Date above) 3COM fails to provide a Remarketing Notice within the time periods specified in the definition of Remarketing Notice above, Fair Market Value shall, for purposes of this Agreement, be deemed to be no less than fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date. (2) To give BNPLC the opportunity to prepare the Required Documents before the Designated Sale Date, 3COM must, if it is to elect to satisfy the obligations set forth in clause (ii) of Paragraph 2(a), irrevocably specify an Applicable Purchaser in notice to BNPLC given at least seven (7) days prior to the Designated Sale Date. If for any reason 3COM fails to so specify an Applicable Purchaser, 3COM shall be deemed to have irrevocably elected to satisfy the obligations set forth in clause (i) of Paragraph 2(a). (c) Termination of 3COM's Option To Purchase. Without limiting BNPLC's right to require 3COM to satisfy the obligations imposed by Paragraph 2(a), 3COM shall have no further option hereunder to purchase the Property if either: (1) 3COM shall have elected to satisfy its obligations under clause (ii) of Paragraph 2(a) on a Designated Sale Date and BNPLC shall have elected to keep the Property on such Designated Sale Date in accordance with clause (ii) of Paragraph 2(a); or (2) 3COM shall have failed on a Designated Sale Date to make or cause to be made all payments to BNPLC required by this Agreement or by the Lease and such failure shall have continued beyond the thirty (30) day period for tender specified in the next sentence. If BNPLC does not receive all payments due under the Lease and all payments required hereunder on a Designated Sale Date, 3COM may nonetheless tender to BNPLC the full Purchase Price and all amounts then due under the Lease, together with interest on the total Purchase Price computed at the Default Rate from the Designated Sale Date to the date of tender, and if presented with such a tender within thirty (30) days after the applicable Designated Sale Date, BNPLC must accept it and promptly thereafter deliver any Escrowed Proceeds and a deed and all other Required Documents listed in Paragraph 3. (d) Payment to BNPLC. All amounts payable under the preceding Paragraphs 2(a) or 2(c) by 3COM and, if applicable, by the Applicable Purchaser must be paid directly to BNPLC, and no payment to any other party shall be effective for the purposes of this Agreement. In addition to the payments required under Paragraph 2(a) hereunder, on the Designated Sale Date 3COM must pay all amounts then due to BNPLC under the Lease. BNPLC will remit any excess amounts due 3COM pursuant to the last sentence of clause (ii) of Paragraph 2(a) promptly after BNPLC's receipt of the same and in no event later than thirty (30) days thereafter. (e) Effect of Options on Subsequent Title Encumbrances. It is the intent of BNPLC and 3COM that any conveyance of the Property to 3COM or any Applicable Purchaser pursuant to this Agreement shall cut off and terminate any interest in the Property claimed by, through or under BNPLC, including the Participants (but not any unsatisfied obligations to BNPLC under the Lease, the Environmental Indemnity or this Agreement), including but not limited to any Prohibited Encumbrances and any leasehold or other interests conveyed by BNPLC in the ordinary course of BNPLC's business. Anyone accepting or taking any interest in the Property by or through BNPLC after the date of this Agreement shall acquire such interest subject to the rights and options granted 3COM hereby. Further, 3COM and any Applicable Purchaser shall be entitled to pay any payment required by this Agreement for the purchase of the Property directly to BNPLC notwithstanding any prior conveyance or assignment by BNPLC, voluntary or otherwise, of any right or interest in this Agreement or the Property, and neither 3COM nor any Applicable Purchaser shall be responsible for the proper distribution or application of any such payments by BNPLC. 3. Terms of Conveyance Upon Purchase. Immediately after receipt of all payments to BNPLC required pursuant to the preceding Paragraph 2, BNPLC must, unless it is to keep the Property as permitted by Paragraph 2(a)(ii), deliver all Escrowed Proceeds, if any, and convey all of its right, title and interest in the Property by grant deed to 3COM or the Applicable Purchaser, as the case may be, subject only to the Permitted Encumbrances (as defined in the Lease) and any other encumbrances that do not constitute Prohibited Encumbrances. However, such conveyance shall not include the right to receive any payment under the Lease then due BNPLC or that may become due thereafter because of any expense or liability incurred by BNPLC resulting in whole or in part from events or circumstances occurring before such conveyance. All costs of such purchase and conveyance of every kind whatsoever, both foreseen and unforeseen, shall be the responsibility of the purchaser, and the form of grant deed used to accomplish such conveyance shall be substantially in the form attached as Exhibit B. With such grant deed, BNPLC shall also tender to 3COM or the Applicable Purchaser, as the case may be, the following, each fully executed and, where appropriate, acknowledged on BNPLC's behalf by an officer of BNPLC: (1) a Preliminary Change of Ownership Report in the form attached as Exhibit C, (2) a Bill of Sale and Assignment of Contract Rights and Intangible Assets in the form attached as Exhibit D, (3) an Acknowledgment of Disclaimer of Representations and Warranties, in the form attached as Exhibit E, which 3COM or the Applicable Purchaser must execute and return to BNPLC, (5) a Documentary Transfer Tax Request in the form attached as Exhibit F, (6) a Secretary's Certificate in the form attached as Exhibit G, (7) a letter to the title insurance company insuring title to the Property in the form attached as Exhibit H, and (8) a certificate concerning tax withholding in the form attached as Exhibit I. 4. Survival of 3COM's Obligations. (a) Status of this Agreement. Except as expressly provided in the last sentence of this subparagraph and elsewhere herein, this Agreement shall not terminate, nor shall 3COM have any right to terminate this Agreement, nor shall 3COM be entitled to any reduction of the Purchase Price hereunder, nor shall the obligations of 3COM to BNPLC under Paragraph 2 be affected by reason of (i) any damage to or the destruction of all or any part of the Property from whatever cause, (ii) the taking of or damage to the Property or any portion thereof under the power of eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of 3COM's use of all or any portion of the Property or any interference with such use by governmental action or otherwise, (iv) any eviction of 3COM or any party claiming under 3COM by paramount title or otherwise, (v) 3COM's prior acquisition or ownership of any interest in the Property, (vi) any default on the part of BNPLC under this Agreement, the Lease or any other agreement to which BNPLC is a party, or (vii) any other cause, whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of 3COM hereunder (including 3COM's obligation to make payments under - and, if applicable, to cause the Applicable Purchaser to make payments under - Paragraph 2) shall be separate and independent of the covenants and agreements of BNPLC. Accordingly, the Purchase Price and the Shortage Amount, as the case may be under Paragraph 2, shall continue to be payable in all events, and the obligations of 3COM hereunder shall continue unaffected by any breach of this Agreement by BNPLC. However, nothing in this subparagraph, nor the performance without objection by 3COM of its obligations hereunder, shall be construed as a waiver by 3COM of any right 3COM may have at law or in equity, following any failure by BNPLC to tender a grant deed and the other Required Documents as required by Paragraph 3 upon the tender by 3COM and/or the Applicable Purchaser of the payments required by Paragraph 2 and of the other documents to be executed in favor of BNPLC at the closing of the sale hereunder, to (i) recover monetary damages proximately caused by such failure of BNPLC if BNPLC does not cure the failure within thirty (30) days after 3COM demands a cure by written notice to BNPLC, or (ii) a decree compelling performance of BNPLC's obligation to so tender a grant deed and the Required Documents. (b) Remedies Under the Lease and the Environmental Indemnity. No repossession of or re-entering upon the Property or exercise of any other remedies available under the Lease or the Environmental Indemnity shall relieve 3COM of its liabilities and obligations hereunder, all of which shall survive the exercise of remedies under the Lease and Environmental Indemnity. 3COM acknowledges that the consideration for this Agreement is separate and independent of the consideration for the Lease and the Environmental Indemnity, and 3COM's obligations hereunder shall not be affected or impaired by any event or circumstance that would excuse 3COM from performance of its obligations under the Lease or the Environmental Indemnity. 5. Remedies Cumulative. No right or remedy herein conferred upon or reserved to BNPLC is intended to be exclusive of any other right or remedy BNPLC has with respect to the Property, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. In addition to other remedies available under this Agreement, either party shall be entitled, to the extent permitted by applicable law, to a decree compelling performance of any of the other party's agreements hereunder. 6. No Implied Waiver. The failure of either party to this Agreement to insist at any time upon the strict performance of any covenant or agreement of the other party or to exercise any remedy contained in this Agreement shall not be construed as a waiver or a relinquishment thereof for the future. The waiver by either party of or redress for any violation of any term, covenant, agreement or condition contained in this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. No express waiver by either party shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by BNPLC of any payment hereunder with knowledge of the breach of this Agreement shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Agreement shall be deemed to have been made unless expressed in writing and signed by the waiving party. 7. Attorneys' Fees and Legal Expenses. If either party commences any legal action or other proceeding to enforce any of the terms of this Agreement or the documents and agreements referred to herein, or because of any breach by the other party or dispute hereunder or thereunder, the successful or prevailing party, shall be entitled to recover from the nonprevailing party all Attorneys' Fees incurred in connection therewith, whether or not such controversy, claim or dispute is prosecuted to a final judgment. Any such Attorneys' Fees incurred by either party in enforcing a judgment in its favor under this Agreement shall be recoverable separately from such judgment, and the obligation for such Attorneys' Fees is intended to be severable from other provisions of this Agreement and not to be merged into any such judgment. 8. Estoppel Certificate. 3COM and BNPLC will each, upon not less than twenty (20) days' prior written request by the other, execute, acknowledge and deliver to the requesting party a written statement certifying that this Agreement is unmodified and in full effect (or, if there have been modifications, that this Agreement is in full effect as modified, and setting forth such modification) and either stating that no default exists hereunder or specifying each such default of which the signer may have knowledge. Any such statement may be relied upon by any Participant or prospective purchaser or assignee of BNPLC with respect to the Property. Neither 3COM nor BNPLC shall be required to provide such a certificate more frequently than once in any six month period; provided, however, that if either party determines that there is a significant business reason for requiring a current certificate, including, without limitation, the need to provide such a certificate to a prospective purchaser or assignee, the other shall provide a certificate upon request whether or not it had provided a certificate within the prior six month period. 9. Notices. Each provision of this Agreement referring to the sending, mailing or delivery of any notice or referring to the making of any payment to BNPLC, shall be deemed to be complied with when and if the following steps are taken: (a) All payments required to be made by 3COM or the Applicable Purchaser to BNPLC hereunder shall be paid to BNPLC in immediately available funds by wire transfer to: Federal Reserve Bank of San Francisco Account: Banque Nationale de Paris ABA #: 121027234 Reference: 3COM (Phase I Transactions) or at such other place and in such other manner as BNPLC may designate in a notice to 3COM (provided BNPLC will not unreasonably designate a method of payment other than wire transfer). Time is of the essence as to all payments to BNPLC under this Agreement. Any payments required to be made by BNPLC to 3COM pursuant to the last sentence of clause (ii) of Paragraph 2(a) shall be paid to 3COM in immediately available funds at the address of 3COM set forth below or as 3COM may otherwise direct by written notice sent in accordance herewith. (b) All notices, demands and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below) and shall be given by any of the following means: (A) personal service, with proof of delivery or attempted delivery retained; (B) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (C) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (A) or (C) hereof shall be deemed received (whether or not actually received) upon first attempted delivery at the proper notice address on any Business Day between 9:00 A.M. and 5:00 P.M., and any notice or other communication sent pursuant to clause (B) hereof shall be deemed received upon dispatch by electronic means. Address of BNPLC: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention:Jennifer Cho or Will La Herran Telecopy: (415) 296-8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of 3COM: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Legal Dept. Mail Stop 1308 Telecopy: (408) 764-6434 With copies to: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Real Estate Dept. Mail Stop 1220 Telecopy: (408) 764-5718; and 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Treasury Dept. Mail Stop 1307 Telecopy: (408) 764-8403; and Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attn: Jonathan E. Rattner, Esq. Telecopy: (415) 328-3029 10. Severability. Each and every covenant and agreement of 3COM contained in this Agreement is, and shall be construed to be, a separate and independent covenant and agreement. If any term or provision of this Agreement or the application thereof to any person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Further, the obligations of 3COM hereunder, to the maximum extent possible, shall be deemed to be separate, independent and in addition to, not in lieu of, the obligations of 3COM under the Lease. In the event of any inconsistency between the terms of this Agreement and the terms and provisions of the Lease, the terms and provisions of this Agreement shall control. 11. Entire Agreement. This Agreement and the documents and agreements referred to herein set forth the entire agreement between the parties concerning the subject matter hereof and no amendment or modification of this Agreement shall be binding or valid unless expressed in a writing executed by both parties hereto. 12. Paragraph Headings. The paragraph headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs hereof. 13. Gender and Number. Within this Agreement, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. 14. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE UNDER AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. 15. Successors and Assigns. The terms, provisions, covenants and conditions hereof shall be binding upon 3COM and BNPLC and their respective permitted successors and assigns and shall inure to the benefit of 3COM and BNPLC and all permitted transferees, mortgagees, successors and assignees of 3COM and BNPLC with respect to the Property; provided, that the rights of BNPLC hereunder shall not pass to 3COM or any Applicable Purchaser or any subsequent owner claiming through them. Prior to the Designated Sale Date BNPLC may transfer, assign and convey, in whole or in part, the Property and any and all of its rights under this Agreement (subject to the terms of this Agreement) by any conveyance that constitutes a Permitted Transfer, but not otherwise. If BNPLC sells or otherwise transfers the Property and assigns its rights under this Agreement and the Lease pursuant to a Permitted Transfer, then to the extent BNPLC's successor in interest confirms its liability for the obligations imposed upon BNPLC by this Agreement and the Lease on and subject to the express terms set out herein and therein, BNPLC shall thereby be released from any further obligations thereafter arising under this Agreement and the Lease, and 3COM will look solely to each successor in interest of BNPLC for performance of such obligations. 16. WAIVER OF JURY TRIAL. BNPLC AND 3COM EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LEASE, THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. 3COM and BNPLC each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Agreement and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. 3COM and BNPLC each further warrant and represent that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LEASE, THIS AGREEMENT OR THE ENVIRONMENTAL INDEMNITY. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 17. Security for 3COM's Obligations. 3COM's obligations under this Agreement are secured by the Pledge Agreement, reference to which is hereby made for a description of the Collateral covered thereby and the rights and remedies provided to BNPLC thereby. Although the collateral agent appointed for BNPLC as provided in the Pledge Agreement shall be entitled to hold all Collateral as security for the full and faithful performance by 3COM of 3COM's covenants and obligations under this Agreement, the Collateral shall not be considered an advance payment of the Purchase Price or any Shortage Amount or a measure of BNPLC's damages should 3COM breach this Agreement. If 3COM does breach this Agreement and fails to cure the same within any time specified herein for the cure, BNPLC may, from time to time, without prejudice to any other remedy and without notice to 3COM, require the collateral agent to immediately apply the proceeds of any disposition of the Collateral (and any cash included in the Collateral) to amounts then due hereunder from 3COM. If BNPLC assigns its interest in the Property before the Designated Sale Date, BNPLC may also assign BNPLC's interest in the Collateral to the assignee. 18. Replacement of Participants Proposed by 3COM. So long as no Event of Default has occurred and is continuing, BNPLC shall not unreasonably withhold its approval for a substitution under the Participation Agreement of a new Participant proposed by 3COM for any Participant, the Deposit Taker for whom has ceased to be a Qualified Deposit Taker; provided, however, that (A) the proposed substitution can be accomplished without a release or breach by BNPLC of its rights and obligations under the Participation Agreement or the "Underlying Documents" described therein (including this Purchase Agreement); (B) the new Participant will agree (by executing Supplements to the Participation Agreement and Pledge Agreement as therein contemplated and by other agreements as may be reasonably required by BNPLC and 3COM) to become a party to the Participation Agreement and to the Pledge Agreement, to designate a Qualified Deposit Taker as the Deposit Taker for it under the Pledge Agreement and to accept a Percentage under the Participation Agreement equal to the Percentage of the Participant to be replaced; (C) the new Participant (or 3COM) will provide the funds required to pay the termination fee by Section 6.4 of the Participation Agreement to accomplish the substitution; (D) 3COM (or the new Participant) agrees in writing to indemnify and defend BNPLC for any and all Losses incurred by BNPLC in connection with or because of the substitution, including the cost of preparing supplements to the Participation Agreement and the Pledge Agreement and including any cost of defending and paying any claim asserted by the Participant to be replaced because of the substitution (but not including any liability of BNPLC to such Participant for damages caused by BNPLC's bad faith or gross negligence in the performance of BNPLC's obligations under the Participation Agreement prior to the substitution); and (E) the new Participant shall be a reputable financial institution having a net worth of no less than seven and one half percent (7.5%) of total assets and total assets of no less than $10,000,000,000.00 (all according to then recent audited financial statements). BNPLC shall attempt in good faith to assist (and cause its Affiliate, Banque Nationale de Paris, to attempt in good faith to assist) 3COM in identifying a new Participant that 3COM may propose to substitute for an existing Participant pursuant to this Paragraph, as 3COM may reasonably request from time to time. However, in no event shall BNPLC itself, or any of its Affiliates, be required to take the Percentage of any Participant to be replaced. 19. Security for BNPLC's Obligations. To secure 3COM's right to recover any damages caused by a breach of Paragraph 3 by BNPLC, including any such breach caused by a rejection or termination of this Agreement in any bankruptcy or insolvency proceeding instituted by or against BNPLC, as debtor, BNPLC does hereby grant to 3COM a lien and security interest against all rights, title and interests of BNPLC from time to time in and to the Property. 3COM may enforce such lien and security interest judicially after any such breach by BNPLC, but not otherwise. 3COM waives any right it has to seek a deficiency judgement against BNPLC in any action brought for a judicial foreclosure of such lien and security interest, and in connection therewith, BNPLC hereby acknowledges that it shall have no right of redemption following any such judicial foreclosure pursuant to Cal. Code Civ. Procedure Section 729. Contemporaneously with the execution of this Agreement, 3COM and BNPLC will execute a memorandum of this Agreement which is in recordable form and which specifically references the lien granted in this Paragraph, and 3COM shall be entitled to record such memorandum at any time prior to the Designated Sale Date. 20. Not a Partnership, Etc. NOTHING IN THIS PURCHASE AGREEMENT IS INTENDED TO BE OR TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN BNPLC AND 3COM. NEITHER THE EXECUTION OF THIS PURCHASE AGREEMENT NOR THE ADMINISTRATION OF THIS PURCHASE AGREEMENT OR OTHER DOCUMENTS REFERENCED HEREIN BY BNPLC, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF BNPLC UNDER OR PURSUANT TO THIS PURCHASE AGREEMENT OR SUCH DOCUMENTS IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF BNPLC TO 3COM. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "BNPLC" BNP LEASING CORPORATION, a Delaware corporation By: /s/ Lloyd G. Cox -------------------- Lloyd G. Cox, Vice President "3COM" 3COM CORPORATION, a California corporation By: /s/ Christopher B. Paisley ------------------------------ Christopher B. Paisley, Chief Financial Officer Exhibit A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: Parcel One Parcel A, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California. EXCEPTING THEREFROM that portion described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at the Southwest corner of said Parcel "A"; thence on the Westerly and Northerly lines of said Parcel "A" the following 5 courses: 1. North 00 12' 36" East a distance of 665.00 feet; 2. North 45 12' 36" East a distance of 64.00 feet; 3. North 00 12' 36" East a distance of 82.98 feet to a point on a non-tangent curve the center of which bears North 29 17' 50" West a distance of 9000.00 feet; 4. Northeasterly a distance of 79.37 feet on the arc of said curve to the left through a central angle of 00 30' 19" (chord bears North 60 27' 01" East a distance of 79.37 feet, to a point on said curve; 5. North 66 32' 39" East, departing said curve, a distance of 75.89 feet; Thence South 62 07' 20" West a distance of 104.00 feet to a point of curvature; thence Southwesterly a distance of 9.53 feet on the arc of said 10136.00 foot radius curve to the right through a central angle of 00 03' 14" (chord bears South 62 08' 57" West a distance of 9.53 feet) to a point on said curve; thence South 00 12' 36" West a distance of 809.62 feet to a point on the South line of said parcel "A"; thence North 89 47' 24" West, on said South line, a distance of 83.50 feet to the point of beginning. ALSO EXCEPTING THEREFROM that portion of said land as condemned to the State of California by Order recorded March 10, 1993 in Book M660, page 1700, described as follows: Being a portion of Parcel A, as shown on that certain Parcel Map filed for record in Book 602 of Maps at pages 34 and 35 Santa Clara County Records described as follows: Beginning at the Northeast corner of said Parcel A; thence from said point of beginning, along the Northerly line of said Parcel A, S 67 25' 20" W 39.39 feet; thence leaving said Northerly line S 41 34' 47" E 73.60 feet to a point in the Easterly line of said Parcel A; thence along said Easterly line of N 10 04' 48" W 71.28 feet to the point of beginning. Parcel Two That portion of Parcel B, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California and described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at a point on the most Northerly Southeasterly line of said Parcel "B" which bears South 66 32' 39" West a distance of 226.19 feet from the most Easterly corner thereof; thence South 10 57' 34" East a distance of 218.69 feet; thence North 89 47' 24" West a distance of 324.26 feet; thence North 77 17' 24" West a distance of 141.24 feet; thence North 66 32' 39" East a distance of 458.33 feet to the point of beginning. APN: 104-52-006, 16 ARB: 104-01-046, 046.02, 046.02.01 Exhibit B CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [3Com Corporation or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ MAIL TAX STATEMENTS TO: NAME: [3Com Corporation or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ CORPORATION GRANT DEED FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), hereby grants to [3COM or the Applicable Purchaser] all of BNPLC's interest in the land situated in the County of Santa Clara, State of California, described on Annex A attached hereto and hereby made a part hereof, together with the improvements currently located on such land and any easements, rights-of-way, privileges, appurtenances and other rights pertaining to such land; provided, however, that this grant is subject to the following, as well as the Permitted Encumbrances described on Annex B: 1. Real Estate Taxes not yet due and payable; 2. General or Special Assessments due and payable after the date hereof; and 3. Encroachments, variations in area or in measurements, boundary line disputes, roadways and other matters not of record which would be disclosed by a survey and inspection of the property conveyed hereby. BNP LEASING CORPORATION Date: As of ____________ By: Its: Vice President Attest: Its: Assistant Secretary STATE OF TEXAS ) ) SS COUNTY OF DALLAS ) On ___________________ before me, , personally appeared and , personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the person, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. Signature Annex A LEGAL DESCRIPTION REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: Parcel One Parcel A, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California. EXCEPTING THEREFROM that portion described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at the Southwest corner of said Parcel "A"; thence on the Westerly and Northerly lines of said Parcel "A" the following 5 courses: 1. North 00 12' 36" East a distance of 665.00 feet; 2. North 45 12' 36" East a distance of 64.00 feet; 3. North 00 12' 36" East a distance of 82.98 feet to a point on a non-tangent curve the center of which bears North 29 17' 50" West a distance of 9000.00 feet; 4. Northeasterly a distance of 79.37 feet on the arc of said curve to the left through a central angle of 00 30' 19" (chord bears North 60 27' 01" East a distance of 79.37 feet, to a point on said curve; 5. North 66 32' 39" East, departing said curve, a distance of 75.89 feet; Thence South 62 07' 20" West a distance of 104.00 feet to a point of curvature; thence Southwesterly a distance of 9.53 feet on the arc of said 10136.00 foot radius curve to the right through a central angle of 00 03' 14" (chord bears South 62 08' 57" West a distance of 9.53 feet) to a point on said curve; thence South 00 12' 36" West a distance of 809.62 feet to a point on the South line of said parcel "A"; thence North 89 47' 24" West, on said South line, a distance of 83.50 feet to the point of beginning. ALSO EXCEPTING THEREFROM that portion of said land as condemned to the State of California by Order recorded March 10, 1993 in Book M660, page 1700, described as follows: Being a portion of Parcel A, as shown on that certain Parcel Map filed for record in Book 602 of Maps at pages 34 and 35 Santa Clara County Records described as follows: Beginning at the Northeast corner of said Parcel A; thence from said point of beginning, along the Northerly line of said Parcel A, S 67 25' 20" W 39.39 feet; thence leaving said Northerly line S 41 34' 47" E 73.60 feet to a point in the Easterly line of said Parcel A; thence along said Easterly line of N 10 04' 48" W 71.28 feet to the point of beginning. Parcel Two That portion of Parcel B, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California and described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at a point on the most Northerly Southeasterly line of said Parcel "B" which bears South 66 32' 39" West a distance of 226.19 feet from the most Easterly corner thereof; thence South 10 57' 34" East a distance of 218.69 feet; thence North 89 47' 24" West a distance of 324.26 feet; thence North 77 17' 24" West a distance of 141.24 feet; thence North 66 32' 39" East a distance of 458.33 feet to the point of beginning. APN: 104-52-006, 16 ARB: 104-01-046, 046.02, 046.02.01 Annex B Permitted Encumbrances [NOTE: TO THE EXTENT THAT SPECIFIC ENCUMBRANCES (OTHER THAN "PROHIBITED LIENS") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "NOTE" WILL BE DELETED BEFORE THIS DEED IS ACTUALLY EXECUTED AND DELIVERED BY BNPLC. SUCH ADDITIONAL ENCUMBRANCES WOULD INCLUDE ANY NEW ENCUMBRANCES APPROVED BY BNPLC AS "PERMITTED ENCUMBRANCES" FROM TIME TO TIME BECAUSE OF 3COM'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT AS PROVIDED IN THE LEASE.] This conveyance is subject to any encumbrances that do not constitute "Prohibited Encumbrances" (as defined in the Purchase Agreement pursuant to which this Deed is being delivered), including County and city taxes for the Fiscal Year _______, a lien not yet due or payable, and including the following matters to the extent the same are still valid and in force: 1. EASEMENT shown on map filed for record in Book 460 of Maps, page 44 and 45, and incidents thereto Purpose : Public Utility Easement Affects : A portion of the Southerly 10 feet of (Affects Parcels A and B) 2. DECLARATION of Reciprocal Easements, Covenants, and Restrictions for the purpose stated herein and subject to the terms and conditions therein, executed by Dairy Associates, L.P., a California Limited Partnership, recorded July 7, 1989 in Book L013, page 971 of Official Records. (Affects Parcels A and B) Amendment No. 1 of Declaration of Reciprocal Easements, Covenants and Restrictions recorded August 16, 1991 in Book L826, page 830 of Official Records. 3. AGREEMENT on the terms and conditions contained therein, For : Agreement regarding number of required parking spaces Between : The City of Santa Clara, a municipal corporation And : Dairy Associates, LP., a California Limited Partnership Recorded : March 6, 1990 in Book L278, page 2239, Official Records. (Affects Parcels A and B) 4. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction and reconstructing, installing, operating, maintaining, repairing and/or replacing underground electrical distribution and/or communication systems and appurtenances thereto, including a reasonable right of ingress and egress over adjoining lands of Grantor Granted to : City of Santa Clara, a California municipal corporation Recorded : April 4, 1990 in Book L310, page 1548, Official Records Affects : As follows: Beginning at a point in the Southerly line of Parcel 2 of that Parcel Map filed for record in Book 460 of Maps at pages 44-45, Santa Clara County Records, distant thereon North 89 47' 24" West, 67.50 feet from the Southeasterly corner of said Parcel 2; thence from said point of beginning, the following forty-eight courses: South 89 47' 24" East, 30.00 feet; North 0 12' 36" East, 19.10 feet; South 89 47' 24" West, 10.00 feet; North 29 47' 24" West, 43.00 feet; North 18 32' 24" West, 89.00 feet; North 29 47' 24" West, 119 feet; North 0 12' 36" East, 235 feet; North 11 02' 24" West, 157 feet; South 78 57' 36" West, 6.00 feet; North 21 02' 24" West, 119.00 feet; South 88 57' 36" West, 73.00 feet; South 58 57' 36" West, 51.00 feet; South 88 57' 36" West, 80.00 feet; North 46 02' 24" West, 11.00 feet; South 43 57' 36" West, 15.00 feet; South 46 02' 24" East, 20.00 feet; North 43 57' 36" East, 9.86 feet; North 88 57' 36" East, 69.77 feet; South 1 02' 24" East, 22.00 feet; North 88 57' 36" East, 15.00 feet; North 1 02' 24" West, 24.78 feet; North 58 57' 36" East, 45.43 feet; North 88 57' 36" East, 63.32 feet; South 21 02' 24" East, 145.68 feet; South 11 02' 24" East 121.11 feet; South 0 12' 36" West, 234.02 feet; North 89 47' 24" West, 63.00 feet; North 59 47' 24" West, 10.00 feet; North 89 47' 24" West, 10.00 feet; South 60 12' 36" West, 10.00 feet; North 89 47' 24" West, 286.00 feet; North 0 12' 36" East, 20.00 feet; South 89 47' 24" East, 2.50 feet; North 0 12' 36" East, 15.00 feet; North 89 47' 24" West, 15.00 fee; South 0 12' 36" West, 294.00 feet; North 0 12' 36" East, 20.00 feet; South 89 47' 24" East, 2.50 feet; North 0 12' 36" East, 15.00 feet; North 89 47' 24" West, 15.00 feet; South 0 12' 36" West, 15.00 feet; South 89 47' 24" East, 2.50 feet; South 0 12' 36" West, 170.00 feet; South 44 37' 45" East, 75.00 feet; South 0 12' 36" West, 3.76 feet; thence, from a tangent bearing South 85 11' 34" East, along the arc of a curve concave to the South, having a radius of 1040 feet, through a central angle of 4 30' 30" an arc length of 81.83 feet; and the following nine courses; North 44 47' 24" West, 44.62 feet; North 89 47' 24" West, 53.50 feet; North 44 37' 45" West, 55.39 feet; North 0 12' 36" East, 135.87 feet; South 89 47' 24" East, 684.55 feet; South 29 47' 24" East, 112.24 feet; South 18 32' 24" East, 89.00 feet; South 29 47' 24" East, 21.30 feet; South 0 12' 36" West, 33.67 feet to the point of beginning. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Underground pipes Granted to : Pacific Gas and Electric Company, a California corporation Recorded : October 22, 1990 in Book L515, page 1223, Official Records Affects : Parcel A as shown upon the Parcel Map filed for record in Book 602 of Parcel Maps at page 35, Santa Clara County Records. Reference is hereby made to the record for further particulars and a map of said easement, no description was recorded. 6. AGREEMENT on the terms and conditions contained therein, For : Deferred obligation to construct stoplight Between : City of Santa Clara, California, a municipal corporation And : Dairy Associates, LP. Recorded : December 17, 1990 in Book L568, page 1565, Official Records. (Affects Parcels A and B) 7. LACK OF ABUTTER'S RIGHTS to and from Route 237 - South Bar Freeway, lying adjacent to the Northerly line of Parcels A & B of said land, said rights having been released and relinquished By : Dairy Associates, LP., a California Limited Partnership To : The State of California Recorded : August 16, 1991 in Book L826, page 839, Official Records. 8. EASEMENT for the purposes stated herein and incidents thereto Purpose : An easement for cut and fill slope purposes Granted to : The State of California Recorded : August 16, 1991 in Book L826, page 839, Official Records Affects : As follows: Commencing at the most Southerly corner of Parcel 1 described in that certain Deed recorded August 16, 1991 in Book L826, page 889, Official Records; thence along the general Southerly line of said Parcel 1 the following courses: from a tangent that bears N. 68 57' 08" E., along a curve to the left with a radius of 10,136.00 feet, through an angle of 05 40' 34", an arc length of 1,004.14 feet, N. 01 05' 17" E., 3.47 feet, and from a tangent that bears N. 61 34' 51" E., along a curve to the left with a radius of 8999.52 feet, through an angle of 00 15' 40", an arc length of 41.03 feet; thence leaving last said line S. 26 57' 54" E., 26.28 feet; thence from a tangent that bears S. 63 02' 06" W., on a curve to the right with a radius of 10,158.00 feet, through an angle of 05 58' 01", an arc length of 1,057.88 feet to the Westerly line of the aforesaid Parcel B; thence along last said line N. 00 50' 30" E., 23.71 feet to the point of commencement. EXHIBIT C PRELIMINARY CHANGE OF OWNERSHIP REPORT THIS REPORT IS NOT A PUBLIC DOCUMENT (To be completed by transferee (buyer) prior to transfer of the subject property in accordance with Section 480.3 of the Revenue and Taxation Code.) THIS SPACE FOR RECORDER'S USE SELLER/TRANSFEROR: SELLER RECORDING DATE: DOCUMENT NO. BUYER/TRANSFEREE: ASSESSOR'S IDENTIFICATION NUMBER(S) LA ------ Page Parcel PROPERTY ADDRESS OR LOCATION: No Street City State Zip Code MAIL TAX INFORMATION TO: NAME: ADDRESS: Street No City State Zip Code FOR ASSESSOR'S USE ONLY Cluster OC1 OC2 DT INT RC SP$ DTT $ # Pcl. A Preliminary Change in Ownership Report must be filed with each conveyance in the County Recorder's office for the county where the property is located; this particular form may be used in all 58 counties of California. NOTICE: A lien for property taxes applies to your property on March 1 of each year for the taxes owing in the following fiscal year, July 1 through June 30. One-half of those taxes is due November 1 and one- half is due February 1. The first installment becomes delinquent on December 10 and the second installment becomes delinquent on April 10. One tax bill is mailed before November 1 to the owner of record. IF THIS TRANSFER OCCURS AFTER MARCH 1 AND ON OR BEFORE DECEMBER 31, YOU MAY BE RESPONSIBLE FOR THE SECOND INSTALLMENT OF TAXES ON FEBRUARY 1. The property which you acquired may be subject to a supplemental tax assessment in an amount to be determined by the Santa Clara County Assessor. For further information on your supplemental roll obligation, please call the Santa Clara County Assessor at (___) ___- ____. PART I: TRANSFER INFORMATION Please answer all questions. YES NO " " A. Is this transfer solely between husband and wife (Addition of a spouse, death of a spouse, divorce settlement, etc.)? " " B. Is this transaction only a correction of the name(s) of the person(s) holding title to the property (For example, a name change upon marriage)? " " C. Is this document recorded to create, terminate, or reconvey a lender's interest in the property? " " D. Is this transaction recorded only to create, terminate, or reconvey a security interest (e.g., cosigner)? " " E. Is this document recorded to substitute a trustee under a deed of trust, mortgage, or other similar document? " " F. Did this transfer result in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants? " " G. Does this transfer return property to the person who created the joint tenancy (original transferor)? " " H. Is this transfer of property: 1. to a trust for the benefit of the grantor, or grantor's spouse? 2. to a trust revocable by the transferor? 3. to a trust from which the property reverts to the grantor within 12 years? " " I. If this property is subject to a lease, is the remaining lease term 35 years or more including written options? " " J. Is this a transfer from parents to children or from children to parents? " " K. Is this transaction to replace a principal residence by a person 55 years of age or older? " " L. Is this transaction to replace a principal residence by a person who is severely disabled as defined by Revenue and Taxation Code Section 69.5? If you checked yes to J, K or L, an applicable claim form must be filed with the County Assessor. Please provide any other information that would help the Assessor to understand the nature of the transfer. IF YOU HAVE ANSWERED "YES" TO ANY OF THE ABOVE QUESTIONS EXCEPT J, K, OR L, PLEASE SIGN AND DATE. OTHERWISE COMPLETE BALANCE OF THE FORM. PART II: OTHER TRANSFER INFORMATION A. Date of transfer if other than recording date. B. Type of transfer. Please check appropriate box. " Purchase "Foreclosure "Gift " Trade or Exchange" Merger, Stock or Partnership Acquisition " Contract of Sale _ Date of Contract "Inheritance _ Date of Contract " Other: Please explain: " Creation of a lease: " Assignment of a lease; "Termination of a lease Date lease began Original term in years (including written options) Remaining term in years (including written options) C. Was only a partial interest in the property transferred? " Yes " No If yes, indicate the percentage transferred % Please answer, to the best of your knowledge, all applicable questions, sign and date. If a question does not apply, indicate with "N/A". PART 1: PURCHASE PRICE & TERMS OF SALE (a) CASH DOWN PAYMENT OR Value of Trade or Exchange (excluding closing cost) (b) FIRST DEED OF TRUST @ % interest for years. Pymts./Mo. = $ (Prin. & Int. only) " FHA" Fixed Rate "New Loan" Conventional "Variable Rate "Assumed Existing Loan Balance "VA" All Inclusive D.T. ($ Wrapped) "Bank or Savings & Loan" Cal-Vet "Loan Carried by Seller" Finance Company Balloon Payment " Yes " No Due Date Amount $ (c) SECOND DEED OF TRUST @ % interest for years. Pymts./Mo. = $ (Prin. & Int. only) "Bank or Savings & Loan "Fixed Rate "New Loan "Loan Carried by Seller "Variable Rate "Assumed Existing Loan Balance Balloon Payment " Yes " No Due Date Amount $ (d) OTHER FINANCING: Is other financing involved not covered in (b) or (c) above? " Yes " No Type @ % interest for years. Pymts./Mo. = $ (Prin. & Int. only) "Bank or Savings & Loan "Fixed Rate "New Loan "Loan Carried by Seller "Variable Rate "Assumed Existing Loan Balance Balloon Payment " Yes " No Due Date Amount $ (e) IMPROVEMENT BOND " Yes " No Outstanding Balance: Amount $ Amount $ Amount $ Amount $ Amount $ (f) TOTAL PURCHASE PRICE: (or acquisition price, if traded or exchanged, include real estate commission if paid.) Total items A through E $ (g) PROPERTY PURCHASED: " Through a broker; " Direct form seller; " Other (Explain) If purchased through a broker, provide broker's name and phone no.: Please explain any special terms or financing and many other information that would help the Assessor understand the purchase price and terms of sale. PART 2: PROPERTY INFORMATION (a) IS PERSONAL PROPERTY INCLUDED IN THE PURCHASE PRICE (other than a mobilehome subject to local property tax)? " Yes " No If yes, enter the value of the personal property included in the purchase price $ (Attach itemized list of personal property) (b) IS THIS PROPERTY INTENDED AS YOUR PRINCIPAL RESIDENCE? " Yes " No If yes, enter date of occupancy / /, 19 or intended occupancy / , 19 Month Day Month Day (c) TYPE OF PROPERTY TRANSFERRED: " Single-Family residence "Agricultural " Timeshare " Multiple-Family residence (no. of units: ) " Coop/ Own-your-own "Mobilehome "Commercial/Industrial "Condominium "Unimproved lot " Other (Description: ) (d) DOES THE PROPERTY PRODUCE INCOME? " Yes " No (e) IF THE ANSWER TO QUESTION D IS YES, IS THE INCOME FROM: " Lease/Rent " Contract " Mineral rights " Other - explain (f) WHAT WAS THE CONDITION OF THE PROPERTY AT THE TIME OF SALE? " Good " Average " Fair " Poor Enter here, or on an attached sheet, any other information that would assist the Assessor in determining value of the property such as the physical condition of the property, restrictions, etc. I certify that the foregoing is true, correct and complete to the best of my knowledge and belief. Signed Date (New Owner/Corporate Officer) Please Print Name of New Owner/Corporate Officer Phone No. where you are available from 8:00 a.m. - 5:00 p.m. ( ) (Note: The Assessor may contact you for further information) If a document evidencing a change of ownership is presented to the recorder for recordation without the concurrent filing of a PRELIMINARY CHANGE OF OWNERSHIP REPORT, the recorder may charge an additional recording fee of twenty dollars ($20). Exhibit D BILL OF SALE, ASSIGNMENT OF CONTRACT RIGHTS AND INTANGIBLE ASSETS Reference is made to that certain ______________ dated _______, 1996 (the "Agreement") between 3Com Corporation, a California Corporation, and Dairy Associates, L.P., a California limited partnership ("Dairy"), pursuant to which 3Com Corporation named BNP LEASING CORPORATION ("Assignor") as its designee and Dairy Associates, L. P. conveyed to Assignor the real property described in Annex A attached hereto (the "Property). Assignor hereby sells, transfers and assigns unto [3COM OR THE APPLICABLE PURCHASER, AS THE CASE MAY BE], a _____________ ("Assignee"), all of Assignor's right, title and interest in and to the following property, if any, to the extent such property is assignable: (a) any warranties, guaranties, indemnities and claims Assignor may have under the Agreement or under any document delivered by Dairy thereunder to the extent related to the Property; (b) all licenses, permits or similar consents (excluding any prepaid utility reservations) from third parties to the extent related to the Property; (c) any pending or future award made because of any condemnation affecting the Property or because of any conveyance to be made in lieu thereof, and any unpaid award for damage to the Property and any unpaid proceeds of insurance or claim or cause of action for damage, loss or injury to the Property; (d) any goods, equipment, furnishings, furniture, chattels and personal property of whatever nature that are located on or about the Property; and (e) any general intangibles, permits, licenses, franchises, certificates, and other rights and privileges owned by Assignor and used solely in connection with, or relating solely to, the Property, including any such rights and privileges conveyed to Assignor pursuant to the Agreement; but excluding any rights or privileges of Assignor under (i) the Environmental Indemnity, as defined in that certain Purchase Agreement between Assignor and 3Com Corporation dated as of October 4, 1996 (the "Purchase Agreement") (pursuant to which this document is being delivered), (ii) the Lease, as defined in the Purchase Agreement, to the extent rights under the Lease relate to the period ending on the date hereof, whether such rights are presently known or unknown, including rights of the Assignor to be indemnified against claims of third parties as provided in the Lease which may not presently be known, and including rights to recover any accrued unpaid rent under the Lease which may be outstanding as of the date hereof, (iii) agreements between Assignor and Participants, as defined in the Lease, or any modification or extension thereof, and (iv) any other instrument being delivered to Assignor contemporaneously herewith pursuant to the Purchase Agreement. Assignor does for itself and its heirs, executors and administrators, covenant and agree to warrant and defend the title to the property assigned herein against the just and lawful claims and demands of any person claiming under or through Assignor, but not otherwise; excluding, however, any claim or demand arising by, through or under [3COM]. Assignee hereby assumes and agrees to keep, perform and fulfill Assignor's obligations, if any, relating to any permits or contracts, under which Assignor has rights being assigned herein. Executed: , _____. ASSIGNOR: BNP LEASING CORPORATION a Delaware corporation By: Its: ASSIGNEE: [3COM, OR THE APPLICABLE PURCHASER], a _________ corporation By: Its: Annex A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: Parcel One Parcel A, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California. EXCEPTING THEREFROM that portion described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at the Southwest corner of said Parcel "A"; thence on the Westerly and Northerly lines of said Parcel "A" the following 5 courses: 1. North 00 12' 36" East a distance of 665.00 feet; 2. North 45 12' 36" East a distance of 64.00 feet; 3. North 00 12' 36" East a distance of 82.98 feet to a point on a non-tangent curve the center of which bears North 29 17' 50" West a distance of 9000.00 feet; 4. Northeasterly a distance of 79.37 feet on the arc of said curve to the left through a central angle of 00 30' 19" (chord bears North 60 27' 01" East a distance of 79.37 feet, to a point on said curve; 5. North 66 32' 39" East, departing said curve, a distance of 75.89 feet; Thence South 62 07' 20" West a distance of 104.00 feet to a point of curvature; thence Southwesterly a distance of 9.53 feet on the arc of said 10136.00 foot radius curve to the right through a central angle of 00 03' 14" (chord bears South 62 08' 57" West a distance of 9.53 feet) to a point on said curve; thence South 00 12' 36" West a distance of 809.62 feet to a point on the South line of said parcel "A"; thence North 89 47' 24" West, on said South line, a distance of 83.50 feet to the point of beginning. ALSO EXCEPTING THEREFROM that portion of said land as condemned to the State of California by Order recorded March 10, 1993 in Book M660, page 1700, described as follows: Being a portion of Parcel A, as shown on that certain Parcel Map filed for record in Book 602 of Maps at pages 34 and 35 Santa Clara County Records described as follows: Beginning at the Northeast corner of said Parcel A; thence from said point of beginning, along the Northerly line of said Parcel A, S 67 25' 20" W 39.39 feet; thence leaving said Northerly line S 41 34' 47" E 73.60 feet to a point in the Easterly line of said Parcel A; thence along said Easterly line of N 10 04' 48" W 71.28 feet to the point of beginning. Parcel Two That portion of Parcel B, as shown on that certain Parcel Map recorded July 7, 1989, Book 602 of Maps, at pages 34 and 35, Records of Santa Clara County, California and described in that certain Lot Line Adjustment dated August 16, 1991 in Book L826, at page 0826 of Official Records and described as follows: Beginning at a point on the most Northerly Southeasterly line of said Parcel "B" which bears South 66 32' 39" West a distance of 226.19 feet from the most Easterly corner thereof; thence South 10 57' 34" East a distance of 218.69 feet; thence North 89 47' 24" West a distance of 324.26 feet; thence North 77 17' 24" West a distance of 141.24 feet; thence North 66 32' 39" East a distance of 458.33 feet to the point of beginning. APN: 104-52-006, 16 ARB: 104-01-046, 046.02, 046.02.01 Exhibit E Acknowledgment of Disclaimer of Representations and Warranties THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "Certificate") is made as of ___________________, ____, by [3COM or the Applicable Purchaser, as the case may be], a ___________________ ("Grantee"). Contemporaneously with the execution of this Certificate, BNP Leasing Corporation, a Delaware corporation ("BNPLC"), is executing and delivering to Grantee (1) a Corporation Grant Deed and (2) a Bill of Sale, Assignment of Contract Rights and Intangible Assets (the foregoing documents and any other documents to be executed in connection therewith are herein called the "Conveyancing Documents" and any of the properties, rights or other matters assigned, transferred or conveyed pursuant thereto are herein collectively called the "Subject Property"). Notwithstanding any provision contained in the Conveyancing Documents to the contrary, Grantee acknowledges that BNPLC makes no representations or warranties of any nature or kind, whether statutory, express or implied, with respect to environmental matters or the physical condition of the Subject Property, and Grantee, by acceptance of the Conveyancing Documents, accepts the Subject Property "AS IS," "WHERE IS," "WITH ALL FAULTS" and without any such representation or warranty by Grantor as to environmental matters, the physical condition of the Subject Property, compliance with subdivision or platting requirements or construction of any improvements. Without limiting the generality of the foregoing, Grantee hereby further acknowledges and agrees that warranties of merchantability and fitness for a particular purpose are excluded from the transaction contemplated by the Conveyancing Documents, as are any warranties arising from a course of dealing or usage of trade. Grantee hereby assumes all risk and liability (and agrees that BNPLC shall not be liable for any special, direct, indirect, consequential, or other damages resulting or arising from or relating to the ownership, use, condition, location, maintenance, repair, or operation of the Subject Property, except for damages proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of BNPLC, its agents or employees. As used in the preceding sentence, "Active Negligence" of a party means, and is limited to, the negligent conduct of activities actually on or about the Property by that party in a manner that proximately causes actual bodily injury or property damage to be incurred. "Active negligence" shall not include (1) any negligent failure of BNPLC to act when the duty to act would not have been imposed but for BNPLC's status as owner of the Subject Property or as a party to the transactions pursuant to which BNPLC is delivering this instrument (the "Applicable Transactions"), (2) any negligent failure of any other party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to BNPLC or participation or facilitation in any manner, directly or indirectly, of the Applicable Transactions, or (3) the exercise in a lawful manner by BNPLC (or any party lawfully claiming through or under BNPLC) of any remedy provided in connection with the Applicable Transactions. The provisions of this Certificate shall be binding on Grantee, its successors and assigns and any other party claiming through Grantee. Grantee hereby acknowledges that BNPLC is entitled to rely and is relying on this Certificate. EXECUTED as of ________________, ____. , a By: Name: Title: Exhibit F Documentary Transfer Tax Request ACCOUNTABLE FORM # DATE: To: Santa Clara County Recorder Subject: REQUEST THAT DOCUMENTARY TRANSFER TAX DECLARATION BE MADE IN ACCORDANCE WITH REVENUE CODE 11932. Re: Instrument Title: Corporation Grant Deed Name of Party Conveying Title: BNP Leasing Corporation The Documentary Transfer Tax is declared to be in the amount of $_______________ for the referenced instrument and is: " Computed on full value of property conveyed. " Computed on full value less liens/encumbrances remaining thereon at time of sale. This separate declaration is made in accordance with _________________________________. It is requested that the amount paid be indicated on the face of the document after the permanent copy has been made. Sincerely, Individual (or his agent) who made, signed or issued instrument PART I RECORDING REFERENCE DATA: Serial # Date Recorded SEPARATE PAPER AFFIXED TO INSTRUMENT: "Tax paid" indicated on the face of instrument and the separate request (DRA 3-A) was affixed for Recorder by: Date Documentary Transfer Tax Collector Witnessed by: Date Mail Clerk (Note: Prepare photo for Recorder file.) PART II ACCOUNTABLE FORM # REFERENCE DATA: Title: Serial: Date: INSTRUCTIONS: 1. This slip must accompany document. 2. Mail Clerk hand carry document to Tax Collector to indicate the amount of tax paid. Exhibit G SECRETARY'S CERTIFICATE The undersigned, Secretary of BNP Leasing Corporation, a Delaware corporation (the "Corporation"), hereby certifies as follows: 1. That he is the duly, elected, qualified and acting Secretary [or Assistant Secretary] of the Corporation and has custody of the corporate records, minutes and corporate seal. 2. That the following named persons have been properly designated, elected and assigned to the office in the Corporation as indicated below; that such persons hold such office at this time and that the specimen signature appearing beside the name of such officer is his or her true and correct signature. [The following blanks must be completed with the names and signatures of the officers who will be signing the deed and other Required Documents on behalf of the Corporation.] Name Title Signature 3. That the resolutions attached hereto and made a part hereof were duly adopted by the Board of Directors of the Corporation in accordance with the Corporation's Articles of Incorporation and Bylaws. Such resolutions have not been amended, modified or rescinded and remain in full force and effect. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Corporation on this , day of , . [signature] CORPORATE RESOLUTIONS OF BNP LEASING CORPORATION WHEREAS, pursuant to that certain Purchase Agreement (herein called the "Purchase Agreement") dated as of October 4, 1996, by and between BNP Leasing Corporation (the "Corporation") and [3COM OR THE APPLICABLE PURCHASER AS THE CASE MAY BE] ("Purchaser"), the Corporation agreed to sell and Purchaser agreed to purchase or cause the Applicable Purchaser (as defined in the Purchase Agreement) to purchase the Corporation's interest in the property (the "Property") located in Santa Clara, California more particularly described therein. NOW THEREFORE, BE IT RESOLVED, that the Board of Directors of the Corporation, in its best business judgment, deems it in the best interest of the Corporation and its shareholders that the Corporation convey the Property to Purchaser or the Applicable Purchaser pursuant to and in accordance with the terms of the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed in the name and on behalf of the Corporation to cause the Corporation to fulfill its obligations under the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed to take or cause to be taken any and all actions and to prepare or cause to be prepared and to execute and deliver any and all deeds and other documents, instruments and agreements that shall be necessary, advisable or appropriate, in such officer's sole and absolute discretion, to carry out the intent and to accomplish the purposes of the foregoing resolutions. Exhibit H BNP LEASING CORPORATION 717 N. HARWOOD SUITE 2630 DALLAS, TEXAS 75201 , [Title Insurance Company] _________________ _________________ _________________ Re: Recording of Grant Deed to [3COM or the Applicable Purchaser] ("Purchaser") Ladies and Gentlemen: BNP Leasing Corporation has executed and delivered to Purchaser a Grant Deed in the form attached to this letter. You are hereby authorized and directed to record the Grant Deed at the request of Purchaser. Sincerely, Exhibit I FIRPTA STATEMENT Section 1445 of the Internal Revenue Code of 1986, as amended, provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. Sections 18805, 18815 and 26131 of the California Revenue and Taxation Code, as amended, provide that a transferee of a California real property interest must withhold income tax if the transferor is a nonresident seller. To inform [3COM or the Applicable Purchaser] (the "Transferee") that withholding of tax is not required upon the disposition of a California real property interest by transferor, BNP Leasing Corporation (the "Seller"), the undersigned hereby certifies the following on behalf of the Seller: 1. The Seller is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. The United States employer identification number for the Seller is _____________________; 3.The office address of the Seller is ______________ __________________________________________. [Note: BNPLC MUST INCLUDE EITHER ONE, BUT ONLY ONE, OF THE FOLLOWING REPRESENTATIONS IN THE FIRPTA STATEMENT, BUT IF THE ONE INCLUDED STATES THAT BNPLC IS DEEMED EXEMPT FROM CALIFORNIA INCOME AND FRANCHISE TAX, THEN BNPLC MUST ALSO ATTACH A WITHHOLDING CERTIFICATE FROM THE CALIFORNIA FRANCHISE TAX BOARD EVIDENCING THE SAME: 4. The Seller is qualified to do business in California. OR 4. The Seller is deemed to be exempt from the withholding requirement of California Revenue and Taxation Code Section 26131(e), as evidenced by the withholding certificate from the California Franchise Tax Board which is attached.] The Seller understands that this certification may be disclosed to the Internal Revenue Service and/or to the California Franchise Tax Board by the Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. The Seller understands that the Transferee is relying on this affidavit in determining whether withholding is required upon said transfer. The Seller hereby agrees to indemnify and hold the Transferee harmless from and against any and all obligations, liabilities, claims, losses, actions, causes of action, demands, rights, damages, costs, and expenses (including but not limited to court costs and attorneys' fees) incurred by the Transferee as a result of any false misleading statement contained herein. Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of the Seller. Dated: ___________, ____. By: Name: Title: Exhibit C - Page 6 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>6 <TEXT> EXHIBIT 10.37 $49,500,000 LEASE AGREEMENT BETWEEN BNP LEASING CORPORATION, AS LANDLORD AND 3COM CORPORATION, AS TENANT EFFECTIVE AS OF NOVEMBER 20, 1996 (North First Street Property) This Agreement is being facilitated by the following banks: Banque Nationale de Paris ABN AMRO Bank N.V. TABLE OF CONTENTS 1. Definitions (a) Active Negligence (b) Additional Rent (c) Administrative Fee (d) Affiliate (e) Applicable Laws (f) Applicable Purchaser (g) Attorneys' Fees (h) Base Rent (i) Base Rent Date (j) Base Rent Period (k) Breakage Costs (l) Business Day (m) Capital Adequacy Charges (n) Closing Costs (o) Change of Control Event (p) Code (q) Collateral (r) Collateral Percentage (s) Debt (t) Default (u) Default Rate (v) Designated Sale Date (w) Effective Rate (x) Environmental Indemnity (y) Environmental Laws (z) Environmental Losses (aa) Environmental Report (ab) ERISA (ac) ERISA Affiliate (ad) ERISA Termination Event (ae) Escrowed Proceeds (af) Eurocurrency Liabilities (ag) Eurodollar Rate Reserve Percentage (ah) Event of Default (ai) Excluded Taxes (aj) Fair Market Value (ak) Fed Funds Rate (al) Funding Advances (am) GAAP (an) Hazardous Substance (ao) Hazardous Substance Activity (ap) Impositions (aq) Improvements (ar) Indemnified Party (as) Initial Funding Advance (at) Landlord's Parent (au) LIBOR (av) Lien (aw) Losses (ax) Ordinary Negligence (ay) Participant (az) Participation Agreement (ba) Permitted Encumbrances (bb) Permitted Hazardous Substance Use (bc) Permitted Hazardous Substances (bd) Permitted Transfer (be) Person (bf) Plan (bg) Pledge Agreement (bh) Prime Rate (bi) Purchase Agreement (bj) Purchase Price (bk) Qualified Payments (bl) Remaining Proceeds (bm) Rent (bn) Responsible Financial Officer (bo) Spread (bp) Stipulated Loss Value (bq) Subsidiary (br) Tenant's Knowledge (bs) Term (bt) Unfunded Benefit Liabilities (bu) Upfront Fee (bv) Voluntary Minimum Pledge Commitment (bw) Other Terms and References 2. Term 3. Rental (a) Base Rent (b) Upfront Fee (c) Administrative Fees (d) Additional Rent (e) Interest and Order of Application (f) Net Lease (g) No Demand or Setoff 4. Insurance and Condemnation Proceeds 5. No Lease Termination (a) Status of Lease (b) Waiver By Tenant 6. Purchase Agreement, Pledge Agreement and Environmental Indemnity 7. Use and Condition of Leased Property (a) Use (b) Condition (c) Consideration of and Scope of Waiver 8. Other Representations, Warranties and Covenants of Tenant (a) Financial Matters (b) Existing Contract (c) No Default or Violation (d) Compliance with Covenants and Laws (e) Environmental Representations (f) No Suits (g) Condition of Property (h) Organization (i) Enforceability (j) Not a Foreign Person (k) Omissions (l) Existence (m) Tenant Taxes (n) Operation of Property (o) Debts for Construction (p) Impositions (q) Repair, Maintenance, Alterations and Additions (r) Insurance and Casualty (s) Condemnation (t) Protection and Defense of Title (u) No Liens on the Leased Property (v) Books and Records (w) Financial Statements; Required Notices; Certificates as to Default (x) Further Assurances (y) Fees and Expenses; General Indemnification; Increased Costs; and Capital Adequacy Charges (z) Liability Insurance (aa) Permitted Encumbrances (ab) Environmental (ac) Affirmative Financial Covenants (ad) Negative Covenants (i) Liens (ii) Transactions with Affiliates (iii) Mergers; Sales of Assets (v) Change of Business (ae) ERISA 9. Representations, Warranties and Covenants of Landlord (a) Title Claims By, Through or Under Landlord (b) Actions Required of the Title Holder (c) No Default or Violation (d) No Suits (e) Organization (f) Enforceability (g) Existence (h) Not a Foreign Person 10. Assignment and Subletting (a) Consent Required (b) Standard for Landlord's Consent to Assignments and Certain Other Matters (c) Consent Not a Waiver (d) Landlord's Assignment 11. Environmental Indemnification (a) Indemnity (b) Assumption of Defense (c) Notice of Environmental Losses (d) Rights Cumulative (e) Survival of the Indemnity 12. Landlord's Right of Access 13. Events of Default (a) Definition of Event of Default (b) Remedies (c) Enforceability (d) Remedies Cumulative (e) Waiver by Tenant (f) No Implied Waiver 14. Default by Landlord 15. Quiet Enjoyment 16. Surrender Upon Termination 17. Holding Over by Tenant 18. Miscellaneous (a) Notices (b) Severability (c) No Merger (d) NO IMPLIED REPRESENTATIONS BY LANDLORD (e) Entire Agreement (f) Binding Effect (g) Time is of the Essence (h) Termination of Prior Rights (i) Governing Law (j) Waiver of a Jury Trial (k) Not a Partnership, Etc (l) Tax Reporting Exhibits and Schedules Exhibit A Legal Description Exhibit B Encumbrance List Exhibit C Intentionally Deleted Exhibit D Intentionally Deleted Exhibit E Covenant Compliance Certificate Exhibit F Certificate Setting Forth the Calculation of the Spread Exhibit G List of Environmental Reports LEASE AGREEMENT This LEASE AGREEMENT (hereinafter called this "Lease"), made to be effective as of November 20, 1996 (all references herein to the "date hereof" or words of like effect shall mean such effective date), by and between BNP LEASING CORPORATION, a Delaware corporation (hereinafter called "Landlord"), and 3COM CORPORATION, a California corporation (hereinafter called "Tenant"); W I T N E S E T H T H A T: WHEREAS, pursuant to a Sale Agreement dated as of July 16, 1996 (as amended, hereinafter called the "Existing Contract") between Tenant and Metropolitan Life Insurance Company, a New York corporation (hereinafter called "Seller"), concerning the land described in Exhibit A attached hereto (hereinafter called the "Land") and the improvements on such Land, if any, Landlord is acquiring the Land and improvements (if any) from Seller contemporaneously with the execution of this Lease; WHEREAS, in anticipation of Landlord's acquisition of the Land, any improvements on the Land and other rights and interests hereinafter described, Landlord and Tenant have reached agreement as to the terms and conditions upon which Landlord is willing to lease the same to Tenant, and by this Lease Landlord and Tenant desire to evidence such agreement; NOW, THEREFORE, in consideration of the rent to be paid and the covenants and agreements to be performed by Tenant, as hereinafter set forth, Landlord does hereby LEASE, DEMISE and LET unto Tenant for the term hereinafter set forth the Land, together with: (i) Landlord's interest in any and all buildings and improvements now or hereafter erected on the Land, including, but not limited to, the fixtures, attachments, appliances, equipment, machinery and other articles attached to any such buildings and improvements (hereinafter called the "Improvements"); (ii) all easements and rights-of-way now owned or hereafter acquired by Landlord for use in connection with the Land or Improvements or as a means of access thereto; (iii) all right, title and interest of Landlord, now owned or hereafter acquired, in and to (A) any land lying within the right-of-way of any street, open or proposed, adjoining the Land, (B) any and all sidewalks and alleys adjacent to the Land and (C) any strips and gores between the Land and abutting land (except strips and gores, if any, between the Land and abutting land owned by Landlord, with respect to which this Lease shall cover only the portion thereof to the center line between the Land and the abutting land owned by Landlord). The Land and all of the property described in items (i) through (iii) above are hereinafter referred to collectively as the "Real Property". In addition to conveying the leasehold in the Real Property as described above, Landlord hereby grants and assigns to Tenant for the term of this Lease the right to use and enjoy (and, to the extent the following consist of contract rights, to enforce) any assignable interests or rights in, to or under the following that have been transferred to Landlord by Seller under the Existing Contract: (a) any goods, equipment, furnishings, furniture, chattels and personal property of whatever nature that are located on the Real Property and all renewals or replacements of or substitutions for any of the foregoing; and (b) any general intangibles, permits, licenses, franchises, certificates, and other rights and privileges. All of the property, rights and privileges described above in this paragraph are hereinafter collectively called the "Personal Property". The Real Property and the Personal Property are hereinafter sometimes collectively called the "Leased Property." Provided, however, the leasehold estate conveyed hereby and Tenant's rights hereunder are expressly made subject and subordinate to the Permitted Encumbrances (as hereinafter defined) and to any other claims or encumbrances not asserted by Landlord itself or by third parties lawfully claiming through or under Landlord. The Leased Property is leased by Landlord to Tenant and is accepted and is to be used and possessed by Tenant upon and subject to the following terms, provisions, covenants, agreements and conditions: 1. Definitions. As used herein, the terms "Landlord," "Tenant," "Existing Contract," "Seller," "Land," "Improvements," "Real Property," "Personal Property" and "Leased Property" shall have the meanings indicated above and the terms listed immediately below shall have the following meanings: (a) Active Negligence. "Active Negligence" of an Indemnified Party means, and is limited to, the negligent conduct of activities on the Leased Property by the Indemnified Party in a manner that proximately causes actual bodily injury or property damage to occur. "Active Negligence" shall not include (1) any negligent failure of Landlord to act when the duty to act would not have been imposed but for Landlord's status as owner of the Leased Property or as a party to the transactions described in this Lease, (2) any negligent failure of any other Indemnified Party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to Landlord or participation or facilitation in any manner, directly or indirectly, of the transactions described in this Lease, or (3) the exercise in a lawful manner by Landlord (or any party lawfully claiming through or under Landlord) of any remedy provided herein or in the Purchase Agreement. (b) Additional Rent. "Additional Rent" shall have the meaning assigned to it in subparagraph 3.(d) below. (c) Administrative Fee. "Administrative Fee" shall have the meaning assigned to it in subparagraph 3.(c). (d) Affiliate. "Affiliate" of any Person means any other Person controlling controlled by or under common control with such Person. For purposes of this definition, the term "control" when used with respect to any Person means the power to direct the management of policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (e) Applicable Laws. "Applicable Laws" shall have the meaning assigned to it in subparagraph 8.(d) below. (f) Applicable Purchaser. "Applicable Purchaser" means any third party designated by Tenant to purchase the Landlord's interest in the Leased Property and in any Escrowed Proceeds as provided in the Purchase Agreement. (g) Attorneys' Fees. "Attorneys' Fees" means the reasonable fees and expenses of counsel to the parties incurring the same, which may include fairly allocated costs of in-house counsel, printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. Such terms shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any manner or proceeding is brought with respect to the matter for which such fees and expenses were incurred. (h) Base Rent. "Base Rent" means the rent payable by Tenant pursuant to subparagraph 3.(a) below. (i) Base Rent Date. "Base Rent Date" means December 2, 1996 and the first Business Day of February, May, August and November of each calendar year thereafter to and including the first Business Day of November, 1998. (j) Base Rent Period. "Base Rent Period" means (1) the period beginning on and including the date hereof and ending on but not including the first Base Rent Date, (2) the period beginning on and including the first Base Rent Date and ending on but not including second Base Rent Date, and (3) each successive period of approximately three (3) months. Each successive Base Rent Period after the first Base Rent Period shall begin on and include the day on which the preceding Base Rent Period ends and shall end on but not include the next following Base Rent Date. (k) Breakage Costs. "Breakage Costs" means any and all costs, losses or expenses incurred or sustained by Landlord's Parent or any other Participant, for which Landlord's Parent or the other Participant shall expect reimbursement from Landlord, because of the resulting liquidation or redeployment of deposits or other funds used to make Funding Advances upon any termination of this Lease by Tenant pursuant to Paragraph 2, if such termination is effective as of any day other than a Base Rent Date. Breakage Costs will include losses attributable to any decline in LIBOR as of the effective date of termination as compared to LIBOR used to determine the Effective Rate then in effect. (However, if Landlord's Parent or another Participant actually receives a profit upon the liquidation or redeployment of deposits or other funds used to make Funding Advances, because of any increase in LIBOR, then such profit will be offset against costs or expenses that would otherwise be charged as Breakage Costs under this Lease.) Each determination by Landlord's Parent of Breakage Costs shall, in the absence of clear and demonstrable error, be conclusive and binding upon Landlord and Tenant. (l) Business Day. "Business Day" means any day that is (1) not a Saturday, Sunday or day on which commercial banks are generally closed or required to be closed in New York City, New York or San Francisco, California, and (2) a day on which dealings in deposits of dollars are transacted in the London interbank market; provided that if such dealings are suspended indefinitely for any reason, "Business Day" shall mean any day described in clause (1). (m) Capital Adequacy Charges. "Capital Adequacy Charges" means any additional amounts Landlord's Parent or any other Participant requires Landlord to pay as compensation for an increase in required capital as provided in subparagraph 8.(y)(iv). (n) Closing Costs. "Closing Costs" means the excess of $49,500,000 over the sums actually paid by Landlord for or in connection with Landlord's acquisition of the Leased Property (including the payment of amounts secured by any lien to which the Real Property may be subject when it is conveyed to Landlord) at the closing under the Existing Contract, which excess will be advanced by or on behalf of Landlord to pay costs incurred in connection with the preparation and negotiation of this Lease, the Purchase Agreement, the Pledge Agreement, the Environmental Indemnity, the Participation Agreement and related documents. To the extent that Landlord does not itself use such excess to pay expenses incurred by Landlord in connection with the preparation and negotiation of such documents, the remainder thereof will be advanced to Tenant, with the expectation that Tenant shall use any such amount advanced for one or more of the following purposes: (1) the payment or reimbursement of expenses incurred by Tenant in connection with the preparation and negotiation of this Lease, the Purchase Agreement, the Pledge Agreement and related documents; (2) the payment or reimbursement of expenses incurred by Tenant in connection with any improvements Tenant may elect to make to the Leased Property in accordance with the requirements and limitations imposed by this Lease, including the planning, design, engineering and permitting of thereof; (3) the maintenance of the Leased Property; (4) the payment of the Upfront Fee and the first Administrative Fee; or (5) the payment of Rents next due. (o) Change of Control Event. "Change of Control Event" means the occurrence of any merger or consolidation or sale of assets involving Tenant that is prohibited by subparagraph 8.(ad)(iii). (p) Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. (q) Collateral. "Collateral" shall have the meaning assigned to it in the Pledge Agreement. (r) Collateral Percentage. "Collateral Percentage" for each Base Rent Period means the Collateral Percentage for such period determined under (and as defined in) the Pledge Agreement; provided, however, for purposes of this Lease, the Collateral Percentage for any Base Rent Period shall not exceed a fraction; the numerator of which fraction shall equal the value (determined as provided in the Pledge Agreement) of all Collateral (a) that is, on the first day of such Base Rent Period, held by the Deposit Takers under (and as defined in) the Pledge Agreement subject to a Qualifying Security Interest (as defined below), (b) that is free from claims or security interests held or asserted by any third party, and (c) that is not in excess of Stipulated Loss Value; and the denominator of which fraction shall equal the Stipulated Loss Value on the first day of such Base Rent Period. "Qualifying Security Interest" means a first priority perfected security interest under the Pledge Agreement which is sufficient, for purposes of the laws and regulations which govern minimum amounts of capital that each of Landlord's Parent and other Participants (or their respective affiliates) must maintain, to permit them to assign a risk weighting of no more than twenty percent to the portion of their respective Funding Advances equal to the Collateral their respective Deposit Takers hold on deposit as provided by the Pledge Agreement. (s) Debt. "Debt" of any Person means (i) indebtedness of such Person for borrowed money, (ii) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations of such Person to pay the deferred purchase price of property or services, (iv) obligations of such Person as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations of such Person, contingent or otherwise, under any lease of real property or related documents (including a separate purchase agreement) which provide that such Person must purchase or cause another to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor; (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above, (vii) liabilities of another Person secured by a Lien on, or payable out of the proceeds of production from, property of such Person even though such obligation shall not be assumed by such Person (but in the case of such liabilities not assumed by such Person, the liabilities shall constitute Debt of such Person only to the extent of the value of such Person's property encumbered by the Lien securing such liabilities) and (viii) Unfunded Benefit Liabilities. (t) Default. "Default" means any event which, with the passage of time or the giving of notice or both, would (if not cured within any applicable cure period) constitute an Event of Default. (u) Default Rate. "Default Rate" means a floating per annum rate equal to three percent (3%) above the Prime Rate. However, in no event will the Default Rate exceed the maximum interest rate permitted by law. (v) Designated Sale Date. "Designated Sale Date" shall have the meaning assigned to it in the Purchase Agreement. (w) Effective Rate. "Effective Rate" means: (i) for each day during the short first Base Rent Period ending on December 2, 1996, the per annum rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate on that day; and (ii) for each Base Rent Period after the first Base Rent Period, the per annum rate determined by dividing (A) LIBOR for such period, by (B) 100% minus the Eurodollar Rate Reserve Percentage for such period. If LIBOR or the Eurodollar Rate Reserve Percentage changes from Base Rent Period to Base Rent Period, then the Effective Rate shall be automatically increased or decreased, as the case may be, as of the date of the change from Base Rent Period to Base Rent Period. If for any reason Landlord's Parent determines that it is impossible or unreasonably difficult to determine the Effective Rate with respect to a given Base Rent Period in accordance with the preceding sentences, then the "Effective Rate" for that Base Rent Period shall equal any published index or per annum interest rate determined reasonably and in good faith by Landlord's Parent to be a comparable rate at the beginning of the first day of that period. A comparable interest rate might be, for example, the then existing yield on short term United States Treasury obligations (as compiled by and published in the then most recently published United States Federal Reserve Statistical Release H.15(519) or its successor publication), plus or minus a fixed adjustment based on Landlord's Parent's comparison of past eurodollar market rates to past yields on such Treasury obligations. Any determination by Landlord's Parent of the Effective Rate hereunder shall, in the absence of clear and demonstrable error, be conclusive and binding. (x) Environmental Indemnity. "Environmental Indemnity" means the separate Environmental Indemnity Agreement dated as of the date hereof executed by Tenant in favor of Landlord covering the Land and certain other property described therein, as such agreement may be extended, supplemented, amended, restated or otherwise modified from time to time. (y) Environmental Laws. "Environmental Laws" means any and all existing and future Applicable Laws pertaining to safety, health or the environment, or to Hazardous Substances or Hazardous Substance Activities, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter called "CERCLA"), and the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended, hereinafter called "RCRA"). (z) Environmental Losses. "Environmental Losses" means Losses suffered or incurred by any Indemnified Party, directly or indirectly, relating to or arising out of, based on or as a result of: (i) any Hazardous Substance Activity; (ii) any violation of Environmental Laws relating to the Leased Property or to the ownership, use, occupancy or operation thereof; (iii) any investigation, inquiry, order, hearing, action, or other proceeding by or before any governmental or quasi-governmental agency or authority in connection with any Hazardous Substance Activity; or (iv) any claim, demand, cause of action or investigation, or any action or other proceeding, whether meritorious or not, brought or asserted against any Indemnified Party which directly or indirectly relates to, arises from, is based on, or results from any of the matters described in clauses (i), (ii), or (iii) of this subparagraph 1.(z), or any allegation of any such matters. ENVIRONMENTAL LOSSES INCURRED BY OR ASSERTED AGAINST A PARTICULAR INDEMNIFIED PARTY SHALL INCLUDE LOSSES RELATING TO OR ARISING OUT OF OR AS A RESULT OF ANY MATTERS LISTED IN THE PRECEDING SENTENCE EVEN WHEN SUCH MATTERS ARE CAUSED BY THE ORDINARY NEGLIGENCE (AS DEFINED BELOW) OF THAT PARTICULAR OR ANY OTHER INDEMNIFIED PARTY. However, Losses incurred by or asserted against a particular Indemnified Party and proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of any Indemnified Party will not constitute Environmental Losses of such Indemnified Party for purposes of this Lease. (aa) Environmental Report. "Environmental Report" means, collectively, the reports listed on Exhibit G attached hereto. (bb) ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations promulgated with respect thereto. (cc) ERISA Affiliate. "ERISA Affiliate" means any Person who for purposes of Title IV of ERISA is a member of Tenant's controlled group, or under common control with Tenant, within the meaning of Section 414 of the Code, and the regulations promulgated and rulings issued thereunder. (dd) ERISA Termination Event. "ERISA Termination Event" means (i) the occurrence with respect to any Plan of a) a reportable event described in Sections 4043(b)(5) or (6) of ERISA or b) any other reportable event described in Section 4043(b) of ERISA other than a reportable event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation under Section 4043(a) of ERISA, or (ii) the withdrawal of Tenant or any Affiliate of Tenant from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate any Plan or the treatment of any Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate any Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. (ee) Escrowed Proceeds. "Escrowed Proceeds" shall mean any proceeds that are received by Landlord from time to time during the Term (and any interest earned thereon), which Landlord is holding for the purposes specified in the next sentence, from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any sale of a Parcel pursuant to subparagraph 9.(b) or for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, in determining "Escrowed Proceeds" there shall be deducted all expenses and costs of every type, kind and nature (including Attorneys' Fees) incurred by Landlord to collect such proceeds; and provided, further, "Escrowed Proceeds" shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4). "Escrowed Proceeds" shall include only such proceeds as are held by Landlord (A) pursuant to Paragraph 4 for the payment to Tenant for the restoration or repair of the Leased Property or (B) for application (generally, on the next following Base Rent Date which is at least three (3) Business Days following Landlord's receipt of such proceeds) as a Qualified Payment or as reimbursement of costs incurred in connection with a Qualified Payment. "Escrowed Proceeds" shall not include any proceeds that have been applied as a Qualified Payment or to pay any costs incurred in connection with a Qualified Payment. Until Escrowed Proceeds are paid to Tenant pursuant to Paragraph 4 below or applied as a Qualified Payment or as reimbursement for costs incurred in connection with a Qualified Payment, Landlord shall keep the same deposited in an interest bearing account, and all interest earned on such account shall be added to and made a part of Escrowed Proceeds. (ff) Eurocurrency Liabilities. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. (gg) Eurodollar Rate Reserve Percentage. "Eurodollar Rate Reserve Percentage" means, for purposes of determining the Effective Rate for any Base Rent Period, the reserve percentage applicable two Business Days before the first day of such period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding One Billion Dollars with respect to liabilities or deposits consisting of or including Eurocurrency Liabilities (or with respect to any other category or liabilities by reference to which LIBOR is determined) having a term comparable to such period. (hh) Event of Default. "Event of Default" shall have the meaning assigned to it in subparagraph 13.(a) below. (ii) Excluded Taxes. "Excluded Taxes" shall mean (1) all federal, state and local income taxes upon the Base Rent, the Upfront Fee, the Administrative Fees and any interest paid to Landlord pursuant to subparagraph 3.(e), (2) any taxes imposed by any governmental authority outside the United States, and (3) any transfer or change of ownership taxes assessed because of Landlord's transfer or conveyance to any third party of any rights or interest in this Lease, the Purchase Agreement or the Leased Property, but excluding any such taxes assessed because of any Permitted Transfer. (jj) Fair Market Value. "Fair Market Value" shall have the meaning assigned to it in the Purchase Agreement. (kk) Fed Funds Rate. "Fed Funds Rate" means, for any period, a fluctuating interest rate (expressed as a per annum rate and rounded upwards, if necessary, to the next 1/16 of 1%) equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rates are not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Landlord's Parent from three Federal funds brokers of recognized standing selected by Landlord's Parent. All determinations of the Fed Funds Rate by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (ll) Funding Advances. "Funding Advances" means the Initial Funding Advance and any subsequent advances made by Landlord's Parent or any other Participant to or on behalf of Landlord in replacement of or renewal and extension of all or part of the Initial Funding Advance. For example, if after the date hereof a new Participant advances funds to or on behalf of Landlord to Landlord's Parent, ABN AMRO Bank N.V. or another of the original Participants in repayment of all or part of the Initial Funding Advance, such advance of funds by the new Participant shall constitute a Funding Advance hereunder. (mm) GAAP. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in subparagraph 8.(w) (except for changes concurred in by Tenant's independent public accountants). (nn) Hazardous Substance. "Hazardous Substance" means (i) any chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, regulated under, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance," "hazardous material," "hazardous waste," "extremely hazardous waste," "infectious waste," "toxic substance," "toxic pollutant," or any other formulation intended to define, list or classify substances by reason of deleterious properties, including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity or reproductive toxicity; (ii) petroleum, any fraction of petroleum, natural gas, natural gas liquids, liquified natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas), and ash produced by a resource recovery facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iii) asbestos and any asbestos containing material; (iv) "waste" as defined in section 13050(d) of the California Water Code; and (v) any other material that, because of its quantity, concentration or physical or chemical characteristics, poses a significant present or potential hazard to human health or safety or to the environment if released into the workplace or the environment. (oo) Hazardous Substance Activity. "Hazardous Substance Activity" means any actual, proposed or threatened use, storage, holding, existence, location, release (including, without limitation, any spilling, leaking, leaching, pumping, pouring, emitting, emptying, dumping, disposing into the environment, and the continuing migration into or through soil, surface water, groundwater or any body of water), discharge, deposit, placement, generation, processing, construction, treatment, abatement, removal, disposal, disposition, handling or transportation of any Hazardous Substance from, under, in, into or on the Leased Property, including, without limitation, the movement or migration of any Hazardous Substance from surrounding property, surface water, groundwater or any body of water under, in, into or onto the Leased Property and any residual Hazardous Substance contamination in, on or under the Leased Property. (pp) Impositions. "Impositions" shall have the meaning assigned to it in subparagraph 8.(p) below. (qq) Improvements. "Improvements," as defined in the recitals at the beginning of this Lease, shall include not only existing improvements to the Land as of the date hereof, if any, but also any new improvements or changes to existing improvements made by Tenant. (rr) Indemnified Party. "Indemnified Party" means each of (1) Landlord and any of Landlord's successors and assigns as to all or any portion of the Leased Property or any interest therein (but excluding Tenant or any Applicable Purchaser under the Purchase Agreement or any Person that claims its interest in the Leased Property through or under Tenant or through or under an assignment from Landlord that does not constitute a Permitted Transfer), (2) the Participants, and (3) any Affiliate, officer, agent, director, employee or servant of any of the parties described in clause (1) or (2) preceding. (ss) Initial Funding Advance. "Initial Funding Advance" means the advance of $49,500,000 made by Landlord's Parent and another Participant to or on behalf of Landlord on or prior to the date of this Lease to cover the cost of Landlord's acquisition of the Leased Property and Closing Costs. (tt) Landlord's Parent. "Landlord's Parent" means Landlord's Affiliate, Banque Nationale de Paris, a bank organized and existing under the laws of France, together with any Affiliates of such bank that directly or indirectly provided or hereafter during the Term provide or maintain any Funding Advances, and any successors of such bank and such Affiliates. (uu) LIBOR. "LIBOR" means, for purposes of determining the Effective Rate for each Base Rent Period, the rate determined by Landlord's Parent to be the average rate of interest per annum (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates at which deposits of dollars are offered or available to Landlord's Parent in the London interbank market at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such period. Landlord shall instruct Landlord's Parent to consider deposits, for purposes of making the determination described in the preceding sentence, that are offered: (i) for delivery on the first day of such Base Rent Period, (ii) in an amount equal or comparable to the total (projected on the applicable date of determination by Landlord's Parent) Stipulated Loss Value on the first day of such Base Rent Period, and (iii) for a period of time equal or comparable to the Base Rent Period. If Landlord's Parent so chooses, it may determine LIBOR for any period by reference to the rate reported by the British Banker's Association on Page 3750 of the Telerate Service at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such period; provided, however, Tenant may notify Landlord that Tenant objects to any future determination of LIBOR in the manner provided by this sentence, in which case any determination of LIBOR required more than three Business Days after Landlord's receipt of such notice shall be made as if this sentence had been struck from this Lease. If for any reason Landlord's Parent determines that it is impossible or unreasonably difficult to determine LIBOR with respect to a given Base Rent Period in accordance with the preceding sentences, or if Landlord's Parent shall determine that it is unlawful (or any central bank or governmental authority shall assert that it is unlawful) for Landlord, Landlord's Parent or any other Participant to provide or maintain any Funding Advances hereunder during any Base Rent Period for which Base Rent is computed by reference to LIBOR, then "LIBOR" for that Base Rent Period shall equal the rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate for that period. All determinations of LIBOR by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (vv) Lien. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any agreement to sell receivables with recourse, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). Customary bankers' rights of set-off arising by operation of law or by contract (however styled, if the contract grants rights no greater than those arising by operation of law) in connection with working capital facilities, lines of credit, term loans and letter of credit facilities and other contractual arrangements entered into with banks in the ordinary course of business are not "Liens" for the purposes of this Lease. (ww) Losses. "Losses" means any and all losses, liabilities, damages (whether actual, consequential, punitive or otherwise denominated), demands, claims, actions, judgments, causes of action, assessments, fines, penalties, costs, and out-of-pocket expenses (including, without limitation, Attorneys' Fees and the fees of outside accountants and environmental consultants), of any and every kind or character, foreseeable and unforeseeable, liquidated and contingent, proximate and remote, known and unknown. (xx) Ordinary Negligence. "Ordinary Negligence" of an Indemnified Partymeans any negligent acts or omissions of such party that does not for any reason constitute Active Negligence as defined in this Lease. (yy) Participant. "Participant" means any Person, including Landlord's Parent, that agrees with Landlord or another Participant to participate in all or some of the risks and rewards to Landlord of this Lease and the Purchase Agreement. As of the effective date hereof, the only Participants are Landlord's Parent, ABN AMRO Bank N.V. and the other financial institutions that have executed the original Participation Agreement, but such Participants and Landlord may agree to share in risks and rewards of this Lease and the Purchase Agreement with other Participants in the future. However, no Person other than Landlord's Parent, ABN AMRO Bank N.V. and the other financial institutions that have executed the original Participation Agreement shall qualify as a Participant for purposes of this Lease, the Purchase Agreement or any other agreement to which 3COM is a party unless, with 3COM's prior written approval (such approval not to be unreasonably withheld) or when an Event of Default had occurred and was continuing, such Person became a party to the Pledge Agreement and to the Participation Agreement by executing supplements to those agreements as contemplated therein. (zz) Participation Agreement. "Participation Agreement" means theParticipation Agreement dated the date hereof between Landlord, Landlord's Parent, ABN AMRO Bank N.V. and other financial institutions, pursuant to which Landlord's Parent, ABN AMRO Bank N.V. and such other financial institutions have agreed to participate in certain risks and rewards to Landlord of this Lease and the Purchase Agreement, as such Participation Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (aaa) Permitted Encumbrances. "Permitted Encumbrances" means (i) the encumbrances and other matters affecting the Leased Property that are set forth in Exhibit B attached hereto and made a part hereof, and (ii) any provisions of the Existing Contract or any other agreement described therein that survived closing thereunder (but not any deed of trust, mortgage or other agreement given to secure the repayment of borrowed funds), and (iii) any easement agreement or other document affecting title to the Leased Property executed by Landlord at the request of or with the consent of Tenant. (bbb) Permitted Hazardous Substance Use. "Permitted Hazardous Substance Use" means the use, storage and offsite disposal of Permitted Hazardous Substances in strict accordance with applicable Environmental Laws and with due care given the nature of the Hazardous Substances involved; provided, the scope and nature of such use, storage and disposal shall not include the use of underground storage tanks for any purpose other than the storage of water for fire control, nor shall such scope and nature: (1) exceed that reasonably required for the construction of Improvements permitted by this Lease and for the operation of the Leased Property for th purposes expressly permitted under subparagraph 7.(a); or (2) include any disposal, discharge or other release of Hazardous Substances from operations on the Leased Property in any manner that might allow such substances to reach the San Francisco Bay, surface water or groundwater, except (i) through a lawful and properly authorized discharge (A) to a publicly owned treatment works or (B) with rainwater or storm water runoff in accordance with Applicable Laws and any permits obtained by Tenant that govern such runoff; or (ii) any such disposal, discharge or other release of Hazardous Substances for which no permits are required and which are not otherwise regulated under applicable Environmental Laws. Further, notwithstanding anything to the contrary herein contained, Permitted Hazardous Substance Use shall not include any use of the Leased Property as a treatment, storage or disposal facility (as defined by federal Environmental Laws) for Hazardous Substances, including but not limited to a landfill, incinerator or other waste disposal facility. (ccc) Permitted Hazardous Substances. "Permitted Hazardous Substances" means Hazardous Substances used and reasonably required for Tenant's operation of the Leased Property for the purposes expressly permitted by subparagraph 7.(a) in strict compliance with all Environmental Laws and with due care given the nature of the Hazardous Substances involved. Without limiting the generality of the foregoing, Permitted Hazardous Substances shall include, without limitation, usual and customary office and janitorial products. (ddd) Permitted Transfer. "Permitted Transfer" means any one or more of the following: (1) the creation or conveyance of rights and interests under the Participation Agreement in favor of Landlord's Parent, ABN AMRO Bank N.V. or other Participants; (2) subject to the last sentence of subparagraph 10.(d), any assignment or conveyance by Landlord of any lien or security interest against the Leased Property (in contrast to a conveyance of Landlord's fee estate in the Leased Property) or of any interest in Rent, payments required by the Purchase Agreement or payments to be generated from the Leased Property after the Term, to any present or future Participant or to any Affiliate of Landlord; (3) any agreement to exercise or refrain from exercising rights or remedies hereunder or under the Purchase Agreement, the Pledge Agreement or the Environmental Indemnity made by Landlord with any present or future Participant or Affiliate of Landlord; (4) any assignment or conveyance by Landlord requested by Tenant or required by any Permitted Encumbrance, by the Purchase Agreement or by Applicable Laws; (5) any assignment or conveyance by Landlord when an Event of Default shall have occurred and be continuing; or (6) any assignment or conveyance by Landlord after the Designated Sale Date. (eee) Person. "Person" means an individual, a corporation, a partnership, an unincorporated organization, an association, a joint stock company, a joint venture, a trust, an estate, a government or agency or political subdivision thereof or other entity, whether acting in an individual, fiduciary or other capacity. (fff) Plan. "Plan" means at any time an employee pension benefit plan which is covered under Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by Tenant or any Subsidiary for employees of Tenant or any Subsidiary or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which Tenant or any Subsidiary is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. (ggg) Pledge Agreement. "Pledge Agreement" means the Pledge Agreement dated as of the date hereof between Landlord and Tenant, pursuant to which Tenant may pledge certificates of deposit as security for Tenant's obligations under the Purchase Agreement (and for the corresponding obligations of Landlord to the Participants under the Participation Agreement), as such Pledge Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (hhh) Prime Rate. "Prime Rate" means the prime interest rate or equivalent charged by Landlord's Parent in the United States as announced or published by Landlord's Parent from time to time, which need not be the lowest interest rate charged by Landlord's Parent. If for any reason Landlord's Parent does not announce or publish a prime rate or equivalent, the prime rate or equivalent announced or published by either ABN AMRO Bank N.V. or Credit Commercial de France as selected by Landlord shall be used as the Prime Rate. The prime rate or equivalent announced or published by such bank need not be the lowest rate charged by it. The Prime Rate may change from time to time after the date hereof without notice to Tenant as of the effective time of each change in rates described in this definition. (iii) Purchase Agreement. "Purchase Agreement" means the Purchase Agreement dated as of the date hereof between Landlord and Tenant pursuant to which Tenant has agreed to purchase or to arrange for the purchase by a third party of the Leased Property, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. (jjj) Purchase Price. "Purchase Price" shall have the meaning assigned toit in the Purchase Agreement. (kkk) Qualified Payments. "Qualified Payments" means all payments received by Landlord from time to time during the Term from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any sale of a Parcel pursuant to subparagraph 9.(b) or for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, that (x) in determining Qualified Payments, there shall be deducted all expenses and costs of every kind, type and nature (including taxes and Attorneys' Fees) incurred by Landlord with respect to the collection of such payments, (y) Qualified Payments shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4) and (z) Qualified Payments shall not include any payments received by Landlord that Landlord has paid to Tenant for the restoration or repair of the Leased Property or that Landlord is holding as Escrowed Proceeds. For purposes of computing the total Qualified Payments (and other amounts dependent upon Qualified Payments, such as Stipulated Loss Value) paid to or received by Landlord as of any date, payments described in the preceding clauses (1) through (4) will be considered as Escrowed Proceeds, not Qualified Payments, until they are actually applied as Qualified Payments by Landlord, which Landlord will do upon the first Base Rent Date which is at least three (3) Business Days after Landlord's receipt of the same unless postponement of such application is required by other provisions of this Lease or consented to by Tenant in writing. Thus, for example, condemnation proceeds actually received by Landlord in the middle of a Base Rent Period will not be considered as having been received by Landlord for purposes of computing the total Qualified Payments unless and until actually applied by Landlord as a Qualified Payment on a subsequent Base Rent Date in accordance with Paragraph 4 below. (lll) Remaining Proceeds. "Remaining Proceeds" shall have the meaning assigned to it in subparagraph 4.(a)(ii). (mmm) Rent. "Rent" means the Base Rent and all Additional Rent. (nnn) Responsible Financial Officer. "Responsible Financial Officer" means the chief financial officer, the controller, the treasurer or the assistant treasurer of Tenant. (ooo) Spread. The "Spread" on any date will depend upon a computation involving (a) the rating by Standard and Poor's Corporation (the "S&P Rating") or the rating by Moody's Investor Service, Inc. (the "Moody's Ratings"), whichever rating is higher, of Tenant's senior, unsecured debt on that date (whether such ratings are express or published, implied ratings), and (b) the Debt to Capital Ratio (as defined below) on that date, such computation to be as follows: (i) If (1) there is no S&P Rating for the senior, unsecured debt of Tenant (express or published, implied) or the S&P Rating is below BBB-, AND (2) there is no Moody's Rating for senior, unsecured debt of Tenant (express or published, implied) or the Moody's Rating is below Baa3, AND (3) the Debt to Capital Ratio is greater than 0.30, then the Spread will be forty-two and one-half basis points (.425%). (ii) If (1) the S&P Rating is BBB-, OR (2) the Moody's Rating is Baa3, OR (3) the Debt to Capital Ratio is equal to or less than 0.30 and more than 0.15, and if Tenant does not qualify for a lower Spread pursuant to clause (iii) or (iv) below, then the Spread will be thirty-seven and one-half basis points (.375%). (iii) If (1) the S&P Rating is BBB, OR (2) the Moody's Rating is Baa2, OR (3) the Debt to Capital Ratio is equal to or less than 0.15, and if Tenant does not qualify for a lower Spread pursuant to clause (iv) below, then the Spread will be thirty-two and one-half basis points (.325%). (iv) If (1) the S&P Rating is above BBB, OR (2) the Moody's Rating is above Baa2, then the Spread will be twenty-seven and one-half basis points (.275%). For purposes of calculating the Spread, "Debt to Capital Ratio" means the quotient determined by dividing (A) funded Senior Debt (as defined in subparagraph 8.(ac)(ii)), by (B) the total Capitalization (as defined in subparagraph 8.(ac)(ii)), including Subordinated Debt (as defined in subparagraph 8.(ac)(ii)). The parties believe it improbable that the ratings systems used by Standard and Poor's Corporation and by Moody's Investor Service, Inc. will be discontinued or changed, but if such ratings systems are discontinued or changed, Landlord shall be entitled to select and use a comparable ratings systems as a substitute for the S&P Rating or the Moody Rating, as the case may be, for purposes of determining the Spread. All determinations of the Spread by Landlord shall, in the absence of clear and demonstrable error, be binding and conclusive for purposes of this Lease. Further Landlord may, but shall not be required, to rely on the determination of the Spread set forth in any certificate delivered by Tenant pursuant to subparagraph 8.(w)(iv) below, and no reduction in the Spread will be effective because of an improvement in the S&P Rating, the Moody's Rating or the Debt to Capital Ratio before Tenant has notified Landlord thereof by delivery of such a certificate. (ppp) Stipulated Loss Value. "Stipulated Loss Value" means the amount computed from time to time in accordance with the formula specified in this definition. Such amount shall equal the Initial Funding Advance (i.e., $49,500,000), LESS the amount (if any) of Qualified Payments paid to Landlord on or prior to such date. Thus, for example, if a determination of Stipulated Loss Value is required under subparagraph 3.(a) on the first day of the applicable Base Rent Period, but the Leased Property has been damaged by fire or other casualty with the result that $500,000 of net insurance proceeds have been paid to Landlord and retained by Landlord as Qualified Payments, then the Stipulated Loss Value as of the date of the required determination shall be $49,000,000. Under no circumstances will any payment of Base Rent or the Upfront Fee or any Administrative Fee reduce Stipulated Loss Value. (qqq) Subsidiary. "Subsidiary" means any corporation of which Tenant and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors. (rrr) Tenant's Knowledge. "Tenant's knowledge," "to the knowledge of Tenant" and words of like effect means the actual knowledge (with due investigation) of any of the following employees of Tenant: Alan Groves, Vice President and Corporate Controller; Christopher B. Paisley, Chief Financial Officer; Abe Darwish, Director of Site Services; and Walter Patti, Manager of Safety and Security. However, to the extent Tenant's knowledge after the date hereof may become relevant hereunder or under any certificate or other notice provided by Tenant to Landlord in connection with this Lease, "Tenant's knowledge" and words of like effect shall include the then actual knowledge of other employees of Tenant (if any) that have assumed responsibilities of the current employees listed in the preceding sentence or that have replaced such current employees. But none of the employees of Tenant whose knowledge is now or may hereafter be relevant shall be personally liable for the representations of Tenant made herein. (sss) Term. "Term" shall have the meaning assigned to it in Paragraph 2 below. (ttt) Unfunded Benefit Liabilities. "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of Tenant or any ERISA Affiliate of Tenant under Title IV of ERISA. (uuu) Upfront Fee. "Upfront Fee" shall have the meaning assigned to it in subparagraph 3.(b). (vvv) Voluntary Minimum Pledge Commitment. "Voluntary Minimum Pledge Commitment" means an agreement in form and substance reasonably satisfactory to Landlord and the other parties to the Pledge Agreement which Tenant may elect to execute in connection with a casualty, condemnation or sale in lieu of condemnation affecting the Leased Property and which modifies the Pledge Agreement by establishing a Minimum Collateral Percentage sufficient to require Tenant to maintain Collateral under the Pledge Agreement with a value of no less than the insurance, condemnation or sale proceeds paid or to be paid because of the casualty, condemnation or sale in lieu of condemnation until Tenant has completed any related repairs or restoration required by this Lease. (www) Other Terms and References. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural and vice versa, unless the context otherwise requires. References herein to Paragraphs, subparagraphs or other subdivisions shall refer to the corresponding Paragraphs, subparagraphs or subdivisions of this Lease, unless specific reference is made to another document or instrument. References herein to any Schedule or Exhibit shall refer to the corresponding Schedule or Exhibit attached hereto, which shall be made a part hereof by such reference. All capitalized terms used in this Lease which refer to other documents shall be deemed to refer to such other documents as they may be renewed, extended, supplemented, amended or otherwise modified from time to time, provided such documents are not renewed, extended or modified in breach of any provision contained herein or therein or, in the case of any other document to which Landlord is a party or of which Landlord is an intended beneficiary, without the consent of Landlord. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. The words "this Lease", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Lease as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Paragraph" and "this subparagraph" and similar phrases refer only to the Paragraphs or subparagraphs hereof in which the phrase occurs. The word "or" is not exclusive. Other capitalized terms are defined in the provisions that follow. 3. Term. The term of this Lease (herein called the "Term") shall commence on and include the effective date hereof, and end at 8:00 A.M. on the first Business Day of November, 1998, unless extended or sooner terminated as herein provided. Notwithstanding any other provision of this Lease which may expressly restrict the early termination hereof, and provided that Tenant is still in possession of the Leased Property and has not breached its obligation to make or have made any payment required by Paragraph 2 of the Purchase Agreement on any prior Designated Sale Date, Tenant may notify Landlord of Tenant's election to terminate this Lease before the first Business Day of November, 1998, by giving Landlord an irrevocable notice of such election and of the effective date of the termination, which notice must be given (if at all) at least sixty (60) days prior to the effective date of the termination. If Tenant elects to so terminate this Lease, then on the date on which this Lease is to be terminated, not only must Tenant pay all unpaid Rent, Tenant must also pay any Breakage Costs resulting from the termination and must satisfy its obligations under the Purchase Agreement. The payment of any unpaid Rent and Breakage Costs and the satisfaction of Tenant's obligations under the Purchase Agreement shall be conditions precedent to the effectiveness of any early termination of this Lease by Tenant. The Term may be extended at the option of Tenant for two successive periods of five (5) years each; provided, however, that prior to any such extension the following conditions must have been satisfied: (A) at least one hundred eighty (180) days prior to the commencement of any such extension, Landlord and Tenant must have agreed in writing upon, and received the written consent and approval of Landlord's Parent and all other Participants to (1) a corresponding extension of the date specified in clause (iii) of the definition of Designated Sale Date in the Purchase Agreement, and (2) an adjustment to the Rent that Tenant will be required to pay for the extension, it being expected that the Rent for the extension may be different than the Rent required for the original Term, and it being understood that the Rent for any extension must in all events be satisfactory to both Landlord and Tenant, each in its sole and absolute discretion; (B) there must be no Event of Default continuing hereunder at the time of Tenant's exercise of its option to extend; and (C) immediately prior to any such extension, this Lease must remain in effect. With respect to the condition that Landlord and Tenant must have agreed upon the Rent required for any extension of the Term, neither Tenant nor Landlord is willing to submit itself to a risk of liability or loss of rights hereunder for being judged unreasonable. Accordingly, both Tenant and Landlord hereby disclaim any obligation express or implied to be reasonable in negotiating the Rent for any such extension. Subject to the changes to the Rent payable during any extension of the Term as provided in this Paragraph, if Tenant exercises its option to extend the Term as provided in this Paragraph, this Lease shall continue in full force and effect, and the leasehold estate hereby granted to Tenant shall continue without interruption and without any loss of priority over other interests in or claims against the Leased Property that may be created or arise after the date hereof and before the extension. 4. Rental. (a) Base Rent. Tenant shall pay Landlord rent (herein called "Base Rent")in arrears, in currency that at the time of payment is legal tender for public and private debts in the United States of America, in installments on each Base Rent Date through the end of the Term. Each payment of Base Rent must be received by Landlord no later than 12:00 noon (San Francisco time) on the date it becomes due; if received after 12:00 noon it will be considered for purposes of this Lease as received on the next following Business Day. Each installment of Base Rent shall represent rent allocable to the Base Rent Period ending on the date on which the installment is due. Landlord shall notify Tenant in writing of the Base Rent due for each Base Rent Period at least fifteen (15) days prior to the Base Rent Date on which such period ends. Any failure by Landlord to so notify Tenant shall not constitute a waiver of Landlord's right to payment, but absent such notice Tenant shall not be in default for any underpayment resulting therefrom if Tenant, in good faith, reasonably estimates the payment required, makes a timely payment of the amount so estimated and corrects any underpayment within three (3) Business Days after being notified by Landlord of the underpayment. If Tenant or any other Applicable Purchaser purchases Landlord's interest in the Leased Property pursuant to the Purchase Agreement, any Base Rent for the three (3) months ending on the date of purchase (or if the date of Purchase is not a Base Rent Date, then pro rated Base Rent for the Base Rent Period which included the date of purchase) and all outstanding Additional Rent shall be due on the Designated Sale Date in addition to the purchase price and other sums due Landlord under the Purchase Agreement. Base Rent shall accrue for each day of the first Base Rent Period, and the total Base Rent for the first Base Rent Period shall equal the sum of Base Rent for all days during such period. The Base Rent accruing for each day during such period shall equal: (1) (A) $49,500,000, times (B) one minus the Collateral Percentage for the first Base Rent Period, times (C) the sum of (i) the Effective Rate for such day and (ii) the Spread calculated on the date of this Lease, divided by (D) three hundred sixty (360); PLUS (2) (A) $49,500,000, times (B) the Collateral Percentage for the first Base Rent Period, times (C) twenty two and one- half basis points (22.5/100 of 1%), divided by (D) three hundred sixty (360) The Base Rent for each Base Rent Period after the first Base Rent Period shall equal the sum of: (1) (A) Stipulated Loss Value on the first day of such Base Rent Period, times (B) one minus the Collateral Percentage for such Base Rent Period, times (C) the sum of (i) the Effective Rate for such Base Rent Period and (ii) the Spread calculated on the tenth (10th) Business Day prior to the day upon which such Base Rent Period commences, times (D) the number of days in such Base Rent Period, divided by (E) three hundred sixty (360); PLUS (2) (A) Stipulated Loss Value on the first day of such Base Rent Period, times (B) the Collateral Percentage for such Base Rent Period, times (C) twenty two and one-half basis points (0.225 of 1%), times (D) the number of days in such Base Rent Period, divided by (E) three hundred sixty (360) Assume, only for the purpose of illustration: that a hypothetical Base Rent Period contains exactly ninety (90) days; that prior to the first day of such Base Rent Period a total of $19,500,000 of Qualified Payments have been received by Landlord, leaving a Stipulated Loss Value of $30,000,000 (the Initial Funding Advance of $49,500,000 less the Qualified Payments of $19,500,000); that the Collateral Percentage for such Base Rent Period is forty percent (40%); and that the Effective Rate plus the Spread for the applicable Base Rent Period is 6%. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $30,000,000 x 60% x 6% x 90/360, or $270,000, PLUS $30,000,000 x 40% x .225% x 90/360, or $6,750 = $276,750 To ease the administrative burden of this Lease and the Pledge Agreement, clause (2) in the formulas above for calculating Base Rent reflects a reduction in the Base Rent equal to the interest that would accrue on any Collateral required by the Pledge Agreement from time to time if the Accounts (as defined in the Pledge Agreement) bore interest at the Effective Rate. Landlord has agreed to such reduction in the Base Rent to provide Tenant with the economic equivalent of interest on such Collateral, and in return Tenant has agreed to the provisions of the Pledge Agreement that excuse the actual payment of interest on the Accounts. By incorporating such reduction of Base Rent into the formulas above, and by providing for noninterest bearing Accounts in the Pledge Agreement, the parties will avoid an unnecessary and cumbersome periodic exchange of equal payments. It is not, however, the intent of Landlord or Tenant to understate Base Rent or interest for financial reporting purposes. Accordingly, for purposes of determining Tenant's compliance with the affirmative financial covenants set forth in subparagraph 8.(ac), and for purposes of any financial reports that this Lease requires of Tenant from time to time, Tenant may report Base Rent as if there had been no such reduction and as if the Collateral from time to time required by the Pledge Agreement had been maintained in Accounts bearing interest at the Effective Rate. (b) Upfront Fee. Upon execution and delivery of this Lease by Landlord, Tenant shall pay Landlord an upfront fee (the "Upfront Fee") as provided in the letter dated August 20, 1996 (modifying a letter dated August 9, 1996) from Landlord to Tenant (less the deposit already paid by Tenant pursuant to that letter which will be applied against the Upfront Fee). The Upfront Fee shall represent Additional Rent for the first Base Rent Period. (c) Administrative Fees. Upon execution and delivery of this Lease by Landlord, and again on each anniversary of the date hereof prior to the Designated Sale Date, Tenant shall pay Landlord an administrative fee (an "Administrative Fee") as provided in the letter dated August 9, 1996, from Landlord to Tenant. Each payment of an Administrative Fee shall represent Additional Rent for the Base Rent Period during which it first becomes due. (d) Additional Rent. All amounts which Tenant is required to pay to or on behalf of Landlord pursuant to this Lease, together with every charge, premium, interest and cost set forth herein which may be added for nonpayment or late payment thereof, shall constitute rent (all such amounts, other than Base Rent, are herein called "Additional Rent"). (e) Interest and Order of Application. All Rent shall bear interest, if not paid when first due, at the Default Rate in effect from time to time from the date due until paid; provided, that nothing herein contained will be construed as permitting the charging or collection of interest at a rate exceeding the maximum rate permitted under Applicable Laws. Landlord shall be entitled to apply any amounts paid by or on behalf of Tenant hereunder against any Rent then past due in the order the same became due or in such other order as Landlord may elect. (f) Net Lease. It is the intention of Landlord and Tenant that the Base Rent and all other payments herein specified shall be absolutely net to Landlord. Tenant shall pay all costs, expenses and obligations of every kind relating to the Leased Property or this Lease which may arise or become due, including, without limitation: (i) Impositions, including any taxes payable by virtue of Landlord's receipt of amounts paid to or on behalf of Landlord in accordance with this subparagraph 3.(f), but not including any Excluded Taxes; (ii) any Capital Adequacy Charges; (iii) any amount for which Landlord is or becomes liable with respect to the Permitted Encumbrances; and (iv) any costs incurred by Landlord (including Attorneys' Fees) because of Landlord's acquisition or ownership of the Leased Property or because of this Lease or the transactions contemplated herein. (g) No Demand or Setoff. The Base Rent and all Additional Rent shall be paid without notice or demand and without abatement, counterclaim, deduction, setoff or defense, except as expressly provided herein. 5. Insurance and Condemnation Proceeds. (a) Subject to Landlord's rights under this Paragraph 4, and so long as no Event of Default shall have occurred and be continuing, Tenant shall be entitled to use all casualty insurance and condemnation proceeds payable with respect to the Leased Property during the Term for the restoration and repair of the Leased Property or any remaining portion thereof. Except as provided in the last sentence of subparagraph 8.(s), all insurance and condemnation proceeds received with respect to the Leased Property (including proceeds payable under any insurance policy covering the Leased Property which is maintained by Tenant) shall be paid to Landlord and applied as follows: (i) First, such proceeds shall be used to reimburse Landlord for any costs and expenses, including Attorneys' Fees, incurred in connection with the collection of such proceeds. (ii) Second, the remainder of such proceeds (the "Remaining Proceeds"), shall be held by Landlord as Escrowed Proceeds and applied to reimburse Tenant for the actual cost of the repair, restoration or replacement of the Leased Property. However, any Remaining Proceeds not needed for such purpose shall be applied by Landlord as Qualified Payments after Tenant notifies Landlord that they are not needed for repairs, restoration or replacement. Notwithstanding the foregoing, if an Event of Default shall have occurred and be continuing, then Landlord shall be entitled to receive and collect insurance or condemnation proceeds payable with respect to the Leased Property, and either, at the discretion of Landlord, (A) hold such proceeds as Escrowed Proceeds until paid to Tenant as reimbursement for the actual and reasonable cost of repairing, restoring or replacing the Leased Property when Tenant has completed such repair, restoration or replacement, or (B) apply such proceeds (net of the deductions described in clause (i) above) as Qualified Payments. (b) Any Remaining Proceeds held by Landlord as Escrowed Proceeds shall be deposited by Landlord in an interest bearing account as provided in the definition of Escrowed Proceeds and shall be paid to Tenant upon completion of the applicable repair, restoration or replacement and upon compliance by Tenant with such terms, conditions and requirements as may be reasonably imposed by Landlord, but in no event shall Landlord be required to pay any Escrowed Proceeds to Tenant in excess of the actual cost to Tenant of the applicable repair, restoration or replacement, it being understood that Landlord may retain any such excess as a Qualified Payment. In any event, Tenant will not be entitled to any abatement or reduction of the Base Rent or any other amount due hereunder except to the extent that such excess Remaining Proceeds result in Qualified Payments which reduce Stipulated Loss Value (and thus payments computed on the basis of Stipulated Loss Value) as provided in the definitions set out above. Further, notwithstanding the inadequacy of the Remaining Proceeds held by Landlord as Escrowed Proceeds, if any, or anything herein to the contrary, Tenant must, after any taking of less than all or substantially all of the Leased Property by condemnation and after any damage to the Leased Property by fire or other casualty, restore or improve the Leased Property or the remainder thereof to a value no less than Stipulated Loss Value (computed after the application of any Remaining Proceeds as a Qualified Payment) and to a safe and sightly condition. Any taking of so much of the Leased Property as, in Landlord's reasonable judgment, makes it impracticable to restore or improve the remainder thereof as required by the preceding sentence shall be considered a taking of substantially all the Leased Property for purposes of this Paragraph 4. (c) In the event of any taking of all or substantially all of the Leased Property, Landlord shall be entitled to apply all Remaining Proceeds as a Qualified Payment, notwithstanding the foregoing. In addition, if Stipulated Loss Value immediately prior to any taking of all or substantially all of the Leased Property by condemnation exceeds the sum of the Remaining Proceeds resulting from such condemnation, then Landlord shall be entitled to recover the excess from Tenant upon demand as an additional Qualified Payment, whereupon this Lease shall terminate. (d) Nothing herein contained shall be construed to prevent Tenant from obtaining and applying as it deems appropriate any separate award from any condemning authority or from any insurer for a taking of or damage to Tenant's personal property not included in the Leased Property or for moving expenses or business interruption, provided, such award is not combined with and does not reduce the award for any taking of the Leased Property, including Tenant's interest therein. Further, notwithstanding anything to the contrary herein contained, if Remaining Proceeds held by Landlord during the term of this Lease shall exceed Stipulated Loss Value and any Rent payable by Tenant, then Tenant may get the excess by terminating this Lease in accordance with Paragraph 2 and purchasing such excess (which will then be held by Landlord as Escrowed Proceeds), together with any remaining interest of Landlord in the Leased Property, pursuant to the Purchase Agreement. (e) Landlord and Tenant each waive any right of recovery against the other, and the other's agents, officers or employees, for any damage to the Leased Property or to the personal property situated from time to time in or on the Leased Property resulting from fire or other casualty covered by a valid and collectible insurance policy; provided, however, that the waiver set forth in this subparagraph 4.(e) shall be effective insofar, but only insofar, as compensation for such damage or loss is actually recovered by the waiving party (net of costs of collection) under the policy notwithstanding the waivers set out in this paragraph. Tenant shall cause the insurance policies required of Tenant by this Lease to be properly endorsed, if necessary, to prevent any loss of coverage because of the waivers set forth in this paragraph. If such endorsements are not available, the waivers set forth in this paragraph shall be ineffective to the extent that such waivers would cause required insurance with respect to the Leased Property to be impaired. 6. No Lease Termination. (a) Status of Lease. Except as expressly provided herein, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease, nor shall Tenant be entitled to any abatement of the Rent, nor shall the obligations of Tenant under this Lease be excused, for any reason whatsoever, including without limitation any of the following: (i) any damage to or the destruction of all or any part of the Leased Property from whatever cause, (ii) the taking of the Leased Property or any portion thereof by eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of Tenant's use of all or any portion of the Leased Property or any interference with such use by governmental action or otherwise, (iv) any eviction of Tenant or of anyone claiming through or under Tenant by paramount title or otherwise (provided, if Tenant is wrongfully evicted by Landlord or by any third party lawfully claiming through or under Landlord, other than Tenant or a third party claiming through or under Tenant, then Tenant will have the remedies described in Paragraph 14 below), (v) any default on the part of Landlord under this Lease or under any other agreement to which Landlord and Tenant are parties, (vi) the inadequacy in any way whatsoever of the design or construction of any improvements included in the Leased Property, it being understood that Landlord has not made and will not make any representation express or implied as to the adequacy thereof, or (vii) any other cause whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent of the covenants and agreements of Landlord, that the Base Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated or limited pursuant to an express provision of this Lease. However, nothing in this Paragraph shall be construed as a waiver by Tenant of any right Tenant may have at law or in equity to (i) recover monetary damages for any default under this Lease by Landlord that Landlord fails to cure within the period provided in Paragraph 14, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by Landlord of any of the express covenants, agreements, conditions or provisions of this Lease, or (iii) a decree compelling performance of any of the express covenants, agreements, conditions or provisions of this Lease. (b) Waiver By Tenant. Without limiting the foregoing, Tenant waives to the extent permitted by Applicable Laws, except as otherwise expressly provided herein, all rights to which Tenant may now or hereafter be entitled by law (including any such rights arising because of any implied "warranty of suitability" or other warranty under Applicable Laws) (i) to quit, terminate or surrender this Lease or the Leased Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Base Rent or any other sums payable under this Lease. 7. Purchase Agreement, Pledge Agreement and Environmental Indemnity. Tenant acknowledges and agrees that nothing contained in this Lease shall limit, modify or otherwise affect any of Tenant's obligations under the Purchase Agreement, Pledge Agreement or Environmental Indemnity, which obligations are intended to be separate, independent and in addition to, and not in lieu of, the obligations established by this Lease. In the event of any inconsistency between the terms and provisions of the Purchase Agreement, Pledge Agreement or Environmental Indemnity and the terms and provisions of this Lease, the terms and provisions of the Purchase Agreement, Pledge Agreement or Environmental Indemnity (as the case may be) shall control. 8. Use and Condition of Leased Property. (a) Use. Subject to the Permitted Encumbrances and the terms hereof, Tenant may use and occupy the Leased Property so long as no Event of Default occurs hereunder, but only as reasonably necessary to develop the Land for use for the following purposes and other lawful purposes incidental thereto: (i) research and development of computer-related and other electronic products; (ii) administrative and office space; and (iii) distribution and warehouse storage of computer-related and other electronic products; and (iv) assembly of computer-related and other electronic products using components manufactured elsewhere, but not including the manufacture of computer chips on-site; and (v) cafeteria, library, fitness center and other support function uses that Tenant may provide to its employees. Although the term "electronic products" in this subparagraph may include products designed to detect, monitor, neutralize, handle or process Hazardous Substances, the use of the Leased Property by Tenant shall not include bringing Hazardous Substances onto the Leased Property for the purpose of researching, testing or demonstrating any such products. (b) Condition. Tenant accepts the Leased Property (and will accept the same upon any purchase of the Landlord's interest therein) in its present state, AS IS, and without any representation or warranty, express or implied, as to the condition of such property or as to the use which may be made thereof. Tenant also accepts the Leased Property without any representation or warranty, express or implied, by Landlord regarding the title thereto or the rights of any parties in possession of any part thereof, except as set forth in subparagraph 9.(a). Landlord shall not be responsible for any latent or other defect or change of condition in the Land, or Improvements, fixtures and personal property (if any) forming a part of the Leased Property, and the Rent hereunder shall in no case be withheld or diminished because of any latent or other defect in such property, any change in the condition thereof or the existence with respect thereto of any violations of Applicable Laws. Nor shall Landlord be required to furnish to Tenant any facilities or service of any kind, such as, but not limited to, water, steam, heat, gas, hot water, electricity, light or power. (c) Consideration of and Scope of Waiver. The provisions of subparagraph 7.(b) above have been negotiated by the Landlord and Tenant after due consideration for the Rent payable hereunder and are intended to be a complete exclusion and negation of any representations or warranties of the Landlord, express or implied, with respect to the Leased Property that may arise pursuant to any law now or hereafter in effect, or otherwise. However, such exclusion of representations and warranties by Landlord is not intended to impair any representations or warranties made by other parties, including Seller, the benefit of which is to pass to Tenant during the Term because of the definition of Personal Property and Leased Property above. 9. Other Representations, Warranties and Covenants of Tenant. Tenant represents, warrants and covenants as follows: (a) Financial Matters. Tenant is solvent and has no outstanding liens, suits, garnishments or court actions which could render Tenant insolvent. There has not been filed by or, to Tenant's knowledge, against Tenant a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to Tenant or any significant portion of Tenant's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the federal Bankruptcy Code or any state law. The financial statements and all financial data heretofore delivered to Landlord relating to Tenant have been prepared in accordance with GAAP in all material respects. No material adverse change has occurred in the financial position of Tenant as reflected in Tenant's financial statements covering the fiscal period ended May 31, 1996. (b) Existing Contract. Except to the extent required of Landlord under subparagraph 9.(b), Tenant shall satisfy all surviving obligations of Tenant under the Existing Contract and under other agreements described therein. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all Losses imposed on or asserted against or incurred by Landlord at any time and from time to time by reason of, in connection with or arising out of any obligations imposed by the Existing Contract or the other agreements described therein. THE INDEMNITY SET OUT IN THIS SUBPARAGRAPH SHALL APPLY EVEN IF THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE ORDINARY NEGLIGENCE (AS DEFINED ABOVE) OF LANDLORD; provided, such indemnity shall not apply to Losses proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or willful misconduct of Landlord. Because Tenant hereby assumes and agrees to satisfy all surviving obligations of Tenant under the Existing Contract and the other agreements described therein, no failure by Landlord to take any action required by the Existing Contract or such other agreements (save and except any actions required of Landlord under subparagraph 9.(b)) shall, for the purposes of this indemnity, be deemed to be caused by the Active Negligence, gross negligence or willful misconduct of Landlord. The foregoing indemnity is in addition to the other indemnities set out herein and shall not terminate upon the closing of any sale of Landlord's interest in the Leased Property pursuant to the provisions of the Purchase Agreement or the termination of this Lease. (c) No Default or Violation. The execution, delivery and performance by Tenant of this Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity do not and will not constitute a breach or default under any other material agreement or contract to which Tenant is a party or by which Tenant is bound or which affects the Leased Property or Tenant's use, occupancy or operation of the Leased Property or any part thereof and do not, to the knowledge of Tenant, violate or contravene any law, order, decree, rule or regulation to which Tenant is subject, and such execution, delivery and performance by Tenant will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance on, or security interest in, Tenant's property pursuant to the provisions of any of the foregoing. (d) Compliance with Covenants and Laws. The intended use of the Leased Property by Tenant complies, or will comply after Tenant obtains readily available permits, in all material respects with all applicable restrictive covenants, zoning ordinances and building codes, flood disaster laws, applicable health, safety and environmental laws and regulations, the Americans with Disabilities Act and other laws pertaining to disabled persons, and all other applicable laws, statutes, ordinances, rules, permits, regulations, orders, determinations and court decisions (all of the foregoing are herein sometimes collectively called "Applicable Laws"). Tenant has obtained or will promptly obtain all utility, building, health and operating permits as may be required for Tenant's use of the Leased Property by any governmental authority or municipality having jurisdiction over the Leased Property. (e) Environmental Representations. To Tenant's knowledge and except as otherwise disclosed in the Environmental Report, as of the date hereof: (i) no Hazardous Substances Activity has occurred prior to the date of this Lease; (iii) neither Tenant nor any prior owner or operator of the Leased Property or any surrounding property has reported or been required to report any release of any Hazardous Substances on or from the Leased Property or the surrounding property pursuant to any Environmental Law; (iv) neither Tenant nor any prior owner or operator of the Leased Property or any surrounding property has received any warning, citation, notice of violation or other communication regarding a suspected or known release or discharge of Hazardous Substances on or from the Leased Property or regarding a suspected or known violation of Environmental Laws concerning the Leased Property from any federal, state or local agency; and (v) none of the following are located on the Leased Property: asbestos; urea formaldehyde foam insulation; transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million; any other Hazardous Substances other than Permitted Hazardous Substances; or any underground storage tank or tanks. Further, Tenant represents that to its knowledge the Environmental Report is not misleading or inaccurate in any material respect. (f) No Suits. There are no judicial or administrative actions, suits, proceedings or investigations pending or, to Tenant's knowledge, threatened that will affect Tenant's intended use of the Leased Property or the validity, enforceability or priority of this Lease, or Tenant's use, occupancy and operation of the Leased Property or any part thereof, and Tenant is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority that could materially and adversely affect the business or assets of Tenant and its Subsidiaries taken as a whole or Tenant's use, occupancy or operation of the Leased Property. No condemnation or other like proceedings are pending or, to Tenant's knowledge, threatened against the Leased Property. (g) Condition of Property. The Land as described in Exhibit A is shown on the plat included as part of the A.L.T.A. Survey prepared by Richard L. Gorman, dated July 25, 1996, which was delivered to Landlord at the request of Tenant. All material improvements on the Land as of the date hereof are as shown on that survey, and except as shown on that survey there are no easements or encroachments visible or apparent from an inspection of the Real Property. Adequate provision has been made (or can be made at a cost that is reasonable in connection with future development of the Land) for the Leased Property to be served by electric, gas, storm and sanitary sewers, sanitary water supply, telephone and other utilities required for the use thereof. All streets, alleys and easements necessary to serve the Leased Property have been completed and are serviceable (or can be completed at a cost that is reasonable in connection with future development of the Land). No extraordinary circumstances (including any use of the Land as a habitat for endangered species) exists that would materially and adversely affect the future development of the Land. Tenant is not aware of any latent or patent material defects or deficiencies in the Real Property that, either individually or in the aggregate, could materially and adversely affect Tenant's use or occupancy or could reasonably be anticipated to endanger life or limb. (h) Organization. Tenant is duly incorporated and legally existing under the laws of the State of California. Tenant has all requisite power and has procured or will procure on a timely basis all governmental certificates of authority, licenses, permits, qualifications and other documentation required to lease and operate the Leased Property. Tenant has the corporate power and adequate authority, rights and franchises to own Tenant's property and to carry on Tenant's business as now conducted and is duly qualified and in good standing in each state in which the character of Tenant's business makes such qualification necessary (including, without limitation, the State of California) or, if it is not so qualified in a state other than California, such failure does not have a material adverse effect on the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (i) Enforceability. The execution, delivery and performance of this Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained and are not in contravention of or conflict with any Applicable Laws or any term or provision of Tenant's articles of incorporation or bylaws. This Lease, the Purchase Agreement, the Pledge Agreement and the Environmental Indemnity are valid, binding and legally enforceable obligations of Tenant in accordance with their terms, except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application. (j) Not a Foreign Person. Tenant is not a "foreign person" within the meaning Sections 1445 and 7701 of the Code (i.e., Tenant is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (k) Omissions. To Tenant's knowledge, none of Tenant's representations or warranties contained in this Lease or any document, certificate or written statement furnished to Landlord by or on behalf of Tenant contains any untrue statement of a material fact or omits a material fact necessary in order to make the statements contained herein or therein (when taken in their entireties) not misleading. (l) Existence. Tenant shall continuously maintain its existence and its qualification to do business in the State of California. (m) Tenant Taxes. Tenant shall comply with all applicable tax laws and pay before the same become delinquent all taxes imposed upon it or upon its property where the failure to so comply or so pay would have a material adverse effect on the financial condition or operations of Tenant; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any such taxes and pending such contest Tenant shall not be deemed in default under this subparagraph if (1) Tenant diligently prosecutes such contest to completion in an appropriate manner, and (2) Tenant promptly causes to be paid any tax adjudged by a court of competent jurisdiction to be due, with all costs, penalties, and interest thereon, promptly after such judgment becomes final; provided, however, in any event such contest shall be concluded and the tax, penalties, interest and costs shall be paid prior to the date any writ or order is issued under which any of Tenant's property that is material to the business of Tenant and its Subsidiaries taken as a whole may be seized or sold because of the nonpayment thereof. (n) Operation of Property. Tenant shall operate the Leased Property in a good and workmanlike manner and in compliance with all Applicable Laws and will pay all fees or charges of any kind in connection therewith. Tenant shall not use or occupy, or allow the use or occupancy of, the Leased Property in any manner which violates any Applicable Law or which constitutes a public or private nuisance or which makes void, voidable or cancelable any insurance then in force with respect thereto. To the extent that any of the following would, individually or in the aggregate, materially and adversely affect the value of the Leased Property or Tenant's use, occupancy or operations on the Leased Property, Tenant shall not: (i) initiate or permit any zoning reclassification of the Leased Property; (ii) seek any variance under existing zoning ordinances applicable to the Leased Property; (iii) use or permit the use of the Leased Property in a manner that would result in such use becoming a nonconforming use under applicable zoning ordinances or similar laws, rules or regulations; (iv) execute or file any subdivision plat affecting the Leased Property; or (v) consent to the annexation of the Leased Property to any municipality. If a change in the zoning or other Applicable Laws affecting the permitted use or development of the Leased Property shall occur that Landlord determines will materially reduce the then-current market value of the Leased Property, and if after such reduction the Stipulated Loss Value shall substantially exceed the then- current market value of the Leased Property in the reasonable judgment of Landlord, then Tenant shall pay Landlord an amount equal to such excess for application as a Qualified Payment. Tenant shall make any payment required by the preceding sentence within one hundred eighty (180) days after it is requested by Landlord, and in any event shall make any such payment before the end of the Term. Tenant shall not impose any restrictive covenants or encumbrances upon the Leased Property without the prior written consent of the Landlord; provided, that such consent shall not be unreasonably withheld for any encumbrance or restriction that is made expressly subject to this Lease, as modified from time to time, and subordinate to Landlord's interest in the Leased Property by an agreement in form satisfactory to Landlord. Tenant shall not cause or permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Leased Property. Tenant shall not do any act whereby the market value of the Leased Property may be materially lessened. Tenant shall allow Landlord or its authorized representative to enter the Leased Property at any reasonable time to inspect the Leased Property and, after reasonable notice, to inspect Tenant's books and records pertaining thereto, and Tenant shall assist Landlord or Landlord's representative in whatever way reasonably necessary to make such inspections. If Tenant receives a written notice or claim from any federal, state or other governmental entity that the Leased Property is not in compliance in any material respect with any Applicable Law, or that any action may be taken against the owner of the Leased Property because the Leased Property does not comply with Applicable Law, Tenant shall promptly furnish a copy of such notice or claim to Landlord. Notwithstanding the foregoing, Tenant may in good faith, by appropriate proceedings, contest the validity and applicability of any Applicable Law with respect to the Leased Property, and pending such contest Tenant shall not be deemed in default hereunder because of a violation of such Applicable Law, if Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and if Tenant promptly causes the Leased Property to comply with any such Applicable Law upon a final determination by a court of competent jurisdiction that the same is valid and applicable to the Leased Property; provided, that in any event such contest shall be concluded and the violation of such Applicable Law must be corrected and any claims asserted against Landlord or the Leased Property because of such violation must be paid by Tenant, all prior to the date that (i) any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such violation or (ii) any action may be taken by any governmental authority against Landlord or any property owned by Landlord (including the Leased Property) because of such violation. (o) Debts for Construction. Tenant shall cause all debts and liabilities incurred in the construction, maintenance, operation and development of the Leased Property, including without limitation all debts and liabilities for labor, material and equipment and all debts and charges for utilities servicing the Leased Property, to be promptly paid. Notwithstanding the foregoing, Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted mechanic's or materialmen's lien and pending such contest Tenant shall not be deemed in default under this subparagraph (or subparagraphs 8.(t) or 8.(u)) because of the contested lien if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to Landlord's satisfaction any contested liens alleged to secure an amount in excess of $500,000 (individually or in the aggregate) (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the lien, interest and costs shall be paid prior to the date (i) any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (ii) any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. (p) Impositions. Tenant shall reimburse Landlord for (or, if requested by Landlord, will pay or cause to be paid prior to delinquency) all sales, excise, ad valorem, gross receipts, business, transfer, stamp, occupancy, rental and other taxes, levies, fees, charges, surcharges, assessments or penalties which arise out of or are attributable to this Lease or which are imposed upon Landlord or the Leased Property because of the ownership, leasing, occupancy, sale or operation of the Leased Property, or any part thereof, or relating to or required to be paid by the terms of any of the Permitted Encumbrances (collectively, herein called the "Impositions"), excluding only Excluded Taxes. If Landlord requires Tenant to pay any Impositions directly to the applicable taxing authority or other party entitled to collect the same, Tenant shall furnish Landlord with receipts showing payment of such Impositions and other amounts prior to delinquency; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted Imposition, and pending such contest Tenant shall not be deemed in default of this subparagraph (or subparagraphs 8.(t) or 8.(u)) because of the contested Imposition if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to the satisfaction of Landlord any lien asserted against the Leased Property and alleged to secure an amount in excess of $500,000 because of the contested Imposition, (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs, penalties and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the Impositions, penalties, interest and costs shall be paid prior to the date (i) any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (ii) any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. (q) Repair, Maintenance, Alterations and Additions. Tenant shall keep the Leased Property in good order, repair, operating condition and appearance (ordinary wear and tear excepted), causing all necessary repairs, renewals, replacements, additions and improvements to be promptly made, and will not allow any of the Leased Property to be materially misused, abused or wasted or to deteriorate. Further, Tenant shall not, without the prior written consent of Landlord, construct or make any alteration to any Improvements which significantly reduce the fair market value of the Leased Property. (r) Insurance and Casualty. Throughout the Term, Tenant will keep any valuable Improvements insured against damage by fire and other casualty in a commercially reasonable manner. (s) Condemnation. Immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Leased Property or any portion thereof, or any other similar governmental or quasi-governmental proceedings arising out of injury or damage to the Leased Property or any portion thereof, Tenant shall notify Landlord of the pendency of such proceedings. Tenant shall, at its expense, diligently prosecute any such proceedings and shall consult with Landlord, its attorneys and experts and cooperate with them as reasonably requested in the carrying on or defense of any such proceedings. All proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Leased Property and all judgments, decrees and awards for injury or damage to the Leased Property shall be paid to Landlord and applied as provided in Paragraph 4 above. Landlord is hereby authorized, in the name of Tenant, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the Leased Property. Landlord shall not be, in any event or circumstances, liable or responsible for failure to collect, or to exercise diligence in the collection of, any such proceeds, judgments, decrees or awards. Notwithstanding the foregoing provisions of this subparagraph 8.(s), following any condemnation or sale in lieu of condemnation involving the Leased Property, if condemnation or sale proceeds totaling not more than $2,000,000 are to be recovered as a result thereof, or if in connection therewith Tenant shall have executed a Voluntary Minimum Pledge Commitment and delivered any additional Collateral required to satisfy such Voluntary Minimum Pledge Commitment, Tenant shall be entitled to receive directly and hold such condemnation or sale proceeds, so long as no Event of Default shall have occurred and be continuing and so long as Tenant applies such proceeds towards the restoration, replacement and repair of the remainder of the Leased Property as required by subparagraph 4.(b). (t) Protection and Defense of Title. If any encumbrance or title defect whatsoever affecting Landlord's fee interest in the Leased Property is claimed or discovered (excluding Permitted Encumbrances, this Lease and any other encumbrance which is claimed by Landlord or lawfully claimed through or under Landlord and which is not claimed by, through or under Tenant) or if any legal proceedings are instituted with respect to title to the Leased Property, Tenant shall give prompt written notice thereof to Landlord and at Tenant's own cost and expense will promptly cause the removal of any such encumbrance and cure any such defect and will take all necessary and proper steps for the defense of any such legal proceedings, including but not limited to the employment of counsel, the prosecution or defense of litigation and the release or discharge of all adverse claims. If Tenant fails to promptly remove any such encumbrance or title defect (other than a Lien Tenant is contesting as expressly permitted by and in accordance with subparagraph 8.(o) or subparagraph 8.(p)), Landlord (whether or not named as a party to legal proceedings with respect thereto) shall be entitled to take such additional steps as in its judgment may be necessary or proper to remove such encumbrance or cure such defect or for the defense of any such attack or legal proceedings or the protection of Landlord's fee interest in the Leased Property, including but not limited to the employment of counsel, the prosecution or defense of litigation, the compromise or discharge of any adverse claims made with respect to the Leased Property, the removal of prior liens or security interests, and all expenses (including Attorneys' Fees) so incurred of every kind and character shall be a demand obligation owing by Tenant. For purposes of this subparagraph 8.(t), Tenant shall be deemed to be acting promptly to remove any encumbrance or to cure any title defect, other than a Lien which Tenant has itself granted or authorized, so long as Tenant (or a title insurance company obligated to do so) is in good faith by appropriate proceedings contesting the validity and applicability of the encumbrance or defect, and pending such contest Tenant shall not be deemed in default under this subparagraph because of the encumbrance or defect; provided, with respect to a contest of any encumbrance or title defect which is the subject of subparagraphs 8.(o) or 8.(p), Tenant (or the applicable title insurance company) must satisfy the conditions and requirements for a permitted contest set forth in those subparagraphs, and with respect to a contest of any other encumbrance or title defect, Tenant (or the applicable title insurance company) must: (1) diligently prosecute the contest to completion in a manner reasonably satisfactory to Landlord; (2) immediately remove the encumbrance or cure the defect, as and to the extent reasonably required to preserve Landlord's indefeasible fee estate in the Leased Property and to prevent any significant adverse impact the encumbrance or defect may have on the value of the Leased Property, upon a final determination by a court of competent jurisdiction that the encumbrance or defect is valid and applicable to the Leased Property; and (3) in any event conclude the contest and remove the encumbrance or cure the defect and pay any claims asserted against Landlord or the Leased Property because of such encumbrance or defect, all prior to (i) any Designated Sale Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than the Purchase Price, (ii) the date any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such encumbrance or defect or (iii) the date any action may be taken against Landlord or any property owned by Landlord (including the Leased Property) by any governmental authority or any other Person who has or claims rights superior to Landlord because of the encumbrance or defect. (u) No Liens on the Leased Property. Tenant shall not, without the prior written consent of Landlord, create, place or permit to be created or placed, or through any act or failure to act, acquiesce in the placing of, or allow to remain, any Lien (except the lien for property taxes or assessments assessed against the Leased Property which are not delinquent and any Lien Tenant is contesting as expressly permitted by and in accordance with subparagraph 8.(o) or subparagraph 8.(p)), against or covering the Leased Property or any part thereof (other than any Lien which is lawfully claimed through or under Landlord and which is not claimed by, through or under Tenant) regardless of whether the same are expressly or otherwise subordinate to this Lease or Landlord's interest in the Leased Property, and should any prohibited Lien exist or become attached hereafter in any manner to any part of the Leased Property without the prior written consent of Landlord, Tenant shall cause the same to be promptly discharged and released to the satisfaction of Landlord. (v) Books and Records. Tenant shall keep books and records that are accurate and complete in all material respects for the construction and maintenance of the Leased Property and will permit all such books and records (including without limitation all contracts, statements, invoices, bills and claims for labor, materials and services supplied for the construction and operation of any Improvements) to be inspected and copied by Landlord and its duly accredited representatives at all times during reasonable business hours; provided that so long as Tenant remains in possession of the Leased Property, Landlord or Landlord's representative will, before making any such inspection or copying any such documents, if then requested to do so by Tenant to maintain Tenant's security: (i) sign in at Tenant's security or information desk if Tenant has such a desk on the premises, (ii) wear a visitor's badge or other reasonable identification provided by Tenant when Landlord or Landlord's representative first arrives at the Leased Property, (iii) permit an employee of Tenant to observe such inspection or work, and (iv) comply with other similar reasonable nondiscriminatory security requirements of Tenant that do not, individually or in the aggregate, interfere with or delay inspections or copying by Landlord authorized by this subparagraph. This subparagraph shall not be construed as requiring Tenant to regularly maintain separate books and records relating exclusively to the Leased Property; provided, however, that if requested by Landlord at any time when an Event of Default shall have occurred and be continuing, Tenant shall construct or abstract from its regularly maintained books and records information required by this subparagraph relating to the Leased Property. (w) Financial Statements; Required Notices; Certificates as to Default. Tenant shall deliver to Landlord and to each Participant of which Tenant has been notified: (i) as soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of Tenant, a consolidated balance sheet of Tenant and its consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows of Tenant and its consolidated Subsidiaries for such fiscal year, all in reasonable detail and all prepared in accordance with GAAP and accompanied by a report and opinion of accountants of national standing selected by Tenant, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualification or exception which Landlord determines, in Landlord's reasonable discretion, is unacceptable; provided that notwithstanding the foregoing, for so long as Tenant is a company subject to the periodic reporting requirements of Section 12 of the Securities Exchange Act of 1934, as amended, Tenant shall be deemed to have satisfied its obligations under this clause (i) so long as Tenant delivers to Landlord the same annual report and report and opinion of accountants that Tenant delivers to its shareholders; (ii) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Tenant, the consolidated balance sheet of Tenant and its consolidated subsidiaries as of the end of such quarter and the consolidated income statement and the consolidated statement of cash flows of Tenant and its consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and all prepared in accordance with GAAP and certified by a Responsible Financial Officer of Tenant (subject to year-end adjustments); provided that notwithstanding the foregoing, for so long as Tenant is a company subject to the periodic reporting requirements of Section 12 of the Securities Exchange Act of 1934, as amended, Tenant shall be deemed to have satisfied its obligations under this clause (ii) so long as Tenant delivers to Landlord the same quarterly reports, certified by a Responsible Financial Officer of Tenant (subject to year-end adjustments), that Tenant delivers to its shareholders; (iii) together with the financial statements furnished in accordance with subparagraph 8.(w)(ii) and 8.(w)(i), a certificate of a Responsible Financial Officer of Tenant in substantially the form attached hereto as Exhibit E: (i) certifying that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a brief statement as to the nature thereof and the action which is proposed to be taken with respect thereto, (ii) certifying that the representations of Tenant set forth in Paragraph 8 of this Lease are true and correct in all material respects as of the date thereof as though made on and as of the date thereof or, if not then true and correct, a brief statement as to why such representations are no longer true and correct, and (iii) with computations demonstrating compliance with the financial covenants contained in subparagraph 8.(ac); (iv) promptly after any change in the rating of Tenant's senior, unsecured debt by Standard and Poor's Corporation or Moody's Investor Service, Inc. or in Tenant's Debt to Capital Ratio (as defined in subparagraph 1.(bo)), which will result in a change in the Spread (as defined in subparagraph 1.(bo)), a certificate of a Responsible Financial Officer of Tenant in substantially the form attached hereto as Exhibit F with computations evidencing Tenant's calculation of the Spread after giving effect to such changes; (v) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which Tenant sends to Tenant's stockholders, and copies of all regular, periodic and special reports, and all registration statements (other than registration statements on Form S-8 or any form substituted therefor) which Tenant files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (vi) as soon as possible and in any event within five (5) Business Days after a Responsible Financial Officer of Tenant becomes aware of the occurrence of each Default or Event of Default with respect to the Affirmative Financial Covenants described in subparagraph 9.(ae) or the Negative Covenants described in subparagraph 9.(af), a statement of a Responsible Financial Officer of Tenant setting forth details of such Default or Event of Default and the action which Tenant has taken and proposes to take with respect thereto; (vii) upon request by Landlord, a statement in writing certifying that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications) and the dates to which the Base Rent has been paid and either stating that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default under this Lease has occurred and is continuing, a brief statement as to the nature thereof; it being intended that any such statement by Tenant may be relied upon by any prospective purchaser or mortgagee of the Leased Property and by any Participant; and (viii) such other information respecting the condition or operations, financial or otherwise, of Tenant, of any of its Subsidiaries or of the Leased Property as Landlord or any Participant through Landlord may from time to time reasonably request. Landlord is hereby authorized to deliver a copy of any information or certificate delivered to it pursuant to this subparagraph 8.(w) to any Participant and to any regulatory body having jurisdiction over Landlord that requires or requests it. (x) Further Assurances. Tenant shall, on request of Landlord, (i) promptly correct any defect, error or omission which may be discovered in the contents of this Lease or in any other instrument executed in connection herewith or in the execution or acknowledgment thereof; (ii) execute, acknowledge, deliver and record or file such further instruments and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of this Lease and to subject to this Lease any property intended by the terms hereof to be covered hereby including specifically, but without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Leased Property; (iii) execute, acknowledge, deliver, procure and record or file any document or instrument deemed advisable by Landlord to protect its rights in and to the Leased Property against the rights or interests of third persons; and (iv) provide such certificates, documents, reports, information, affidavits and other instruments and do such further acts as may be necessary, desirable or proper in the reasonable determination of Landlord to enable Landlord, Landlord's Parent and other Participants to comply with the requirements or requests of any agency or authority having jurisdiction over them. (y) Fees and Expenses; General Indemnification; Increased Costs; and Capital Adequacy Charges. (i) Except for any costs paid by Landlord with the proceeds of the Initial Funding Advance as part of the Closing Costs, Tenant shall pay (and shall indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses incurred by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer in connection with or because of (A) the ownership of any interest in or operation of the Leased Property, (B) the negotiation or administration of this Lease, the Purchase Agreement, the Pledge Agreement, the Environmental Indemnity or the Participation Agreement (excluding the negotiation or administration of the Participation Agreement between Landlord and Landlord's Parent), or (C) 3COM's request for assistance in identifying any new Participant pursuant to Paragraph 18 of the Purchase Agreement, whether such Losses are incurred at the time of execution of this Lease or at any time during the Term. Costs and expenses included in such Losses may include, without limitation, all appraisal fees, filing and recording fees, inspection fees, survey fees, taxes (other than Excluded Taxes), brokerage fees and commissions, abstract fees, title policy fees, Uniform Commercial Code search fees, escrow fees, Attorneys' Fees and environmental consulting fees incurred by Landlord with respect to the Leased Property. If Landlord pays or reimburses Landlord' Parent for any such Losses, Tenant shall reimburse Landlord for the same notwithstanding that Landlord may have already received any payment from any other Participant on account of such Losses, it being understood that the other Participant may expect repayment from Landlord when Landlord does collect the required reimbursement from Tenant. (ii) Tenant shall also pay (and indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses, including Attorneys' Fees, incurred or expended by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer or in connection with (A) the breach by Tenant of any covenant of Tenant herein or in any other instrument executed in connection herewith or (B) Landlord's exercise in a lawful manner of any of Landlord's remedies hereunder or under Applicable Law or Landlord's protection of the Leased Property and Landlord's interest therein as permitted hereunder or under Applicable Law. (However, the indemnity in the preceding sentence shall not be construed to make Tenant liable to both Landlord and any Participant or other party claiming through Landlord for the same damages. For example, so long as Landlord remains entitled to recover any past due Base Rent from Tenant, no Participant shall be entitled to collect a percentage of the same Base Rent from Tenant.) Tenant shall further indemnify and hold harmless Landlord and all other Indemnified Parties against, and reimburse them for, all Losses which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or damage to the property of third parties occurring in or upon or in the vicinity of the Leased Property through any cause whatsoever. THE FOREGOING INDEMNITY FOR INJURY, DEATH OR PROPERTY DAMAGE SHALL APPLY EVEN WHEN INJURY, DEATH OR PROPERTY DAMAGE IN, ON OR IN THE VICINITY OF THE LEASED PROPERTY RESULTS IN WHOLE OR IN PART FROM THE ORDINARY NEGLIGENCE (AS DEFINED ABOVE) OF AN INDEMNIFIED PARTY; provided, such indemnity shall not apply to Losses suffered by an Indemnified Party that were proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or wilful misconduct of such Indemnified Party. (iii) If, after the date hereof, due to either (A) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (B) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to Landlord's Parent or any other Participant of agreeing to make or making, funding or maintaining advances to Landlord in connection with the Leased Property, then Tenant shall from time to time, upon demand by Landlord pay to Landlord for the account of Landlord's Parent or such other Participant, as the case may be, additional amounts sufficient to compensate Landlord's Parent or the Participant for such increased cost. An increase in costs resulting from any imposition or increase of reserve requirements applicable to Collateral held from time to time by Landlord's Parent or other Participants pursuant to the Pledge Agreement would be an increase covered by the preceding sentence. A certificate as to the amount of any increased cost covered by this subparagraph, submitted to Landlord and Tenant by Landlord's Parent or the other Participant, shall be conclusive and binding for purposes of determining Tenant's obligations hereunder, absent clear and demonstrable error. (iv) Landlord's Parent or any other Participant may demand additional payments (herein called "Capital Adequacy Charges") if Landlord's Parent or the other Participant determines that any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects the amount of capital to be maintained by it and that the amount of such capital is increased by or based upon the existence of Funding Advances made or to be made to Landlord to permit Landlord to maintain Landlord's investment in the Leased Property. To the extent that Landlord's Parent or the other Participant demands Capital Adequacy Charges as compensation for the additional capital requirements reasonably allocable to such advances, Tenant shall pay to Landlord for the account of Landlord's Parent or the other Participant, as the case may be, the amount so demanded. (v) Any amount to be paid to Landlord, Landlord's Parent or any other Indemnified Party under this subparagraph 8.(y) shall be a demand obligation owing by Tenant. Tenant's indemnities and obligations under this subparagraph 8.(y) shall survive the termination or expiration of this Lease with respect to any circumstance or event existing or occurring prior to such termination or expiration. (z) Liability Insurance. Tenant shall maintain one or more policies of commercial general liability insurance against claims for bodily injury or death and property damage occurring or resulting from any occurrence in or upon the Leased Property, in standard form and with an insurance company or companies rated by the A.M. Best Company of Oldwick, New Jersey as having a policyholder's rating of A or better and a reported financial information rating of X or better, such insurance to afford immediate protection, to the aggregate limit of not less than $10,000,000 combined single limit for bodily injury and property damage in respect of any one accident or occurrence, with not more than $500,000 self-insured retention. Such commercial general liability insurance shall include blanket contractual liability coverage which insures contractual liability under the indemnifications set forth in this Lease (other than the indemnifications set forth in Paragraph 11 concerning environmental matters), but such coverage or the amount thereof shall in no way limit such indemnifications. The policy evidencing such insurance shall name as additional insureds Landlord and all Participants of which Tenant has been notified (including Landlord's Parent, ABN AMRO Bank N.V. and the other financial institutions that are parties to the original Participation Agreement). Tenant shall maintain with respect to each policy or agreement evidencing such commercial general liability insurance such endorsements as may be reasonably required by Landlord and shall at all times deliver and maintain with Landlord written confirmation (in form satisfactory to Landlord) with respect to such insurance from the applicable insurer or its authorized agent, which confirmation must provide that insurance coverage will not be canceled or reduced without at least ten (10) days notice to Landlord. Not less than five (5) days prior to the expiration date of each policy of insurance required of Tenant pursuant to this subparagraph, Tenant shall deliver to Landlord a certificate evidencing a paid renewal policy or policies. (aa) Permitted Encumbrances. Except to the extent expressly required of Landlord by subparagraph 9.(b), Tenant shall comply with and will cause to be performed all of the covenants, agreements and obligations imposed upon the owner of the Leased Property in the Permitted Encumbrances in accordance with their respective terms and provisions. Tenant shall not, without the prior written consent of Landlord, modify or permit any modification of any Permitted Encumbrance in any manner that could impose significant monetary obligations upon Landlord or any subsequent owner of the Leased Property, could significantly and adversely affect the value of the Leased Property, could impose any lien to secure payment or performance obligations against any part of the Leased Property or would otherwise be material and adverse to Landlord. (bb) Environmental. (i) Environmental Covenants. Tenant covenants: a) not to cause or permit the Leased Property to be in violation of, or do anything or permit anything to be done which will subject the Leased Property to any remedial obligations under, any Environmental Laws, including without limitation CERCLA and RCRA, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances pertaining to the Leased Property; b) not to conduct or authorize others to conduct Hazardous Substance Activities on the Leased Property, except Permitted Hazardous Substance Use; c) to the extent required by Environmental Laws, to remove Hazardous Substances from the Leased Property (or if removal is prohibited by law, to take whatever action is required by law) promptly upon discovery; and d) not to discharge or authorize the discharge of anything (including Permitted Hazardous Substances) from the Leased Property into groundwater or surface water that would require any permit under applicable Environmental Laws, other than storm water runoff. If Tenant's failure to cure any breach of the covenants listed above in this subparagraph (i) continues beyond the Environmental Cure Period (as defined below), Landlord may, in addition to any other remedies available to it, after notifying Tenant of the remediation efforts Landlord believes are needed, cause the Leased Property to be freed from all Hazardous Substances (or if removal is prohibited by law, to take whatever action is required by law), and the cost of the removal shall be a demand obligation owing by Tenant to Landlord. Further, subject to the provisions of subparagraph 11.(c) below, Tenant agrees to indemnify Landlord against all Losses incurred by or asserted or proven against Landlord in connection therewith. As used in this subparagraph, "Environmental Cure Period" means the period ending on the earlier of: (1) one hundred and eighty days (180) after Tenant is notified of the breach which must be cured within such period, or such longer period as is reasonably required for any cure that Tenant pursues with diligence pursuant to and in accordance with an Approved Plan (as defined below), (2) the date any writ or order is issued for the levy or sale of any property owned by Landlord (including the Leased Property) or any criminal action is instituted against Landlord or any of its directors, officers or employees because of the breach which must be cured within such period, (3) the end of the Term. As used in this subparagraph, an "Approved Plan" means a plan of remediation of a violation of Environmental Laws for which Tenant has obtained, within one hundred and eighty days (180) after Tenant is notified of the applicable breach of the covenants listed above in this subparagraph (i), the written approval of the governmental authority with primary jurisdiction over the violation and with respect to which no other governmental authority asserting jurisdiction has claimed such plan is inadequate. (ii) Environmental Inspections and Reviews. Landlord reserves the right to retain an independent professional consultant to review any report prepared by Tenant or to conduct Landlord's own investigation to confirm whether Hazardous Substances Activities or the discharge of anything into groundwater or surface water has occurred in violation of the preceding subparagraph (i), but Landlord's right to reimbursement for the fees of such consultant shall be limited to the following circumstances: (1) an Event of Default shall have occurred; (2) Landlord shall have retained the consultant to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) Landlord shall have retained the consultant to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) Landlord shall have retained the consultant because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with the preceding subparagraph (i). Tenant grants to Landlord and to Landlord's agents, employees, consultants and contractors the right during reasonable business hours and after reasonable notice to enter upon the Leased Property to inspect the Leased Property and to perform such tests as are reasonably necessary or appropriate to conduct a review or investigation of Hazardous Substances on, or any discharge into groundwater or surface water from, the Leased Property. Without limiting the generality of the foregoing, Tenant agrees that Landlord will have the same right, power and authority to enter and inspect the Leased Property as is granted to a secured lender under Section 2929.5 of the California Civil Code. Tenant shall promptly reimburse Landlord for the cost of any such inspections and tests, but only when the inspections and tests are (1) ordered by Landlord after an Event of Default; (2) ordered by Landlord to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) ordered by Landlord to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) ordered because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with the preceding subparagraph (i). (iii) Notice of Environmental Problems. Tenant shall immediately advise Landlord of (i) any discovery of any event or circumstance which would render any of the representations contained in subparagraph 8.(e) inaccurate in any material respect if made at the time of such discovery, (ii) any remedial action taken by Tenant in response to any (A) discovery of any Hazardous Substances other than Permitted Hazardous Substances on, under or about the Leased Property or (B) any claim for damages resulting from Hazardous Substance Activities, (iii) Tenant's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Leased Property which could cause the Leased Property or any part thereof to be subject to any ownership, occupancy, transferability or use restrictions under Environmental Laws, or (iv) any investigation or inquiry affecting the Leased Property by any governmental authority in connection with any Environmental Laws. In such event, Tenant shall deliver to Landlord within thirty (30) days after Landlord's request, a preliminary written environmental plan setting forth a general description of the action that Tenant proposes to take with respect thereto, if any, to bring the Leased Property into compliance with Environmental Laws or to correct any breach by Tenant of the covenants listed above in subparagraph (i), including, without limitation, any proposed corrective work, the estimated cost and time of completion, the name of the contractor and a copy of the construction contract, if any, and such additional data, instruments, documents, agreements or other materials or information as Landlord may reasonably request. (cc) Affirmative Financial Covenants. (i) Quick Ratio. Tenant shall maintain a ratio of (A) Quick Assets of Tenant and its Subsidiaries (determined on a consolidated basis) to (B) the sum of Current Liabilities of Tenant and its Subsidiaries (determined on a consolidated basis), of not less than 1.00 to 1.00. As used in this subparagraph 8.(ac), "Quick Assets" means the sum (without duplication of any item) of the Collateral held and pledged under the Pledge Agreement, plus unencumbered cash, plus unencumbered short term cash investments, plus other unencumbered marketable securities which are classified as short term investments according to GAAP, plus the fair market value of unencumbered Long-Term Investments, plus unencumbered current net accounts receivable. For purposes of determining Quick Assets, assets will be deemed to be "unencumbered" if they are actually unencumbered or if they are encumbered only by Liens, from which, at the time of the applicable determination of Quick Assets, Tenant is entitled to a release of such assets upon no more than ninety days' notice, without any payment (other than the payment of ministerial fees and costs), without subjecting other assets to any Lien and without otherwise satisfying any condition that is beyond Tenant's control. As used herein "Long-Term Investments" means those investments described below (to the extent that they are not classified as short term investments in accordance with GAAP), provided that such investments shall have maturities of not longer than two years, and shall be rated not less than A- by Standard & Poor's Corporation or less than A by Moody's Investors Service, Inc.: (1) Securities issued or fully guaranteed or fully insured by the United States government or any agency thereof and backed by the full faith and credit of the United States; (2) Certificates of deposit, time deposits, eurodollar time deposits, repurchase agreements, or banker's acceptances that are issued by either one of the 50 largest (in assets) banks in the United States or by one of the 100 largest (in assets) banks in the world; and (3) Notes and municipal bonds. As used in this subparagraph 8.(ac), "Current Liabilities" means, with respect to any Person, all liabilities of such Person treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one year after the date in which the determination is made and (b) installment and sinking fund payments required to be made within one year after the date on which determination is made, but excluding all such liabilities or obligations which are renewable or extendable at the option of such Person to a date more than one year from the date of determination. (ii) Maximum Senior Debt to Capitalization. Throughout the Term Tenant shall maintain a ratio of Senior Debt to Capitalization of not more than 0.35 to 1.00. As used in this subparagraph 8.(ac): "Senior Debt" means the Debt of Tenant and its Subsidiaries (determined on a consolidated basis), minus the aggregate principal amount of the Subordinated Debt. "Capitalization" means the sum of the Debt of Tenant and its Subsidiaries (determined on a consolidated basis), including the aggregate principal amount of the Subordinated Debt, plus Consolidated Tangible Net Worth of Tenant and its Subsidiaries (determined on a consolidated basis). "Subordinated Debt" means the unsecured Debt of Tenant in respect of the $110,000,000 aggregate principal amount at maturity of 10 1/14% Convertible Subordinated Notes due 2001 issued pursuant to the Indenture. However, such unsecured Debt shall be included in Subordinated Debt for purposes hereof only to the extent that it remains expressly subordinated to the payment and performance obligations of Tenant in transactions of the type and structure contemplated by this Lease and the Purchase Agreement. "Consolidated Tangible Net Worth" means, at any date of determination thereof, the excess of consolidated total assets on such date over consolidated total liabilities on such date; provided, however, that Intangible Assets on such date shall be excluded from any determination of consolidated total assets on such date. "Intangible Assets" means, as of the date of any determination thereof, the total amount of all assets of Tenant and its consolidated Subsidiaries that are properly classified as "intangible assets" in accordance with GAAP and, in any event, shall include, without limitation, goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges other than prepaid insurance and prepaid taxes and current deferred taxes which are classified on the balance sheet of Tenant and its consolidated Subsidiaries as a current asset in accordance with GAAP and in which classification Tenant's independent public accountants concur. "Indenture" means the Indenture dated as of November 1, 1994 by and between Tenant and the First National Bank of Boston, as trustee. (iii) Minimum Tangible Net Worth. Tenant shall not permit its Consolidated Tangible Net Worth, on a consolidated basis, at the end of any fiscal quarter to be less than the sum of: (A) eighty percent (80%) of Consolidated Tangible Net Worth as of May 31, 1996; plus (B) fifty percent (50%) of Tenant's net income (but without deducting any net losses for any period) earned in each fiscal quarter, starting with the quarter ended August 31, 1996, and ending with the quarter which, at such time, is the most recently ended fiscal quarter; less (C) the amount of write-offs resulting from acquisitions after May 31, 1996, such amount not to exceed an aggregate, cumulative amount of $150,000,000. (iv) Fixed Charge Ratio. Throughout the Term Tenant shall maintain as of the last day of each fiscal quarter of Tenant a ratio of (A) Adjusted EBIT of Tenant and its Subsidiaries (determined on a consolidated basis) for the twelve (12) month period ending on such date, to (B) Fixed Charges of Tenant and its Subsidiaries (determined on a consolidated basis) for the twelve (12) month period ending on such date, of not less than 2.00 to 1.00. As used in this clause (iv), "Adjusted EBIT" means, for any accounting period, net income (or net loss), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) gross interest expense, (b) income tax expense (c) rent expense under leases of property (excluding rent expense payable under any "Minor Lease", which shall mean a lease under which rent is less than $1,000,000 per annum), (d) depreciation, and (e) non-recurring charges taken in connection with the acquisition of in-process technologies, in each case determined in accordance with GAAP. As used in this clause (iv), "Fixed Charges" means, for any accounting period, the sum of (a) gross interest expense, plus (b) amortization of principal or debt discount in respect of all Debt during such period, plus (c) rent payable under all leases of property during such period (excluding rent payable under any Minor Lease), plus (d) taxes payable during such period. (dd) Negative Covenants. Without the prior written consent of Landlord in each case, neither Tenant nor any of its Subsidiaries shall: (i) Liens. Create, incur, assume or suffer to exist any Lien, upon or with respect to any of its properties, now owned or hereafter acquired; provided, however, that the following shall be permitted except to the extent that they would encumber any interest in the Leased Property in violation of other provisions of this Lease or would encumber Collateral covered by the Pledge Agreement: a) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; b) Liens that secure obligations incurred in the ordinary course of business, that are not past due for more than thirty (30) days (or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established) and that: (1) are imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens; or (2) encumber only equipment or other tangible personal property and any proceeds thereof (including Liens created by equipment leases) and are imposed to secure the payment of the purchase price or other direct costs of acquiring the equipment or other tangible personal property they encumber; c) Liens under workmen's compensation, unemployment insurance, social security or similar legislation (other than ERISA); d) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; e) judgment and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; f) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by Tenant or any such Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; g) Liens securing obligations of such a Subsidiary to Tenant or to another such Subsidiary; h) Liens incurred after the date of this Lease given to secure the payment of the purchase price or other direct costs incurred in connection with the acquisition, construction, improvement or rehabilitation of assets, including Liens existing on such assets at the time of acquisition thereof or at the time of acquisition by Tenant or a Subsidiary of any business entity (including a Subsidiary) then owning such assets, whether or not such existing Liens were given to secure the payment of the purchase price of the assets to which they attach, provided that (i) except in the case of Liens existing on assets at the time of acquisition of a Subsidiary then owning such assets, the Lien shall be created within six (6) months of the later of the acquisition of, or the completion of the construction or improvement in respect of, such assets and shall attach solely to such assets, and (ii) except in the case of Liens existing on assets at the time of acquisition of a Subsidiary then owning such assets, at the time such Liens are imposed, the aggregate amount remaining unpaid on all Debt secured by Liens on such assets whether or not assumed by Tenant or a Subsidiary shall not exceed an amount equal to seventy-five percent (75%) of the lesser of the total purchase price or fair market value, at the time such Debt is incurred, of such assets; i) existing mortgages and deeds of trust as of the date of this Lease; j) Liens created by the Lease Agreement dated as of July 14, 1994 between Landlord and Tenant, evidenced by a short form dated July 15, 1994, recorded in Book N520, Page 1474 of the Official Records of Santa Clara County, California, or by the other agreements executed in connection therewith (including the Pledge Agreement and Custodial Agreement referenced therein); k) Liens created by the Lease Agreement dated as of October 4, 1996 between Landlord and Tenant, evidenced by a short form dated October 4, 1996, recorded in Series Number 13473188 of the Official Records of Santa Clara County, California, or by the other agreements executed in connection therewith (including the Pledge Agreement referenced therein); l) Liens created by any real property lease, or related documents (including a separate purchase agreement), executed after the date hereof that requires Tenant or its Subsidiaries to purchase or cause another to purchase any interest in the property covered thereby and thus guarantee a minimum residual value of the property to the landlord; provided, that the value of all such leases (other than this lease and the lease referenced in the preceding clause) shall not exceed an aggregate, cumulative amount of $250,100,000 (for purposes of this clause, the "value" of a lease means the amount, determined as of the date the lease became effective, equal to the greater of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with FASB Statement 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as capital leases] or (2) the fair value of the property covered thereby); m) Liens imposed to secure Debt incurred to finance the acquisition of property which has been leased or sold by Tenant or one of its Subsidiaries to another Person (other than Tenant or a Subsidiary of Tenant) pursuant to a lease or sales agreement providing for payments sufficient to pay such Debt in full, provided such Debt is not a general obligation of Tenant or its Subsidiaries, but rather is payable only from the rentals or other sums payable under the lease or sales agreement or from the property sold or leased thereunder; n) Liens not otherwise permitted by this subsection 8.(ad)(i) (and not encumbering the Leased Property or any Collateral) which secure the payment of Debt, provided that (i) at no time does the sum of the aggregate amount of all outstanding Debt secured by such Liens exceed $50,000,000, and (i) such Liens do not constitute Liens against Tenant's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of Tenant or of any material Subsidiary of Tenant (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of Tenant and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and o) Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the other clauses of this subsection 8.(ad)(i), provided that there is no increase in the aggregate principal amount of Debt secured thereby from that which was outstanding as of the date of such renewal, extension or refunding and no additional property is encumbered. (ii) Transactions with Affiliates. Enter into any transactions that individually or in the aggregate are material to Tenant (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates, except upon fair and reasonable terms no less favorable to Tenant than would be obtained in a comparable arm's length transaction with a Person not an Affiliate. (iii) Mergers; Sales of Assets. a) Except to the extent permitted by the last sentence of this subparagraph 8.(ad), liquidate or dissolve, or merge, consolidate with or into, or convey, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), to any Person, or enter into any joint venture, partnership or other combination which involves the investment, sale, lease, loan, or other disposition of the business or all of the assets of Tenant and its Subsidiaries or so much thereof as, in the reasonable opinion of Landlord, constitutes a substantial portion of such business or assets. b) Except to the extent permitted by the last sentence of this subparagraph 8.(ad), acquire the assets or business of any Person, other than in the ordinary course of Tenant's business as presently conducted. (iv) Sale of Receivables. Sell for less than the full face value of, or otherwise sell for consideration other than cash, any of its notes or accounts receivable. However, this subparagraph (iv) shall not prohibit: a) a sale of receivables for cash at a discount which is less than fifteen percent (15%) of the face value of all receivables then outstanding on the books of Tenant and its consolidated Subsidiaries, if such sale and all other discounted sales of receivables permitted by this clause a) during the same fiscal year of Tenant do not affect more than fifteen percent (15%) of the individual accounts (excluding intercompany accounts) comprising the receivables of Tenant and its Subsidiaries; b) any license or sale of products or services in the ordinary course of business where payment for such transactions is made by credit card, provided that the fees and discounts incurred by the Tenant or the Subsidiary in connection therewith shall not exceed the normal and customary fees and discounts incurred for general credit card transactions through major credit card issuers; or c) the delivery and endorsement to banks in the ordinary course of business by Tenant or any of its Subsidiaries of promissory notes received in payment of trade receivables, where delivery and endorsement are made prior to the date of maturity of such promissory notes, and the retention by such banks of normal and customary fees and discounts therefor, provided such practice is usual and customary in the country where such activity occurs. (v) Change of Business. Permit any significant change in the nature of the business of Tenant and its Subsidiaries, taken as whole, from that presently conducted. Notwithstanding any contrary provisions of subparagraph 8.(ad)(iii), Tenant may engage in any of the following transactions, provided that immediately prior to and immediately after giving effect thereto, no Default or Event of Default exists or would exist: (i) merge with another entity if Tenant is the corporation surviving the merger; (ii) enter into joint ventures; (iii) acquire the assets or business of another Person; or (iv) liquidate or dissolve Subsidiaries to the extent that such liquidations and dissolutions would not, in the aggregate, result in a material adverse effect on the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (ee) ERISA. (i) Each Plan is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law, and as of the date hereof no event or condition is occurring or exists which would require a notice from Tenant under clause 8.(ae)(ii). (ii) Tenant shall provide a notice to Landlord as soon as possible after, and in any event within ten (10) days after Tenant becomes aware that, any of the following has occurred, with respect to which the potential aggregate liability to Tenant relating thereto is $2,000,000 or more, and such notice shall include a statement signed by a senior financial officer of Tenant setting forth details of the following and the response, if any, which Tenant or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to Pension Benefit Guaranty Corporation by Tenant or an ERISA Affiliate with respect to any of the following or the events or conditions leading up it): (A) the assertion, to secure any Unfunded Benefit Liabilities, of any Lien against the assets of Tenant, against the assets of any Plan of Tenant or any ERISA Affiliate of Tenant or against any interest of Landlord or Tenant in the Leased Property or the Collateral covered by the Pledge Agreement, or (B) the taking of any action by the Pension Benefit Guaranty Corporation or any other governmental authority action against Tenant to terminate any Plan of Tenant or any ERISA Affiliate of Tenant or to cause the appointment of a trustee or receiver to administer any such Plan. 10. Representations, Warranties and Covenants of Landlord. Landlord represents, warrants and covenants as follows: (a) Title Claims By, Through or Under Landlord. Except by a Permitted Transfer, Landlord shall not assign, transfer, mortgage, pledge, encumber or hypothecate this Lease or any interest of Landlord in and to the Leased Property during the Term without the prior written consent of Tenant. Landlord further agrees that if any encumbrance or title defect affecting the Leased Property is lawfully claimed through or under Landlord, including any judgment lien lawfully filed against Landlord, Landlord will at its own cost and expense remove any such encumbrance and cure any such defect; provided, however, Landlord shall not be responsible for (i) any Permitted Encumbrances (regardless of whether claimed through or under Landlord) or any other encumbrances not lawfully claimed through or under Landlord, (ii) any encumbrances or title defects claimed by, through or under Tenant, ABN AMRO Bank N.V. or any other Participant (other than Landlord's Parent) which Tenant shall have approved, or (iii) any encumbrance or title defect arising because of Landlord's compliance with subparagraph 9.(b) or any request made by Tenant. (b) Actions Required of the Title Holder. So long as no Event of Default shall have occurred and be continuing, Landlord shall take any and all action required of Landlord by the Permitted Encumbrances or otherwise required of Landlord by Applicable Laws or reasonably requested by Tenant (including granting any utility easements required in connection with construction of Improvements); provided that (i) actions Tenant may require of Landlord under this subparagraph shall be limited to actions that can only be taken by Landlord as the owner of the Leased Property, as opposed to any action that can be taken by Tenant or any third party (and the payment of any monetary obligation shall not be an action required of Landlord under this subparagraph unless Landlord shall first have received funds from Tenant, in excess of any other amounts due from Tenant hereunder, sufficient to pay such monetary obligations), (ii) Tenant requests the action to be taken by Landlord (which request must be specific and in writing, if required by Landlord at the time the request is made) and (iii) the action to be taken will not constitute a violation of any Applicable Laws or compromise or constitute a waiver of Landlord's rights hereunder or under the Purchase Agreement, the Pledge Agreement or Environmental Indemnity or otherwise be reasonably objectionable to Landlord. So long as no Event of Default shall have occurred and be continuing, Tenant shall have the option from time to time during the Term to purchase one or more undeveloped portions of the Real Property, consisting of one or more tracts or lots of the Land which can be sold under Applicable Laws separate and apart from the rest of the Land (each, a "Parcel"), for an amount equal to the Release Price (as defined below) with respect thereto. Tenant may exercise such option by delivering to Landlord not less than ninety (90) days prior written notice, which written notice shall describe the Parcel or Parcels to be purchased, the date such Parcels are to be conveyed by Landlord and an estimate by Tenant of the Release Price to be paid by Tenant. In each case Landlord's obligation to convey such Parcels to Tenant shall be subject to Tenant's satisfaction of each of the following conditions: a) Landlord and Tenant shall have agreed upon, entered into and recorded such reciprocal easements relating to the Land and the Parcel to be so sold as they shall deem necessary or reasonably required to preserve usefulness of the Parcels and the remaining Land after the conveyance; b) Tenant shall have paid to Landlord the Release Price for such Parcels; and c) Tenant shall have reimbursed Landlord for, and Landlord shall have received, any new appraisal that Landlord believes it should obtain in connection with the sale to satisfy regulatory requirements applicable to Landlord, Landlord's Parent or the Participants. d) In addition to the Release Price, Tenant shall have paid all costs and expenses necessary to consummate the sale, including all legal fees of Landlord. Upon Tenant's satisfaction of each of the foregoing conditions, Landlord shall convey such Parcel or Parcels to Tenant pursuant to a quitclaim transfer of all of Landlord's right, title and interest therein on as "as is, where is, with all faults" basis free and clear of encumbrances which are claimed by Landlord or lawfully claimed through or under Landlord and which are not claimed by, through or under Tenant, but otherwise without recourse, representation or warranty of any kind. As used in this subparagraph 9.(b), the "Release Price" with respect to any Parcel or Parcels means the higher of (1) $49,500,000 times a fraction, the numerator of which is the square footage of such Parcel or Parcels, and the denominator of which is the total square footage of all Land described in Exhibit A, and (2) the sales price that Landlord must receive for the Parcel or Parcels if, following the Landlord's sale of thereof and application of the net sales proceeds paid to Landlord as a Qualified Payment, the remaining Leased Property is to have a Remaining Value (as defined below) of no less than sixty percent (60%) of Stipulated Loss Value. As used in this subparagraph 9.(b), "Remaining Value" means the market value of the Leased Property that Landlord will retain, taking into account any loss of visibility, accessibility or development potential that may result from Landlord's compliance with this subparagraph. Remaining Value will be determined in accordance with the following procedure, unless Landlord and Tenant otherwise agree in a particular case: (A) Landlord and Tenant shall each, within ten (10) days after written notice from either to the other, select an appraiser. If either Landlord or Tenant fails to select an appraiser within the required period, then the appraiser who has been timely selected shall conclusively determine the Remaining Value in accordance with this clause subparagraph within forty-five (45) days after his or her selection. (B) Upon the selection of the two appraisers as provided above, such appraisers shall proceed to determine the Remaining Value of the Leased Property that Landlord will retain after any sale required by this subparagraph. Such appraisals shall be submitted in writing no later than forty-five (45) days after selection of the second appraiser. If the Remaining Value as determined by such appraisers is identical, such sum they determine shall be the Remaining Value. In the event the lower appraisal is not lower than five percent (5%) below the higher appraisal, then Remaining Value shall be the sum of the two appraisal figures divided by two (2). If either appraiser fails to timely submit his or her appraisal, the timely submitted appraisal shall be determinative of Remaining Value. (C) In the event the lower appraisal is lower than five percent (5%) below the higher appraisal figure, then the two appraisers previously selected shall select a third appraiser. The name of such appraiser shall be submitted at the same time the written appraisals are due. Such third appraiser shall then review the previously submitted appraisals and select the one that, in his professional opinion, more closely reflects the market value of the Leased Property that Landlord will retain, such selection to be submitted in writing no later than ten (10) days after selection of the third appraiser. Such selection shall be determinative of Remaining Value. (D) In making any such determination of Remaining Value, the appraisers shall assume that any improvements then located on the Leased Property (or applicable portion thereof) or under construction constitute the highest and best use, that Tenant will promptly complete all construction which this Lease obligates Tenant to complete and that neither this Lease nor the Purchase Agreement add any value to the Leased Property. Each appraiser selected hereunder shall be an independent MAI-designated appraiser with not less than ten (10) years' experience in commercial real estate appraisal in Santa Clara County, California and surrounding areas. Any Losses (including appraisal fees) incurred by Landlord because of any action taken pursuant to this subparagraph 9.(b) shall be covered by the indemnification set forth in subparagraph 8.(y). Further, for purposes of such indemnification, any action taken by Landlord will be deemed to have been made at the request of Tenant if made pursuant to any request of Tenant's counsel or of any officer of Tenant (or with their knowledge, and without their objection) in connection with the closing under the Existing Contract or the closing of any sale of a Parcel by Landlord pursuant to the foregoing provisions. (c) No Default or Violation. The execution, delivery and performance of this Lease do not contravene, result in a breach of or constitute a default under any material contract or agreement to which Landlord is a party or by which Landlord is bound and do not, to the knowledge of Landlord, violate or contravene any law, order, decree, rule or regulation to which Landlord is subject. (d) No Suits. To Landlord's knowledge there are no judicial or administrative actions, suits or proceedings involving the validity, enforceability or priority of this Lease, and to Landlord's knowledge no such suits or proceedings are threatened. (e) Organization. Landlord is duly incorporated and legally existing under the laws of Delaware and is or, if necessary, will become duly qualified to do business in the State of California. Landlord has or will obtain, at Tenant's expense pursuant to the other provisions of this Lease, all requisite power and all material governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to own and lease the Leased Property and to perform its obligations under this Lease. (f) Enforceability. The execution, delivery and performance of this Lease, the Purchase Agreement and the Pledge Agreement by Landlord are duly authorized, are not in contravention of or conflict with any term or provision of Landlord's articles of incorporation or bylaws and do not, to Landlord's knowledge, require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained or conflict with any Applicable Laws. This Lease, the Purchase Agreement and the Pledge Agreement are valid, binding and legally enforceable obligations of Landlord except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application; provided, Landlord makes no representation or warranty that conditions imposed by any state or local Applicable Laws to the purchase, ownership, lease or operation of the Leased Property have been satisfied. (g) Existence. Landlord will continuously maintain its existence and, after qualifying to do business in the State of California if Landlord has not already done so, Landlord will continuously maintain its right to do business in that state to the extent necessary for the performance of Landlord's obligations hereunder. (h) Not a Foreign Person. Landlord is not a "foreign person" within the meaning of the Sections 1445 and 7701 of the Code (i.e., Landlord is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder), and Landlord is not subject to withholding under California Revenue and Taxation Code Sections 18805, 18815, and 26131. 11. Assignment and Subletting. (a) Consent Required. During the term of this Lease, without the prior written consent of Landlord first had and received, Tenant shall not assign, transfer, mortgage, pledge or hypothecate this Lease or any interest of Tenant hereunder and shall not sublet all or any part of the Leased Property, by operation of law or otherwise; provided, that, so long as no Event of Default has occurred and is continuing, Tenant shall be entitled without the consent of Landlord to sublet all or any portion of the space in any then completed Improvements if: (i) any sublease by Tenant is made expressly subject and subordinate to the terms hereof; (ii) no sublease has a term longer than the remainder of the then effective term of this Lease; (iii) the use permitted by such sublease is expressly limited to general office use or other uses approved in advance by Landlord as uses that will not present extraordinary risks of uninsured environmental or other liability; and (iv) no more than forty-five percent of the space in any completed Improvements shall be subleased without Landlord's prior consent to any Person that is neither (A) an Affiliate of Tenant nor (B) the operator of a business in the subleased space that is related to the operation of Tenant's own business (such as another venturer in a joint venture with Tenant). (b) Standard for Landlord's Consent to Assignments and Certain Other Matters. Consents and approvals of Landlord which are required by this Paragraph 10 will not be unreasonably withheld, but Tenant acknowledges that Landlord's withholding of such consent or approval shall be reasonable if Landlord determines in good faith that (1) giving the approval may increase Landlord's risk of liability for any existing or future environmental problem, (2) giving the approval is likely to substantially increase Landlord's administrative burden of complying with or monitoring Tenant's compliance with the requirements of this Lease, or (3) any transaction for which Tenant has requested the consent or approval would negate Tenant's representations in this Lease regarding ERISA or cause this Lease or the other documents referenced herein to constitute a violation of any provision of ERISA. (c) Consent Not a Waiver. No consent by Landlord to a sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or Tenant's interest hereunder, and no assignment or subletting of the Leased Property or any part thereof in accordance with this Lease or otherwise with Landlord's consent, shall release Tenant from liability hereunder; and any such consent shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from any requirement of obtaining the prior written consent of Landlord to any further sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or any interest of Tenant hereunder. (d) Landlord's Assignment. Landlord shall have the right to transfer, assign and convey, in whole or in part, the Leased Property and any and all of its rights under this Lease by any conveyance that constitutes a Permitted Transfer. (However, any Permitted Transfer shall be subject to all of the provisions of each and every agreement concerning the Leased Property then existing between Landlord and Tenant, including without limitation this Lease and the Purchase Agreement.) If Landlord sells or otherwise transfers the Leased Property and assigns its rights under this Lease, the Purchase Agreement and the Pledge Agreement pursuant to a Permitted Transfer, then to the extent Landlord's successor in interest confirms its liability for the obligations imposed upon Landlord by this Lease, the Purchase Agreement and the Pledge Agreement on and subject to the express terms and conditions set out herein and therein, the original Landlord shall thereby be released from any obligations thereafter arising under this Lease, the Purchase Agreement and the Pledge Agreement, and Tenant will look solely to each successor in interest of Landlord for performance of such obligations. However, notwithstanding anything to the contrary herein contained, if withholding taxes are imposed on the rents and other amounts payable to Landlord hereunder because of Landlord's assignment of this Lease to any citizen of, or any corporation or other entity formed under the laws of, a country other than the United States, Tenant shall not be required to compensate such assignee for the withholding tax. Further, during the Term and so long as no Event of Default has occurred and is continuing, Landlord shall not decrease the percentage of Base Rent it (and/or its Affiliates) is entitled to receive and retain under the Participation Agreement below ten percent (10%) without Tenant's consent, which consent will not be unreasonably withheld. 12. Environmental Indemnification. (a) Indemnity. Tenant hereby agrees to assume liability for and to pay, indemnify, defend, and hold harmless each and every Indemnified Party from and against any and all Environmental Losses, subject only to the provisions of subparagraph 11.(c) below. (b) Assumption of Defense. (i) If an Indemnified Party notifies Tenant of any claim, demand, action, administrative or legal proceeding, investigation or allegation as to which the indemnity provided for in this Paragraph 11 applies, Tenant shall assume on behalf of the Indemnified Party and conduct with due diligence and in good faith the investigation and defense thereof and the response thereto with counsel selected by Tenant but reasonably satisfactory to the Indemnified Party; provided, that the Indemnified Party shall have the right to be represented by advisory counsel of its own selection and at its own expense; and provided further, that if any such claim, demand, action, proceeding, investigation or allegation involves both Tenant and the Indemnified Party and the Indemnified Party shall have been advised in writing by counsel that there may be legal defenses available to it which are inconsistent with those available to Tenant, then the Indemnified Party shall have the right to select separate counsel to participate in the investigation and defense of and response to such claim, demand, action, proceeding, investigation or allegation on its own behalf, and Tenant shall pay or reimburse the Indemnified Party for all Attorney's Fees incurred by the Indemnified Party because of the selection of such separate counsel. (ii) If any claim, demand, action, proceeding, investigation or allegation arises as to which the indemnity provided for in this Paragraph 11 applies, and Tenant fails to assume promptly (and in any event within fifteen (15) days after being notified of the claim, demand, action, proceeding, investigation or allegation) the defense of the Indemnified Party, then the Indemnified Party may contest (or settle, with the prior written consent of Tenant, which consent will not be unreasonably withheld) the claim, demand, action, proceeding, investigation or allegation at Tenant's expense using counsel selected by the Indemnified Party; provided, that if any such failure by Tenant continues for thirty (30) days or more after Tenant is notified thereof, no such contest need be made by the Indemnified Party and settlement or full payment of any claim may be made by the Indemnified Party without Tenant's consent and without releasing Tenant from any obligations to the Indemnified Party under this Paragraph 11 so long as, in the written opinion of reputable counsel to the Indemnified Party, the settlement or payment in full is clearly advisable. (c) Notice of Environmental Losses. If an Indemnified Party receives a written notice of Environmental Losses that such Indemnified Party believes are covered by this Paragraph 11, then such Indemnified Party will be expected to promptly furnish a copy of such notice to Tenant. The failure to so provide a copy of the notice to Tenant shall not excuse Tenant from its obligations under this Paragraph 11; provided, that if Tenant is unaware of the matters described in the notice and such failure renders unavailable defenses that Tenant might otherwise assert, or precludes actions that Tenant might otherwise take, to minimize its obligations hereunder, then Tenant shall be excused from its obligation to indemnify such Indemnified Party (and any Affiliate of such Indemnified Party) against Environmental Losses, if any, which would not have been incurred but for such failure. For example, if Landlord fails to provide Tenant with a copy of a notice of an obligation covered by the indemnity set out in subparagraph 11.(a) and Tenant is not otherwise already aware of such obligation, and if as a result of such failure Landlord becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if Tenant had been promptly provided with a copy of the notice, then Tenant will be excused from any obligation to Landlord (or any Affiliate of Landlord) to pay the excess. (d) Rights Cumulative. The rights of each Indemnified Party under this Paragraph 11 shall be in addition to any other rights and remedies of such Indemnified Party against Tenant under the other provisions of this Lease or under any other document or instrument now or hereafter executed by Tenant, or at law or in equity (including, without limitation, any right of reimbursement or contribution pursuant to CERCLA). (e) Survival of the Indemnity. Tenant's obligations under this Paragraph 11 shall survive the termination or expiration of this Lease. All obligations of Tenant under this Paragraph 11 shall be payable upon demand, and any amount due upon demand to any Indemnified Party by Tenant which is not paid shall bear interest from the date of such demand at a floating interest rate equal to the Default Rate, but in no event in excess of the maximum rate permitted by law. 13. Landlord's Right of Access. (a) Landlord and Landlord's representatives may enter the Leased Property, after five (5) Business Days advance written notice to Tenant (except in the event of an emergency, when no advance notice will be required), for the purpose of making inspections or performing any work Landlord is authorized to undertake by the next subparagraph. So long as Tenant remains in possession of the Leased Property, Landlord or Landlord's representative will, before making any such inspection or performing any such work on the Leased Property, if then requested to do so by Tenant to maintain Tenant's security: (i) sign in at Tenant's security or information desk if Tenant has such a desk on the premises, (ii) wear a visitor's badge or other reasonable identification provided by Tenant when Landlord or Landlord's representative first arrives at the Leased Property, (iii) permit an employee of Tenant to observe such inspection or work, and (iv) comply with other similar reasonable nondiscriminatory security requirements of Tenant that do not, individually or in the aggregate, interfere with or delay inspections or work of Landlord authorized by this Lease. (b) If Tenant fails to perform any act or to take any action which hereunder Tenant is required to perform or take, or to pay any money which hereunder Tenant is required to pay, and if such failure or action constitutes an Event of Default or renders Landlord or any director, officer, employee or Affiliate of Landlord at risk of criminal prosecution or renders Landlord's interest in the Leased Property or any part thereof at risk of forfeiture by forced sale or otherwise, then in addition to any other remedies specified herein or otherwise available, Landlord may, in Tenant's name or in Landlord's own name, perform or cause to be performed such act or take such action or pay such money. Any expenses so incurred by Landlord, and any money so paid by Landlord, shall be a demand obligation owing by Tenant to Landlord. Further, Landlord, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment. But nothing herein shall imply any duty upon the part of Landlord to do any work which under any provision of this Lease Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default. Landlord may during the progress of any such work permitted by Landlord hereunder on or in the Leased Property keep and store upon the Leased Property all necessary materials, tools, and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage to Tenant or the subtenants of Tenant by reason of making such repairs or the performance of any such work on or in the Leased Property, or on account of bringing materials, supplies and equipment into or through the Leased Property during the course of such work (except for liability in connection with death or injury or damage to the property of third parties caused by the Active Negligence, gross negligence or wilful misconduct of Landlord or its officers, employees, or agents in connection therewith), and the obligations of Tenant under this Lease shall not thereby be affected in any manner. 14. Events of Default. (a) Definition of Event of Default. Each of the following events shall be deemed to be an "Event of Default" by Tenant under this Lease: (i) Tenant shall fail to pay when due any installment of Rent due hereunder and such failure shall continue for three (3) Business Days after Tenant is notified thereof. (ii) Tenant shall fail to cause any representation or warranty of Tenant contained herein that is false or misleading in any material respect when made to be made true and not misleading (other than as described in the other clauses of this subparagraph 13.(a)), or Tenant shall fail to comply with any term, provision or covenant of this Lease (other than as described in the other clauses of this subparagraph 13.(a)), and in either case shall not cure such failure prior to the earlier of (A) thirty (30) days after written notice thereof is sent to Tenant or (B) the date any writ or order is issued for the levy or sale of any property owned by Landlord (including the Leased Property) or any criminal action is instituted against Landlord or any of its directors, officers or employees because of such failure; provided, however, that so long as no such writ or order is issued and no such criminal action is instituted, if such failure is susceptible of cure but cannot with reasonable diligence be cured within such thirty day period, and if Tenant shall promptly have commenced to cure the same and shall thereafter prosecute the curing thereof with reasonable diligence, the period within which such failure may be cured shall be extended for such further period (not to exceed an additional sixty (60) days) as shall be necessary for the curing thereof with reasonable diligence. (iii) Tenant shall fail to comply with any term, provision or condition of the Purchase Agreement or the Pledge Agreement and, if the Purchase Agreement or Pledge Agreement expressly provides a time within which Tenant may cure such failure, Tenant shall not cure the failure within such time. (iv) Tenant shall abandon the Leased Property. (v) Tenant shall fail to make any payment or payments of principal, premium or interest, on any Debt of Tenant described in the next sentence when due (taking into consideration the time Tenant may have to cure such failure, if any, under the documents governing such Debt). As used in this clause 13.(a)(v), "Debt" shall mean only a Debt of Tenant now existing or arising in the future, (A) payable to Landlord or any Participant or any Affiliate of Landlord or any Participant, the outstanding balance of which has become due by reason of acceleration or maturity, or (B) payable to any Person, with respect to which $5,000,000 or more is actually due and payable because of acceleration or otherwise. (vi) Tenant or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Tenant or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of thirty (30) consecutive days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or Tenant or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this clause (vi). (vii) Any order, judgment or decree is entered in any proceedings against Tenant or any Subsidiary decreeing the dissolution of Tenant or such Subsidiary and such order, judgment or decree remains unstayed and in effect for more than sixty (60) days. (viii) Any order, judgment or decree is entered in any proceedings against Tenant or any Subsidiary decreeing a split- up of Tenant or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of Tenant and its Subsidiaries (determined in accordance with GAAP) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of Tenant and its Subsidiaries (determined in accordance with GAAP) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than sixty (60) days. (ix) A final judgment or order for the payment of money in an amount (not covered by insurance) which exceeds $3,000,000 shall be rendered against Tenant or any of its Subsidiaries and within sixty (60) days after the entry thereof, such judgment or order is not discharged or execution thereof stayed pending appeal, or within thirty (30) days after the expiration of any such stay, such judgment is not discharged. (x) Any ERISA Termination Event that Landlord determines might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States district court of a trustee to administer any Plan shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to Tenant by Landlord, or any Plan shall be terminated, or a trustee shall be appointed by an appropriate United States district court to administer any Plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan. (xi) A Change of Control Event not approved in advance by Landlord shall occur. (xii) The subordination provisions of the Indenture (as defined in subparagraph 8.(ac)(ii) of this Lease) or any other agreement or instrument governing the Subordinated Debt (as defined in subparagraph 8.(ac)(ii) of this Lease) shall be for any reason revoked or invalidated, or otherwise cease to be in full force and effect; or the Tenant or any of its Subsidiaries shall contest in any manner the validity or enforceability of such subordination provisions or shall deny that it has any further liability or obligation thereunder; or the obligations of Tenant hereunder or under the Purchase Agreement shall be for any reason subordinated to such Subordinated Debt or shall not have the priority over such Subordinated Debt as contemplated by this Lease or by the Indenture or by such subordination provisions. Notwithstanding the foregoing, any Default that could become an Event of Default under clause 13.(a)(ii) may be cured within the earlier of the periods described in clauses (A) and (B) thereof by Tenant's delivery to Landlord of a written notice irrevocably exercising Tenant's option under the Purchase Agreement to purchase Landlord's interest in the Leased Property and designating as the Designated Sale Date the next following date which is a Base Rent Date and which is at least ten (10) days after the date of such notice; provided, however, Tenant must, as a condition to the effectiveness of its cure, on the date so designated as the Designated Sale Date tender to Landlord the full purchase price required by the Purchase Agreement and all Rent and all other amounts then due or accrued and unpaid hereunder (including reimbursement for any costs incurred by Landlord in connection with the applicable Default hereunder, regardless of whether Landlord shall have been reimbursed for such costs in whole or in part by any Participants) and Tenant must also furnish written confirmation that all indemnities set forth herein (including specifically, but without limitation, the general indemnity set forth in subparagraph 8.(y) and the environmental indemnity set forth in Paragraph 11 shall survive the payment of such amounts by Tenant to Landlord and the conveyance of Landlord's interest in the Leased Property to Tenant. (b) Remedies. Upon the occurrence of an Event of Default which is not cured within any applicable period expressly permitted by subparagraph 13.(a), at Landlord's option and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such default, and without any further demand or notice except as expressly described in this subparagraph 13.(b): (i) By notice to Tenant, Landlord may terminate Tenant's right to possession of the Leased Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a default shall terminate Tenant's right to possession if Tenant fails to cure the default within the time specified in the notice. (ii) Upon termination of Tenant's right to possession and without further demand or notice, Landlord may re-enter the Leased Property and take possession of all improvements, additions, alterations, equipment and fixtures thereon and remove any persons in possession thereof. Any property in the Leased Property may be removed and stored in a warehouse or elsewhere at the expense and risk of and for the account of Tenant. (iii) Upon termination of Tenant's right to possession, this Lease shall terminate and Landlord may recover from Tenant: a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination; b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; c) The worth at the time of award of the amount by which the unpaid Rent for the balance of the scheduled Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the costs and expenses (including Attorneys' Fees, advertising costs and brokers' commissions) of recovering possession of the Leased Property, removing persons or property therefrom, placing the Leased Property in good order, condition, and repair, preparing and altering the Leased Property for reletting, all other costs and expenses of reletting, and any loss incurred by Landlord as a result of Tenant's failure to perform Tenant's obligations under the Purchase Agreement. The "worth at the time of award" of the amounts referred to in subparagraph 13.(b)(iii)a) and subparagraph 13.(b)(iii)b) shall be computed by allowing interest at ten percent (10%) per annum or such other rate as may be the maximum interest rate then permitted to be charged under California law at the time of computation. The "worth at the time of award" of the amount referred to in subparagraph 13.(b)(iii)c) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). e) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. (iv) The Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in force even after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Accordingly, even though Tenant has breached this Lease and abandoned the Leased Property, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Rent as it becomes due under this Lease. Tenant's right to possession shall not be deemed to have been terminated by Landlord except pursuant to subparagraph 13.(b)(i) hereof. The following shall not constitute a termination of Tenant's right to possession: a) Acts of maintenance or preservation or efforts to relet the Leased Property; b) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease; or c) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by Tenant. (c) Enforceability. This Paragraph shall be enforceable to the maximum extent not prohibited by Applicable Law, and the unenforceability of any provision in this Paragraph shall not render any other provision unenforceable. (d) Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing under Applicable Law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by Applicable Law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to any other remedy allowed to Landlord under Applicable Law or in equity. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency of Tenant by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. Without limiting the generality of the foregoing, nothing contained herein shall modify, limit or impair any of the rights and remedies of Landlord under the Purchase Agreement, the Pledge Agreement or the Environmental Indemnity. (e) Waiver by Tenant. To the extent permitted by law, Tenant hereby waives and surrenders for itself and all claiming by, through and under it, including creditors of all kinds, (i) any right and privilege which it or any of them may have under any present or future constitution, statute or rule of law to have a continuance of this Lease for the term hereby demised after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, or under the terms of this Lease, or after the termination of this Lease as herein provided, and (ii) the benefits of any present or future constitution, or statute or rule of law which exempts property from liability for debt or for distress for rent, and (iii) the provisions of law relating to notice and/or delay in levy of execution in case of eviction of a lessee for nonpayment of rent. (f) No Implied Waiver. The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any violation by Tenant of any term, covenant, agreement or condition contained in this Lease shall not prevent a similar subsequent act from constituting a violation. Any express waiver shall affect only the term or condition specified in such waiver and only for the time and in the manner specifically stated therein. A receipt by Landlord of any Base Rent or other payment hereunder with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. 15. Default by Landlord. If Landlord should default in the performance of any of its obligations under this Lease, Landlord shall have the time reasonably required, but in no event less than thirty (30) days, to cure such default after receipt of written notice from Tenant specifying such default and specifying what action Tenant believes is necessary to cure the default. If Tenant prevails in any litigation brought against Landlord because of Landlord's failure to cure a default within the time required by the preceding sentence, then Tenant shall be entitled to an award against Landlord for the damages proximately caused to Tenant by such default. 16. Quiet Enjoyment. Provided no Event of Default has occurred and is continuing, Landlord shall not during the Term disturb Tenant's peaceable and quiet enjoyment of the Leased Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Lease and the Permitted Encumbrances and any other claims or encumbrances not lawfully made through or under Landlord, to which this Lease is subject and subordinate as hereinabove set forth. Any breach by Landlord of the foregoing covenant of quiet enjoyment shall, subject to the other provisions of this Lease, render Landlord liable to Tenant for any monetary damages proximately caused thereby, but as more specifically provided in Paragraph 5 above, no such breach shall entitle Tenant to terminate this Lease or excuse Tenant from its obligation to pay Base Rent and other amounts hereunder. 17. Surrender Upon Termination. Unless Tenant or an Applicable Purchaser purchases Landlord's entire interest in the Leased Property pursuant to the terms of the Purchase Agreement, Tenant shall, upon the termination of Tenant's right to occupancy, surrender to Landlord the Leased Property, including any buildings, alterations, improvements, replacements or additions constructed by Tenant, with all fixtures and furnishings included in the Leased Property, but not including movable furniture and movable personal property not covered by this Lease, free of all Hazardous Substances (including Permitted Hazardous Substances) and tenancies and, to the extent required by Landlord, with all Improvements in the same condition as of the date hereof, excepting only (i) ordinary wear and tear (provided that the Leased Property shall have been maintained as required by the other provisions hereof) and (ii) alterations and additions which are expressly permitted by the terms of this Lease and which have been completed by Tenant in a good and workmanlike manner in accordance with all Applicable Laws. Any movable furniture or movable personal property belonging to Tenant or any party claiming under Tenant, if not removed at the time of such termination and if Landlord shall so elect, shall be deemed abandoned and become the property of Landlord without any payment or offset therefor. If Landlord shall not so elect, Landlord may remove such property from the Leased Property and store it at Tenant's risk and expense. Tenant shall bear the expense of repairing any damage to the Leased Property caused by such removal by Landlord or Tenant. 18. Holding Over by Tenant. Should Tenant not purchase Landlord's right, title and interest in the Leased Property as provided in the Purchase Agreement, but nonetheless continue to hold the Leased Property after the termination of this Lease without Landlord's written consent, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from day to day only, at a daily Base Rent equal to: (i) the unpaid Purchase Price on the day in question, times (ii) the Holdover Rate (as defined below) for such day, divided by (iii) 360; subject, however, to all of the terms, provisions, covenants and agreements on the part of Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue or extend the Term of this Lease and no extension of this Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant; provided, however, following any breach by Landlord of its obligations to tender a deed and other documents on the Designated Sale Date as provided in the Purchase Agreement, Tenant may at its option continue its possession and use of the Leased Property pursuant to this Lease, as if the Term had been extended, for a period not to exceed 180 days after the Designated Sale Date or such longer time as may be proscribed by Applicable Law. As used herein, the "Holdover Rate" means: (1) for any day prior to the date on which Landlord tenders a deed and other documents as required by the Purchase Agreement (or is excused from its obligation to tender by Tenant's breach or anticipatory repudiation of the Purchase Agreement), a rate equal to the Fed Funds Rate on that day plus one hundred basis points; (2) for any day on which or within ninety days after Landlord tenders a deed and other documents as required by the Purchase Agreement (or is excused from its obligation to tender by Tenant's breach or anticipatory repudiation of the Purchase Agreement), the per annum Prime Rate in effect for such day; and (3) for any day after the ninety days described in the preceding clause, a rate which is three percent (3%) above the per annum Prime Rate. 19. Miscellaneous. (a) Notices. Each provision of this Lease, or of any Applicable Laws with reference to the sending, mailing or delivery of any notice or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (i) All Rent required to be paid by Tenant to Landlord hereunder shall be paid to Landlord in immediately available funds by wire transfer to: Federal Reserve Bank of San Francisco Account: Banque Nationale de Paris ABA #: 121027234 Reference: 3COM (North First Street Property) or at such other place and in such other manner as Landlord may designate in a notice to Tenant (provided Landlord will not unreasonably designate a method of payment other than wire transfer). Time is of the essence as to all payments and other obligations of Tenant under this Lease. (ii) All notices, demands and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below, or in the case of communications to Participants, at the addresses for notice established by the Participation Agreement) and shall be given by any of the following means: (A) personal service, with proof of delivery or attempted delivery retained; (B) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (C) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (A) or (C) hereof shall be deemed received (whether or not actually received) upon first attempted delivery at the proper notice address on any Business Day between 9:00 A.M. and 5:00 P.M., and any notice or other communication sent pursuant to clause (B) hereof shall be deemed received upon dispatch by electronic means. Address of Landlord: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Telecopy: (415) 296- 8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of Tenant: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Legal Dept. Telecopy: (408) 764-6434 With copies to: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Real Estate Dept. Telecopy: (408) 764-5718; and 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Treasury Dept. Telecopy: (408) 764-8403; and Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attn: Jonathan E. Rattner, Esq. Telecopy: (415) 328-3029 (b) Severability. If any term or provision of this Lease or the application thereof shall to any extent be held by a court of competent jurisdiction to be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision other than to the extent to which it is invalid or unenforceable, shall not be affected thereby. (c) No Merger. There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Property or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Leased Property or any interest in such fee estate, unless all Persons with an interest in the Leased Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. (d) NO IMPLIED REPRESENTATIONS BY LANDLORD. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO REPRESENTATIONS OR PROMISES WITH RESPECT TO THE LEASED PROPERTY EXCEPT AS EXPRESSLY SET FORTH HEREIN, AND NO RIGHTS, EASEMENTS OR LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR OTHERWISE EXCEPT AS EXPRESSLY SET FORTH IN THE PROVISIONS OF THIS LEASE, THE PURCHASE AGREEMENT AND THE PLEDGE AGREEMENT. (e) Entire Agreement. This Lease and the instruments referred to herein supersede any prior negotiations and agreements between the parties concerning the Leased Property and no amendment or modification of this Lease shall be binding or valid unless expressed in a writing executed by both parties hereto. (f) Binding Effect. All of the covenants, agreements, terms and conditions to be observed and performed by the parties hereto shall be applicable to and binding upon their respective successors and, to the extent assignment is permitted hereunder, their respective assigns. (g) Time is of the Essence. Time is of the essence as to all obligations of Tenant and all notices required of Tenant under this Lease, but this paragraph shall not limit Tenant's opportunity to prevent an Event of Default by curing any breach within the cure period (if any) applicable under subparagraph 13.(a). (h) Termination of Prior Rights. Without limiting the rights and obligations of Tenant under this Lease, Tenant acknowledges that any and all rights or interest of Tenant in and to the Land, the improvements to the Land and to any other property included in the Leased Property (except under this Lease and the Purchase Agreement) are hereby superseded. Tenant quitclaims unto Landlord any rights or interests Tenant has in or to the Land, the improvements to the Land and to any other property included in the Leased Property other than the rights and interests created by this Lease and the Purchase Agreement. (i) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of California. (j) Waiver of a Jury Trial. LANDLORD AND TENANT EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS LEASE OR ANY OTHER DOCUMENT OR DEALINGS BETWEEN THEM RELATING TO THIS LEASE OR THE LEASED PROPERTY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Tenant and Landlord each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Lease and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. Tenant and Landlord each further warrants and represents that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS LEASE OR THE LEASED PROPERTY. In the event of litigation, this Lease may be filed as a written consent to a trial by the court. (k) Not a Partnership, Etc. NOTHING IN THIS LEASE IS INTENDED TO BE OR TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN LANDLORD AND TENANT. NEITHER THE EXECUTION OF THIS LEASE NOR THE ADMINISTRATION OF THIS LEASE OR OTHER DOCUMENTS REFERENCED HEREIN BY LANDLORD, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF LANDLORD UNDER OR PURSUANT TO THIS LEASE OR SUCH DOCUMENTS IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF LANDLORD TO TENANT. (l) Tax Reporting. Landlord and Tenant shall report this Lease and the Purchase Agreement for federal income tax purposes as a conditional sale unless prohibited from doing so by the Internal Revenue Service. Similarly, Tenant shall report all interest earned on Escrowed Proceeds or the Collateral as Tenant's income for federal and state income tax purposes. If the Internal Revenue Service shall challenge Landlord's characterization of this Lease and the Purchase Agreement as a conditional sale for federal income tax reporting purposes, Landlord shall notify Tenant in writing of such challenge and consider in good faith any reasonable suggestions by Tenant about an appropriate response. In any event, Tenant shall indemnify and hold harmless Landlord from and against all liabilities, costs, additional taxes and other expenses that may arise or become due because of such challenge or because of any resulting recharacterization required by the Internal Revenue Service, including any additional taxes that may become due upon any sale under the Purchase Agreement to the extent (if any) that such additional taxes are not offset by tax savings resulting from additional depreciation deductions or other tax benefits to Landlord of the recharacterization. (m) IN WITNESS WHEREOF, this Lease is hereby executed in multiple originals as of the effective date above set forth. "Landlord" BNP LEASING CORPORATION By: /s/ Lloyd G. Cox -------------------- Lloyd G. Cox, Vice President "Tenant" 3COM CORPORATION By: /s/ Christopher B. Paisley ------------------------------ Christopher B. Paisley, Chief Financial Officer Exhibit A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: PARCEL ONE: All of Parcel 1, as shown upon that certain Map entitled, "Amended Parcel Map," which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9. EXCEPTING THEREFROM: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 1, being on the Northeasterly line of North First Street; Thence N. 71 56' 56" E., 341.59 feet along the Northerly line of said Parcel 1; Thence S. 37 32' 48" W., 281.82 feet to said Northeasterly line of North First Street; Thence along said Northeasterly line N. 52 27' 37" W., 193.00 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL TWO: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E, 341.59 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 358.60 feet; thence N. 45 14' 38" W., 168.87 feet; thence S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence S. 37 32' 48" W., 20.53 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses; N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL THREE: Beginning at a 4" x 4" stake marked A.D.C.M.1, standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone Monument standing at the point of intersection of the South line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 28.14 chains; running thence along the South line of the Alviso and Milpitas Road East 38.88 chains to a 4"x4" stake marked C.M.N.M.1; thence S. 7 20' E., 7.835 chains to a 4"x4" stake marked C.M.N.M.2 standing on the Southerly line of the lands formerly belonging to the Estate of John W. Meads; thence along said Southerly line S. 88 55' W., 36.74 chains to a 4"x4" stake marked M.4; thence S. 59 57' E., 1.322 chains to a 4" stake marked M.3; thence S. 71 48' W., 3.35 chains to a 4"x4" stake marked A D.C.M. 3; thence N. 1 28' W. 5.02 chains to a 4"x4" stake marked A D.C.M.2; thence N. 10 18' W., 5.474 chains to the place of beginning, and being Lot 2 as shown on the map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. EXCEPTING THEREFROM A portion of that parcel of land described in the Deed recorded September 21, 1966 as Instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said parcel (7512 OR 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California Parcel; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. ALSO EXCEPTING THEREFROM: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 787.15 feet to the Westerly line of said Parcel described in the said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 327.06 feet to the true point of beginning; thence continuing along said Westerly line N. 1 19' 04" W., 4.26 feet; thence N. 10 16' 10" W., 261.37 feet; thence leaving said Westerly line S. 89 50' 02" E., 218.46 feet; thence S. 0 09' 58" W., 88.17 feet; thence Southwesterly along a non-tangent curve to the left having a radius of 325.00 feet whose radius point bears S. 43 03' 16" E., through a central angle of 2 11' 22" for an arc length of 12.42 feet; thence S. 44 45' 22" W., 230.93 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W., 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3 N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses: S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 54' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet; N. 89 01' 32" W. 2099.03 feet; and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: Beginning at the Southwest corner of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California recorded February 17, 1970 in Book 8830 of Official Records at page 352, Santa Clara County Records; thence from said point of beginning, along the Southerly line of said 6.465 acre parcel S. 89 01' 16" E. 537.24 feet; thence leaving said Southerly line, at right angles, S 0 58' 44" W. 6.61 feet; thence S. 89 49' 56" W. 330.95 feet; thence S. 88 43' 01" W. 202.59 feet to a point in the Southerly prolongation of the Westerly line of said 6.465 acre parcel; thence along said Southerly prolongation N. 9 29' 16" W., 21.59 feet to the point of beginning. PARCEL FOUR: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records, at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 700.27 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 86.88 feet to the Easterly line of said parcel of land described in the Deed recorded May 3, 1979; thence along said Easterly line N. 1 19' 04" W., 289.58 feet; thence leaving said Easterly line S. 44 45' 22" W. 278.16 feet; thence S. 45 14' 38: E., 168.87 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said Parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W. 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. PARCEL FIVE: Beginning at a 4'x4' stake marked C.M.N.M.1., standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone monument standing at the point of intersection of the Southerly line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 67.02 chains; running thence along the South line of the Alviso and Milpitas Road East 5.955 chains to a 4'x4' stake marked M; thence still along the Southeasterly line of the Alviso and Milpitas Road N. 73 54' E., 19.93 chains to a fence post marked W.P. standing in fence line on the Westerly line of lands now or formerly of Boots; thence along said fence S. 7 15' E., 12.77 chains to a stake marked M.1.; thence along the fence along the Northerly line of the lands now or formerly of Nicholson, S. 88 55' W., 25.727 chains to a 4'x4' stake marked C.M.N.M.2; thence N. 7 20' W., 7.835 chains to the place of beginning, and being Lot 3 as shown on the Map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. Excepting therefrom a portion of that parcel of land described in the Deed recorded September 2, 1966 as instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said Parcel (7512 or 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. The bearings and distances used in the above excepted description are on the California System Zone 3. Multiply the above distances by 1.0000530 to obtain ground level distances. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve lo the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W. 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the Northeasterly corner of said parcel, said corner being on the Westerly line of Zanker Road and Southerly line of Highway 237; thence along the Easterly line of said Parcel, S. 7 05' 54" E. 99.01 feet; thence Northerly along a non-tangent curve to the left having a radius of 931.00 feet whose radius point bears S. 79 08' 59" W. through a central angle of 3 39' 23" for an arc length of 59.41 feet to a point of compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 85 24' 20" for an arc length of 64.10 feet to the Northerly line of said Parcel; thence along said Northerly line N. 60 05' 16" E, 50.59 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3, N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses; S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 64' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet N. 89 01' 32" W. 2099.03 feet and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: Beginning at the Northwest corner of that certain 0.019 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York Corporation, to the City of San Jose, a municipal corporation of the State of California, recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence from said point of beginning, along the Southerly line of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California, recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records, the following courses: S 80 55' 58" W. 1034.16 feet; along a tangent curve to the right with a radius of 1395.00 feet, through a central angle of 16 09' 23" for an arc length of 393.37 feet and N. 89 01' 16" W. 275.13 feet; thence leaving said Southerly line S. 86 14' 18" E. 317.01 feet to a point in a Northerly line of that certain 6.474 acre parcel described in said Deed to the City of San Jose; thence along said Northerly line the following courses: N. 84 55' 33" E. 658.09 feet and along a tangent curve to the right with a radius of 349.98 feet, through a central angle of 0 20' 33" for an arc length of 2.09 feet; thence leaving said Northerly line N. 85 16' 06" E. 587.33 feet; thence along a tangent curve to the right with a radius of 15.00 feet, through a central angle of 75 05' 51" for an arc length of 19.66 feet; thence S. 19 35' 03" E. 467.07 feet; thence S. 49 41' 05 W. 25.15 feet to a point in said Northerly line; thence along said Northerly line and a Westerly line of said 6.474 acre parcel the following courses: from a tangent bearing of S. 77 14' 33" E along a curve to the left with a radius of 43.00 feet, through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a tangent curve to the right with a radius of 1064.94 feet, through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 0 35' 30" W. 358.63 feet; thence along a tangent curve to the left with a radius of 830.95 feet, through a central angle of 1 55' 59" for an arc length of 31.41 feet to the Northeast corner of said 6.474 acre parcel; thence along the Northerly prolongation of the Easterly line of said 6.474 acre parcel N. 6 16' 05" W. 121.98 feet to the most Southerly corner of said 0.019 acre parcel; thence along the Westerly line of said 0.019 acre parcel the following courses: from a tangent bearing of N. 10 01' 13" W. along a curve to the left with a radius of 930.95 feet, through a central angle of 3 39' 22" for an arc length of 59.41 feet; thence from a tangent bearing of N. 13 40' 35" W. along a curve to the left with a radius of 43.00 feet, through a central angle of 85 23' 27" for an arc length of 64.09 feet to the point of beginning. PARCEL SIX: All of Parcel Two as shown upon that Parcel Map which filed for record in the Office of the Recorder of the County of Santa Clara, State of California on July 13, 1984 in Book 531 of Maps, at pages 41 and 42. APN: 097-03-59,79,80,84,85,86,87,88,90,93,102,103,104 ARB: 097-3-x5,x6,8,9,x15,x16,20,21,25.1,25.2 Exhibit B Permitted Encumbrances This conveyance is subject to the following matters, but only to the extent the same are still valid and in full force and effect: 1. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 7E The above Assessment No. covers APN No. 097-03-079 and 097-03-093, but is being collected under APN No. 097-03-079. Said matter affects a portion of Parcel One. 2. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 6Y Said matter affects a portion of Parcel Three. 3. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 9Y Said matter affects a portion of Parcel Three. 4. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 7Y Said matter affects a portion of Parcel Three. 5. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 8Y Said matter affects portions of Parcels Three and Five. 6. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 5Y Said matter affects Parcel Four. 7. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 10Y Said matter affects a portion of Parcel Five. 8. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 4E Said matter affects Parcel Six. 9. EASEMENT for the purposes stated herein and incidents thereto Purpose : A right of way for a covered wooden sewer Granted to : The City of San Jose, a municipal corporation Recorded : February 26, 1989 in Book 115 of Deeds, page 142 Affects : A strip of land twelve (12) feet wide, the center line of which is described as follows: Beginning in the Southerly line of land of the party of the first part at a point from which the Southeasterly corner thereof bears N.88 55' East 12.35 feet distant and running thence N. 36 30' East 623 1/2 feet a little more or less to a point in the Southerly line of the Alviso and Milpitas Road, from which the Southwesterly corner of the land of J. Farney bears N. 19 30' West 72 3/4 feet distant THE EXACT location of said easement is not defined of record. Said matter affects a portion of Parcel Three and Five. 10. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : October 14, 1931 in Book 585, page 340, Official Records Affects : The said route of said pipe line shall be as follows, namely: Beginning at a point in the Easterly boundary line of said premises (marked by a fence now upon the ground), from which a 4" x 4" white stake marking the Northeast corner of said premises bears North 15 26 1/2' West 5.2 feet distant, and running thence South 86 58' West 367.9 feet; thence North 89 04' West 259.6 feet; thence South 88 51' West 1135.53 feet; thence South 86 52 1/2' West 254.7 feet; thence North 89 19 1/2' West 172.0 feet; thence South 88 42 1/2' West 1918.3 feet, more or less, to ta point in the Southwesterly boundary line of said premises. Said matter affects Parcels One and Six. 11. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas a pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : November 5, 1931 in Book 586, page 515, Official Records Affects : As follows: Beginning at a point in the Southwesterly boundary line of said premises (marked by the center line of the San Jose- Alviso Road), from which a 2" x 4" post marking the point of intersection of the Southwesterly boundary line of said road with the Northerly boundary line of that certain 42.5 acre parcel of land conveyed to Kenneth R. Burrell by F.C. Burrell, et ux, by deed dated June 13, 1930, and recorded in Vol. 522 of Official Records, at page 508 records of said Santa Clara County, bears South 78 25' West 45.3 feet distant, and running thence North 75 51 1/2' East 51.6 feet; thence South 89 10' East 265.3 feet; thence North 89 16' East 161.9 feet; thence North 88 00' East 425.0 feet; thence North 72 54' minutes East 285.0 feet thence South 38 28' East 126.9 feet; thence North 88 42 1/2' East 35.0 feet, more or less, to a point in the Easterly boundary line of said premises. Said matter affects Parcels Two and Four. 12. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas a pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : December 10, 1931 in Book 595, page 196, Official Records Affects : As follows: Beginning at a point in the Southwesterly boundary line of that certain 99.5 acre parcel of land described in that certain mortgage from George E. Nicholson to Mollie F. Nicholson dated December 18, 1913 and recorded in Book 216 of Mortgages at page 255, records of said Santa Clara County, (said boundary line being marked by a fence now upon the ground) from which a 4" x 4" post marked "M4" set at the most Westerly corner of said 99.5 acre parcel of land bears North 60 46 1/2' West 16.7 feet distant; and running thence South 88 42 1/2' West 150.0 feet, more or less, to a point in the Westerly boundary line of said premises. Said matter affects Parcel Three. 13. EASEMENT for the purposes stated herein and incidents thereto Purpose : A right of way for sewer purposes Granted to : City of San Jose, a municipal corporation Recorded : August 8, 1933 in Book 659, page 121, Official Records Affects : A right of way over, along and upon a strip twelve (12) feet wide, the center line of which is described as follows: Beginning at a point from which the Southeasterly corner of the land Norman L. Meads bears N. 88 55' E., 1530 feet distant; thence N. 66 54' W. 513 feet to a point in the Southerly line of the Alviso and Milpitas Road, from which the Southeasterly corner of the private road of F.W. Zanker lies Northerly and across the Alviso and Milpitas Road, 67 feet a little more or less. Said matter affects Parcel Five. 14. WAIVER OF DAMAGES as contained in the Deed to the State of California Recorded : February 17, 1970 in Book 8830, page 352, Official Records Said matter affects Parcels Three and Five. 15. THE EFFECT of the Rincon de los Esteros Project Redevelopment Plan and Ordinances Nos. 17306, 19686, 19835, 20677, 20958, 21417, 21496, 21903, 22660, 22412, 22761, 22761.1 and 22961, 23703, 23732, 23761 and 23934 of the City of San Jose as recorded and as disclosed by documents recorded July 11, 1975 in Book B502, Page 711; August 6, 1979 in Book E699, Page 245; August 6, 1979 in Book E699, Page 277; December 21, 1979 in Book F37, Page 585; October 8, 1981 in Book G382, Page 605; July 28, 1982 in Book G929, Page 703; September 14, 1983 in Book H892, Page 200; January 10, 1984 in Book 1220, Page 271; December 17, 1987 in Book K394, page 143; May 5, 1988 in Book K524, page 526; May 5, 1988 in Book K524, page 532; January 6, 1992 in Book L996, Page 508, all of Official Records, and as disclosed by information provided by the Redevelopment Agency of the City of San Jose. 16. EASEMENTS AND INCIDENTS THERETO, filed for record in the Office of the County Recorder of the County of Santa Clara, State of California, shown on the "Amended Parcel Map" filed for record on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9 Purpose : Public Service Easement Affects : Southwesterly 10 feet and Southeasterly 10 feet of Parcel One and Southwesterly 10 feet and Northwesterly 10 feet of Parcel Six 17. EASEMENT for the purposes stated herein and incidents thereto Purpose : To construct, install, inspect, maintain, replace, remove and use facilities of such underground conduits, pipes, manholes, service boxes, wires, cables, and electrical conductors; aboveground marker posts, risers, and service pedestals; underground and aboveground switches, fuses, terminals, and transformers with associated concrete pads; and fixtures and appurtenances necessary to any and all thereof Granted to : Pacific Gas and Electric Company, a California corporation Recorded : March 26, 1986 in Book J640, page 960, Official Records Affects : Strips of land of the uniform width of 10 feet the center lines of which are delineated by the heavy dashed lines shown upon the print of second party's Drawing No. SJB-1821 attached thereto and made a part thereof; excepting therefrom the portion lying outside the boundary lines of said lands. Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcel Six. 18. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public Service Easements Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 156, Official Records Affects : As follows: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being also a portion of Parcel as 2 described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Strip 1 A strip of land 10.00 feet wide extending Northeasterly from the Northeasterly line of the 10.00 feet wide P.S.E. along North First Street, as shown on said Amended Parcel Map and lying contiguous to and Southeasterly of a line that begins at a point in the Northeasterly line of North First Street from which the most Southerly corner of Parcel 1 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1698, Santa Clara County Records, bears N. 52 27' 12" W. 77.00 feet and running; thence Northeasterly along a curve to the right having a radius of 50.00 feet whose radius point bears N. 37 32' 48" E., through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 37 32' 48" E., 251.93 feet to a point hereon designated "Point A"; thence N. 37 32' 48" E., 0.42 feet; thence along a curve to the right having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence N. 44 45' 22" E. 261.02 feet to the Northeasterly line of said Parcel 2, the side line of said strip shall be lengthened or shortened to terminate in said Northeasterly line. Strip 2 Beginning at a point herein above designated "Point A"; thence S. 37 32' 48" W., 31.00 feet; thence S. 52 27' 12" E., 25.00 feet; thence N. 37 32' 48" E., 31.00 feet; thence N. 52 27' 12" W., 25.00 feet to the point of beginning. Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels One. 19. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public Service Easements Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 162, Official Records Affects : 10 foot wide strips over Parcels Three, Four and Five and more fully described in said document Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels Three, Four and Five. 20. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sanitary Sewer Easement Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 162, Official Records Affects : A 15 foot wide strip and a 20 foot wide strip over Parcels Four and Five more fully described in said document Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels Four and Five. 21. LACK OF ABUTTER'S RIGHTS to and from Freeway 237, lying adjacent to the Northerly and Northeasterly line of Parcel Five, said rights having been released and relinquished By : Final Order of Condemnation To : The People of the State of California Acting by and through the Department of Transportation Recorded : March 30, 1994 in Book N373, page 0560, Official Records. 22. Any rights, interests, or claims adverse to those of the vestee herein which may exist or arise by reason of the following facts shown on a survey plat entitled "ALTA/ACSM LAND TITLE SURVEY," dated July 15, 1996, prepared by Bryan & Murphy Engineers, Planners, Surveyors, Job No. 67320. a. The fact that a cyclone fence extends across the Southerly line of Parcel Five. b. The fact that a walkway exists in the public services easement shown as Exception No. 16 and that said walkway extends across the Westerly lines of Parcel Six. c. The fact that concrete landscaping extends across the Easterly line of Parcel Six. d. The fact that a 12 foot wall extends across the Southerly line of Parcel Three. Exhibit C Intentionally deleted. Exhibit D Intentionally deleted. Exhibit E FINANCIAL COVENANT COMPLIANCE CERTIFICATE BNP Leasing Corporation c/o Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Re: 3Com Lease Agreement (North First Street Property) Gentlemen: I, the undersigned, the [chief financial officer, controller, treasurer or the assistant treasurer] of 3Com Corporation, do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to subparagraph 8. (w)(iii) of that certain Lease Agreement dated as of November 20, 1996 (the "Lease Agreement," the terms defined therein being used herein as therein defined) between 3Com Corporation (the "Tenant"), and you. 2. Annex 1 attached hereto sets forth financial data and computations evidencing the Tenant's compliance with certain covenants of the Lease Agreement, all of which data and computations are complete, true and correct. 3. To the knowledge of Tenant no Default or Event of Default under the Lease Agreement has occurred and is continuing. 4. The representations of Tenant set forth in the Lease Agreement are true and correct in all material respects as of the date hereof as though made on and as of the date hereof. Executed this _____ day of ______________, ____. 3Com Corporation Name:_________________________ Title:________________________ [cc all Participants] Annex 1 To Compliance Certificate For the _________________ Ended ________________, ____ I. PARAGRAPH 8.(ac)(i): Quick Ratio A. Unencumbered Cash and Cash Equivalents and other "Quick Assets" as defined in Paragraph 8.(ac)(i) of the Lease: $_____________ B. "Current Liabilities" as defined in Paragraph 8.(ac)(i) of the Lease: $_____________ C. Ratio of A to B: _____ to 1.00 F. Minimum ratio computed as provided in Paragraph 8.(ac)(i) of the Lease: 1.00 to 1.00 II. PARAGRAPH 8.(ac)(ii): Maximum Senior Debt to Capitalization A. Total "Debt" as defined in Paragraph 1.(s) of Tenant and its consolidated Subsidiaries: $_____________ B. "Subordinated Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ C. "Senior Debt" as defined in Paragraph 8.(ac)(ii) of the Lease (A - B): $_____________ D. Consolidated Tangible Net Worth (from calculation below): $_____________ E. Capitalization as defined in Paragraph 8.(ac)(ii) of the Lease (A + D): $_____________ F. Ratio of B to E: _____ to 1.00 D. Maximum ratio: 0.35 to 1.00 III. PARAGRAPH 8.(ac)(iii): Minimum Tangible Net Worth A. Reported stockholders equity: $_____________ B. "Intangible Assets" as defined in Paragraph 8.(ac)(iii) of the Lease: $_____________ D. Consolidated Tangible Net Worth (A - B): $_____________ E. Minimum computed as provided in Paragraph 8.(ac)(iii) of the Lease: $_____________ IV. PARAGRAPH 8.(ac)(iv): Fixed Charge Ratio A. "Adjusted EBIT" as defined in Paragraph 8.(ac)(iv) of the Lease: $_____________ B. "Fixed Charges" as defined in Paragraph 8.(ac)(iv) of the Lease: $_____________ C. Ratio of A to B: _____ to 1.00 D. Minimum ratio: 2.00 to 1.00 Exhibit F CERTIFICATE OF TENANT'S CALCULATION OF THE SPREAD BNP Leasing Corporation c/o Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho or Will La Herran Re: 3Com Lease Agreement (North First Street Property) Gentlemen: I, the undersigned, the [chief financial officer, controller, treasurer or the assistant treasurer] of 3Com Corporation, do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to subparagraph 8.(w)(iv) of that certain Lease Agreement dated as of November 20, 1996 (the "Lease Agreement," the terms defined therein being used herein as therein defined) between 3Com Corporation, and you. 2. Annex 1 attached hereto sets forth financial data and computations evidencing the Tenant's computation of the Spread, all of which data and computations are complete, true and correct. Executed this _____ day of ______________, ____. 3Com Corporation Name:_________________________ Title:________________________ [cc all Participants] Annex 1 To Certificate of Tenant's Calculation of the Spread As of the ________________, ____ I. S&P'S RATING OF TENANT'S SENIOR UNSECURED DEBT: _____________ II. MOODY'S RATING OF TENANT'S SENIOR UNSECURED DEBT: _____________ III. CALCULATION OF TENANT'S DEBT TO CAPITAL RATIO: _____________ A. Funded "Senior Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ B. Other outstanding Debt as defined in Paragraph 1.(s) of the Lease: $_____________ C. Outstanding "Subordinated Debt" as defined in Paragraph 8.(ac)(ii) of the Lease: $_____________ D. Debt for purposes of this ratio (A + B - C): $_____________ E. Reported stockholders equity: $_____________ F. "Intangible Assets" as defined in Paragraph 8.(ac)(iii) of the Lease: $_____________ G. Consolidated Tangible Net Worth (E - F): $_____________ H. Capital for purposes of this test (A + B + G): $_____________ I. D divided by H: _____________ III. SPREAD AS DEFINED IN PARAGRAPH 1.(bo) OF THE LEASE: _____________ Exhibit G LIST OF ENVIRONMENTAL REPORTS (North First Street Property) 1. AllWest 1996. Phase I Environmental Site Assessment for North First Street Site, San Jose, CA 95134. July 9, 1996. 2. ENVIRON 1996. Phase I and Phase II Environmental Site Assessment Report for Two Undeveloped Properties Located in San Jose, CA. August 19, 1996. 3. Tetra tech 1996, Phase II Environmental Site Investigation for 3COM Corporation, End of North First Street, San Jose, California 95052-8145. September 24, 1996. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>7 <TEXT> EXHIBIT 10.38 $49,500,000 PURCHASE AGREEMENT BETWEEN BNP LEASING CORPORATION, ("BNPLC") AND 3COM CORPORATION, ("3COM") EFFECTIVE AS OF NOVEMBER 20, 1996 (North First Street Property) This Agreement is being facilitated by the following banks: Banque Nationale de Paris ABN AMRO Bank N.V. PURCHASE AGREEMENT This PURCHASE AGREEMENT (this "Agreement") is made as of November 20, 1996, by 3COM CORPORATION, a California corporation ("3COM") and BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"). R E C I T A L S A. BNPLC is acquiring the land described in Exhibit A attached hereto and the improvements and fixtures located thereon, if any, and is leasing the same to 3COM pursuant to that certain Lease Agreement (as from time to time supplemented, amended or restated, the "Lease") between 3COM and BNPLC dated as of the date hereof. (The land described in Exhibit A and any and all other real or personal property from time to time covered by the Lease and included within the "Leased Property" as defined therein are hereinafter collectively referred to as the "Property".) B. BNPLC is also concurrently herewith receiving a separate environmental indemnity from 3COM pursuant to an Environmental Indemnity Agreement (as from time to time supplemented, amended or restated, the "Environmental Indemnity") between 3COM and BNPLC dated as of the date hereof. C. 3COM has requested an option to purchase the Property, which BNPLC is willing to provide on and subject to the terms and conditions set out herein. NOW, THEREFORE, in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. As used herein, the terms "3COM", "BNPLC", "Property", "Lease" and "Environmental Indemnity" shall have the meanings indicated above; terms with initial capitals defined in the Lease and used but not defined herein shall have the meanings assigned to them in the Lease; and the terms listed immediately below shall have the following meanings: "Applicable Purchaser" means any third party designated by 3COM to purchase the interest of BNPLC in the Property as provided in Paragraph 2(a)(ii) below. "Deposit Taker" shall have the meaning assigned to it in the Pledge Agreement. "Deposit Taker Losses" shall have the meaning assigned to it in the Pledge Agreement. "Designated Sale Date" means the earlier of: (1) the effective date of any termination of the Lease by 3COM pursuant to Paragraph 2 thereof; (2) any date designated by BNPLC in a written notice given by BNPLC to 3COM when an Event of Default by 3COM is continuing, provided the notice of the date so designated is given by BNPLC at least thirty (30) days before the date so designated; or (3) the first Business Day in November, 1998. "Direct Payments to Participants" means the amounts paid or required to be paid directly to Participants on the Designated Sale Date as provided in Section 6.2 of the Pledge Agreement at the direction of and for 3COM by the collateral agent appointed pursuant to the Pledge Agreement from all or any part of the Collateral described therein. "Fair Market Value" means the fair market value of the Property on or about the Designated Sale Date (calculated under the assumptions, whether or not then accurate, that 3COM has maintained the Property in compliance with all Applicable Laws [including Environmental Laws]; that 3COM has completed the construction of any Improvements which was commenced prior to the Designated Sale Date; that all such Improvements are self-sufficient in the sense that any easements or offsite facilities needed for their use will be available at no additional cost to the owner of the Improvements; that 3COM has repaired and restored the Property after any damage following fire or other casualty; that 3COM has restored the remainder of the Property after any partial taking by eminent domain; that 3COM has completed any contests of and paid any taxes due [other than Excluded Taxes] or other amounts secured by or allegedly secured by a lien against the Property other than Prohibited Encumbrances; that no conditions or circumstances on or about the Property [such as the presence of an endangered species] is discovered that will impede the use or any development of the Property permitted by the Lease; that any use or development of the Property as permitted by the Lease will not be hindered or delayed because of the limited availability of utilities or water; that without undue cost or delay any purchaser paying fair market value for the Property can obtain any necessary permits or licenses needed to use the Property for the purposes permitted by the Lease; and that 3COM has cured any title defects affecting the Property other than Prohibited Encumbrances, all in accordance with the standards and requirements of the Lease as though the Lease were continuing in force) as determined by an independent MAI appraiser selected by BNPLC, which appraiser must have five (5) years or more experience appraising similar properties in northern California. "Qualified Deposit Taker" means one of the fifty largest (measured by total assets) U.S. banks, or one of the one hundred largest (measured by total assets) banks in the world, with debt ratings of at least (i) A- (in the case of long term debt) and A-1 (in the case of short term debt) or the equivalent thereof by Standard and Poor's Corporation, and (ii) A (in the case of long term debt) and P-1 (in the case of short term debt) or the equivalent thereof by Moody's Investor Service, Inc. The parties believe it improbable that the ratings systems used by Standard and Poor's Corporation and by Moody's Investor Service, Inc. will be discontinued or changed, but if such ratings systems are discontinued or changed, 3COM shall be entitled to select and use a comparable ratings systems as a substitute for the S&P Rating or the Moody Rating, as the case may be, for purposes of determining the status of any bank as a Qualified Deposit Taker. "Purchase Price" means an amount equal to Stipulated Loss Value outstanding on the Designated Sale Date, plus all costs and expenses (including appraisal costs, withholding taxes (if any) and reasonable Attorneys' Fees, as defined in the Lease) incurred in connection with any sale of the Property by BNPLC hereunder or in connection with collecting sales proceeds due hereunder, less the aggregate amounts (if any) of Direct Payments to Participants and Deposit Taker Losses. "Prohibited Encumbrance" means any lien or other title defect encumbering the Property that is claimed by BNPLC itself or lawfully claimed by a third party through or under BNPLC, including any judgment lien lawfully filed against BNPLC and including any tax lien assessed because of BNPLC's failure to pay Excluded Taxes, but excluding the Lease and any lien or other title defect that (i) is a Permitted Encumbrance (as defined in the Lease), regardless of whether claimed by, through or under BNPLC, (ii) is claimed by, through or under 3COM or any of the Participants approved by 3COM (other than Landlord's Parent), or (iii) exists because of any breach by 3COM of the Lease, because of anything done or not done by BNPLC in an effort to satisfy subparagraph 9(b) of the Lease, or because of anything done or not done by BNPLC at the request of 3COM. "Remarketing Notice" shall have the meaning assigned to it in Paragraph 2(b)(1) below. "Required Documents" means the grant deed and other documents that BNPLC must tender pursuant to Paragraph 3 below. "Shortage Amount" means any amount payable to BNPLC by 3COM, rather than by the Applicable Purchaser, pursuant to clause 2(a)(ii) below. 2. 3COM's Options and Obligations on the Designated Sale Date. (a) Choices. On the Designated Sale Date 3COM shall have the right and the obligation to either: (i) purchase BNPLC's interest in the Property and in Escrowed Proceeds, if any, for a net cash price equal to the Purchase Price; or (ii) cause the Applicable Purchaser to purchase BNPLC's interest in the Property and in Escrowed Proceeds, if any, for a net cash price not less than the lesser of (a) the Fair Market Value of the Property, (b) fifteen percent (15%) of Stipulated Loss Value outstanding immediately prior to the purchase or (c) the Purchase Price. If, however, the Fair Market Value is less than fifteen percent (15%) of Stipulated Loss Value and less than the Purchase Price, BNPLC may elect to keep the Property and any Escrowed Proceeds rather than sell to the Applicable Purchaser, in which case 3COM shall pay BNPLC an amount equal to (A) eighty-five percent (85%) of Stipulated Loss Value, less (B) the sum of (x) any Escrowed Proceeds then held and to be retained by BNPLC, (y) any Direct Payments to Participants and (z) any Deposit Taker Losses. Unless BNPLC elects to keep the Property pursuant to the preceding sentence, 3COM must make a supplemental payment to BNPLC on the Designated Sale Date equal to the excess (if any) of the Purchase Price over the net cash price actually paid to BNPLC on the Designated Sale Date by the Applicable Purchaser for BNPLC's interest in the Property and in Escrowed Proceeds, if any. However, provided no Event of Default has occurred and is continuing under the Lease, and provided further that neither 3COM nor any Applicable Purchaser has failed to pay any amount required to be paid by this Agreement on the date such amount first became due, any supplemental payment required by the preceding sentence shall not exceed (1) eighty-five percent (85%) of Stipulated Loss Value on the Designated Sale Date, less (2) any Direct Payments to Participants and any Deposit Taker Losses. Any supplemental payment payable to BNPLC by 3COM, rather than by the Applicable Purchaser, pursuant to this clause (ii) is hereinafter referred to as the "Shortage Amount." If the net cash price actually paid by the Applicable Purchaser to BNPLC exceeds the Purchase Price and all other sums that are then due from 3COM to BNPLC, 3COM shall be entitled to such excess. If any amount payable to BNPLC pursuant to this subparagraph 2(a) is not actually paid to BNPLC on the Designated Sale Date, 3COM shall pay interest on the past due amount computed at the Default Rate from the Designated Sale Date. However, Tenant shall be entitled to a reduction of the interest required by the preceding sentence equal to the Base Rent, if any, paid by Tenant as provided in Paragraph 17 of the Lease for any holdover period after the Designated Sale Date. (b) Election by 3COM. 3COM shall have the right to elect whether it will satisfy the obligations set out in clause (i) or (ii) of the preceding Paragraph 2(a); provided, however, that the following conditions are satisfied: (1) To give BNPLC the opportunity to have the Fair Market Value determined by an appraiser as provided in the definition of Fair Market Value above before the Designated Sale Date, 3COM must, unless 3COM concedes that Fair Market Value will not be less than fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date, provide BNPLC with a Remarketing Notice. "Remarketing Notice" means a notice given by 3COM to BNPLC (and to each of the Participants) no earlier than one hundred eighty (180) days before the Designated Sale Date and no later than ninety (90) days before the Designated Sale Date, specifying that 3COM does not concede that the Fair Market Value is equal to or greater than fifteen percent (15%) of the Stipulated Loss Value. A Remarketing Notice will be required only if 3COM does not concede that Fair Market Value will equal or exceed fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date. But if for any reason (including but not limited to any acceleration of the Designated Sale Date pursuant to clause (2) of the definition of Designated Sale Date above) 3COM fails to provide a Remarketing Notice within the time periods specified in the definition of Remarketing Notice above, Fair Market Value shall, for purposes of this Agreement, be deemed to be no less than fifteen percent (15%) of Stipulated Loss Value on the Designated Sale Date. (2) To give BNPLC the opportunity to prepare the Required Documents before the Designated Sale Date, 3COM must, if it is to elect to satisfy the obligations set forth in clause (ii) of Paragraph 2(a), irrevocably specify an Applicable Purchaser in notice to BNPLC given at least seven (7) days prior to the Designated Sale Date. If for any reason 3COM fails to so specify an Applicable Purchaser, 3COM shall be deemed to have irrevocably elected to satisfy the obligations set forth in clause (i) of Paragraph 2(a). (c) Termination of 3COM's Option To Purchase. Without limiting BNPLC's right to require 3COM to satisfy the obligations imposed by Paragraph 2(a), 3COM shall have no further option hereunder to purchase the Property if either: (1) 3COM shall have elected to satisfy its obligations under clause (ii) of Paragraph 2(a) on a Designated Sale Date and BNPLC shall have elected to keep the Property on such Designated Sale Date in accordance with clause (ii) of Paragraph 2(a); or (2) 3COM shall have failed on a Designated Sale Date to make or cause to be made all payments to BNPLC required by this Agreement or by the Lease and such failure shall have continued beyond the thirty (30) day period for tender specified in the next sentence. If BNPLC does not receive all payments due under the Lease and all payments required hereunder on a Designated Sale Date, 3COM may nonetheless tender to BNPLC the full Purchase Price and all amounts then due under the Lease, together with interest on the total Purchase Price computed at the Default Rate from the Designated Sale Date to the date of tender, and if presented with such a tender within thirty (30) days after the applicable Designated Sale Date, BNPLC must accept it and promptly thereafter deliver any Escrowed Proceeds and a deed and all other Required Documents listed in Paragraph 3. (d) Payment to BNPLC. All amounts payable under the preceding Paragraphs 2(a) or 2(c) by 3COM and, if applicable, by the Applicable Purchaser must be paid directly to BNPLC, and no payment to any other party shall be effective for the purposes of this Agreement. In addition to the payments required under Paragraph 2(a) hereunder, on the Designated Sale Date 3COM must pay all amounts then due to BNPLC under the Lease. BNPLC will remit any excess amounts due 3COM pursuant to the last sentence of clause (ii) of Paragraph 2(a) promptly after BNPLC's receipt of the same and in no event later than thirty (30) days thereafter. (e) Effect of Options on Subsequent Title Encumbrances. It is the intent of BNPLC and 3COM that any conveyance of the Property to 3COM or any Applicable Purchaser pursuant to this Agreement shall cut off and terminate any interest in the Property claimed by, through or under BNPLC, including the Participants (but not any unsatisfied obligations to BNPLC under the Lease, the Environmental Indemnity or this Agreement), including but not limited to any Prohibited Encumbrances and any leasehold or other interests conveyed by BNPLC in the ordinary course of BNPLC's business. Anyone accepting or taking any interest in the Property by or through BNPLC after the date of this Agreement shall acquire such interest subject to the rights and options granted 3COM hereby. Further, 3COM and any Applicable Purchaser shall be entitled to pay any payment required by this Agreement for the purchase of the Property directly to BNPLC notwithstanding any prior conveyance or assignment by BNPLC, voluntary or otherwise, of any right or interest in this Agreement or the Property, and neither 3COM nor any Applicable Purchaser shall be responsible for the proper distribution or application of any such payments by BNPLC. 3. Terms of Conveyance Upon Purchase. Immediately after receipt of all payments to BNPLC required pursuant to the preceding Paragraph 2, BNPLC must, unless it is to keep the Property as permitted by Paragraph 2(a)(ii), deliver all Escrowed Proceeds, if any, and convey all of its right, title and interest in the Property by grant deed to 3COM or the Applicable Purchaser, as the case may be, subject only to the Permitted Encumbrances (as defined in the Lease) and any other encumbrances that do not constitute Prohibited Encumbrances. However, such conveyance shall not include the right to receive any payment under the Lease then due BNPLC or that may become due thereafter because of any expense or liability incurred by BNPLC resulting in whole or in part from events or circumstances occurring before such conveyance. All costs of such purchase and conveyance of every kind whatsoever, both foreseen and unforeseen, shall be the responsibility of the purchaser, and the form of grant deed used to accomplish such conveyance shall be substantially in the form attached as Exhibit B. With such grant deed, BNPLC shall also tender to 3COM or the Applicable Purchaser, as the case may be, the following, each fully executed and, where appropriate, acknowledged on BNPLC's behalf by an officer of BNPLC: (1) a Preliminary Change of Ownership Report in the form attached as Exhibit C, (2) a Bill of Sale and Assignment of Contract Rights and Intangible Assets in the form attached as Exhibit D, (3) an Acknowledgment of Disclaimer of Representations and Warranties, in the form attached as Exhibit E, which 3COM or the Applicable Purchaser must execute and return to BNPLC, (5) a Documentary Transfer Tax Request in the form attached as Exhibit F, (6) a Secretary's Certificate in the form attached as Exhibit G, (7) a letter to the title insurance company insuring title to the Property in the form attached as Exhibit H, and (8) a certificate concerning tax withholding in the form attached as Exhibit I. 4. Survival of 3COM's Obligations. (a) Status of this Agreement. Except as expressly provided in the last sentence of this subparagraph and elsewhere herein, this Agreement shall not terminate, nor shall 3COM have any right to terminate this Agreement, nor shall 3COM be entitled to any reduction of the Purchase Price hereunder, nor shall the obligations of 3COM to BNPLC under Paragraph 2 be affected by reason of (i) any damage to or the destruction of all or any part of the Property from whatever cause, (ii) the taking of or damage to the Property or any portion thereof under the power of eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of 3COM's use of all or any portion of the Property or any interference with such use by governmental action or otherwise, (iv) any eviction of 3COM or any party claiming under 3COM by paramount title or otherwise, (v) 3COM's prior acquisition or ownership of any interest in the Property, (vi) any default on the part of BNPLC under this Agreement, the Lease or any other agreement to which BNPLC is a party, or (vii) any other cause, whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of 3COM hereunder (including 3COM's obligation to make payments under - and, if applicable, to cause the Applicable Purchaser to make payments under - Paragraph 2) shall be separate and independent of the covenants and agreements of BNPLC. Accordingly, the Purchase Price and the Shortage Amount, as the case may be under Paragraph 2, shall continue to be payable in all events, and the obligations of 3COM hereunder shall continue unaffected by any breach of this Agreement by BNPLC. However, nothing in this subparagraph, nor the performance without objection by 3COM of its obligations hereunder, shall be construed as a waiver by 3COM of any right 3COM may have at law or in equity, following any failure by BNPLC to tender a grant deed and the other Required Documents as required by Paragraph 3 upon the tender by 3COM and/or the Applicable Purchaser of the payments required by Paragraph 2 and of the other documents to be executed in favor of BNPLC at the closing of the sale hereunder, to (i) recover monetary damages proximately caused by such failure of BNPLC if BNPLC does not cure the failure within thirty (30) days after 3COM demands a cure by written notice to BNPLC, or (ii) a decree compelling performance of BNPLC's obligation to so tender a grant deed and the Required Documents. (b) Remedies Under the Lease and the Environmental Indemnity. No repossession of or re-entering upon the Property or exercise of any other remedies available under the Lease or the Environmental Indemnity shall relieve 3COM of its liabilities and obligations hereunder, all of which shall survive the exercise of remedies under the Lease and Environmental Indemnity. 3COM acknowledges that the consideration for this Agreement is separate and independent of the consideration for the Lease and the Environmental Indemnity, and 3COM's obligations hereunder shall not be affected or impaired by any event or circumstance that would excuse 3COM from performance of its obligations under the Lease or the Environmental Indemnity. 5. Remedies Cumulative. No right or remedy herein conferred upon or reserved to BNPLC is intended to be exclusive of any other right or remedy BNPLC has with respect to the Property, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. In addition to other remedies available under this Agreement, either party shall be entitled, to the extent permitted by applicable law, to a decree compelling performance of any of the other party's agreements hereunder. 6. No Implied Waiver. The failure of either party to this Agreement to insist at any time upon the strict performance of any covenant or agreement of the other party or to exercise any remedy contained in this Agreement shall not be construed as a waiver or a relinquishment thereof for the future. The waiver by either party of or redress for any violation of any term, covenant, agreement or condition contained in this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. No express waiver by either party shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by BNPLC of any payment hereunder with knowledge of the breach of this Agreement shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Agreement shall be deemed to have been made unless expressed in writing and signed by the waiving party. 7. Attorneys' Fees and Legal Expenses. If either party commences any legal action or other proceeding to enforce any of the terms of this Agreement or the documents and agreements referred to herein, or because of any breach by the other party or dispute hereunder or thereunder, the successful or prevailing party, shall be entitled to recover from the nonprevailing party all Attorneys' Fees incurred in connection therewith, whether or not such controversy, claim or dispute is prosecuted to a final judgment. Any such Attorneys' Fees incurred by either party in enforcing a judgment in its favor under this Agreement shall be recoverable separately from such judgment, and the obligation for such Attorneys' Fees is intended to be severable from other provisions of this Agreement and not to be merged into any such judgment. 8. Estoppel Certificate. 3COM and BNPLC will each, upon not less than twenty (20) days' prior written request by the other, execute, acknowledge and deliver to the requesting party a written statement certifying that this Agreement is unmodified and in full effect (or, if there have been modifications, that this Agreement is in full effect as modified, and setting forth such modification) and either stating that no default exists hereunder or specifying each such default of which the signer may have knowledge. Any such statement may be relied upon by any Participant or prospective purchaser or assignee of BNPLC with respect to the Property. Neither 3COM nor BNPLC shall be required to provide such a certificate more frequently than once in any six month period; provided, however, that if either party determines that there is a significant business reason for requiring a current certificate, including, without limitation, the need to provide such a certificate to a prospective purchaser or assignee, the other shall provide a certificate upon request whether or not it had provided a certificate within the prior six month period. 9. Notices. Each provision of this Agreement referring to the sending, mailing or delivery of any notice or referring to the making of any payment to BNPLC, shall be deemed to be complied with when and if the following steps are taken: (a) All payments required to be made by 3COM or the Applicable Purchaser to BNPLC hereunder shall be paid to BNPLC in immediately available funds by wire transfer to: Federal Reserve Bank of San Francisco Account: Banque Nationale de Paris ABA #: 121027234 Reference: 3COM (North First Street Property) or at such other place and in such other manner as BNPLC may designate in a notice to 3COM (provided BNPLC will not unreasonably designate a method of payment other than wire transfer). Time is of the essence as to all payments to BNPLC under this Agreement. Any payments required to be made by BNPLC to 3COM pursuant to the last sentence of clause (ii) of Paragraph 2(a) shall be paid to 3COM in immediately available funds at the address of 3COM set forth below or as 3COM may otherwise direct by written notice sent in accordance herewith. (b) All notices, demands and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below) and shall be given by any of the following means: (A) personal service, with proof of delivery or attempted delivery retained; (B) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (C) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (A) or (C) hereof shall be deemed received (whether or not actually received) upon first attempted delivery at the proper notice address on any Business Day between 9:00 A.M. and 5:00 P.M., and any notice or other communication sent pursuant to clause (B) hereof shall be deemed received upon dispatch by electronic means. Address of BNPLC: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention:Jennifer Cho or Will La Herran Telecopy: (415) 296-8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of 3COM: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Legal Dept. Mail Stop 1308 Telecopy: (408) 764-6434 With copies to: 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Real Estate Dept. Mail Stop 1220 Telecopy: (408) 764-5718; and 3Com Corporation 5400 Bayfront Plaza Santa Clara, California 95052 Attn: Treasury Dept. Mail Stop 1307 Telecopy: (408) 764-8403; and Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attn: Jonathan E. Rattner, Esq. Telecopy: (415) 328-3029 10. Severability. Each and every covenant and agreement of 3COM contained in this Agreement is, and shall be construed to be, a separate and independent covenant and agreement. If any term or provision of this Agreement or the application thereof to any person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Further, the obligations of 3COM hereunder, to the maximum extent possible, shall be deemed to be separate, independent and in addition to, not in lieu of, the obligations of 3COM under the Lease. In the event of any inconsistency between the terms of this Agreement and the terms and provisions of the Lease, the terms and provisions of this Agreement shall control. 11. Entire Agreement. This Agreement and the documents and agreements referred to herein set forth the entire agreement between the parties concerning the subject matter hereof and no amendment or modification of this Agreement shall be binding or valid unless expressed in a writing executed by both parties hereto. 12. Paragraph Headings. The paragraph headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs hereof. 13. Gender and Number. Within this Agreement, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. 14. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE UNDER AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. 15. Successors and Assigns. The terms, provisions, covenants and conditions hereof shall be binding upon 3COM and BNPLC and their respective permitted successors and assigns and shall inure to the benefit of 3COM and BNPLC and all permitted transferees, mortgagees, successors and assignees of 3COM and BNPLC with respect to the Property; provided, that the rights of BNPLC hereunder shall not pass to 3COM or any Applicable Purchaser or any subsequent owner claiming through them. Prior to the Designated Sale Date BNPLC may transfer, assign and convey, in whole or in part, the Property and any and all of its rights under this Agreement (subject to the terms of this Agreement) by any conveyance that constitutes a Permitted Transfer, but not otherwise. If BNPLC sells or otherwise transfers the Property and assigns its rights under this Agreement and the Lease pursuant to a Permitted Transfer, then to the extent BNPLC's successor in interest confirms its liability for the obligations imposed upon BNPLC by this Agreement and the Lease on and subject to the express terms set out herein and therein, BNPLC shall thereby be released from any further obligations thereafter arising under this Agreement and the Lease, and 3COM will look solely to each successor in interest of BNPLC for performance of such obligations. 16. WAIVER OF JURY TRIAL. BNPLC AND 3COM EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LEASE, THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. 3COM and BNPLC each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Agreement and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. 3COM and BNPLC each further warrant and represent that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LEASE, THIS AGREEMENT OR THE ENVIRONMENTAL INDEMNITY. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 17. Security for 3COM's Obligations. 3COM's obligations under this Agreement are secured by the Pledge Agreement, reference to which is hereby made for a description of the Collateral covered thereby and the rights and remedies provided to BNPLC thereby. Although the collateral agent appointed for BNPLC as provided in the Pledge Agreement shall be entitled to hold all Collateral as security for the full and faithful performance by 3COM of 3COM's covenants and obligations under this Agreement, the Collateral shall not be considered an advance payment of the Purchase Price or any Shortage Amount or a measure of BNPLC's damages should 3COM breach this Agreement. If 3COM does breach this Agreement and fails to cure the same within any time specified herein for the cure, BNPLC may, from time to time, without prejudice to any other remedy and without notice to 3COM, require the collateral agent to immediately apply the proceeds of any disposition of the Collateral (and any cash included in the Collateral) to amounts then due hereunder from 3COM. If BNPLC assigns its interest in the Property before the Designated Sale Date, BNPLC may also assign BNPLC's interest in the Collateral to the assignee. 18. Replacement of Participants Proposed by 3COM. So long as no Event of Default has occurred and is continuing, BNPLC shall not unreasonably withhold its approval for a substitution under the Participation Agreement of a new Participant proposed by 3COM for any Participant, the Deposit Taker for whom has ceased to be a Qualified Deposit Taker; provided, however, that (A) the proposed substitution can be accomplished without a release or breach by BNPLC of its rights and obligations under the Participation Agreement or the "Underlying Documents" described therein (including this Purchase Agreement); (B) the new Participant will agree (by executing Supplements to the Participation Agreement and Pledge Agreement as therein contemplated and by other agreements as may be reasonably required by BNPLC and 3COM) to become a party to the Participation Agreement and to the Pledge Agreement, to designate a Qualified Deposit Taker as the Deposit Taker for it under the Pledge Agreement and to accept a Percentage under the Participation Agreement equal to the Percentage of the Participant to be replaced; (C) the new Participant (or 3COM) will provide the funds required to pay the termination fee by Section 6.4 of the Participation Agreement to accomplish the substitution; (D) 3COM (or the new Participant) agrees in writing to indemnify and defend BNPLC for any and all Losses incurred by BNPLC in connection with or because of the substitution, including the cost of preparing supplements to the Participation Agreement and the Pledge Agreement and including any cost of defending and paying any claim asserted by the Participant to be replaced because of the substitution (but not including any liability of BNPLC to such Participant for damages caused by BNPLC's bad faith or gross negligence in the performance of BNPLC's obligations under the Participation Agreement prior to the substitution); and (E) the new Participant shall be a reputable financial institution having a net worth of no less than seven and one half percent (7.5%) of total assets and total assets of no less than $10,000,000,000.00 (all according to then recent audited financial statements). BNPLC shall attempt in good faith to assist (and cause its Affiliate, Banque Nationale de Paris, to attempt in good faith to assist) 3COM in identifying a new Participant that 3COM may propose to substitute for an existing Participant pursuant to this Paragraph, as 3COM may reasonably request from time to time. However, in no event shall BNPLC itself, or any of its Affiliates, be required to take the Percentage of any Participant to be replaced. 19. Security for BNPLC's Obligations. To secure 3COM's right to recover any damages caused by a breach of Paragraph 3 by BNPLC, including any such breach caused by a rejection or termination of this Agreement in any bankruptcy or insolvency proceeding instituted by or against BNPLC, as debtor, BNPLC does hereby grant to 3COM a lien and security interest against all rights, title and interests of BNPLC from time to time in and to the Property. 3COM may enforce such lien and security interest judicially after any such breach by BNPLC, but not otherwise. 3COM waives any right it has to seek a deficiency judgement against BNPLC in any action brought for a judicial foreclosure of such lien and security interest, and in connection therewith, BNPLC hereby acknowledges that it shall have no right of redemption following any such judicial foreclosure pursuant to Cal. Code Civ. Procedure Section 729. Contemporaneously with the execution of this Agreement, 3COM and BNPLC will execute a memorandum of this Agreement which is in recordable form and which specifically references the lien granted in this Paragraph, and 3COM shall be entitled to record such memorandum at any time prior to the Designated Sale Date. 20. Not a Partnership, Etc. NOTHING IN THIS PURCHASE AGREEMENT IS INTENDED TO BE OR TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN BNPLC AND 3COM. NEITHER THE EXECUTION OF THIS PURCHASE AGREEMENT NOR THE ADMINISTRATION OF THIS PURCHASE AGREEMENT OR OTHER DOCUMENTS REFERENCED HEREIN BY BNPLC, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF BNPLC UNDER OR PURSUANT TO THIS PURCHASE AGREEMENT OR SUCH DOCUMENTS IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF BNPLC TO 3COM. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "BNPLC" BNP LEASING CORPORATION, a Delaware corporation By: /s/ Lloyd G. Cox -------------------- Lloyd G. Cox, Vice President "3COM" 3COM CORPORATION, a California corporation By: /s/ Christopher B. Paisley ------------------------------ Christopher B. Paisley, Chief Financial Officer Exhibit A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: PARCEL ONE: All of Parcel 1, as shown upon that certain Map entitled, "Amended Parcel Map," which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9. EXCEPTING THEREFROM: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 1, being on the Northeasterly line of North First Street; Thence N. 71 56' 56" E., 341.59 feet along the Northerly line of said Parcel 1; Thence S. 37 32' 48" W., 281.82 feet to said Northeasterly line of North First Street; Thence along said Northeasterly line N. 52 27' 37" W., 193.00 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL TWO: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E, 341.59 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 358.60 feet; thence N. 45 14' 38" W., 168.87 feet; thence S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence S. 37 32' 48" W., 20.53 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses; N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL THREE: Beginning at a 4" x 4" stake marked A.D.C.M.1, standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone Monument standing at the point of intersection of the South line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 28.14 chains; running thence along the South line of the Alviso and Milpitas Road East 38.88 chains to a 4"x4" stake marked C.M.N.M.1; thence S. 7 20' E., 7.835 chains to a 4"x4" stake marked C.M.N.M.2 standing on the Southerly line of the lands formerly belonging to the Estate of John W. Meads; thence along said Southerly line S. 88 55' W., 36.74 chains to a 4"x4" stake marked M.4; thence S. 59 57' E., 1.322 chains to a 4" stake marked M.3; thence S. 71 48' W., 3.35 chains to a 4"x4" stake marked A D.C.M. 3; thence N. 1 28' W. 5.02 chains to a 4"x4" stake marked A D.C.M.2; thence N. 10 18' W., 5.474 chains to the place of beginning, and being Lot 2 as shown on the map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. EXCEPTING THEREFROM A portion of that parcel of land described in the Deed recorded September 21, 1966 as Instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said parcel (7512 OR 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California Parcel; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. ALSO EXCEPTING THEREFROM: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 787.15 feet to the Westerly line of said Parcel described in the said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 327.06 feet to the true point of beginning; thence continuing along said Westerly line N. 1 19' 04" W., 4.26 feet; thence N. 10 16' 10" W., 261.37 feet; thence leaving said Westerly line S. 89 50' 02" E., 218.46 feet; thence S. 0 09' 58" W., 88.17 feet; thence Southwesterly along a non-tangent curve to the left having a radius of 325.00 feet whose radius point bears S. 43 03' 16" E., through a central angle of 2 11' 22" for an arc length of 12.42 feet; thence S. 44 45' 22" W., 230.93 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W., 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3 N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses: S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 54' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet; N. 89 01' 32" W. 2099.03 feet; and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: Beginning at the Southwest corner of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California recorded February 17, 1970 in Book 8830 of Official Records at page 352, Santa Clara County Records; thence from said point of beginning, along the Southerly line of said 6.465 acre parcel S. 89 01' 16" E. 537.24 feet; thence leaving said Southerly line, at right angles, S 0 58' 44" W. 6.61 feet; thence S. 89 49' 56" W. 330.95 feet; thence S. 88 43' 01" W. 202.59 feet to a point in the Southerly prolongation of the Westerly line of said 6.465 acre parcel; thence along said Southerly prolongation N. 9 29' 16" W., 21.59 feet to the point of beginning. PARCEL FOUR: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records, at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 700.27 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 86.88 feet to the Easterly line of said parcel of land described in the Deed recorded May 3, 1979; thence along said Easterly line N. 1 19' 04" W., 289.58 feet; thence leaving said Easterly line S. 44 45' 22" W. 278.16 feet; thence S. 45 14' 38: E., 168.87 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said Parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W. 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. PARCEL FIVE: Beginning at a 4'x4' stake marked C.M.N.M.1., standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone monument standing at the point of intersection of the Southerly line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 67.02 chains; running thence along the South line of the Alviso and Milpitas Road East 5.955 chains to a 4'x4' stake marked M; thence still along the Southeasterly line of the Alviso and Milpitas Road N. 73 54' E., 19.93 chains to a fence post marked W.P. standing in fence line on the Westerly line of lands now or formerly of Boots; thence along said fence S. 7 15' E., 12.77 chains to a stake marked M.1.; thence along the fence along the Northerly line of the lands now or formerly of Nicholson, S. 88 55' W., 25.727 chains to a 4'x4' stake marked C.M.N.M.2; thence N. 7 20' W., 7.835 chains to the place of beginning, and being Lot 3 as shown on the Map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. Excepting therefrom a portion of that parcel of land described in the Deed recorded September 2, 1966 as instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said Parcel (7512 or 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. The bearings and distances used in the above excepted description are on the California System Zone 3. Multiply the above distances by 1.0000530 to obtain ground level distances. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve lo the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W. 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the Northeasterly corner of said parcel, said corner being on the Westerly line of Zanker Road and Southerly line of Highway 237; thence along the Easterly line of said Parcel, S. 7 05' 54" E. 99.01 feet; thence Northerly along a non-tangent curve to the left having a radius of 931.00 feet whose radius point bears S. 79 08' 59" W. through a central angle of 3 39' 23" for an arc length of 59.41 feet to a point of compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 85 24' 20" for an arc length of 64.10 feet to the Northerly line of said Parcel; thence along said Northerly line N. 60 05' 16" E, 50.59 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3, N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses; S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 64' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet N. 89 01' 32" W. 2099.03 feet and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: Beginning at the Northwest corner of that certain 0.019 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York Corporation, to the City of San Jose, a municipal corporation of the State of California, recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence from said point of beginning, along the Southerly line of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California, recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records, the following courses: S 80 55' 58" W. 1034.16 feet; along a tangent curve to the right with a radius of 1395.00 feet, through a central angle of 16 09' 23" for an arc length of 393.37 feet and N. 89 01' 16" W. 275.13 feet; thence leaving said Southerly line S. 86 14' 18" E. 317.01 feet to a point in a Northerly line of that certain 6.474 acre parcel described in said Deed to the City of San Jose; thence along said Northerly line the following courses: N. 84 55' 33" E. 658.09 feet and along a tangent curve to the right with a radius of 349.98 feet, through a central angle of 0 20' 33" for an arc length of 2.09 feet; thence leaving said Northerly line N. 85 16' 06" E. 587.33 feet; thence along a tangent curve to the right with a radius of 15.00 feet, through a central angle of 75 05' 51" for an arc length of 19.66 feet; thence S. 19 35' 03" E. 467.07 feet; thence S. 49 41' 05 W. 25.15 feet to a point in said Northerly line; thence along said Northerly line and a Westerly line of said 6.474 acre parcel the following courses: from a tangent bearing of S. 77 14' 33" E along a curve to the left with a radius of 43.00 feet, through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a tangent curve to the right with a radius of 1064.94 feet, through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 0 35' 30" W. 358.63 feet; thence along a tangent curve to the left with a radius of 830.95 feet, through a central angle of 1 55' 59" for an arc length of 31.41 feet to the Northeast corner of said 6.474 acre parcel; thence along the Northerly prolongation of the Easterly line of said 6.474 acre parcel N. 6 16' 05" W. 121.98 feet to the most Southerly corner of said 0.019 acre parcel; thence along the Westerly line of said 0.019 acre parcel the following courses: from a tangent bearing of N. 10 01' 13" W. along a curve to the left with a radius of 930.95 feet, through a central angle of 3 39' 22" for an arc length of 59.41 feet; thence from a tangent bearing of N. 13 40' 35" W. along a curve to the left with a radius of 43.00 feet, through a central angle of 85 23' 27" for an arc length of 64.09 feet to the point of beginning. PARCEL SIX: All of Parcel Two as shown upon that Parcel Map which filed for record in the Office of the Recorder of the County of Santa Clara, State of California on July 13, 1984 in Book 531 of Maps, at pages 41 and 42. APN: 097-03-59,79,80,84,85,86,87,88,90,93,102,103,104 ARB: 097-3-x5,x6,8,9,x15,x16,20,21,25.1,25.2 Exhibit B CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [3Com Corporation or the Applicable Purchaser] ADDRESS:___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ MAIL TAX STATEMENTS TO: NAME: [3Com Corporation or the Applicable Purchaser] ADDRESS:___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ CORPORATION GRANT DEED FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), hereby grants to [3COM or the Applicable Purchaser] all of BNPLC's interest in the land situated in the County of Santa Clara, State of California, described on Annex A attached hereto and hereby made a part hereof, together with the improvements currently located on such land and any easements, rights-of-way, privileges, appurtenances and other rights pertaining to such land; provided, however, that this grant is subject to the following, as well as the Permitted Encumbrances described on Annex B: 1. Real Estate Taxes not yet due and payable; 2. General or Special Assessments due and payable after the date hereof; and 3. Encroachments, variations in area or in measurements, boundary line disputes, roadways and other matters not of record which would be disclosed by a survey and inspection of the property conveyed hereby. BNP LEASING CORPORATION Date: As of ____________ By:___________________________________ Its: Vice President Attest:_______________________________ Its: Assistant Secretary STATE OF TEXAS ) ) SS COUNTY OF DALLAS ) On _______________ before me,________________, personally appeared ____________________ and _______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the person, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. Signature _____________________________ Annex A LEGAL DESCRIPTION REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: PARCEL ONE: All of Parcel 1, as shown upon that certain Map entitled, "Amended Parcel Map," which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9. EXCEPTING THEREFROM: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 1, being on the Northeasterly line of North First Street; Thence N. 71 56' 56" E., 341.59 feet along the Northerly line of said Parcel 1; Thence S. 37 32' 48" W., 281.82 feet to said Northeasterly line of North First Street; Thence along said Northeasterly line N. 52 27' 37" W., 193.00 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL TWO: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E, 341.59 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 358.60 feet; thence N. 45 14' 38" W., 168.87 feet; thence S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence S. 37 32' 48" W., 20.53 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses; N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL THREE: Beginning at a 4" x 4" stake marked A.D.C.M.1, standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone Monument standing at the point of intersection of the South line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 28.14 chains; running thence along the South line of the Alviso and Milpitas Road East 38.88 chains to a 4"x4" stake marked C.M.N.M.1; thence S. 7 20' E., 7.835 chains to a 4"x4" stake marked C.M.N.M.2 standing on the Southerly line of the lands formerly belonging to the Estate of John W. Meads; thence along said Southerly line S. 88 55' W., 36.74 chains to a 4"x4" stake marked M.4; thence S. 59 57' E., 1.322 chains to a 4" stake marked M.3; thence S. 71 48' W., 3.35 chains to a 4"x4" stake marked A D.C.M. 3; thence N. 1 28' W. 5.02 chains to a 4"x4" stake marked A D.C.M.2; thence N. 10 18' W., 5.474 chains to the place of beginning, and being Lot 2 as shown on the map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. EXCEPTING THEREFROM A portion of that parcel of land described in the Deed recorded September 21, 1966 as Instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said parcel (7512 OR 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California Parcel; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. ALSO EXCEPTING THEREFROM: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 787.15 feet to the Westerly line of said Parcel described in the said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 327.06 feet to the true point of beginning; thence continuing along said Westerly line N. 1 19' 04" W., 4.26 feet; thence N. 10 16' 10" W., 261.37 feet; thence leaving said Westerly line S. 89 50' 02" E., 218.46 feet; thence S. 0 09' 58" W., 88.17 feet; thence Southwesterly along a non-tangent curve to the left having a radius of 325.00 feet whose radius point bears S. 43 03' 16" E., through a central angle of 2 11' 22" for an arc length of 12.42 feet; thence S. 44 45' 22" W., 230.93 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W., 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3 N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses: S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 54' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet; N. 89 01' 32" W. 2099.03 feet; and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: Beginning at the Southwest corner of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California recorded February 17, 1970 in Book 8830 of Official Records at page 352, Santa Clara County Records; thence from said point of beginning, along the Southerly line of said 6.465 acre parcel S. 89 01' 16" E. 537.24 feet; thence leaving said Southerly line, at right angles, S 0 58' 44" W. 6.61 feet; thence S. 89 49' 56" W. 330.95 feet; thence S. 88 43' 01" W. 202.59 feet to a point in the Southerly prolongation of the Westerly line of said 6.465 acre parcel; thence along said Southerly prolongation N. 9 29' 16" W., 21.59 feet to the point of beginning. PARCEL FOUR: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records, at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 700.27 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 86.88 feet to the Easterly line of said parcel of land described in the Deed recorded May 3, 1979; thence along said Easterly line N. 1 19' 04" W., 289.58 feet; thence leaving said Easterly line S. 44 45' 22" W. 278.16 feet; thence S. 45 14' 38: E., 168.87 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said Parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W. 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. PARCEL FIVE: Beginning at a 4'x4' stake marked C.M.N.M.1., standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone monument standing at the point of intersection of the Southerly line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 67.02 chains; running thence along the South line of the Alviso and Milpitas Road East 5.955 chains to a 4'x4' stake marked M; thence still along the Southeasterly line of the Alviso and Milpitas Road N. 73 54' E., 19.93 chains to a fence post marked W.P. standing in fence line on the Westerly line of lands now or formerly of Boots; thence along said fence S. 7 15' E., 12.77 chains to a stake marked M.1.; thence along the fence along the Northerly line of the lands now or formerly of Nicholson, S. 88 55' W., 25.727 chains to a 4'x4' stake marked C.M.N.M.2; thence N. 7 20' W., 7.835 chains to the place of beginning, and being Lot 3 as shown on the Map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. Excepting therefrom a portion of that parcel of land described in the Deed recorded September 2, 1966 as instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said Parcel (7512 or 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. The bearings and distances used in the above excepted description are on the California System Zone 3. Multiply the above distances by 1.0000530 to obtain ground level distances. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve lo the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W. 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the Northeasterly corner of said parcel, said corner being on the Westerly line of Zanker Road and Southerly line of Highway 237; thence along the Easterly line of said Parcel, S. 7 05' 54" E. 99.01 feet; thence Northerly along a non-tangent curve to the left having a radius of 931.00 feet whose radius point bears S. 79 08' 59" W. through a central angle of 3 39' 23" for an arc length of 59.41 feet to a point of compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 85 24' 20" for an arc length of 64.10 feet to the Northerly line of said Parcel; thence along said Northerly line N. 60 05' 16" E, 50.59 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3, N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses; S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 64' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet N. 89 01' 32" W. 2099.03 feet and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: Beginning at the Northwest corner of that certain 0.019 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York Corporation, to the City of San Jose, a municipal corporation of the State of California, recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence from said point of beginning, along the Southerly line of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California, recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records, the following courses: S 80 55' 58" W. 1034.16 feet; along a tangent curve to the right with a radius of 1395.00 feet, through a central angle of 16 09' 23" for an arc length of 393.37 feet and N. 89 01' 16" W. 275.13 feet; thence leaving said Southerly line S. 86 14' 18" E. 317.01 feet to a point in a Northerly line of that certain 6.474 acre parcel described in said Deed to the City of San Jose; thence along said Northerly line the following courses: N. 84 55' 33" E. 658.09 feet and along a tangent curve to the right with a radius of 349.98 feet, through a central angle of 0 20' 33" for an arc length of 2.09 feet; thence leaving said Northerly line N. 85 16' 06" E. 587.33 feet; thence along a tangent curve to the right with a radius of 15.00 feet, through a central angle of 75 05' 51" for an arc length of 19.66 feet; thence S. 19 35' 03" E. 467.07 feet; thence S. 49 41' 05 W. 25.15 feet to a point in said Northerly line; thence along said Northerly line and a Westerly line of said 6.474 acre parcel the following courses: from a tangent bearing of S. 77 14' 33" E along a curve to the left with a radius of 43.00 feet, through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a tangent curve to the right with a radius of 1064.94 feet, through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 0 35' 30" W. 358.63 feet; thence along a tangent curve to the left with a radius of 830.95 feet, through a central angle of 1 55' 59" for an arc length of 31.41 feet to the Northeast corner of said 6.474 acre parcel; thence along the Northerly prolongation of the Easterly line of said 6.474 acre parcel N. 6 16' 05" W. 121.98 feet to the most Southerly corner of said 0.019 acre parcel; thence along the Westerly line of said 0.019 acre parcel the following courses: from a tangent bearing of N. 10 01' 13" W. along a curve to the left with a radius of 930.95 feet, through a central angle of 3 39' 22" for an arc length of 59.41 feet; thence from a tangent bearing of N. 13 40' 35" W. along a curve to the left with a radius of 43.00 feet, through a central angle of 85 23' 27" for an arc length of 64.09 feet to the point of beginning. PARCEL SIX: All of Parcel Two as shown upon that Parcel Map which filed for record in the Office of the Recorder of the County of Santa Clara, State of California on July 13, 1984 in Book 531 of Maps, at pages 41 and 42. APN: 097-03-59,79,80,84,85,86,87,88,90,93,102,103,104 ARB: 097-3-x5,x6,8,9,x15,x16,20,21,25.1,25.2 Annex B Permitted Encumbrances [NOTE: TO THE EXTENT THAT SPECIFIC ENCUMBRANCES (OTHER THAN "PROHIBITED LIENS") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "NOTE" WILL BE DELETED BEFORE THIS DEED IS ACTUALLY EXECUTED AND DELIVERED BY BNPLC. SUCH ADDITIONAL ENCUMBRANCES WOULD INCLUDE ANY NEW ENCUMBRANCES APPROVED BY BNPLC AS "PERMITTED ENCUMBRANCES" FROM TIME TO TIME BECAUSE OF 3COM'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT AS PROVIDED IN THE LEASE.] This conveyance is subject to any encumbrances that do not constitute "Prohibited Encumbrances" (as defined in the Purchase Agreement pursuant to which this Deed is being delivered), including County and city taxes for the Fiscal Year _______, a lien not yet due or payable, and including the following matters to the extent the same are still valid and in force: 1. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 7E The above Assessment No. covers APN No. 097-03-079 and 097-03-093, but is being collected under APN No. 097-03-079. Said matter affects a portion of Parcel One. 2. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 6Y Said matter affects a portion of Parcel Three. 3. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 9Y Said matter affects a portion of Parcel Three. 4. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 7Y Said matter affects a portion of Parcel Three. 5. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 8Y Said matter affects portions of Parcels Three and Five. 6. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 5Y Said matter affects Parcel Four. 7. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 10Y Said matter affects a portion of Parcel Five. 8. Bond for Reassessment District #93-210 Consolidated Refunding Bond No. : 24J Assessment No. : 4E Said matter affects Parcel Six. 9. EASEMENT for the purposes stated herein and incidents thereto Purpose : A right of way for a covered wooden sewer Granted to : The City of San Jose, a municipal corporation Recorded : February 26, 1989 in Book 115 of Deeds, page 142 Affects : A strip of land twelve (12) feet wide, the center line of which is described as follows: Beginning in the Southerly line of land of the party of the first part at a point from which the Southeasterly corner thereof bears N.88 55' East 12.35 feet distant and running thence N. 36 30' East 623 1/2 feet a little more or less to a point in the Southerly line of the Alviso and Milpitas Road, from which the Southwesterly corner of the land of J. Farney bears N. 19 30' West 72 3/4 feet distant THE EXACT location of said easement is not defined of record. Said matter affects a portion of Parcel Three and Five. 10. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : October 14, 1931 in Book 585, page 340 Official Records Affects : The said route of said pipe line shall be as follows, namely: Beginning at a point in the Easterly boundary line of said premises (marked by a fence now upon the ground), from which a 4" x 4" white stake marking the Northeast corner of said premises bears North 15 26 1/2' West 5.2 feet distant, and running thence South 86 58' West 367.9 feet; thence North 89 04' West 259.6 feet; thence South 88 51' West 1135.53 feet; thence South 86 52 1/2' West 254.7 feet; thence North 89 19 1/2' West 172.0 feet; thence South 88 42 1/2' West 1918.3 feet, more or less, to ta point in the Southwesterly boundary line of said premises. THE EXACT location of said easement is not defined of record. Said matter affects Parcels One and Six. 11. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas a pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : November 5, 1931 in Book 586, page 515, Official Records Affects : As follows: Beginning at a point in the Southwesterly boundary line of said premises (marked by the center line of the San Jose-Alviso Road), from which a 2" x 4" post marking the point of intersection of the Southwesterly boundary line of said road with the Northerly boundary line of that certain 42.5 acre parcel of land conveyed to Kenneth R. Burrell by F.C. Burrell, et ux, by deed dated June 13, 1930, and recorded in Vol. 522 of Official Records, at page 508 records of said Santa Clara County, bears South 78 25' West 45.3 feet distant, and running thence North 75 51 1/2' East 51.6 feet; thence South 89 10' East 265.3 feet; thence North 89 16' East 161.9 feet; thence North 88 00' East 425.0 feet; thence North 72 54' minutes East 285.0 feet thence South 38 28' East 126.9 feet; thence North 88 42 1/2' East 35.0 feet, more or less, to a point in the Easterly boundary line of said premises. THE EXACT location of said easement is not defined of record. Said matter affects Parcels Two and Four. 12. EASEMENT for the purposes stated herein and incidents thereto Purpose : The right to excavate for, install, replace, maintain and use for conveying gas a pipe line with necessary appliances Granted to : Pacific Gas and Electric Company, a California corporation Recorded : December 10, 1931 in Book 595, page 196, Official Records Affects : As follows: Beginning at a point in the Southwesterly boundary line of that certain 99.5 acre parcel of land described in that certain mortgage from George E. Nicholson to Mollie F. Nicholson dated December 18, 1913 and recorded in Book 216 of Mortgages at page 255, records of said Santa Clara County, (said boundary line being marked by a fence now upon the ground) from which a 4" x 4" post marked "M4" set at the most Westerly corner of said 99.5 acre parcel of land bears North 60 46 1/2' West 16.7 feet distant; and running thence South 88 42 1/2' West 150.0 feet, more or less, to a point in the Westerly boundary line of said premises. THE EXACT location of said easement is not defined of record. Said matter affects Parcel Three. 13. EASEMENT for the purposes stated herein and incidents thereto Purpose : A right of way for sewer purposes Granted to : City of San Jose, a municipal corporation Recorded : August 8, 1933 in Book 659, page 121, Official Records Affects : A right of way over, along and upon a strip twelve (12) feet wide, the center line of which is described as follows: Beginning at a point from which the Southeasterly corner of the land Norman L. Meads bears N. 88 55' E., 1530 feet distant; thence N. 66 54' W. 513 feet to a point in the Southerly line of the Alviso and Milpitas Road, from which the Southeasterly corner of the private road of F.W. Zanker lies Northerly and across the Alviso and Milpitas Road, 67 feet a little more or less. Said matter affects Parcel Five. 14. WAIVER OF DAMAGES as contained in the Deed to the State of California Recorded : February 17, 1980 in Book 8830, page 352, Official Records Said matter affects Parcels Three and Five. 15. THE EFFECT of the Rincon de los Esteros Project Redevelopment Plan and Ordinances Nos. 17306, 19686, 19835, 20677, 20958, 21417, 21496, 21903, 22660, 22412, 22761, 22761.1 and 22961, 23703, 23732, 23761 and 23934 of the City of San Jose as recorded and as disclosed by documents recorded July 11, 1975 in Book B502, Page 711; August 6, 1979 in Book E699, Page 245; August 6, 1979 in Book E699, Page 277; December 21, 1979 in Book F37, Page 585; October 8, 1981 in Book G382, Page 605; July 28, 1982 in Book G929, Page 703; September 14, 1983 in Book H892, Page 200; January 10, 1984 in Book 1220, Page 271; December 17, 1987 in Book K394, page 143; May 5, 1988 in Book K524, page 526; May 5, 1988 in Book K524, page 532; January 6, 1992 in Book L996, Page 508, all of Official Records, and as disclosed by information provided by the Redevelopment Agency of the City of San Jose. 16. EASEMENTS AND INCIDENTS THERETO, filed for record in the Office of the County Recorder of the County of Santa Clara, State of California, shown on the "Amended Parcel Map" filed for record on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9 Purpose : Public Service Easement Affects : Southwesterly 10 feet and Southeasterly 10 feet of Parcel One and Southwesterly 10 feet and Northwesterly 10 feet of Parcel Six 17. EASEMENT for the purposes stated herein and incidents thereto Purpose : To construct, install, inspect, maintain, replace, remove and use facilities of such underground conduits, pipes, manholes, service boxes, wires, cables, and electrical conductors; aboveground marker posts, risers, and service pedestals; underground and aboveground switches, fuses, terminals, and transformers with associated concrete pads; and fixtures and appurtenances necessary to any and all thereof Granted to : Pacific Gas and Electric Company, a California corporation Recorded : March 26, 1986 in Book J640, page 960, Official Records Affects : Strips of land of the uniform width of 10 feet the center lines of which are delineated by the heavy dashed lines shown upon the print of second party's Drawing No. SJB-1821 attached thereto and made a part thereof; excepting therefrom the portion lying outside the boundary lines of said lands. Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcel Six. 18. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public Service Easements Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 156, Official Records Affects : As follows: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being also a portion of Parcel as 2 described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Strip 1 A strip of land 10.00 feet wide extending Northeasterly from the Northeasterly line of the 10.00 feet wide P.S.E. along North First Street, as shown on said Amended Parcel Map and lying contiguous to and Southeasterly of a line that begins at a point in the Northeasterly line of North First Street from which the most Southerly corner of Parcel 1 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1698, Santa Clara County Records, bears N. 52 27' 12" W. 77.00 feet and running; thence Northeasterly along a curve to the right having a radius of 50.00 feet whose radius point bears N. 37 32' 48" E., through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 37 32' 48" E., 251.93 feet to a point hereon designated "Point A"; thence N. 37 32' 48" E., 0.42 feet; thence along a curve to the right having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence N. 44 45' 22" E. 261.02 feet to the Northeasterly line of said Parcel 2, the side line of said strip shall be lengthened or shortened to terminate in said Northeasterly line. Strip 2 Beginning at a point herein above designated "Point A"; thence S. 37 32' 48" W., 31.00 feet; thence S. 52 27' 12" E., 25.00 feet; thence N. 37 32' 48" E., 31.00 feet; thence N. 52 27' 12" W., 25.00 feet to the point of beginning. Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels One. 19. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public Service Easements Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 162, Official Records Affects : 10 foot wide strips over Parcels Three, Four and Five and more fully described in said document Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels Three, Four and Five. 20. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sanitary Sewer Easement Granted to : City of San Jose Recorded : August 20, 1987 in Book K267, page 162, Official Records Affects : A 15 foot wide strip and a 20 foot wide strip over Parcels Four and Five more fully described in said document Terms and conditions contained in the document hereinabove referred to. Said matter affects Parcels Four and Five. 21. LACK OF ABUTTER'S RIGHTS to and from Freeway 237, lying adjacent to the Northerly and Northeasterly line of Parcel Five, said rights having been released and relinquished By : Final Order of Condemnation To : The People of the State of California Acting by and through the Department of Transportation Recorded : March 30, 1994 in Book N373, page 0560, Official Records. 22. Any rights, interests, or claims adverse to those of the vestee herein which may exist or arise by reason of the following facts shown on a survey plat entitled "ALTA/ACSM LAND TITLE SURVEY," dated July 15, 1996, prepared by Bryan & Murphy Engineers, Planners, Surveyors, Job No. 67320. a. The fact that a cyclone fence extends across the Southerly line of Parcel Five. b. The fact that a walkway exists in the public services easement shown as Exception No. 16 and that said walkway extends across the Westerly lines of Parcel Six. c. The fact that concrete landscaping extends across the Easterly line of Parcel Six. d. The fact that a 12 foot wall extends across the Southerly line of Parcel Three. EXHIBIT C PRELIMINARY CHANGE OF OWNERSHIP REPORT THIS REPORT IS NOT A PUBLIC DOCUMENT (To be completed by transferee (buyer) prior to transfer of the subject property in accordance with Section 480.3 of the Revenue and Taxation Code.) THIS SPACE FOR RECORDER'S USE SELLER/TRANSFEROR: SELLER RECORDING DATE: DOCUMENT NO. BUYER/TRANSFEREE: ASSESSOR'S IDENTIFICATION NUMBER(S) LA ------ Page Parcel PROPERTY ADDRESS OR LOCATION: No Street City State Zip Code MAIL TAX INFORMATION TO: NAME: ADDRESS: Street No City State Zip Code FOR ASSESSOR'S USE ONLY Cluster ______ OC1 _________ OC2 _________ DT _________ INT _________ RC _________ SP$ _________ DTT $_________ # Pcl._________ A Preliminary Change in Ownership Report must be filed with each conveyance in the County Recorder's office for the county where the property is located; this particular form may be used in all 58 counties of California. NOTICE: A lien for property taxes applies to your property on March 1 of each year for the taxes owing in the following fiscal year, July 1 through June 30. One-half of those taxes is due November 1 and one- half is due February 1. The first installment becomes delinquent on December 10 and the second installment becomes delinquent on April 10. One tax bill is mailed before November 1 to the owner of record. IF THIS TRANSFER OCCURS AFTER MARCH 1 AND ON OR BEFORE DECEMBER 31, YOU MAY BE RESPONSIBLE FOR THE SECOND INSTALLMENT OF TAXES ON FEBRUARY 1. The property which you acquired may be subject to a supplemental tax assessment in an amount to be determined by the Santa Clara County Assessor. For further information on your supplemental roll obligation, please call the Santa Clara County Assessor at (___) ___- ____. PART I: TRANSFER INFORMATION Please answer all questions. YES NO " " A. Is this transfer solely between husband and wife (Addition of a spouse, death of a spouse, divorce settlement, etc.)? " " B. Is this transaction only a correction of the name(s) of the person(s) holding title to the property (For example, a name change upon marriage)? " " C. Is this document recorded to create, terminate, or reconvey a lender's interest in the property? " " D. Is this transaction recorded only to create, terminate, or reconvey a security interest (e.g., cosigner)? " " E. Is this document recorded to substitute a trustee under a deed of trust, mortgage, or other similar document? " " F. Did this transfer result in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants? " " G. Does this transfer return property to the person who created the joint tenancy (original transferor)? " " H. Is this transfer of property: 1. to a trust for the benefit of the grantor, or grantor's spouse? 2. to a trust revocable by the transferor? 3. to a trust from which the property reverts to the grantor within 12 years? " " I. If this property is subject to a lease, is the remaining lease term 35 years or more including written options? " " J. Is this a transfer from parents to children or from children to parents? " " K. Is this transaction to replace a principal residence by a person 55 years of age or older? " " L. Is this transaction to replace a principal residence by a person who is severely disabled as defined by Revenue and Taxation Code Section 69.5? If you checked yes to J, K or L, an applicable claim form must be filed with the County Assessor. Please provide any other information that would help the Assessor to understand the nature of the transfer. IF YOU HAVE ANSWERED "YES" TO ANY OF THE ABOVE QUESTIONS EXCEPT J, K, OR L, PLEASE SIGN AND DATE. OTHERWISE COMPLETE BALANCE OF THE FORM. PART II: OTHER TRANSFER INFORMATION A. Date of transfer if other than recording date. B. Type of transfer. Please check appropriate box. __Purchase __Foreclosure __Gift __Trade or Exchange __Merger, Stock or Partnership Acquisition __Contract of Sale--Date of Contract____________________ __Inheritance--Date of Contract____________________ __Other: Please explain: __Creation of a lease __Assignment of a lease __Termination of a lease Date lease began____________________ Original term in years (including written options)__________________ Remaining term in years (including written options)_________________ C. Was only a partial interest in the property transferred? __Yes __No If yes, indicate the percentage transferred ____% Please answer, to the best of your knowledge, all applicable questions, sign and date. If a question does not apply, indicate with "N/A". PART 1: PURCHASE PRICE & TERMS OF SALE (a) CASH DOWN PAYMENT OR Value of Trade or Exchange (excluding closing cost) Amount $______ (b) FIRST DEED OF TRUST @____% interest for ____years. Pymts./Mo.= $___ (Prin. & Int. only) Amount $______ __FHA __Fixed Rate __New Loan __Conventional __Variable Rate __Assumed Existing Loan Balance __VA __All Inclusive D.T. ($________ Wrapped) __Bank or Savings & Loan __Cal-Vet __Loan Carried by Seller __Finance Company Balloon Payment __Yes __No Due Date______ Amount $______ Amount $______ (c) SECOND DEED OF TRUST @________% interest for ____ years. Pymts./Mo. = $________ (Prin. & Int. only) __Bank or Savings & Loan __Fixed Rate __New Loan __Loan Carried by Seller __Variable Rate __Assumed Existing Loan Balance Balloon Payment __Yes __No Due Date______ Amount $______ Amount $____ (d) OTHER FINANCING: Is other financing involved not covered in (b) or (c) above? __Yes __No Type____ @____% interest for ____ years. Pymts./Mo. = $_____(Prin. & Int. only) __Bank or Savings & Loan __Fixed Rate __New Loan __Loan Carried by Seller __Variable Rate __Assumed Existing Loan Balance Balloon Payment __Yes __No Due Date______ Amount $______ Amount $____ (e) IMPROVEMENT BOND __Yes __No Outstanding Balance:____________ (f) TOTAL PURCHASE PRICE: (or acquisition price, if traded or exchanged, include real estate commission if paid.) $ Total items A through E ____________ (g) PROPERTY PURCHASED: __Through a broker; __Direct form seller; __Other (Explain)______________________________ If purchased through a broker, provide broker's name and phone no.: Please explain any special terms or financing and many other information that would help the Assessor understand the purchase price and terms of sale. PART 2: PROPERTY INFORMATION (a) IS PERSONAL PROPERTY INCLUDED IN THE PURCHASE PRICE (other than a mobilehome subject to local property tax)? __Yes __No If yes, enter the value of the personal property included in the purchase price $__________ (Attach itemized list of personal property) (b) IS THIS PROPERTY INTENDED AS YOUR PRINCIPAL RESIDENCE? __Yes __No If yes, enter date of occupancy ________/________/, 19__ Month Day or intended occupancy ________/________/, 19__ Month Day (c) TYPE OF PROPERTY TRANSFERRED: __Single-Family residence __Agricultural __Timeshare __Multiple-Family residence (no. of units:__) __Coop/Own-your-own __Mobilehome __Commercial/Industrial __Condominium __Unimproved lot __Other (Description:__________________________) (d) DOES THE PROPERTY PRODUCE INCOME? __Yes __No (e) IF THE ANSWER TO QUESTION D IS YES, IS THE INCOME FROM: __Lease/Rent __Contract __Mineral rights __Other - explain (f) WHAT WAS THE CONDITION OF THE PROPERTY AT THE TIME OF SALE? __Good __Average __Fair __Poor Enter here, or on an attached sheet, any other information that would assist the Assessor in determining value of the property such as the physical condition of the property, restrictions, etc. I certify that the foregoing is true, correct and complete to the best of my knowledge and belief. Signed _____________________________ Date _______________________________ (New Owner/Corporate Officer) Please Print Name of New Owner/Corporate Officer Phone No. where you are available from 8:00 a.m. - 5:00 p.m. (____) (Note: The Assessor may contact you for further information) If a document evidencing a change of ownership is presented to the recorder for recordation without the concurrent filing of a PRELIMINARY CHANGE OF OWNERSHIP REPORT, the recorder may charge an additional recording fee of twenty dollars ($20). Exhibit D BILL OF SALE, ASSIGNMENT OF CONTRACT RIGHTS AND INTANGIBLE ASSETS Reference is made to that certain ______________ dated _______, 1996 (the "Agreement") between 3Com Corporation, a California Corporation, and Metropolitan Life Insurance Company, a New York corporation ("Metropolitan"), pursuant to which 3Com Corporation named BNP LEASING CORPORATION ("Assignor") as its designee and Metropolitan conveyed to Assignor the real property described in Annex A attached hereto (the "Property). Assignor hereby sells, transfers and assigns unto [3COM OR THE APPLICABLE PURCHASER, AS THE CASE MAY BE], a _____________ ("Assignee"), all of Assignor's right, title and interest in and to the following property, if any, to the extent such property is assignable: (a) any warranties, guaranties, indemnities and claims Assignor may have under the Agreement or under any document delivered by Metropolitan thereunder to the extent related to the Property; (b) all licenses, permits or similar consents (excluding any prepaid utility reservations) from third parties to the extent related to the Property; (c) any pending or future award made because of any condemnation affecting the Property or because of any conveyance to be made in lieu thereof, and any unpaid award for damage to the Property and any unpaid proceeds of insurance or claim or cause of action for damage, loss or injury to the Property; (d) any goods, equipment, furnishings, furniture, chattels and personal property of whatever nature that are located on or about the Property; and (e) any general intangibles, permits, licenses, franchises, certificates, and other rights and privileges owned by Assignor and used solely in connection with, or relating solely to, the Property, including any such rights and privileges conveyed to Assignor pursuant to the Agreement; but excluding any rights or privileges of Assignor under (i) the Environmental Indemnity, as defined in that certain Purchase Agreement between Assignor and 3Com Corporation dated as of November 20, 1996 (the "Purchase Agreement") (pursuant to which this document is being delivered), (ii) the Lease, as defined in the Purchase Agreement, to the extent rights under the Lease relate to the period ending on the date hereof, whether such rights are presently known or unknown, including rights of the Assignor to be indemnified against claims of third parties as provided in the Lease which may not presently be known, and including rights to recover any accrued unpaid rent under the Lease which may be outstanding as of the date hereof, (iii) agreements between Assignor and Participants, as defined in the Lease, or any modification or extension thereof, and (iv) any other instrument being delivered to Assignor contemporaneously herewith pursuant to the Purchase Agreement. Assignor does for itself and its heirs, executors and administrators, covenant and agree to warrant and defend the title to the property assigned herein against the just and lawful claims and demands of any person claiming under or through Assignor, but not otherwise; excluding, however, any claim or demand arising by, through or under [3COM]. Assignee hereby assumes and agrees to keep, perform and fulfill Assignor's obligations, if any, relating to any permits or contracts, under which Assignor has rights being assigned herein. Executed: ____________, _____. ASSIGNOR: BNP LEASING CORPORATION a Delaware corporation By: Its: ASSIGNEE: [3COM, OR THE APPLICABLE PURCHASER], a _________ corporation By: Its: Annex A Legal Description REAL PROPERTY in the City of Santa Clara, County of Santa Clara, State of California, described as follows: PARCEL ONE: All of Parcel 1, as shown upon that certain Map entitled, "Amended Parcel Map," which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California on December 22, 1983 in Book 523 of Maps, at pages 7, 8 and 9. EXCEPTING THEREFROM: All that certain real property situated in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1, as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 1, being on the Northeasterly line of North First Street; Thence N. 71 56' 56" E., 341.59 feet along the Northerly line of said Parcel 1; Thence S. 37 32' 48" W., 281.82 feet to said Northeasterly line of North First Street; Thence along said Northeasterly line N. 52 27' 37" W., 193.00 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses: N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL TWO: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E, 341.59 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 358.60 feet; thence N. 45 14' 38" W., 168.87 feet; thence S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence S. 37 32' 48" W., 20.53 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to the City of San Jose, a municipal corporation recorded August 20, 1987 in Book K267, page 156 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, being also a portion of Parcel 2 as described in the deed recorded October 21, 1985 in Book J492 of Official Records at page 1703, Santa Clara County Records, being more particularly described as follows: Beginning at the most Southerly corner of the parcel of land described in the deed recorded October 21, 1985 at Series Number 8564627, Book J492 of Official Records at page 1698, Santa Clara County Records; thence along the Southeasterly line of said parcel described in said deed recorded October 21, 1985, N. 37 32' 48" E., 281.82 feet to the Northwesterly line of said Parcel 2; thence along said Northwesterly line the following three courses; N. 37 32' 48" E., 20.53 feet; thence along a curve to the right having a radius of 300.00 feet through a central angle of 7 12' 34" for an arc length of 37.75 feet; thence N. 44 45' 22" E., 261.02 feet to the Northeasterly line of said Parcel 2; thence along said Northeasterly S 45 14' 38" E., 27.00 feet to a line that is parallel with and 27.00 Southeasterly of said Northwesterly line; thence along said parallel line S. 44 45' 22" W., 261.02 feet; thence along a curve to the left having a radius of 273.00 feet through a central angle of 7 12' 34" for an arc length of 34.35 feet; thence S. 37 32' 48" W., 252.35 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet to the Northeasterly line of North First Street; thence along said Northeasterly line N. 52 27' 12" W., 77.00 feet to the point of beginning. PARCEL THREE: Beginning at a 4" x 4" stake marked A.D.C.M.1, standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone Monument standing at the point of intersection of the South line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 28.14 chains; running thence along the South line of the Alviso and Milpitas Road East 38.88 chains to a 4"x4" stake marked C.M.N.M.1; thence S. 7 20' E., 7.835 chains to a 4"x4" stake marked C.M.N.M.2 standing on the Southerly line of the lands formerly belonging to the Estate of John W. Meads; thence along said Southerly line S. 88 55' W., 36.74 chains to a 4"x4" stake marked M.4; thence S. 59 57' E., 1.322 chains to a 4" stake marked M.3; thence S. 71 48' W., 3.35 chains to a 4"x4" stake marked A D.C.M. 3; thence N. 1 28' W. 5.02 chains to a 4"x4" stake marked A D.C.M.2; thence N. 10 18' W., 5.474 chains to the place of beginning, and being Lot 2 as shown on the map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. EXCEPTING THEREFROM A portion of that parcel of land described in the Deed recorded September 21, 1966 as Instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said parcel (7512 OR 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California Parcel; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. ALSO EXCEPTING THEREFROM: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 787.15 feet to the Westerly line of said Parcel described in the said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 327.06 feet to the true point of beginning; thence continuing along said Westerly line N. 1 19' 04" W., 4.26 feet; thence N. 10 16' 10" W., 261.37 feet; thence leaving said Westerly line S. 89 50' 02" E., 218.46 feet; thence S. 0 09' 58" W., 88.17 feet; thence Southwesterly along a non-tangent curve to the left having a radius of 325.00 feet whose radius point bears S. 43 03' 16" E., through a central angle of 2 11' 22" for an arc length of 12.42 feet; thence S. 44 45' 22" W., 230.93 feet to the true point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W., 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3 N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses: S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 54' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet; N. 89 01' 32" W. 2099.03 feet; and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: Beginning at the Southwest corner of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California recorded February 17, 1970 in Book 8830 of Official Records at page 352, Santa Clara County Records; thence from said point of beginning, along the Southerly line of said 6.465 acre parcel S. 89 01' 16" E. 537.24 feet; thence leaving said Southerly line, at right angles, S 0 58' 44" W. 6.61 feet; thence S. 89 49' 56" W. 330.95 feet; thence S. 88 43' 01" W. 202.59 feet to a point in the Southerly prolongation of the Westerly line of said 6.465 acre parcel; thence along said Southerly prolongation N. 9 29' 16" W., 21.59 feet to the point of beginning. PARCEL FOUR: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of that parcel of land described in the Deed recorded May 3, 1979 in Book E464 of Official Records, at page 51, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of Parcel 1 as shown on the Amended Parcel Map recorded in Book 523 of Maps, at page 9, Santa Clara County Records, said corner being on the Northeasterly line of North First Street; thence along the Northerly line of said Parcel 1, N. 71 56' 56" E., 700.27 feet to the true point of beginning; thence continuing along said Northerly line N. 71 56' 56" E., 86.88 feet to the Easterly line of said parcel of land described in the Deed recorded May 3, 1979; thence along said Easterly line N. 1 19' 04" W., 289.58 feet; thence leaving said Easterly line S. 44 45' 22" W. 278.16 feet; thence S. 45 14' 38: E., 168.87 feet to the true point of beginning. EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve to the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said Parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W. 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. PARCEL FIVE: Beginning at a 4'x4' stake marked C.M.N.M.1., standing on the Southerly line of the Alviso and Milpitas Road, from which stake a stone monument standing at the point of intersection of the Southerly line of the Alviso and Milpitas Road with the center line of the San Jose and Alviso Road bears West 67.02 chains; running thence along the South line of the Alviso and Milpitas Road East 5.955 chains to a 4'x4' stake marked M; thence still along the Southeasterly line of the Alviso and Milpitas Road N. 73 54' E., 19.93 chains to a fence post marked W.P. standing in fence line on the Westerly line of lands now or formerly of Boots; thence along said fence S. 7 15' E., 12.77 chains to a stake marked M.1.; thence along the fence along the Northerly line of the lands now or formerly of Nicholson, S. 88 55' W., 25.727 chains to a 4'x4' stake marked C.M.N.M.2; thence N. 7 20' W., 7.835 chains to the place of beginning, and being Lot 3 as shown on the Map accompanying the report of the sole commissioner in the partition of the Estate of John W. Meads, deceased. Excepting therefrom a portion of that parcel of land described in the Deed recorded September 2, 1966 as instrument No. 3120626 in Book 7512, page 79, Official Records of Santa Clara County, said portion being more particularly described as follows: Commencing at the Northeasterly corner of that parcel of land described in the Deed to the State of California, recorded November 15, 1957 in Volume 3937, page 635, Official Records of Santa Clara County; thence along the Northerly line of said Parcel (7512 or 79) S. 89 01' 21" E., 2959.87 feet and N. 74 49' 08" E., 1314.86 feet to the Easterly line of last said parcel; thence along last said line S. 6 22' 52" E., 76.47 feet; thence S. 80 54' 25" W., 72.96 feet to a line parallel with, and distant 67.83 feet Southerly, at right angles, from the course described above as "N. 74 49' 08" E., 1314.86 feet"; thence along said parallel line S. 74 49' 08" W., 1034.16 feet; thence along a tangent curve to the right with a radius of 1395.00 feet through an angle of 16 09' 31", an arc length of 393.42 feet to a line parallel with and distant 65.59 feet Southerly, at right angles, from the course described above as "S. 89 01' 21" E., 2959.87 feet"; thence along last said parallel line N. 89 01' 21" W., 2767.11 feet to the Easterly line of said State of California; thence along last said line N. 9 29' 21" W., 66.70 feet to the point of commencement, as granted to the State of California by Deed recorded February 17, 1970, Series No. 3764080, Book 8830, page 352 and Series No. 3764081, Book 8830, page 355, Official Records, Santa Clara County. The bearings and distances used in the above excepted description are on the California System Zone 3. Multiply the above distances by 1.0000530 to obtain ground level distances. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being also a portion of the Parcel 4 as described in the Deed recorded October 21, 1985 in Book J492 of Official Records at page 1713, Santa Clara County Records, being more particularly described as follows: Beginning at the most Westerly corner of said Parcel 4; thence along the Northwesterly line of said Parcel 4, N. 44 45' 22" E., 278.16 feet to the Westerly line of said parcel described in said Deed recorded July 26, 1984; thence along said Westerly line N. 1 19' 04" W., 37.49 feet to the Southeasterly line of Parcel 3 as described in the deed recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence along said Southeasterly line N. 44 45' 22" E., 230.93 feet; thence Northeasterly along a curve to the right having a radius at 325.00 feet through a central angle of 45 24' 36" for an arc length of 257.58 feet; thence S. 89 50' 02" E., 2099.12 feet; thence along a curve to the left, having a radius of 2000.00 feet, through a central angle of 6 03' 43" for an arc length of 211.60 feet; thence N. 84 06' 15" E., 709.89 feet; thence along a curve to the right having a radius of 350.00 feet through a central angle of 31 13' 08" for an arc length of 190.71 feet; thence S. 64 40' 37" E., 358.91 feet; thence along a curve to the right having a radius of 226.00 feet through a central angle of 42 17' 12" for an arc length of 166.80 feet to a point of reverse curvature; thence along a curve lo the left having a radius 173.00 feet through a central angle of 55 40' 26" for an arc length of 168.10 feet to a point of compound curvature; thence along a curve, to the left having a radius of 43.00 feet through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a curve to the right having a radius of 1065.00 feet through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 1 24' 49" W, 358.65 feet; thence along a curve to the left having a radius of 931.00 feet through a central angle of 1 55' 58" for an arc length of 31.40 feet to a point on the Westerly line of Zanker Road; thence along said Westerly line S 7 05' 54" E., 546.38 feet to the Southerly line of said parcel described in said deed recorded July 26, 1984; thence along said Southerly line S. 88 44' 54" W., 72.55 feet; thence Northwesterly along a non-tangent curve to the right having a radius of 226.00 feet whose radius point bears N. 0 26' 07" E., through a central angle of 67 10' 28" for an arc length of 264.97 feet to a point of reverse curvature; thence along a curve to the left having a radius of 173.00 feet through a central angle of 42 17' 12" for an arc length of 127.68 feet; thence N. 64 40' 37" W. 358.91 feet; thence along a curve to the left having a radius of 297.00 feet through a central angle of 31 13' 08" for an arc length of 161.83 feet; thence S. 84 06' 15" W., 709.89 feet; thence along a curve to the right having a radius of 2053.00 feet through a central angle of 6 03' 43" for an arc length of 217.71 feet; thence N. 89 50' 02" W., 1574.68 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence S. 0 09' 58" W., 247.88 feet; thence along curve to the right having a radius of 177.00 feet through a central angle of 37 22' 50" for an arc length of 115.48 feet to said Southerly line, being also the Northwesterly corner of Parcel 1 shown on the Parcel Map recorded in Book 531 of Maps at page 42 Santa Clara County Records; thence along said Southerly line S. 88 44' 54" W., 69.29 feet; thence leaving said line N. 37 32' 48" E., 43.41 feet; thence along a curve to the left having a radius of 123.00 feet through a central angle of 37 22' 50" for an arc length of 80.25 feet; thence N. 0 09' 58" E., 247.88 feet; thence along a curve to the left having a radius of 50.00 feet through a central angle of 90 00' 00" for an arc length of 78.54 feet; thence N. 89 50' 02" W., 365.69 feet; thence along a curve to the left having a radius of 280.00 feet through a central angle of 45 24' 36" for an arc length of 221.92 feet; thence S. 44 45' 22" W., 532.74 feet to the Southwesterly line of said Parcel 4; thence along said Southwesterly N. 45 14' 38" W., 27.00 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion described in the Grant Deed to The City of San Jose, a municipal corporation, recorded August 20, 1987 in Book K267, page 162 Official Records, and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, State of California being a portion of the parcel of land described in the Deed recorded July 26, 1984 in Book I749 of Official Records, at page 539, Santa Clara County Records, being more particularly described as follows: Beginning at the Northeasterly corner of said parcel, said corner being on the Westerly line of Zanker Road and Southerly line of Highway 237; thence along the Easterly line of said Parcel, S. 7 05' 54" E. 99.01 feet; thence Northerly along a non-tangent curve to the left having a radius of 931.00 feet whose radius point bears S. 79 08' 59" W. through a central angle of 3 39' 23" for an arc length of 59.41 feet to a point of compound curvature; thence along a curve to the left having a radius of 43.00 feet through a central angle of 85 24' 20" for an arc length of 64.10 feet to the Northerly line of said Parcel; thence along said Northerly line N. 60 05' 16" E, 50.59 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: All that certain real property situate in the City of San Jose, County of Santa Clara, described as follows: Beginning at the Northwest corner of Parcel 3 as described in the Deed from Highway 237 Associates, a California general partnership, to John Arrillaga, et al, recorded October 21, 1985 in Book J492 of Official Records, at page 1708, Santa Clara County Records; thence from said point of beginning, along the Northerly prolongation of the Westerly line of said Parcel 3, N. 9 29' 16" W., 11.25 feet; thence leaving said Northerly prolongation N. 88 43' 01" E., 202.59 feet; thence N. 89 49' 56" E. 330.95 feet; thence N. 0 58' 44" E., 6.61 feet to a point in the Southerly line of that certain 6.465 acre parcel described in the Deed from Edward S.J. Cali, et al, to the State of California; recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records; thence along said Southerly line S 89 01' 16" E., 1954.77 feet; thence leaving said Southerly line S. 86 14' 18" E., 317.01 feet to a point in the general Northerly line of the 6.474 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York corporation to the City of San Jose, a municipal corporation of the State of California recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence along said general Northerly line the following courses; S 84 55' 33" W. 51.74 feet; from a tangent bearing of S. 84 64' 26" W. along a curve to the right with a radius of 1999.89 feet, through a central angle of 6 03' 42" for an arc length of 211.58 feet N. 89 01' 32" W. 2099.03 feet and from a tangent bearing of N. 89 01' 57" W., along a curve to the left with a radius of 324.98 feet, through a central angle of 43 13' 13" for an arc length of 245.14 feet to the Southeasterly corner of said Parcel 3; thence along the Easterly line of said Parcel 3 N. 0 58' 29" E., 88.17 feet to the Northeast corner of said Parcel 3; thence along the Northerly line of said Parcel 3 N. 89 01' 31" W., 218.48 feet to the point of beginning. ALSO EXCEPTING THEREFROM: That portion thereof as shown in that Final Order of Condemnation recorded March 30, 1994 in Book N373, page 560, Official Records and all that portion lying thereof and being more particularly described as follows: Beginning at the Northwest corner of that certain 0.019 acre parcel described in the Deed from Metropolitan Life Insurance Company, a New York Corporation, to the City of San Jose, a municipal corporation of the State of California, recorded August 20, 1987 in Book K267 of Official Records at page 162 Santa Clara County Records; thence from said point of beginning, along the Southerly line of that certain 6.465 acre parcel of land described in the Deed from Edward S.J. Cali, et al to the State of California, recorded February 17, 1970 in Book 8830 of Official Records at page 352 Santa Clara County Records, the following courses: S 80 55' 58" W. 1034.16 feet; along a tangent curve to the right with a radius of 1395.00 feet, through a central angle of 16 09' 23" for an arc length of 393.37 feet and N. 89 01' 16" W. 275.13 feet; thence leaving said Southerly line S. 86 14' 18" E. 317.01 feet to a point in a Northerly line of that certain 6.474 acre parcel described in said Deed to the City of San Jose; thence along said Northerly line the following courses: N. 84 55' 33" E. 658.09 feet and along a tangent curve to the right with a radius of 349.98 feet, through a central angle of 0 20' 33" for an arc length of 2.09 feet; thence leaving said Northerly line N. 85 16' 06" E. 587.33 feet; thence along a tangent curve to the right with a radius of 15.00 feet, through a central angle of 75 05' 51" for an arc length of 19.66 feet; thence S. 19 35' 03" E. 467.07 feet; thence S. 49 41' 05 W. 25.15 feet to a point in said Northerly line; thence along said Northerly line and a Westerly line of said 6.474 acre parcel the following courses: from a tangent bearing of S. 77 14' 33" E along a curve to the left with a radius of 43.00 feet, through a central angle of 106 08' 43" for an arc length of 79.66 feet to a point of reverse curvature; thence along a tangent curve to the right with a radius of 1064.94 feet, through a central angle of 2 47' 46" for an arc length of 51.97 feet; thence N. 0 35' 30" W. 358.63 feet; thence along a tangent curve to the left with a radius of 830.95 feet, through a central angle of 1 55' 59" for an arc length of 31.41 feet to the Northeast corner of said 6.474 acre parcel; thence along the Northerly prolongation of the Easterly line of said 6.474 acre parcel N. 6 16' 05" W. 121.98 feet to the most Southerly corner of said 0.019 acre parcel; thence along the Westerly line of said 0.019 acre parcel the following courses: from a tangent bearing of N. 10 01' 13" W. along a curve to the left with a radius of 930.95 feet, through a central angle of 3 39' 22" for an arc length of 59.41 feet; thence from a tangent bearing of N. 13 40' 35" W. along a curve to the left with a radius of 43.00 feet, through a central angle of 85 23' 27" for an arc length of 64.09 feet to the point of beginning. PARCEL SIX: All of Parcel Two as shown upon that Parcel Map which filed for record in the Office of the Recorder of the County of Santa Clara, State of California on July 13, 1984 in Book 531 of Maps, at pages 41 and 42. APN: 097-03-59,79,80,84,85,86,87,88,90,93,102,103,104 ARB: 097-3-x5,x6,8,9,x15,x16,20,21,25.1,25.2 Exhibit E Acknowledgment of Disclaimer of Representations and Warranties THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "Certificate") is made as of ___________________, ____, by [3COM or the Applicable Purchaser, as the case may be], a ___________________ ("Grantee"). Contemporaneously with the execution of this Certificate, BNP Leasing Corporation, a Delaware corporation ("BNPLC"), is executing and delivering to Grantee (1) a Corporation Grant Deed and (2) a Bill of Sale, Assignment of Contract Rights and Intangible Assets (the foregoing documents and any other documents to be executed in connection therewith are herein called the "Conveyancing Documents" and any of the properties, rights or other matters assigned, transferred or conveyed pursuant thereto are herein collectively called the "Subject Property"). Notwithstanding any provision contained in the Conveyancing Documents to the contrary, Grantee acknowledges that BNPLC makes no representations or warranties of any nature or kind, whether statutory, express or implied, with respect to environmental matters or the physical condition of the Subject Property, and Grantee, by acceptance of the Conveyancing Documents, accepts the Subject Property "AS IS," "WHERE IS," "WITH ALL FAULTS" and without any such representation or warranty by Grantor as to environmental matters, the physical condition of the Subject Property, compliance with subdivision or platting requirements or construction of any improvements. Without limiting the generality of the foregoing, Grantee hereby further acknowledges and agrees that warranties of merchantability and fitness for a particular purpose are excluded from the transaction contemplated by the Conveyancing Documents, as are any warranties arising from a course of dealing or usage of trade. Grantee hereby assumes all risk and liability (and agrees that BNPLC shall not be liable for any special, direct, indirect, consequential, or other damages resulting or arising from or relating to the ownership, use, condition, location, maintenance, repair, or operation of the Subject Property, except for damages proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of BNPLC, its agents or employees. As used in the preceding sentence, "Active Negligence" of a party means, and is limited to, the negligent conduct of activities actually on or about the Property by that party in a manner that proximately causes actual bodily injury or property damage to be incurred. "Active negligence" shall not include (1) any negligent failure of BNPLC to act when the duty to act would not have been imposed but for BNPLC's status as owner of the Subject Property or as a party to the transactions pursuant to which BNPLC is delivering this instrument (the "Applicable Transactions"), (2) any negligent failure of any other party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to BNPLC or participation or facilitation in any manner, directly or indirectly, of the Applicable Transactions, or (3) the exercise in a lawful manner by BNPLC (or any party lawfully claiming through or under BNPLC) of any remedy provided in connection with the Applicable Transactions. The provisions of this Certificate shall be binding on Grantee, its successors and assigns and any other party claiming through Grantee. Grantee hereby acknowledges that BNPLC is entitled to rely and is relying on this Certificate. EXECUTED as of ________________, ____. ____________________, a____________________ By: Name: Title: Exhibit F Documentary Transfer Tax Request ACCOUNTABLE FORM #____________________ DATE:____________________ To: Santa Clara County Recorder Subject: REQUEST THAT DOCUMENTARY TRANSFER TAX DECLARATION BE MADE IN ACCORDANCE WITH REVENUE CODE 11932. Re: Instrument Title: Corporation Grant Deed Name of Party Conveying Title: BNP Leasing Corporation The Documentary Transfer Tax is declared to be in the amount of $_______________ for the referenced instrument and is: __Computed on full value of property conveyed. __Computed on full value less liens/encumbrances remaining thereon at time of sale. This separate declaration is made in accordance with _________________________________. It is requested that the amount paid be indicated on the face of the document after the permanent copy has been made. Sincerely, Individual (or his agent) who made, signed or issued instrument PART I RECORDING REFERENCE DATA: Serial #____________ Date Recorded____________________ SEPARATE PAPER AFFIXED TO INSTRUMENT: "Tax paid" indicated on the face of instrument and the separate request (DRA 3-A) was affixed for Recorder by: __________________________________ Date______________ Documentary Transfer Tax Collector Witnessed by:_____________________ Date______________ Mail Clerk (Note: Prepare photo for Recorder file.) PART II ACCOUNTABLE FORM # REFERENCE DATA: Title: Serial: ____________ Date:_______________ INSTRUCTIONS: 1. This slip must accompany document. 2. Mail Clerk hand carry document to Tax Collector to indicate the amount of tax paid. Exhibit G SECRETARY'S CERTIFICATE The undersigned,____________________ Secretary of BNP Leasing Corporation, a Delaware corporation (the "Corporation"), hereby certifies as follows: 1. That he is the duly, elected, qualified and acting Secretary [or Assistant Secretary] of the Corporation and has custody of the corporate records, minutes and corporate seal. 2. That the following named persons have been properly designated, elected and assigned to the office in the Corporation as indicated below; that such persons hold such office at this time and that the specimen signature appearing beside the name of such officer is his or her true and correct signature. [The following blanks must be completed with the names and signatures of the officers who will be signing the deed and other Required Documents on behalf of the Corporation.] Name Title Signature 3. That the resolutions attached hereto and made a part hereof were duly adopted by the Board of Directors of the Corporation in accordance with the Corporation's Articles of Incorporation and Bylaws. Such resolutions have not been amended, modified or rescinded and remain in full force and effect. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Corporation on this ______, day of ____________, ____. _________________________ [signature] CORPORATE RESOLUTIONS OF BNP LEASING CORPORATION WHEREAS, pursuant to that certain Purchase Agreement (herein called the "Purchase Agreement") dated as of November ___, 1996, by and between BNP Leasing Corporation (the "Corporation") and [3COM OR THE APPLICABLE PURCHASER AS THE CASE MAY BE] ("Purchaser"), the Corporation agreed to sell and Purchaser agreed to purchase or cause the Applicable Purchaser (as defined in the Purchase Agreement) to purchase the Corporation's interest in the property (the "Property") located in Santa Clara, California more particularly described therein. NOW THEREFORE, BE IT RESOLVED, that the Board of Directors of the Corporation, in its best business judgment, deems it in the best interest of the Corporation and its shareholders that the Corporation convey the Property to Purchaser or the Applicable Purchaser pursuant to and in accordance with the terms of the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed in the name and on behalf of the Corporation to cause the Corporation to fulfill its obligations under the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed to take or cause to be taken any and all actions and to prepare or cause to be prepared and to execute and deliver any and all deeds and other documents, instruments and agreements that shall be necessary, advisable or appropriate, in such officer's sole and absolute discretion, to carry out the intent and to accomplish the purposes of the foregoing resolutions. Exhibit H BNP LEASING CORPORATION 717 N. HARWOOD SUITE 2630 DALLAS, TEXAS 75201 ____________, ______ [Title Insurance Company] _________________ _________________ _________________ Re: Recording of Grant Deed to [3COM or the Applicable Purchaser] ("Purchaser") Ladies and Gentlemen: BNP Leasing Corporation has executed and delivered to Purchaser a Grant Deed in the form attached to this letter. You are hereby authorized and directed to record the Grant Deed at the request of Purchaser. Sincerely, Exhibit I FIRPTA STATEMENT Section 1445 of the Internal Revenue Code of 1986, as amended, provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. Sections 18805, 18815 and 26131 of the California Revenue and Taxation Code, as amended, provide that a transferee of a California real property interest must withhold income tax if the transferor is a nonresident seller. To inform [3COM or the Applicable Purchaser] (the "Transferee") that withholding of tax is not required upon the disposition of a California real property interest by transferor, BNP Leasing Corporation (the "Seller"), the undersigned hereby certifies the following on behalf of the Seller: 1. The Seller is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. The United States employer identification number for the Seller is _____________________; 3.The office address of the Seller is ______________ __________________________________________. [Note: BNPLC MUST INCLUDE EITHER ONE, BUT ONLY ONE, OF THE FOLLOWING REPRESENTATIONS IN THE FIRPTA STATEMENT, BUT IF THE ONE INCLUDED STATES THAT BNPLC IS DEEMED EXEMPT FROM CALIFORNIA INCOME AND FRANCHISE TAX, THEN BNPLC MUST ALSO ATTACH A WITHHOLDING CERTIFICATE FROM THE CALIFORNIA FRANCHISE TAX BOARD EVIDENCING THE SAME: 4. The Seller is qualified to do business in California. OR 4. The Seller is deemed to be exempt from the withholding requirement of California Revenue and Taxation Code Section 26131(e), as evidenced by the withholding certificate from the California Franchise Tax Board which is attached.] The Seller understands that this certification may be disclosed to the Internal Revenue Service and/or to the California Franchise Tax Board by the Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. The Seller understands that the Transferee is relying on this affidavit in determining whether withholding is required upon said transfer. The Seller hereby agrees to indemnify and hold the Transferee harmless from and against any and all obligations, liabilities, claims, losses, actions, causes of action, demands, rights, damages, costs, and expenses (including but not limited to court costs and attorneys' fees) incurred by the Transferee as a result of any false misleading statement contained herein. Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of the Seller. Dated: ___________, ____. By: Name: Title: [North First Street Property] </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CPB

https://www.sec.gov/Archives/edgar/data/16732/0000893220-97-000521.txt

-----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, J/qlpquzSVHtbCinWDyPNH/h1fqpFGQD5q2j8inEMwrF6XDUKZJF0ZTASgfd/1Ld o4uBKL02Ojg1OHiK9dzrtA== <SEC-DOCUMENT>0000893220-97-000521.txt : 19970312 <SEC-HEADER>0000893220-97-000521.hdr.sgml : 19970312 ACCESSION NUMBER: 0000893220-97-000521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970126 FILED AS OF DATE: 19970311 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMPBELL SOUP CO CENTRAL INDEX KEY: 0000016732 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 210419870 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0729 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03822 FILM NUMBER: 97554729 BUSINESS ADDRESS: STREET 1: CAMPBELL PL CITY: CAMDEN STATE: NJ ZIP: 08103 BUSINESS PHONE: 6093424800 MAIL ADDRESS: STREET 1: CAMPBELL PL CITY: CAMDEN STATE: NJ ZIP: 08103 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q CAMPBELL SOUP COMPANY <TEXT> <PAGE> 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER JANUARY 26, 1997 1-3822 CAMPBELL SOUP COMPANY NEW JERSEY 21-0419870 STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. CAMPBELL PLACE CAMDEN, NEW JERSEY 08103-1799 PRINCIPAL EXECUTIVE OFFICES TELEPHONE NUMBER: (609) 342-4800 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 . --- --- THERE WERE 232,489,098 SHARES OF CAPITAL STOCK OUTSTANDING AS OF MARCH 7, 1997. ================================================================================ <PAGE> 2 PART I. FINANCIAL INFORMATION CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (million dollars except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------- ---------------------- JANUARY January JANUARY January 26, 1997 28, 1996 26, 1997 28, 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $2,317 $2,217 $4,369 $4,207 - ------------------------------------------------------------------------------------------ Costs and expenses Cost of products sold 1,227 1,245 2,339 2,388 Marketing and selling expenses 486 438 882 797 Administrative expenses 93 78 176 159 Research and development expenses 19 21 37 41 Other expense 29 20 67 45 Restructuring charges -- -- 216 -- - ------------------------------------------------------------------------------------------ Total costs and expenses 1,854 1,802 3,717 3,430 - ------------------------------------------------------------------------------------------ Earnings before interest and taxes 463 415 652 777 Interest, net 45 31 74 66 - ------------------------------------------------------------------------------------------ Earnings before taxes 418 384 578 711 Taxes on earnings 142 127 214 235 - ------------------------------------------------------------------------------------------ Net earnings $ 276 $ 257 $ 364 $ 476 ========================================================================================== Per share Net earnings $ 1.18 $ 1.03 $ 1.51 $ 1.91 ========================================================================================== Dividends $ .385 $ .345 $ .730 $ .655 ========================================================================================== Weighted average shares outstanding 233 249 241 249 ========================================================================================== See Notes To Financial Statements </TABLE> -2- <PAGE> 3 CAMPBELL SOUP COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (million dollars) <TABLE> <CAPTION> JANUARY July 26, 1997 28, 1996 -------- -------- <S> <C> <C> Current assets Cash and cash equivalents $ 31 $ 34 Accounts receivable 930 618 Inventories 695 739 Other current assets 219 227 - ------------------------------------------------------------------------------- Total current assets 1,875 1,618 - ------------------------------------------------------------------------------- Plant assets, net of depreciation 2,667 2,681 Intangible assets, net of amortization 1,932 1,808 Other assets 531 525 - ------------------------------------------------------------------------------- Total assets $ 7,005 $ 6,632 =============================================================================== Current liabilities Notes payable $ 1,791 $ 865 Payable to suppliers and others 511 568 Accrued liabilities 847 593 Dividend payable 90 86 Accrued income taxes 200 117 - ------------------------------------------------------------------------------- Total current liabilities 3,439 2,229 - ------------------------------------------------------------------------------- Long-term debt 938 744 Nonpension postretirement benefits 459 452 Other liabilities, including deferred income taxes of $266 and $274 481 465 - ------------------------------------------------------------------------------- Total liabilities 5,317 3,890 - ------------------------------------------------------------------------------- Shareowners' equity Preferred stock; authorized 40 shares; none issued -- -- Capital stock, $.075 par value; authorized 280 shares; issued 271 shares 20 20 Capital surplus 267 228 Earnings retained in the business 3,400 3,211 Capital stock in treasury, at cost (2,021) (779) Cumulative translation adjustments 22 62 - ------------------------------------------------------------------------------- Total shareowners' equity 1,688 2,742 - ------------------------------------------------------------------------------- Total liabilities and shareowners' equity $ 7,005 $ 6,632 =============================================================================== See Notes to Financial Statements </TABLE> -3- <PAGE> 4 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (million dollars) <TABLE> <CAPTION> Six Months Ended ---------------------- JANUARY January 26, 1997 28, 1996 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 364 $ 476 Non-cash charges to net earnings Restructuring charges 216 -- Depreciation and amortization 160 159 Deferred taxes (64) 4 Other, net 65 49 Changes in working capital Accounts receivable (289) (195) Inventories 74 (8) Other current assets and liabilities 51 41 - --------------------------------------------------------------------------------- Net cash provided by operating activities 577 526 - --------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of plant assets (133) (165) Sales of plant assets 21 7 Businesses acquired (238) (142) Sales of businesses 73 45 Net change in other assets and liabilities (19) (5) - --------------------------------------------------------------------------------- Net cash used in investing activities (296) (260) - --------------------------------------------------------------------------------- Cash flows from financing activities: Long-term borrowings 300 221 Repayments of long-term borrowings (4) (27) Short-term borrowings 1,019 58 Repayments of short-term borrowings (196) (347) Dividends paid (175) (155) Treasury stock purchased (1,235) (40) Treasury stock issued 20 34 - --------------------------------------------------------------------------------- Net cash used in financing activities (271) (256) - --------------------------------------------------------------------------------- Effect of exchange rate changes on cash (13) (7) - --------------------------------------------------------------------------------- Net change in cash and cash equivalents (3) 3 Cash and cash equivalents - beginning of period 34 53 - --------------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 31 $ 56 ================================================================================= See Notes to Financial Statements </TABLE> -4- <PAGE> 5 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (unaudited) (million dollars) <TABLE> <CAPTION> Earnings Capital Retained Stock Cumulative Total Preferred Capital Capital in the in Translation Shareowners' Stock Stock Surplus Business Treasury Adjustments Equity --------- ------- ------- ---------- -------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at July 30, 1995 $ - $20 $165 $2,755 $(550) $78 $2,468 Net earnings 476 476 Cash dividends ($.655 per share) (163) (163) Treasury stock purchased (38) (38) Treasury stock issued under Management incentive and Stock option plans 32 11 43 Translation adjustments (53) (53) - ------------------------------------------------------------------------------------------------------------------------- Balance at January 28, 1996 $ - $20 $197 $3,068 $(577) $25 $2,733 ========================================================================================================================= BALANCE AT JULY 28, 1996 $ - $20 $228 $3,211 $(779) $62 $2,742 NET EARNINGS 364 364 CASH DIVIDENDS ($.730 PER SHARE) (175) (175) TREASURY STOCK PURCHASED (1,235) (1,235) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 39 (7) 32 TRANSLATION ADJUSTMENTS (40) (40) - ------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 26, 1997 $ - $20 $267 $3,400 $(2,021) $22 $1,688 ========================================================================================================================= </TABLE> Changes in Number of Shares (unaudited) (thousands of shares) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- Issued Outstanding In Treasury ------ ----------- ----------- <S> <C> <C> <C> Balance at July 30, 1995 271,245 249,231 22,014 Treasury stock purchased (833) 833 Treasury stock issued under Management incentive and Stock option plans 1,281 (1,281) - --------------------------------------------------------------------------------------------------------------------------- Balance at January 28, 1996 271,245 249,679 21,566 =========================================================================================================================== BALANCE AT JULY 28, 1996 271,245 247,228 24,017 TREASURY STOCK PURCHASED (15,445) 15,445 TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 759 (759) - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 26, 1997 271,245 232,542 38,703 =========================================================================================================================== See Notes to Financial Statements </TABLE> -5- <PAGE> 6 CAMPBELL SOUP COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) (millions) (a) The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the indicated periods. All such adjustments are of a normal recurring nature. (b) Net earnings per share are based on the weighted average shares outstanding during the applicable periods. The potential dilution from the exercise of stock options is not material. (c) Inventories <TABLE> <CAPTION> JANUARY July 26, 1997 28, 1996 -------- -------- <S> <C> <C> Raw materials, containers and supplies $292 $323 Finished products 446 461 - ------------------------------------------------------------------------------- 738 784 Less - Adjustment of certain inventories to LIFO basis 43 45 - ------------------------------------------------------------------------------- $695 $739 =============================================================================== </TABLE> (d) Restructuring Program A special charge of $216 million, $160 million after tax or $.65 per share, was recorded in the first quarter of fiscal 1997 to cover the costs of the restructuring program approved September 4, 1996 by the company's Board of Directors. The restructuring program is designed to provide funding for the company's strategic growth plan by reconfiguring or closing various plants to improve operational efficiency, reducing administrative and operational staff functions and divesting non-strategic, under-performing businesses with sales of approximately $275 million. The restructuring includes the elimination of approximately 2,100 administrative and operational positions from the company's worldwide workforce. Restructuring charges include approximately $113 million in cash charges primarily related to severance and employee benefit costs, substantially all of which will be paid in fiscal 1997. The balance of the restructuring charge relates to non-cash charges for the write down of plant assets and estimated losses on the disposition of plant assets and business divestitures. The company plans to complete the program in fiscal 1998. A summary of the original reserves and activity through January 26, 1997 follows: -6- <PAGE> 7 <TABLE> <CAPTION> BALANCE Original JANUARY Reserves Activity 26, 1997 -------- -------- -------- <S> <C> <C> <C> Loss on asset dispositions and divestitures $108 $ (9) $ 99 Severance and benefits 93 (14) 79 Other 15 -- 15 - ------------------------------------------------------------------------------------------ Total $216 $(23) $193 ========================================================================================== </TABLE> (e) Subsequent Event The Executive Committee of the Board of Directors of Campbell Soup Company authorized a 2-for-1 split of Capital Stock, effective February 24, 1997, to be distributed to shareowners on March 17, 1997. After giving effect to the split, earnings per share would have been reported as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- January January January January 26, 1997 28, 1996 26, 1997 28, 1996 -------- -------- -------- -------- <S> <C> <C> <C> $.59 $.51 $.76 $.96 </TABLE> In addition, as of January 26, 1997, the par value of Capital Stock would have been $.0375, authorized shares 560 and issued shares 542. -7- <PAGE> 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAMPBELL SOUP COMPANY RESULTS OF OPERATIONS OVERVIEW Campbell achieved record sales and earnings for the second quarter ended January 26, 1997. Net sales for the quarter were $2.32 billion, up 5% from the comparable period last year. Earnings per share increased 15% to a quarterly record of $1.18, up from $1.03 in the second quarter last year. Net earnings rose 7% to $276 million from $257 million a year ago. Sales for the six months increased 4% to $4.37 billion, versus $4.21 billion for the comparable period last year. Net earnings for the six months of $364 million were down from $476 million last year and earnings per share declined to $1.51 from $1.91 due to a special charge recorded in the first quarter to cover the costs of a restructuring program. Before the special charge, net earnings increased 10% and earnings per share increased 14% versus the prior year. RESULTS BY DIVISION SECOND QUARTER U.S.A. - U.S. sales for the quarter increased 1% to $1.38 billion from $1.36 billion last year. The sales increase was primarily driven by 4% growth in wet soup volume. Operating earnings rose 14% to $364 million. Wet soup volume was led by traditional Red & White icons, Chicken Noodle, Tomato and Cream of Mushroom, the continued success of 98% fat-free cream soups and the new Joseph A. Campbell premium soup in glass. Strong sales and volume performances were also achieved by "V-8", "Swanson" broth and "Franco-American" pasta featuring new "Superiore" for the adult market. Food Service continued its growth behind the new frozen Campbell's Restaurant Soups, "Prego" lasagna for the home-meal replacement category and "Pace" Mexican sauces. BAKERY & CONFECTIONERY - Bakery & Confectionery sales increased 5% to $490 million from $466 million in the second quarter of last year. The sales increase was driven by Pepperidge Farm cracker and cookie volume and Godiva Chocolatier volume. Operating earnings rose 10% to $73 million versus $67 million last year. Pepperidge Farm's "Goldfish" crackers continued their phenomenal growth with a more than 50% sales volume increase, responding to expansion into the grocery store snack aisle and new channels such as club stores. "Milano" cookies reported substantial new growth, fueled by increased marketing and advertising. Godiva, boosted by excellent holiday season and Valentine's Day sales, also reported strong volume growth and increased profitability. -8- <PAGE> 9 INTERNATIONAL GROCERY - International Grocery reported sales of $470 million, a 13% increase from last year. The sales increase was primarily due to the first quarter acquisition of Erasco, Germany's leading soup company. Operating earnings were $42 million, unchanged from the prior year. Strong soup volume gains in Asia, Canada and Japan were driven by consumer marketing investments, a key element of the company's growth plan for international businesses. Earnings were impacted by those marketing investments and by weak performance of specialty distribution companies in Europe. SIX MONTHS U.S.A. - U.S. sales for the six months were $2.62 billion versus $2.55 billion last year. The sales increase was primarily driven by 4% growth in wet soup volume. Operating earnings after the special charge were $553 million versus $608 million last year. Before the charge, operating earnings grew 16% to $705 million. Red & White condensed soup, led by icons Chicken Noodle, Tomato and Cream of Mushroom, continued its strong volume growth. Other strong sales and volume performers included "Swanson" broth, "V-8", "Franco-American" pasta, "Superiore," Food Service's frozen Campbell's Restaurant Soups and "Prego" lasagna for the home-meal replacement category. BAKERY & CONFECTIONERY - Bakery & Confectionery sales grew 6% to $955 million from $901 million in the first six months. The sales increase was driven by Pepperidge Farm and Godiva. Operating earnings after the special charge were $74 million versus $120 million last year. Before the charge, operating earnings increased 9% to $130 million. Pepperidge Farm's "Goldfish" crackers and "Milano" cookies volume and Godiva's holiday season and Valentine's Day record sales have led the way for the first six months. INTERNATIONAL GROCERY - International Grocery reported sales of $845 million in the first six months, a 6% increase over the prior year. The sales increase was primarily due to the acquisition of Erasco. Operating earnings after the special charge declined to $64 million from $79 million last year. Before the charge, operating earnings were $72 million down 9% from last year. Wet soup volume outside the U.S. was up 13% led by Erasco, Asia, Canada and Japan. Although the German grocery business sales and earnings trends have improved over the prior quarter, sales and earnings still reflect a decline versus the prior year. In addition, earnings were impacted by consumer marketing investments and by weak performance of the specialty distribution companies. -9- <PAGE> 10 STATEMENTS OF EARNINGS Net sales increased 5% for the second quarter and 4% for the six months, compared to the same periods last year. Sales of ongoing businesses are up 8% for the quarter and 7% for the six months. The gains were driven principally by worldwide wet soup volume gains of 7% for the quarter and 6% for the first six months. Strong volume gains were achieved in U.S. condensed soup, Asia, Japan and Canada. Gross margins improved 3.2 percentage points to 47.1% in the second quarter and 46.5% for the six month period. Improvements resulted primarily from higher selling prices and on-going cost productivity programs. Marketing and selling expenses increased 11% for the second quarter and six month period, over similar periods a year ago. The increases are attributable to the launch of 98% fat-free cream soups and premium soup in glass in the U.S., marketing efforts at Arnotts and Pepperidge Farm and advertising for "Franco-American" pasta "Superiore". Overall these expenses have increased 1.2 and 1.3 percentage points for the quarter and first half, respectively, as a percentage of sales versus last year. Administrative expenses were up 19% for the quarter and 11% for the six month period versus last year. The increases are attributable principally to incentive compensation and consulting accruals. Other expense is up due to the effect of the increase in Campbell's share price on the company's long-term incentive plan obligations. The increase in interest expense is primarily due to financing costs associated with the company's share repurchase program. The effective tax rate for the first six months was 37% compared to 33% last year, principally due to the tax effect of the restructuring charges. Before the special charge, the company expects its effective tax rate for fiscal 1997 to approximate 34% due to tax planning strategies, including utilization of tax loss carryforwards. SPECIAL CHARGE On September 4, 1996 the company's Board of Directors approved a special charge of $216 million ($160 million after-tax or $.65 per share) to cover the costs of a restructuring program. The restructuring program is designed to provide funding for the company's strategic growth plan by reconfiguring or closing various plants to improve operational efficiency, reducing administrative and operational staff functions and divesting non-strategic, under-performing businesses with sales of approximately $275 million. The program includes the elimination of approximately 2,100 administrative and operational positions from the company's worldwide workforce. -10- <PAGE> 11 Restructuring charges include approximately $113 million in cash charges primarily related to severance and employee benefits, substantially all of which will be paid in fiscal 1997. The balance of the charge relates to non-cash charges for the write down of plant assets and the estimated losses on the disposition of assets and divestitures. The restructuring program is expected to generate approximately $200 million in savings over the next two years. These savings are from reductions in employee salaries and benefits, plant overhead, depreciation and amortization. The company plans to complete the program in fiscal 1998 and cash outflows are not expected to adversely affect the company's liquidity. See Note (d) of the Consolidated Financial Statements for further discussion of the restructuring program. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was up 10% to $577 million due to the strong underlying operating earnings growth and continued tight management of inventory levels. Capital expenditures were $133 million, a decline of $32 million from the prior year, due to the completion of the Arnotts Huntingwood manufacturing facility. Capital expenditures are projected to approximate $375 million in fiscal 1997. During the year, the company acquired Erasco, Germany's leading soup company, for approximately $205 million. In addition, Arnotts acquired the assets of Kettle Chip Company, a Sydney, Australia based potato chip concern. During the first six months, the company completed its "Dutch Auction" tender offer by repurchasing 13.5 million shares at $80 per share. In addition, the company repurchased approximately 1.9 million shares in the open market bringing the total shares repurchased to 15.4 million versus 833,000 shares during the same period in fiscal 1996. The repurchases were funded by short-term borrowings of approximately $900 million and a long-term debt issuance of $300 million at 6.9% due in fiscal 2007. RECENT DEVELOPMENTS In fiscal 1996, the Financial Accounting Standards Board issued FAS 123 -- "Accounting for Stock-Based Compensation". The standard allows the option of recording an expense for the fair market value of stock options and similar equity instruments issued to employees or disclosing the "proforma" impact on net earnings and earnings per share. The company will comply with the disclosure requirements for the fiscal year ending August 3, 1997. There will be no effect on reported net earnings and earnings per share. -11- <PAGE> 12 PART II ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the legal proceedings as reported in Campbell's Form 10-Q for the quarter ended October 27, 1996. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. Campbell's Annual Meeting of Shareowners was held on November 21, 1996. c. The matters voted upon and the results of the vote are as follows: Election of Directors <TABLE> <CAPTION> ================================================================= Number of Shares -------------------------------- Name For Withheld ================================================================= <S> <C> <C> Alva A. App 202,599,008 398,579 Edmund M. Carpenter 202,614,818 382,769 Bennett Dorrance 202,617,764 379,823 Thomas W. Field, Jr. 202,608,854 388,733 Kent B. Foster 202,506,827 490,760 Harvey Golub 202,598,891 398,696 David W. Johnson 202,583,691 413,896 David K. P. Li 195,171,760 7,825,827 Philip E. Lippincott 202,577,037 420,550 Mary Alice Malone 202,612,618 384,969 Charles H. Mott 202,611,903 385,684 George M. Sherman 202,599,289 398,298 Donald M. Stewart 202,591,041 406,546 George Strawbridge, Jr. 202,600,241 397,346 Charlotte C. Weber 202,609,720 387,867 ================================================================= </TABLE> -12- <PAGE> 13 Ratification of Appointment of Auditors <TABLE> <CAPTION> =============================================================================================== Broker For Against Abstentions Non-Votes - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Ratification of Appointment of Auditors 202,461,615 195,157 340,815 -0- =============================================================================================== </TABLE> ITEM 5. OTHER INFORMATION a. Stock Split On February 11, 1997, the Executive Committee of the Board of Directors of Campbell Soup Company adopted resolutions amending the Restated Certificate of Incorporation to increase the number of authorized shares of capital stock from 280 million, $0.075 par value per share, to 560 million, $0.0375 par value per share, and authorized a 2-for-1 stock split. The additional shares will be distributed on March 17, 1997, to shareowners of record at the close of business on February 24, 1997, the record date for the stock split. Those shareowners will receive an account statement evidencing one additional share for each share already held. Outstanding stock certificates do not have to be surrendered or exchanged. b. Cautionary Statement on Forward-Looking Statements This report contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. These statements are qualified by reference to the section "Cautionary Statement on Forward-Looking Statements" in Item 1 of the company's Annual Report on Form 10-K for the fiscal year ended July 28, 1996. See Item 1 for a description of important factors that could impact the company's strategic growth plan goals and cause actual results to differ materially from those expressed or implied in the forward-looking statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits No. --- 3 Campbell Soup Company's Restated Certificate of Incorporation, amended through February 24, 1997. -13- <PAGE> 14 4 There is no instrument with respect to long-term debt of the company that involves indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the company upon request of the Securities and Exchange Commission. 27 Financial Data Schedule. b. Reports on Form 8-K There were no reports on Form 8-K filed by Campbell during the quarter for which this report is filed. 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. CAMPBELL SOUP COMPANY Date: March 10, 1997 By:/s/JOHN M. COLEMAN ------------------------------------ John M. Coleman, Senior Vice President Law and Public Affairs Date: March 10, 1997 By:/s/BASIL L. ANDERSON ------------------------------------ Basil L. Anderson Senior Vice President - Finance Chief Financial Officer and Treasurer -14- <PAGE> 15 INDEX TO EXHIBITS Exhibit Number - -------------- 3(i) Campbell Soup Company's Restated Certificate of Incorporation, amended through February 24, 1997. 27 Financial Data Schedule. -15- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <DESCRIPTION>RESTATED CERTIFICATE OF INCORPORATION <TEXT> <PAGE> 1 EXHIBIT 3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAMPBELL SOUP COMPANY INCORPORATED IN NEW JERSEY ---------------------------------- RESTATED CERTIFICATE OF INCORPORATION ---------------------------------- As Restated December 1, 1980, and as amended through February 24, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> 2 RESTATED CERTIFICATE OF INCORPORATION OF CAMPBELL SOUP COMPANY FIRST. The name of the corporation is: CAMPBELL SOUP COMPANY SECOND. The address of the corporation's registered office is Campbell Place, Camden, New Jersey 08101. The name of the corporation's registered agent at such address, upon whom process against the corporation may be served, is John J. Furey. THIRD. The purposes for which the corporation is organized are to engage in any or all activities within the purposes for which corporations now or at any time hereafter may be organized under the New Jersey Business Corporation Act and under all amendments and supplements thereto, or any revision thereof or any statute enacted to take the place thereof, including but not limited to the following: (1) To do all kinds of agricultural, communications, construction, farming, food, mining, manufacturing, marketing, publishing, sales, service, trading, transportation and warehousing business; and to acquire, use, sell and grant licenses with respect to copyrights, trademarks, patents and other intellectual property. (2) To engage in any activities encompassed within this Article Third directly or through or with one or more subsidiaries, general or limited partnerships, joint ventures, other incorporated or unincorporated associations or entities, or individuals and to take any and all acts deemed appropriate to promote the interests thereof; and (3) To exercise as a purpose or purposes each power granted to corporations by the New Jersey Business Corporation Act or by any amendment or supplement thereto or by any statute enacted to take the place thereof, insofar as such powers authorize or may hereafter authorize corporations to engage in activities. FOURTH. The aggregate number of shares which the corporation has authority to issue is 600,000,000, consisting of 560,000,000 shares of Capital Stock, $0.0375 par value, and 40,000,000 shares of Preferred Stock issuable in one or more classes and series of any class. The shares of Preferred Stock of each class shall be without par value unless the amendment creating the class provides for a par value. 1 <PAGE> 3 The designations, relative voting, dividend, liquidation and other rights, preferences and limitations of the Preferred Stock and Capital Stock of the corporation, and the authority of the board of directors to divide the shares of the Preferred Stock in to classes or series and to determine and change the relative rights, preferences and limitations of any such class or series are as follows: A. PREFERRED STOCK (1) The board of directors is expressly authorized to adopt and to cause to be executed and filed, without further approval of the stockholders, an amendment or amendments to this Restated Certificate of Incorporation to divide any unissued shares of Preferred Stock into one or more classes and into series within any class or classes of Preferred Stock, to authorize the issuance of such shares for such consideration (not less than par value in the case of shares having a par value) as the board of directors may determine, and to determine in any one or more respects from time to time before issuance of such unissued shares; (a) the distinctive designation of such class or series and the number of shares to constitute such class or series and whether shares of such class are to have a par value and the par value of any shares which are to have a par value, provided that, unless otherwise stated in any such resolution or resolutions, such number of shares may be increased or decreased by the board of directors; (b) the annual dividend rate on the shares of such class or series and the date or dates from which dividends shall accumulate thereon as herein provided; (c) the times of redemption of the shares of such class or series and the prices which the holders of shares of such class or series shall be entitled to receive upon the redemption thereof, which prices may vary at different redemption dates and may also be different with respect to shares redeemed through the operation of any retirement or sinking fund than with respect to shares otherwise redeemed; (d) the amount which the holders of shares of such class or series shall be entitled to receive upon the voluntary or involuntary liquidation, dissolution, or winding up of the corporation; (e) whether or not the shares of such class or series shall be subject to the operation of a purchase or sinking fund, and, if so, the extent to and manner in which the fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or for other corporate purposes and the terms and provisions relative to the operation thereof; (f) whether or not the shares of such class or series shall, at the option of the holder or the corporation or both, be convertible into, or exchangeable for shares of stock of any other class or series, and if so convertible or exchangeable, the price or 2 <PAGE> 4 prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; and (g) such other preferences, rights, restrictions and qualifications as shall not be inconsistent herewith and as are permitted by the New Jersey Business Corporation Act. (2) The board of directors is expressly authorized to determine voting rights for the holders of the shares of any class or series of Preferred Stock, provided that the voting rights shall be limited to any or all of the following: (a) the right to elect, voting as a class, a maximum of two directors upon default of the equivalent of six quarterly dividends, whether or not the defaulted dividends occurred in consecutive periods, and such right will remain in effect until cumulative dividends have been paid in full or until non-cumulative dividends have been paid regularly for at least one year; (b) the right to approve, by at least a majority of the outstanding shares of the class or classes of Preferred Stock affected, any increase in the authorized number of shares of such class or classes or the creation of a class of equal rank; (c) the right to approve, by at least two-thirds of the outstanding shares of Preferred Stock, the creation of a senior equity security, provided that the board of directors may create a senior equity security without such stockholder vote if (i) stockholders authorized such action by the board of directors at the time the existing class of Preferred Stock was created or (ii) the holders of shares of the existing class of Preferred Stock previously received adequate notice of the redemption thereof, which redemption must occur within 90 days, unless all or part of the existing issue is being retired with proceeds from the sale of the new senior equity security; and (d) the right to approve, by at least two-thirds of the outstanding shares of the class of Preferred Stock affected, the adoption of any amendment to the Restated Certificate of Incorporation or the by-laws that would materially change existing terms of such class of Preferred Stock, provided that if all series of a class of Preferred Stock are not equally affected by such amendment, then such amendment shall receive the approval of two-thirds of the outstanding shares of the class and, in addition, two-thirds of the outstanding shares of the series that will have a diminished status. (3) The board of directors may also change the designation or number of shares or the relative rights, preferences and limitations of any of the shares of any theretofore established class or series of the Preferred Stock no shares of which class or series have been issued. B. CAPITAL STOCK 3 <PAGE> 5 (1) Each holder of Capital Stock of the corporation from time to time issued and outstanding shall be entitled to vote and shall have one vote for each share of Capital Stock standing in the holder's name on the books of the corporation, except with respect to matters as to which the holders of the Preferred Stock or any class or series thereof shall be entitled to vote separately as a single class as authorized in Section A of this Article FOURTH or as may be required by law. (2) Subject to the provisions of Section A of this Article FOURTH, the board of directors in its discretion may, from the assets of the corporation legally available for the payment of dividends and at such times and in such manner as determined by the board of directors, declare and pay, whether in cash, property, stock or otherwise, dividends on the Capital Stock of the corporation. (3) In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, subject to the preferential or other rights of the holders of the Preferred Stock pursuant to Section A of this Article FOURTH, the holders of the Capital Stock shall be entitled to receive ratably any and all assets remaining to be paid or distributed. C. ALL SHARES No holder of shares of any class or series of stock of the corporation shall be entitled as such, as a matter of right, to subscribe for or purchase any unissued or treasury shares of any class or series of stock, or any option rights, or securities convertible into, exchangeable for or warrants to subscribe to, stock, of any class or series whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. A stockholder may not cumulate his or her votes in an election for directors. FIFTH. The number of directors of the corporation as of November 21, 1980, is sixteen and their names and business office addresses are: Robert A. Beck The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07101 James H. Binns Armstrong World Industries, Inc. Liberty and Charlotte Streets Lancaster, Pennsylvania 17604 4 <PAGE> 6 William S. Cashel, Jr. American Telephone and Telegraph Company 195 Broadway New York, New York 10007 John T. Dorrance, Jr. Campbell Place Camden, New Jersey 08101 Henry W. Gadsden 30 Lake Road Short Hills, New Jersey 07078 Belton K. Johnson 300 Main Plaza Bldg. 114 West Commerce San Antonio, Texas 78205 J. M. Lindley Campbell Place Camden, New Jersey 08101 Claudine B. Malone Harvard University Graduate School of Business Administration Soldiers Field Boston, Massachusetts 02163 R. G. McGovern Campbell Place Camden, New Jersey 08101 William Piel, Jr. Sullivan & Cromwell 125 Broad Street New York, New York 10004 Harold A. Shaub Campbell Place Camden, New Jersey 08101 Lewis H. Van Dusen, Jr. Drinker Biddle & Reath 1100 Philadelphia National Bank Building Broad and Chestnut Streets Philadelphia, Pennsylvania 19107 Robert J. Vlasic Vlasic Foods, Inc. 710 North Woodward Bloomfield Hills, Michigan 48013 J. Page R. Wadsworth P.O. Box 211 Commerce Court Postal Station Toronto, Canada M5L 1E8 A. M. Williams Campbell Place Camden, New Jersey 08101 Sterling Wortman The Rockefeller Foundation 1133 Avenue of the Americas New York, New York 10036 5 <PAGE> 7 SIXTH. The number of directors at any time may be increased or decreased by vote of the board of directors, and in case of any such increase the board of directors shall have power to elect each such additional director to hold office until the next succeeding annual meeting of stockholders and until his or her successor shall have been elected and qualified. The board of directors, by the affirmative vote of two-thirds of the directors in office, may remove a director or directors for cause where, in the judgment of such majority, the continuation of the director or directors in office would be harmful to the interests of the corporation and may suspend the director or directors for a reasonable period pending final determination of whether cause exists for such removal. SEVENTH. The following action may be taken by the affirmative vote of two-thirds of the votes cast by the holders of all of the corporation's outstanding shares of stock entitled to vote thereon, and, in addition, if any class or series is entitled to vote thereon as a class, the affirmative vote of two-thirds of all of the votes which the holders of each such class or series are entitled to cast thereon: (1) the adoption by the stockholders of a proposed amendment of this Restated Certificate of Incorporation of the corporation; (2) the adoption by the stockholders of a proposed plan of merger or consolidation involving the corporation; (3) the approval by the stockholders of a sale, lease, exchange, or other disposition of all, or substantially all, the assets of the corporation otherwise than in the usual and regular course of business as conducted by the corporation; and (4) dissolution. EIGHTH. Except as otherwise provided by statute or by this Restated Certificate of Incorporation or the by-laws of the corporation as in each case the same may be amended from time to time, all corporate powers may be exercised by the board of directors. Without limiting the foregoing, the board of directors shall have the power, without stockholder action except where required by New Jersey law: (1) to amend the by-laws of the corporation; (2) to authorize the corporation to issue for cash or property shares of any class or series of its stock, now or hereafter authorized but unissued or held in the treasury; and 6 <PAGE> 8 (3) to authorize the borrowing of money, the issuance of bonds, debentures, notes and other obligations or evidences of indebtedness of the corporation, secured or unsecured, and the inclusion of provisions as to redeemability and convertibility into shares of any class or series of stock of the corporation or otherwise, and, as security for money borrowed or bonds, debentures, notes and other obligations or evidences of indebtedness issued by the corporation, the mortgaging or pledging of any property, real, personal, or mixed, then owned or thereafter acquired by the corporation. NINTH. The duration of the corporation is perpetual. TENTH. The effective date of this Restated Certificate of Incorporation shall be December 1, 1980. ELEVENTH. To the full extent from time to time permitted by law, no director or officer of the corporation shall be personally liable to the corporation or its stockholders for damages for breach of any duty owed to the corporation or its stockholders. Neither the amendment or repeal of this Article ELEVENTH, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article ELEVENTH, shall eliminate, reduce or have any effect on the protection afforded by this Article ELEVENTH to a director or an officer of the corporation in respect of any matter occurring, or any cause of action, suit or claim that but for this Article ELEVENTH would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> AUG-03-1997 <PERIOD-START> JUL-29-1996 <PERIOD-END> JAN-26-1997 <CASH> 31 <SECURITIES> 0 <RECEIVABLES> 992 <ALLOWANCES> 62 <INVENTORY> 695 <CURRENT-ASSETS> 1,875 <PP&E> 4,523 <DEPRECIATION> 1,856 <TOTAL-ASSETS> 7,005 <CURRENT-LIABILITIES> 3,439 <BONDS> 938 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 20 <OTHER-SE> 1,668 <TOTAL-LIABILITY-AND-EQUITY> 7,005 <SALES> 4,369 <TOTAL-REVENUES> 4,369 <CGS> 2,339 <TOTAL-COSTS> 2,339 <OTHER-EXPENSES> 919 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 77 <INCOME-PRETAX> 578 <INCOME-TAX> 214 <INCOME-CONTINUING> 364 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 364 <EPS-PRIMARY> 1.51 <EPS-DILUTED> 1.51 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CSCO

https://www.sec.gov/Archives/edgar/data/858877/0000891618-97-001083.txt

-----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, EMeyAbhHPWlgEQc+RzxCL/bedP/JV/f3XgSuFdq0tJgiOd7yAOZT/N2ZYkvbynUh VJQb4AuAYEIf6DYc3ULKkw== <SEC-DOCUMENT>0000891618-97-001083.txt : 19970311 <SEC-HEADER>0000891618-97-001083.hdr.sgml : 19970311 ACCESSION NUMBER: 0000891618-97-001083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970125 FILED AS OF DATE: 19970310 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CISCO SYSTEMS INC CENTRAL INDEX KEY: 0000858877 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770059951 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18225 FILM NUMBER: 97553929 BUSINESS ADDRESS: STREET 1: 225 WEST TASMAN DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085264000 MAIL ADDRESS: STREET 1: 225 WEST TASMAN DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134-1706 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR PERIOD ENDED JANUARY 25, 1997 <TEXT> <PAGE> 1 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 JANUARY 25, 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 0-18225 CISCO SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 77-0059951 (State or other jurisdiction (I.R.S. Employer of Identification Number) incorporation or organization) 170 West Tasman Drive San Jose, California 95134 (Address of principal executive office and zip code) (408) 526-4000 (Registrant's telephone number, including area code) 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 filing requirements for the past 90 days. YES X NO --------- -------- As of February 28, 1997 663,646,520 shares of the Registrant's common stock were outstanding. <PAGE> 2 CISCO SYSTEMS, INC. FORM 10-Q FOR THE QUARTER ENDED JANUARY 25, 1997 INDEX <TABLE> <CAPTION> Page <S> <C> <C> Facing sheet 1 Index 2 Part I. Financial information Item 1. a) Consolidated balance sheets at January 25, 1997 and July 28, 1996 3 b) Consolidated statements of operations for the three and six month periods ended January 25, 1997 and January 28, 1996 4 c) Consolidated statements of cash flows for the six month periods ended January 25, 1997 and January 28, 1996 5 d) Notes to consolidated financial statements 6 Item 2. Management's discussion and analysis of financial condition and results of operations 8 Part II. Other information 16 Signature 17 Exhibits Exhibit 3.02, Restated Bylaws of the Corporation 18 Exhibit 10.45, Employment agreement with Don LeBeau Exhibit 11.01, Computation of net income per share </TABLE> 2 <PAGE> 3 ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CISCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> January 25, July 28, 1997 1996 ----------- ----------- (Unaudited) ASSETS <S> <C> <C> Current assets: Cash and equivalents $ 332,807 $ 279,695 Short-term investments 774,673 758,489 Accounts receivable, net of allowance for doubtful accounts of $17,166 at January 25, 1997 and $21,074 at July 28, 1996 1,024,942 622,859 Inventories, net 203,721 301,188 Deferred income taxes 191,268 101,827 Prepaid expenses and other current assets 91,608 95,582 ----------- ----------- Total current assets 2,619,019 2,159,640 Investments 1,160,995 832,114 Restricted investments 247,649 228,644 Property and equipment, net 410,065 331,315 Other assets 132,316 78,519 ----------- ----------- Total assets $ 4,570,044 $ 3,630,232 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 253,406 $ 153,683 Income taxes payable 172,744 169,894 Accrued payroll and related expenses 252,419 195,197 Other accrued liabilities 269,190 250,579 ----------- ----------- Total current liabilities 947,759 769,353 Minority interest 41,192 41,257 Shareholders' equity: Preferred stock, no par value, 5,000 shares authorized: none issued or outstanding at January 25, 1997 and July 28, 1996 Common stock, no par value, 1,200,000 shares authorized: 661,616 shares issued and outstanding at January 25, 1997 and 649,284 at July 28, 1996 1,180,201 888,067 Retained earnings 2,271,002 1,777,369 Unrealized gains on marketable securities 139,147 158,848 Cumulative translation adjustments (9,257) (4,662) ----------- ----------- Total shareholders' equity 3,581,093 2,819,622 ----------- ----------- Total liabilities and shareholders' equity $ 4,570,044 $ 3,630,232 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. 3 <PAGE> 4 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------------------- --------------------------------- Jan. 25, Jan. 28, Jan. 25, Jan. 28, 1997 1996 1997 1996 ---------------------------------- --------------------------------- (Unaudited) <S> <C> <C> <C> <C> Net sales $1,592,377 $918,510 $3,027,203 $1,716,801 Cost of sales 552,519 312,315 1,053,999 580,057 ---------------- ---------------- --------------- ---------------- Gross margin 1,039,858 606,195 1,973,204 1,136,744 Operating expenses: Research and development 167,652 89,695 312,363 167,875 Sales and marketing 288,341 163,527 547,451 308,778 General and administrative 52,111 31,462 93,887 59,729 Purchased research and development 43,203 217,792 ---------------- ---------------- --------------- ---------------- Total operating expenses 551,307 284,684 1,171,493 536,382 ---------------- ---------------- --------------- ---------------- Operating income 488,551 321,511 801,711 600,362 Realized gain on sale of investment 47,299 102,407 Interest and other income, net 27,064 15,646 48,542 28,504 ---------------- ---------------- --------------- ---------------- Income before provision for income taxes 562,914 337,157 952,660 628,866 Provision for income taxes 224,455 127,420 433,258 237,742 ---------------- ---------------- --------------- ---------------- Net income $ 338,459 $209,737 $ 519,402 $ 391,124 ================ ================ =============== ================ Net income per share $ .49 $ .31 $ .76 $ .59 ================ ================ =============== ================ Shares used in per-share calculation 690,304 666,177 686,824 659,625 ================ ================ =============== ================ </TABLE> The accompanying notes are an integral part of these financial statements. 4 <PAGE> 5 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Six Months Ended --------------------------------- January 25, January 28, 1997 1996 ----------- ----------- (Unaudited) <S> <C> <C> Cash flows from operating activities: Net income $ 519,402 $ 391,124 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 98,541 52,798 Deferred income taxes (61,461) (22,129) Tax benefit of disqualifying dispositions 101,546 93,704 Adjustment to conform StrataCom, Inc. fiscal year (11,020) Purchased research and development from Netsys Technology, Inc. acquisition 43,203 Change in operating assets and liabilities: Accounts receivable (399,887) (124,117) Inventories 100,013 (157,357) Prepaid expenses and other current assets 4,150 (29,257) Income taxes payable 2,750 33,866 Accounts payable 99,272 74,283 Accrued payroll and related expenses 56,447 30,353 Other accrued liabilities 4,315 30,537 ----------- ----------- Net cash provided by operating activities 557,271 373,805 ----------- ----------- Cash flows from investing activities: Purchases of short-term investments (697,891) (337,811) Proceeds from sales and maturities of short-term investments 706,535 269,814 Purchases of investments (1,007,291) (319,996) Proceeds from sales of investments 618,377 130,404 Purchases of restricted investments (133,744) (72,348) Proceeds from sales and maturities of restricted investments 114,071 58,165 Acquisition of property and equipment (169,372) (101,249) Acquisition of Telebit Corporation, net of purchased research and development (25,189) Other (8,000) (13,652) ----------- ----------- Net cash used in investing activities (602,504) (386,673) ----------- ----------- Cash flows from financing activities: Issuance of common stock 102,940 50,335 Repurchase of common stock (112,734) Other (4,595) (9,424) ----------- ----------- Net cash provided by (used in)financing activities 98,345 (71,823) ----------- ----------- Net increase (decrease) in cash and equivalents 53,112 (84,691) Cash and equivalents, beginning of period 279,695 284,388 ----------- ----------- Cash and equivalents, end of period $ 332,807 $ 199,697 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. 5 <PAGE> 6 CISCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Cisco Systems Inc. ("Cisco" or "the Company") develops, manufactures, markets and supports high-performance, multiprotocol internetworking systems that link geographically dispersed local-area and wide-area networks (LANs and WANs, respectively). Cisco's products include a wide range of routers, LAN and WAN switches, dial access servers, and network management solutions. The Company sells its products in approximately 90 countries through a combination of direct sales and reseller and distribution channels. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year is the 52 or 53 weeks ending on the last Saturday in July. Fiscal years 1997 and 1996 are both 52 week years. Prior to fiscal year 1997, the Company's fiscal year was the 52 or 53 weeks ending on the last Sunday in July. Basis of Presentation The accompanying financial data as of January 25, 1997 and July 28, 1996 and for the three and six month periods ended January 25, 1997 and January 28, 1996, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended July 28, 1996. In July 1996, the Company acquired StrataCom, Inc.("StrataCom"), a Company that develops, manufactures, and supports high speed LAN and WAN switching equipment. The merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements were restated for all periods prior to the merger to include the results of operations, financial positions, and cash flows for StrataCom for the twelve months ended June 30, 1996. Prior to the merger, StrataCom used a calendar year-end. In order for both companies to operate on the same fiscal calendar for 1997, StrataCom's operations for the one month period ended July 28, 1996, which are not material to the consolidated companies, have been reflected as an adjustment to retained earnings in the first quarter of fiscal 1997. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the 6 <PAGE> 7 financial position, results of operations, and cash flows for the three and six month periods ended January 25, 1997 and January 28, 1996, have been made. The results of operations for the period ended January 25, 1997 are not necessarily indicative of the operating results for the full year. The July 28, 1996 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Computation of Net Income Per Share Net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. 3. BUSINESS COMBINATIONS In September 1996, the Company acquired Nashoba Networks ("Nashoba"). The Company issued approximately 1.6 million shares of common stock for all the outstanding stock of Nashoba in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Nashoba stock that remain outstanding as options to purchase approximately .1 million shares of the Company's common stock. Also, in September 1996, the Company acquired Granite Systems, Inc. ("Granite"), a company established to develop, market, and sell multilayer switching and gigabit Ethernet equipment. The Company issued approximately 2.2 million shares of common stock for all the outstanding stock of Granite in a transaction accounted for as a pooling of interests. The Company also assumed options to purchase Granite stock that remain outstanding as options to purchase approximately 1.6 million shares of the Company's common stock. The historical operations of Nashoba and Granite are not material to the Company's consolidated operations and financial position on either an individual or an aggregated basis. Therefore, prior period statements have not been restated for these acquisitions. In October 1996, the Company acquired substantially all of the assets of Telebit Corporation ("Telebit") and its Modem ISDN Channel Aggregation (MICA) technologies for approximately $200 million in cash. The Company purchased Telebit patents, MICA intellectual property and established employment contracts with MICA personnel, and assumed certain preferred stock and notes receivable related to a management buyout of the remaining assets of Telebit. The transaction was accounted for as a purchase. Accordingly, the results of operations of the acquired business and the fair values of the acquired assets and liabilities were included in the Company's financial statements as of the effective date. As part of this transaction, the Company recorded approximately $174 million in purchased research and development expense in the first quarter of fiscal 1997. In November 1996, the Company acquired Netsys Technologies ("Netsys"), a privately held innovator of network infrastructure 7 <PAGE> 8 management and performance analysis software. Under the terms of the agreement, shares of the Company's common stock worth approximately $79 million have been exchanged for all outstanding shares and options of Netsys in a transaction accounted for as a purchase. The Company had held a minority equity interest in Netsys since February 1995 and had also entered into a strategic reseller agreement. As part of this transaction, the Company recorded approximately $43 million in purchased research and development expense and $41 million of goodwill and other intangible assets in the second quarter of fiscal 1997. Amounts allocated to goodwill and other intangibles will be amortized on a straight-line basis over a five year period. The historical operations of Telebit and Netsys are not material to the Company's consolidated operations and financial position on either an individual or an aggregated basis, therefore, pro forma summaries are not presented. The amounts allocated to purchased research and development were determined through established valuation techniques in the high technology communications industry, and were expensed upon acquisition, because technological feasibility had not been established and no future alternative uses existed. 4. BALANCE SHEET DETAIL (In thousands) <TABLE> <CAPTION> January 25, July 28, Inventories: 1997 1996 -------- -------- (Unaudited) <S> <C> <C> Raw materials $ 85,993 $134,531 Work in process 77,127 99,723 Finished goods 18,551 51,920 Demonstration systems 22,050 15,014 -------- -------- $203,721 $301,188 ======== ======== </TABLE> 5. INCOME TAXES The Company paid income taxes of $390 million for the six months ended January 25, 1997 and $136 million for the six months ended January 28, 1996. The Company's income taxes currently payable for both federal and state purposes have been reduced by the tax benefit from stock option transactions. This benefit totaled $102 million in the first six months of 1997, and was credited directly to shareholders' equity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are referred to the "Other Risk Factors" section of the Company's 1996 Form 10-K filed on October 25, 1996, as well as the "Financial Risk Management", "Future Growth Subject to Risks", "Potential Volatility in Operating Results", "Risks Associated With Internet Infrastructure", and "Volatility of Stock Price" sections contained in this report, which identify important risk factors that 8 <PAGE> 9 could cause actual results to differ from those contained in the forward-looking statements. Net sales grew to $1,592 million in the second quarter of 1997 from $919 million in the second quarter of 1996. Net sales for the first half of 1997 were $3,027 million, compared to $1,717 million in the first half of 1996. The 73.2% increase in net sales between the two three month periods and the 76.3% increase in net sales between the two six month periods was primarily the result of increasing unit sales of the Cisco 2500 product family, the Cisco 4700, LAN switching products such as the Catalyst 5000, and high end routers such as the Cisco 7500 product family. These increases were partially offset by decreasing unit sales of the Company's older product lines, consisting of the Cisco 7000 and Cisco 4000. Sales to international customers decreased to 43.6% of net sales in the second quarter of 1997, from 51.9% for the second quarter of 1996. International sales in the first six months of 1997 were 45.1% of net sales compared with 49.7% of net sales for the same period in 1996. These decreases reflect slower sales growth in certain international markets, particularly Japan, France, Germany and Italy. Sales growth in these markets have been impacted by certain factors such as weaker economic conditions, delayed government spending, a stronger dollar versus the local currencies, and slower adoption of networking technologies, among other factors. Gross margins decreased to 65.3% in the second quarter of 1997 from 66.0% for the second quarter of 1996. Gross margins for the first six months of 1997 were 65.2% compared with 66.2% for the same period in 1996. This is due principally to the continued shift in revenue mix to the Company's lower margin products consisting primarily of products in the Access and Workgroup business units, and to a lesser extent to write-downs of inventory and higher warranty costs. The prices of component parts have fluctuated in the recent past, and the Company expects that this trend may continue. An increase in the price of component parts may have a material adverse impact on gross margins. The Company expects that gross margins will continue to decrease in the future, because it believes that the market for lower margin remote access and high-speed switching products will continue to increase at a faster rate than the market for the Company's higher margin router products. The Company is attempting to mitigate this trend through various means, such as emphasizing software content, increasing the functionality of its products, controlling royalty costs, and improving manufacturing efficiencies. There can be no assurance that any efforts made by the Company in these and other areas will successfully offset decreasing margins. Research and development expenses increased $78 million in the second quarter of 1997 over the second quarter of 1996, and increased $144.5 million in the first six months of 1997 over the first six months of 1996. This represents an increase to 10.5% from 9.8% of net sales in the quarter to quarter period and to 10.3% from 9.8% of net sales for the first six months of each fiscal year. The increase reflects the Company's ongoing research and development efforts, including the further development of the CiscoFusion(TM) architecture, as well as the acquisition of technologies to bring a broad range of products to the market in a timely fashion. A significant portion of the increase was due to the addition of new personnel, as well as higher 9 <PAGE> 10 expenditures on prototypes and depreciation on new equipment. The Company is primarily developing new technologies internally. Accordingly, research and development expenses are expected to increase at the same, or a slightly greater rate than the sales growth rate. If the Company believes it is unable to enter a particular market in a timely manner, it may acquire other businesses or license technology from other businesses as an alternative to internal research and development. All of the Company's research and development costs are expensed as incurred. Sales and marketing expenses in the second quarter of fiscal 1997 increased $124.8 million over the second quarter of fiscal 1996, and $238.7 million over the first six months of 1996. This represents slight increases to 18.1% from 17.8% of net sales in the quarter to quarter period and to 18.1% from 18.0% of net sales for the first six months of each fiscal year. The increases in these expenses resulted from an increase in the size of the Company's direct sales force and related commissions, additional marketing programs to support the launch of new products, the entry into new markets, both domestic and international, and expanding distribution channels. General and administrative expenses rose by $21 million in the second quarter of 1997 versus the second quarter of 1996 which is a slight decrease to 3.3% from 3.4% of net sales. These expenses increased $34 million in the first half of 1997 from the first half of 1996, representing a slight decrease to 3.1% from 3.5% of net sales for the comparable six month periods, which reflects management's continued efforts to control discretionary spending. The dollar increase reflects increased personnel costs necessary to support the Company's business infrastructure, as well as merger and acquisition related costs. The Company is continuously evaluating potential acquisition candidates as part of its growth strategy and incurs legal, accounting, and other related costs associated with this activity. It is management's intent to keep general and administrative costs relatively constant as a percentage of net sales; however, this goal is dependent upon the level of acquisition activity, among other factors. The amount expensed to purchased research and development in the second quarter of fiscal 1997 arose from the acquisition of the outstanding shares of Netsys. The remaining purchased research and development for the first six months of fiscal 1997 is due to the acquisition of assets and assumption of liabilities of Telebit (See Note 3). Recent Accounting Pronouncements During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 is effective for the Company's fiscal year 1997. The Company does not expect the adoption of SFAS No. 121 to have a material 10 <PAGE> 11 impact on the Company's financial condition or results of operations. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This statement, which establishes a fair value-based method of accounting for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures on a pro forma basis of net income and earnings per share under the new method. SFAS No. 123 is effective for fiscal year 1997. The Company has elected to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25. Pro forma disclosure of net income and earnings per share, which will be made on an annual basis, will reflect the difference between compensation cost included in net income and the related cost measured by the fair value-based method defined in SFAS No. 123, including tax effects, that would have been recognized in the consolidated statement of operations if the fair value-based method had been used. Financial Risk Management As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. Historically, the Company's primary exposures related to non dollar-denominated sales in Japan, Canada, and Australia and non dollar-denominated operating expenses in Europe, Latin America, and Asia where the Company sells primarily in U.S. dollars. The Company is planning to expand its business activities in Europe. As a result, the Company expects to have exposures related to non dollar-denominated sales in several European currencies. At the present time, the Company hedges only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies and does not generally hedge anticipated foreign currency cash flows. The Company maintains investment portfolio holdings of various issuers, types, and maturities. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of shareholders' equity. Part of this portfolio includes minority equity investments in several publicly traded companies, the value of which is subject to market price volatility. The Company also has certain real estate lease commitments with payments tied to short-term interest rates. Given the current profile of interest rate exposures, a sharp rise in interest rates could have a material adverse impact on the market value of the Company's investment portfolio while increasing the costs associated with its lease commitments. The Company does not currently hedge these interest rate exposures. Future Growth Subject to Risks The Company's operating performance each quarter is subject to various risks and uncertainties as discussed in the Company's Annual Report on Form 10-K for 1996 filed on October 25, 1996, and the 11 <PAGE> 12 Company's Registration Statement on Form S-4 filed on June 7, 1996. This report on Form 10-Q should be read in conjunction with such Annual Report and Form S-4, particularly "Other Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report on Form 10-K and "Risk Factors" contained in Form S-4. The internetworking business is highly competitive, and as such, the Company's growth is dependent upon market growth and its ability to enhance its existing products and introduce new products on a timely basis. One of the ways the Company has addressed and will continue to address the need to develop new products is through acquisitions of other companies. Acquisitions involve numerous risks, including difficulties in assimilation of the operations, technologies, and products of the acquired companies; risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; and the potential loss of key employees of the acquired company. The Company must also maintain its ability to manage any such growth effectively. In particular, this would include potential growth associated with the StrataCom acquisition. Failure to manage growth effectively and successfully integrate StrataCom or other acquisitions made by the Company could adversely affect the Company's business and operating results. The Company has essentially completed the functional integration of StrataCom. The Company is now focusing on training the sales force, and further integrating StrataCom's products and technologies into its sales channels. Although the integration has met the Company's sales expectations to date, it may be a year or more before the Company can assess the commercial success of the acquisition. The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, and evolving methods of building and operating networks. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely manner, or that products and technologies developed by others will not render Cisco's products or technologies obsolete or noncompetitive. The failure of Cisco's new product development efforts could have a material adverse effect on Cisco's business operating results and financial condition. Potential Volatility in Operating Results The Company expects that, in the future, its net sales may grow at a slower rate than was experienced in previous periods and that on a quarter-to-quarter basis, the Company's growth in net sales may be significantly lower than its historical quarterly growth rate. The Company generally has had one quarter of a fiscal year when backlog has been reduced. Traditionally, it has been the third quarter. While such a reduction has not occurred in the past two fiscal years, such reductions are extremely difficult to predict and may occur in the future. In addition, in response to customer demand, the Company has attempted to reduce its product manufacturing lead times which may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less 12 <PAGE> 13 predictability in the Company's quarter-to-quarter net sales and operating results going forward. On the other hand, for certain products, lead times are longer than the Company's goal. If the Company can not reduce manufacturing lead times for such products, the Company's customers may cancel orders, or not place further orders if shorter lead times are available from other manufacturers, thus creating additional variability. Although sales to the service provider market have continued to grow, this market is characterized by large, and often times sporadic purchases. Sales activity in this industry depends upon their status regarding infrastructure build out, the availability of funding, and the extent that they are affected by regulatory and business conditions in the country of operations. A decline or delay in sales orders from this industry could have a material adverse effect on the Company's business operating results and financial condition. The Company conducts business on a global basis. Accordingly, the Company's future results could be adversely affected by a variety of uncontrollable and changing factors including foreign currency exchange rates, regulatory, political or economic conditions in a specific country or region, trade protection measures and other regulatory requirements, government spending patterns, and natural disasters, among other factors. In the second quarter of fiscal 1997 the Company experienced slower sales growth in Japan, France, Germany, and Italy. Any or all of these factors could have a material adverse impact on the Company's future international business in these or other countries. The Company also expects that gross margins may be adversely affected by increases in material or labor costs, heightened price competition, and changes in channels of distribution or in the mix of products sold. For example, the Company believes that gross margins may continue to decline over time, because the sales of lower margin Access and Workgroup business unit products have continued to grow at a faster rate than the Company's higher margin Core business unit products. The Company's gross margins may also be impacted by geographic mix, as well as the mix of configurations within each product group. The Company continues to expand into third-party or indirect distribution channels, which generally result in lower gross margins. In addition, increasing third-party and indirect distribution channels generally result in greater difficulty in forecasting the mix of the Company's products, and to a certain degree the timing of its orders. The Company's growth and ability to meet customer demand also depend in part on its ability to obtain timely supplies of parts from its vendors. During the second quarter, one of the Company's suppliers experienced technical problems with a component. As a result of the component problem, the Company's sales flow was impeded resulting in higher sales volume toward the end of the quarter. Although the Company works closely with its vendors to avoid these types of shortages, there can be no assurance that the Company will not encounter these problems in the future. The Company also expects that its operating margins may decrease as it continues to hire additional personnel and increases other 13 <PAGE> 14 operating expenses to support its business. The Company plans its operating expense levels based primarily on forecasted revenue levels. Since these expenses are relatively fixed in the short-term, a shortfall in revenues could lead to operating results being below expectations. The results of operations for the second quarter of 1997 are not necessarily indicative of results to be expected in future periods, and the Company's operating results may be subject to quarterly fluctuations as a result of a number of factors. These factors include the integration of people, operations, and products from acquired businesses and technologies; increased competition in the internetworking industry; the overall trend toward industry consolidation; the introduction and market acceptance of new products, including high-speed switching and ATM technologies; variations in sales channels, product costs, or mix of products sold; the timing of orders and manufacturing lead times; and changes in general economic conditions, any of which could have a material adverse impact on operations and financial results. Risks Associated with Internet Infrastructure The Company's management believes that in the future there will be performance problems with Internet communications which could receive a high degree of publicity and visibility. As the Company is a large supplier of equipment for the Internet infrastructure, customer's perceptions of the Company's products and the marketplace's perception of Cisco as a supplier of internetworking products, whether or not these problems are due to the performance of Cisco's products, may be adversely affected, particularly as the Company migrates toward providing end-to-end solutions for its customers. Such an event could also result in an adverse effect on the market price of the Company's Common Stock and could adversely affect Cisco's business. Volatility of Stock Price The Company's Common Stock has experienced substantial price volatility, particularly as a result of variations between the Company's actual or anticipated financial results and the published expectations of analysts and as a result of announcements by the Company and its competitors. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in particular and have often been unrelated to the operating performance of any specific company. These factors, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock in the future. LIQUIDITY AND CAPITAL RESOURCES Cash, short-term investments, and investments increased by $398 million from July 28, 1996 to January 25, 1997, primarily as a result of cash generated by operations and to a lesser extent through the exercise of employee stock options. This increase was partially offset by cash payments to Telebit Corporation shareholders and optionees for approximately $200 million, tax payments of approximately $390 million, and capital expenditures of approximately $169 million during this time. In fiscal 1996, the Company hedged 14 <PAGE> 15 its minority equity position in a publicly traded company. The hedge expires quarterly over a period of two years which commenced in October 1996. Cash proceeds on the sales of this investment in fiscal 1997 were approximately $104 million. Accounts receivable increased 64.6% from July 28, 1996 to January 25, 1997. Days sales outstanding in receivables increased to 59 days as of January 25, 1997 from 43 days at July 28, 1996. Inventories decreased 32.4% between July 28, 1996 and January 25, 1997 which reflects the Company's continued asset management efforts. Inventory management remains an area of focus, as the Company balances the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence, due to rapidly changing technology and customer requirements. Accounts payable increased by 64.9% at January 25, 1997 over July 28, 1996 because of increases in operating expenses, and material purchases to support the growth in net sales. Other accrued liabilities increased by 7.4%, primarily due to higher deferred revenue on service contracts. At January 25, 1997, the Company had a line of credit totaling $100.0 million, which expires April 1998. There have been no borrowings under this agreement. The Company has entered into certain lease arrangements in San Jose, California, and Research Triangle Park, North Carolina, where it has established its headquarters operations and certain research and development and customer support activities, respectively. In connection with these transactions, the Company pledged $247.6 million of its investments as collateral for certain obligations of the leases. The restricted investments balance will continue to increase as the Company phases in operations at these lease sites. The Company's management believes that its current cash and equivalents, short-term investments, line of credit, and cash generated from operations will satisfy its expected working capital and capital expenditure requirements through the next year. 15 <PAGE> 16 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on November 15, 1996. The following actions were taken at this meeting: <TABLE> <CAPTION> Affirmative Negative Votes Broker Votes Votes Withheld Non-Votes ------ ----- -------- --------- a. Election of Directors <S> <C> <C> <C> <C> John T. Chambers 576,028,842 - 3,486,656 - James F. Gibbons 577,066,158 - 2,449,340 - Edward R. Kozel 575,913,735 - 3,601,763 - Richard M. Moley 576,875,312 - 2,640,186 - John P. Morgridge 576,017,327 - 3,498,171 - Robert L. Puette 576,298,912 - 3,216,586 - Masayoshi Son 577,006,159 - 2,509,339 - Donald T. Valentine 576,670,347 - 2,845,151 - Steven M. West 576,900,810 - 2,614,688 - b. Approval of the 1996 Stock Option Plan 339,224,813 148,579,505 1,536,710 90,174,470 c. Amendment to the Company's Bylaws to increase minimum and 557,363,936 2,632,156 1,472,615 18,046,791 maximum number of directors. d. Ratification of Coopers & Lybrand L.L.P. as the Company's independent accountants 578,105,944 501,478 908,076 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.02 The Company's Restated Bylaws, as currently in effect 10.45 Employment Agreement with Don LeBeau 11.01 Computation of net income per share 27 Financial Data Schedule (b) Report on Form 8-K The Company filed one report on Form 8-K during the quarter ended January 25, 1997. The filing was on January 22, 1997. The item reported on was the acquisition of Netsys Technologies, Inc. 16 <PAGE> 17 SIGNATURE 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. Cisco Systems, Inc. Date: March 4, 1997 By /s/ LARRY R. CARTER -------------------------------- Larry R. Carter, Vice President Finance, and Chief Financial Officer (Principal Financial and Accounting Officer) 17 <PAGE> 18 CISCO SYSTEMS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 25, 1997 <TABLE> <CAPTION> Sequentially Exhibit# Description Numbered Plan - -------- ----------- ------------- <S> <C> 3.02 Restated Bylaws of the Corporation 10.45 Employment agreement Don LeBeau 11.01 Computation of net income per share 27 Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>2 <DESCRIPTION>RESTATED BYLAWS OF THE CORPORATION <TEXT> <PAGE> 1 EXHIBIT 3.02 CERTIFICATE OF AMENDMENT TO THE BYLAWS OF CISCO SYSTEMS, INC. The undersigned, Secretary of Cisco Systems, Inc., hereby represents that Article III, Section 2 of the Company's Bylaws was amended by the Board of Directors of the Company on July 31, 1996. By such amendment, the first and second sentences of Article III, Section 2 are to be deleted in their entirety and replaced with the following sentence: "The number of authorized directors shall be not less than seven (7) nor more than thirteen (13), the exact number of directors to be fixed from time to time within such range by a duly adopted resolution of the Board of Directors or shareholders." /s/ LARRY R. CARTER ---------------------------------------- Larry R. Carter Secretary and Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.45 <SEQUENCE>3 <DESCRIPTION>EMPLOYMENT AGREEMENT DON LEBEAU <TEXT> <PAGE> 1 EXHIBIT 10.45 [CISCO SYSTEMS LETTERHEAD] October 11, 1996 Mr. Don LeBeau Dear Don: Let me first thank you for your hard work and dedication to Cisco over the past few years. I understand and fully support your desire for some much-deserved time off. I am also thankful that you will remain employed by the Company during your leave and hope that you will return to work on a full-time basis at the end of that leave. Please allow me to confirm the terms of your leave of absence from Cisco: 1. As you requested, you will continue to work on a regular basis through November 1, at which time you will take a six-week vacation which will last through December 13, 1996. At the conclusion of your vacation, you will go on a personal leave of absence from Cisco effective December 14, 1996 and lasting through December 13, 1997. While on vacation, you will receive your full salary and continue to participate in all Company benefits. Starting on December 14, 1996 and during the remainder of your leave, you will be paid one-half of your current base salary. You will not participate in any bonus or incentive plans or receive payments under such plans for fiscal year 1997. 2. I hope it goes without saying that you have been a critical part of <PAGE> 2 Mr. Don LeBeau October 11, 1996 Page 2 Cisco's operation and your absence will be greatly felt. I very much appreciate your willingness to assist during the transition. Although it will not be necessary for you to report into the office on a regular basis during your leave, it is very important to Cisco that you make yourself available, as needed, to assist in making your successor effective and successful. 3. Because you will not be working on a regular full-time basis during your leave, your participation in all Company benefits, including the medical plan and Employee Stock Purchase Plan, will cease on December 13, 1996. The only exception will be the section 401(k) Plan. As long as you are employed and continue to provide substantial services to the Company, you may continue to participate in that Plan. You may also continue your medical coverage under COBRA, but you will have to pay for that coverage. You will continue to vest in your outstanding stock options from December 14, 1996 through December 13, 1997, at five-twelfths of your normal rate. Thus, your outstanding stock options will continue to become exercisable after December 13, 1996, but only as to five-twelfths of the number of shares that otherwise would have become exercisable for that month. This reduced rate of vesting will continue until either your employment terminates, the end of one year, or you resume regular full-time employment with Cisco, whichever occurs first. 4. Your Proprietary Information Agreement and Employment Agreement will continue in effect. <PAGE> 3 Mr. Don LeBeau October 11, 1996 Page 3 5. Because you will be an employee of Cisco and providing services during your leave, I ask that you talk with me before taking any position with, or providing services to, any other company. We agree that it would not be appropriate for you to provide services, as an employee, consultant or otherwise, to any company in a business competitive with Cisco. Accordingly, you will not accept employment with, or provide any services to, Bay Networks, Fore Systems, Inc., Cascade Communications Corporation, Ipsilion Networks, Inc., Ascend Communications, 3Com Corporation, Xylan, or any other company in a business competitive with Cisco during your leave. If you wish to provide services to a company that is not competitive with Cisco, then I will not withhold my consent as long as you agree to any modification of the terms of your leave that the Company might believe are appropriate under the circumstances. 6. I sincerely hope that you will consider rejoining Cisco on a regular, full-time basis at the end of your leave. Although neither of us can predict what the Company's needs will be at that time, I would certainly want to talk with you about any opportunity that might be of interest to you and the Company. <PAGE> 4 Mr. Don LeBeau October 11, 1996 Page 4 I hope you are able to relax and enjoy the next few months. And, again, thank you for your dedication and willingness to assist in this transition. Sincerely, /s/ JOHN CHAMBERS --------------------- John Chambers JC: -- I ACCEPT THE TERMS SET FORTH ABOVE. /s/ DON LEBEAU - ----------------------------- Don LeBeau October 2, 1996 - ----------------------------- Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11.1 <SEQUENCE>4 <DESCRIPTION>COMPUTATION OF NET INCOME PER SHARE <TEXT> <PAGE> 1 EXHIBIT 11.01 COMPUTATION OF NET INCOME PER SHARE IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083 (In thousands, except per-share amounts) <TABLE> <CAPTION> Three Months Six Months Ended Ended -------------------------- -------------------------- Jan. 25, Jan. 28, Jan. 25, Jan. 28, 1997 1996 1997 1996 -------- -------- -------- -------- PRIMARY EARNINGS PER SHARE (Unaudited) <S> <C> <C> <C> <C> Actual weighted average common shares outstanding for the period 658,739 644,012 655,525 637,332 Weighted average shares assuming exercise of employee stock options using average market price 31,565 22,165 31,299 22,293 -------- -------- -------- -------- Shares used in per-share calculations 690,304 666,177 686,824 659,625 ======== ======== ======== ======== Net income applicable to primary income per share $338,459 $209,737 $519,402 $391,124 ======== ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ .49 $ .31 $ .76 $ .59 ======== ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE Actual weighted average common shares outstanding for the period 658,739 644,012 655,525 637,332 Weighted average shares assuming exercise of employee stock options using the greater of ending or average market price 32,398 22,738 33,324 23,807 -------- -------- -------- -------- Shares used in per-share calculations 691,137 666,750 688,849 661,139 ======== ======== ======== ======== Net income applicable to fully diluted income per share $338,459 $209,737 $519,402 $391,124 ======== ======== ======== ======== Net income per share based on SEC Interpretive Release No. 34-9083 $ .49 $ .31 $ .75 $ .59 ======== ======== ======== ======== </TABLE> These calculations are submitted in accordance with Securities Exchange Act of 1934 Release No. 34-9083 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING JANUARY 25, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUL-26-1997 <PERIOD-START> JUL-29-1996 <PERIOD-END> JAN-25-1997 <CASH> 332,807 <SECURITIES> 2,183,317 <RECEIVABLES> 1,042,108 <ALLOWANCES> 17,166 <INVENTORY> 203,721 <CURRENT-ASSETS> 2,619,019 <PP&E> 737,532 <DEPRECIATION> 327,467 <TOTAL-ASSETS> 4,570,044 <CURRENT-LIABILITIES> 947,759 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,180,201 <OTHER-SE> 2,400,892 <TOTAL-LIABILITY-AND-EQUITY> 4,570,044 <SALES> 3,027,203 <TOTAL-REVENUES> 3,027,203 <CGS> 1,053,999 <TOTAL-COSTS> 2,225,492 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 952,660 <INCOME-TAX> 433,258 <INCOME-CONTINUING> 519,402 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 519,402 <EPS-PRIMARY> .76 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

CTX

https://www.sec.gov/Archives/edgar/data/18532/0000950134-97-000980.txt

-----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, NcEv7yHZOcIQm/JjDEZkIKqIzOLfD6dfkTtv7/rrKr1kJgIrkpHdx1Lq7ELOuwf6 SAQddhErSZS69iUqzt7BBg== <SEC-DOCUMENT>0000950134-97-000980.txt : 19970222 <SEC-HEADER>0000950134-97-000980.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950134-97-000980 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTEX CORP CENTRAL INDEX KEY: 0000018532 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 750778259 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06776 FILM NUMBER: 97530780 BUSINESS ADDRESS: STREET 1: 3333 LEE PARKWAY SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596500 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 FORMER COMPANY: FORMER CONFORMED NAME: CENTEX CONSTRUCTION CO INC DATE OF NAME CHANGE: 19681211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3333 HOLDING CORP CENTRAL INDEX KEY: 0000818762 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 752178860 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09624 FILM NUMBER: 97530781 BUSINESS ADDRESS: STREET 1: 3333 LEE PKWY STREET 2: SUITE 500 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596700 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTEX DEVELOPMENT CO LP CENTRAL INDEX KEY: 0000818764 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 752168471 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09625 FILM NUMBER: 97530782 BUSINESS ADDRESS: STREET 1: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145596700 MAIL ADDRESS: STREET 1: PO BOX 19000 STREET 2: PO BOX 19000 CITY: DALLAS STATE: TX ZIP: 75219 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR 12/31/96 <TEXT> <PAGE> 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q JOINT QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended DECEMBER 31, 1996 Commission File No. 1-6776 CENTEX CORPORATION A Nevada Corporation IRS Employer Identification No. 75-0778259 2728 N. Harwood Dallas, Texas 75201 (214) 981-5000 Commission File Nos. 1-9624 and 1-9625, respectively 3333 HOLDING CORPORATION A Nevada Corporation CENTEX DEVELOPMENT COMPANY, L.P. A Delaware Limited Partnership IRS Employer Identification Nos. 75-2178860 and 75-2168471, respectively 2728 N. Harwood Dallas, Texas 75201 (214) 981-6700 The registrants have 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 and have been subject to such filing requirements for the past 90 days. - -------------------------------------------------------------------------------- As of the close of business on February 7, 1997, 28,887,672 shares of Centex Corporation common stock were outstanding, 1,000 shares of common stock of 3333 Holding Corporation were outstanding, and 900 class B units of limited partnership interest of Centex Development Company, L.P. were outstanding. - -------------------------------------------------------------------------------- <PAGE> 2 CENTEX CORPORATION 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. FORM 10-Q TABLE OF CONTENTS DECEMBER 31, 1996 CENTEX CORPORATION <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements 1 Condensed Consolidated Statement of Earnings for the Three Months Ended December 31, 1996 2 Condensed Consolidated Statement of Earnings for the Nine Months Ended December 31, 1996 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended December 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6-9 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-14 PART II. OTHER INFORMATION ITEM 2. Changes in Securities 15 ITEM 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 </TABLE> -i- <PAGE> 3 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Combining Financial Statements 18 Condensed Combining Statement of Operations for the Three Months Ended December 31, 1996 19 Condensed Consolidated Statement of Operations for the Nine Months Ended December 31, 1996 20 Condensed Combining Balance Sheets 21 Condensed Combining Statement of Cash Flows for the Nine Months Ended December 31, 1996 22 Notes to Condensed Combining Financial Statements 23 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 24 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26-27 </TABLE> -ii- <PAGE> 4 CENTEX CORPORATION PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ITEM 1. The condensed consolidated financial statements include the accounts of Centex Corporation and subsidiaries ("Centex" or the "Company"), and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments necessary to present fairly the information in the following condensed consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. -1- <PAGE> 5 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (dollars in thousands, except per share data) (unaudited) <TABLE> <CAPTION> For the Three Months Ended December 31, ------------------------------------- 1996 1995 --------------- --------------- <S> <C> <C> REVENUES Home Building $ 566,691 $ 499,199 Investment Real Estate 4,771 - Financial Services 38,190 33,307 Contracting and Construction Services 270,338 257,643 Construction Products (A) 59,117 - --------------- --------------- 939,107 790,149 --------------- --------------- COSTS AND EXPENSES Home Building 529,834 470,612 Investment Real Estate (787) - Financial Services 30,990 28,080 Contracting and Construction Services 273,387 259,593 Construction Products (A) 41,826 (15,344) Other, net 654 29 Corporate General and Administrative 4,285 3,540 Interest Expense 7,969 10,908 Minority Interest in Construction Products (A) 8,455 7,825 --------------- --------------- 896,613 765,243 --------------- --------------- EARNINGS BEFORE INCOME TAXES 42,494 24,906 Income Taxes 15,031 9,750 --------------- --------------- NET EARNINGS $ 27,463 $ 15,156 =============== =============== EARNINGS PER SHARE $ 0.93 $ 0.52 =============== =============== AVERAGE SHARES OUTSTANDING 29,470,683 29,229,616 =============== =============== CASH DIVIDENDS PER SHARE $ 0.05 $ 0.05 =============== =============== </TABLE> (A) As a result of Centex Construction Products, Inc.'s (CXP) repurchases of its own stock during the June 30, 1996 quarter, Centex's ownership interest in CXP increased to more than 50%, (51.2% as of December 31, 1996). Accordingly, beginning with the quarter ended June 30, 1996, CXP's financial results have been consolidated with those of Centex and are reflected in Centex's revenues and operating earnings. In order to facilitate comparisons between years, CXP's operating earnings and the related minority interest in CXP have been reclassified to reflect the total amounts for the quarter ended December 31, 1995. Had CXP's revenues been consolidated for the quarter ended December 31, 1995, Centex's consolidated revenues for that quarter would have increased by $55,429 to $845,578. See notes to condensed consolidated financial statements. -2- <PAGE> 6 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (dollars in thousands, except per share data) (unaudited) <TABLE> <CAPTION> For the Nine Months Ended December 31, ------------------------------------------- 1996 1995 ------------------- ------------------ <S> <C> <C> REVENUES Home Building $ 1,704,181 $ 1,410,522 Investment Real Estate 6,781 - Financial Services 117,113 93,243 Contracting and Construction Services 819,333 774,180 Construction Products (A) 185,713 - ------------------- ------------------ 2,833,121 2,277,945 ------------------- ------------------ COSTS AND EXPENSES Home Building 1,600,161 1,338,903 Investment Real Estate (6,007) - Financial Services 97,676 81,044 Contracting and Construction Services 822,019 775,975 Construction Products (A) 133,172 (43,587) Other, net 1,516 275 Corporate General and Administrative 12,760 10,910 Interest Expense 26,760 30,202 Minority Interest in Construction Products (A) 25,900 22,229 ------------------- ------------------ 2,713,957 2,215,951 ------------------- ------------------ EARNINGS BEFORE INCOME TAXES 119,164 61,994 Income Taxes 41,642 24,414 ------------------- ------------------ NET EARNINGS $ 77,522 $ 37,580 =================== ================== EARNINGS PER SHARE $ 2.64 $ 1.29 =================== ================== AVERAGE SHARES OUTSTANDING 29,318,786 29,050,846 =================== ================== CASH DIVIDENDS PER SHARE $ 0.15 $ 0.15 =================== ================== </TABLE> (A) As a result of Centex Construction Products, Inc.'s (CXP) repurchases of its own stock during the June 30, 1996 quarter, Centex's ownership interest in CXP increased to more than 50%, (51.2% as of December 31, 1996). Accordingly, beginning with the quarter ended June 30, 1996, CXP's financial results have been consolidated with those of Centex and are reflected in Centex's revenues and operating earnings. In order to facilitate comparisons between years, CXP's operating earnings and the related minority interest in CXP have been reclassified to reflect the total amounts for the nine months ended December 31, 1995. Had CXP's revenues been consolidated for the nine months ended December 31, 1995, Centex's consolidated revenues for that period would have increased by $177,016 to $2,454,961. See notes to condensed consolidated financial statements. -3- <PAGE> 7 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> Centex Corporation and Subsidiaries Centex Corporation ----------------------------- ------------------------------- December 31, March 31, December 31, March 31, 1996* 1996** 1996* 1996** ------------- ------------- -------------- -------------- <S> <C> <C> <C> <C> ASSETS Cash and Cash Equivalents $ 73,981 $ 14,042 $ 67,875 $ 11,897 Receivables - Residential Mortgage Loans 626,089 629,756 - - Other 331,508 280,803 310,006 258,661 Affiliates - - - - Inventories 1,063,126 1,205,450 1,063,126 1,205,450 Investments - Centex Construction Products, Inc. - 106,504 - 106,504 Centex Development Company, L. P. 35,413 36,866 35,413 36,866 Joint Ventures and Other 4,637 3,804 4,125 3,804 Unconsolidated Subsidiaries - - 46,004 38,366 Property and Equipment, net 203,531 37,139 191,064 25,413 Other Assets - Deferred Taxes, net 207,199 (16,620) 205,627 (16,085) Deferred Charges and Other 55,037 22,602 37,632 14,767 ------------- ------------- -------------- -------------- $ 2,600,521 $ 2,320,346 $ 1,960,872 $ 1,685,643 ============= ============= ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 682,622 $ 610,671 $ 633,676 $ 550,984 Short-term Debt 668,963 662,267 80,242 87,251 Long-term Debt 224,504 321,002 224,504 321,002 Minority Stockholders' Interest 118,431 3,570 116,449 3,570 Negative Goodwill 102,837 - 102,837 - Stockholders' Equity - Preferred Stock, Authorized 5,000,000 Shares, None Issued - - - - Common Stock $.25 Par Value; Authorized 50,000,000 Shares; Issued and Outstanding 28,785,671 and 28,425,851 respectively 7,196 7,107 7,196 7,107 Capital in Excess of Par Value 13,824 6,814 13,824 6,814 Retained Earnings 782,144 708,915 782,144 708,915 ------------- ------------- -------------- -------------- Total Stockholders' Equity 803,164 722,836 803,164 722,836 ------------- ------------- -------------- -------------- $ 2,600,521 $ 2,320,346 $ 1,960,872 $ 1,685,643 ============= ============= ============== ============== <CAPTION> Financial Services ------------------------------- December 31, March 31, 1996* 1996** ------------- ------------- <S> <C> <C> ASSETS Cash and Cash Equivalents $ 6,106 $ 2,145 Receivables - Residential Mortgage Loans 626,089 629,756 Other 21,502 22,142 Affiliates 36 (1,267) Inventories - - Investments - Centex Construction Products, Inc. - - Centex Development Company, L. P. - - Joint Ventures and Other 512 - Unconsolidated Subsidiaries - - Property and Equipment, net 12,467 11,726 Other Assets - Deferred Taxes, net 1,572 (535) Deferred Charges and Other 17,405 7,835 ------------- ------------- $ 685,689 $ 671,802 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 48,946 $ 59,687 Short-term Debt 588,721 575,016 Long-term Debt - - Minority Stockholders' Interest 1,982 - Negative Goodwill - - Stockholders' Equity - Preferred Stock, Authorized 5,000,000 Shares, None Issued - - Common Stock $.25 Par Value; Authorized 50,000,000 Shares; Issued and Outstanding 28,785,671 and 28,425,851 respectively 1 2 Capital in Excess of Par Value 44,075 37,917 Retained Earnings 1,964 (820) ------------- ------------- Total Stockholders' Equity 46,040 37,099 ------------- ------------- $ 685,689 $ 671,802 ============= ============= </TABLE> See notes to condensed consolidated financial statements. * Unaudited ** Condensed from audited financial statements. In the supplemental data presented above, "Centex Corporation" represents the adding together of all subsidiaries other than those included in Financial Services (CTX Mortgage and Affiliates). Transactions between Centex Corporation and Financial Services have been eliminated from the Centex Corporation and Subsidiaries balance sheets. -4- <PAGE> 8 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands) (unaudited) <TABLE> <CAPTION> For the Nine Months Ended December 31, ------------------------------------ 1996 1995 ---------------- ---------------- <S> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net Earnings $ 77,522 $ 37,580 Adjustments - Depreciation and Amortization 9,851 9,396 Deferred Income Taxes 27,807 (8,425) Equity in Earnings of CXP, CDC and Joint Ventures (1,671) (14,192) Minority Interest in CXP 25,900 - Increase in Receivables (9,458) (8,934) Decrease (Increase) in Residential Mortgage Loans 3,667 (178,554) Decrease in Inventories 29,024 3,007 Increase in Payables and Accruals 16,924 17,558 (Increase) Decrease in Other Assets (31,328) 2,597 Other, net 1,225 (3,518) ---------------- ---------------- 149,463 (143,485) ---------------- ---------------- CASH FLOWS - INVESTING ACTIVITIES Decrease in Advances to Joint Ventures, Unconsolidated Subsidiaries, and CDC 2,291 6,429 Increase in Property and Equipment, net (4,099) (4,923) Acquisition Of Vista Properties - (85,422) Vista/Centex Homes Combination ($ in millions): Deferred Taxes ($266.2); Negative Goodwill $114.8; Inventories $140.2; and Payables and Accruals $11.2 - - ---------------- ---------------- (1,808) (83,916) ---------------- ---------------- CASH FLOWS - FINANCING ACTIVITIES (Decrease) Increase in Debt (90,522) 224,737 Proceeds from Stock Option Exercises 7,099 6,373 Dividends Paid (4,293) (4,238) ---------------- ---------------- (87,716) 226,872 ---------------- ---------------- NET INCREASE IN CASH 59,939 (529) CASH AT BEGINNING OF PERIOD 14,042 23,785 ---------------- ---------------- CASH AT END OF PERIOD $ 73,981 $ 23,256 ================ ================ </TABLE> See notes to condensed consolidated financial statements. -5- <PAGE> 9 CENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) (A) A summary of changes in stockholders' equity is presented below: <TABLE> Capital in Preferred Common Excess of Retained Stock Stock Par Value Earnings Total --------- ----------- ----------- ------------ ------------ (dollars in thousands) <CAPTION> <S> <C> <C> <C> <C> <C> Balance, March 31, 1996 $ - $ 7,107 $ 6,814 $ 708,915 $ 722,836 Net Earnings - - - 77,522 77,522 Exercise of Stock Options - 89 7,010 - 7,099 Cash Dividends - - - (4,293) (4,293) --------- ----------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 1996 $ - $ 7,196 $ 13,824 $ 782,144 $ 803,164 ========= =========== =========== ============ ============ </TABLE> (B) On November 30, 1987 the Company distributed to a nominee, all of the issued and outstanding shares of common stock of 3333 Holding Corporation and warrants to purchase approximately 80% of the Class B units of limited partnership interest in Centex Development Company, L. P. A wholly-owned subsidiary of 3333 Holding Corporation serves as general partner of Centex Development Company, L. P. These securities are held by the nominee on behalf of Centex stockholders, and will trade in tandem with the common stock of Centex, until such time as they are detached. Supplementary condensed combined financial statements for Centex, 3333 Holding Corporation and Subsidiary and Centex Development Company, L. P. are as follows: -6- <PAGE> 10 NOTES - continued CENTEX CORPORATION, 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L. P. SUPPLEMENTARY CONDENSED COMBINED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> December 31, March 31, 1996 1996 * --------------- -------------- ASSETS <S> <C> <C> Cash and Cash Equivalents $ 74,668 $ 14,273 Receivables 960,190 914,549 Inventories 1,103,643 1,244,931 Investments - Centex Construction Products, Inc. - 106,504 Joint Ventures and Unconsolidated Subsidiaries 4,918 3,984 Property and Equipment, net 203,531 37,139 Other Assets - Deferred Taxes, net 207,199 (16,620) Deferred Charges and Other 58,037 22,602 --------------- -------------- $ 2,612,186 $ 2,327,362 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 685,432 $ 616,959 Short-term Debt 676,631 665,593 Long-term Debt 224,504 321,002 Minority Stockholders' Interest 118,431 - Negative Goodwill 102,837 - Stockholders' Equity 804,351 723,808 --------------- -------------- $ 2,612,186 $ 2,327,362 =============== ============== *Condensed from audited financial statements. SUPPLEMENTARY CONDENSED COMBINED STATEMENT OF EARNINGS (dollars in thousands) FOR THE NINE MONTHS ENDED DECEMBER 31, ----------------------------------- 1996 1995 --------------- -------------- Revenues $ 2,840,658 $ 2,289,790 Costs and Expenses 2,721,279 2,227,572 --------------- -------------- Earnings Before Income Taxes 119,379 62,218 Income Taxes 41,642 24,414 --------------- -------------- NET EARNINGS $ 77,737 $ 37,804 =============== ============== </TABLE> -7- <PAGE> 11 Notes - continued (C) In order to assure the future availability of land for its Home Building operation, the Company has made deposits totaling $15 million as of December 31, 1996 for options to purchase undeveloped land and developed lots having a total purchase price of approximately $368 million. These options and commitments expire at various dates to the year 2000. The Company has also committed to purchase land and developed lots totaling approximately $30 million. In addition, the Company has executed lot purchase contracts with CDC which aggregate approximately $2 million. (D) Interest expense relating to the financial services operations is included in its costs and expenses. Interest related to non-financial services is included as interest expense. <TABLE> <CAPTION> Nine Months Ended ---------------------------- 12/31/96 12/31/95 -------- -------- <S> <C> <C> Total Interest Incurred $50,946 $51,681 Less Financial Services (24,186) (21,479) ------- ------- Interest Expense $26,760 $30,202 ======= ======= </TABLE> (E) During the quarter ended June 30, 1994, Centex Construction Products, Inc. (CXP) completed an initial public offering of 51% of its stock and began trading on the New York Stock Exchange under the symbol "CXP". As a result of CXP's repurchase of its own stock during the quarter ended June 30, 1996, Centex's ownership interest in CXP has increased to more than 50% (51.2% as of December 31, 1996). Accordingly, beginning with the quarter ended June 30, 1996, CXP's financial results have been consolidated with those of Centex. The reconsolidation of CXP had a $6.6 million net effect on the Statement of Cash Flows as of June 30, 1996 and was included in Other, net. The major items making up the net effect were (in millions) Property and Equipment ($181.4), Investment in CXP $106.5, Minority Interest $95.0, Inventories ($26.9) and Receivables, Payables and Other $13.4. (F) During the quarter ended June 30, 1996, Centex's Home Building subsidiary completed a business combination transaction and reorganization with Vista Properties, Inc. that increased Centex's ownership of Vista's common stock from approximately 53% to 99.975%. Under the terms of the combination transaction, Centex's Home Building assets and operations were contributed to Vista in exchange for 12.4 million shares of Vista's common stock. As a result of the combination, Centex's Investment Real Estate portfolio, valued in excess of $125 million, was reduced to a nominal "book basis" after recording certain Vista-related tax benefits. Accordingly, as these properties are developed or sold, the net sales proceeds will be reflected as operating margin. "Negative Goodwill" recorded as a result of the business combination is being amortized to earnings over approximately seven years. All investment property operations are being reported through Centex's "Investment Real Estate" business segment which operates under the Vista Properties Company name. -8- <PAGE> 12 Notes - continued (G) During the quarter, a subsidiary of Centex Corporation completed the Company's first Mexican investment (capital commitment of approximately $10 million) through its acquisition of a 30% interest in a Mexican corporation - Inverloma - which was recently organized to acquire and develop approximately 70 acres of real estate in Mexico City. This property is the last large undeveloped tract available for residential development in Mexico City which is both close to downtown and located in an affluent area. The current development plan includes up to 750 residential lots and homes, ranging in price from $230,000 to $450,000. The project should be completed in approximately 5 to 7 years. Grupo Loma, a large and experienced upper end real estate developer in Mexico City, owns a 50% interest in Inverloma. (H) During the quarter, Centex Real Estate Corporation, a subsidiary of Centex, ("CREC") and Cavco Industries, Inc. ("Cavco"), the largest manufactured housing company in Arizona, entered into a definitive merger agreement providing for CREC's acquisition of approximately 80% of Cavco's outstanding common stock at a price of $26.75 per share. The estimated transaction value is approximately $75 million, all cash, based on the acquisition of about 80% of the anticipated 3.56 million Cavco shares outstanding as of the merger's effective date. Following the merger, the remaining Cavco shares will be owned by Cavco founder Al Ghelfi and his affiliates. The acquisition of Cavco will expand the Company's capacity to serve the growing affordable housing market by creating a strategic base for its entry into the manufactured housing industry. The contemplated merger, the first combination in recent years of a manufactured housing company with a builder of conventional housing, is expected to be completed by the end of March 1997, subject to the approval of Cavco stockholders. (I) Certain prior year balances have been reclassified to be consistent with the fiscal 1997 presentation. -9- <PAGE> 13 CENTEX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Centex's consolidated revenues for the quarter were $939.1 million, a 19% increase over $790.1 million for the same quarter last year. Earnings before income taxes were $42.5 million, 71% higher than $24.9 million last year. Net earnings were $27.5 million and earnings per share were $.93 for this quarter compared to $15.2 million and $.52, respectively, for the same quarter last year. For the nine months ended December 31, 1996, corporate revenues totaled $2.8 billion, 24% greater than $2.3 billion for the same period last year. Earnings before income taxes were $119.2 million, 92% higher than $62.0 million for the same period last year. Net earnings were $77.5 million and earnings per share were $2.64 for the current nine months compared to $37.6 million and $1.29 last year. HOME BUILDING The following summarizes Home Building results for the quarter and nine months ended December 31, 1996 compared to the quarter and nine months ended December 31, 1995 (dollars in millions, except per unit data): <TABLE> <CAPTION> Quarter Ended Quarter Ended 12/31/96 12/31/95 -------------------------------- ---------------------------- <S> <C> <C> <C> <C> Home Building Revenues $ 566.7 100.0% $ 499.2 100.0% Cost of Sales (464.2) (81.9%) (410.9) (82.3%) Selling, General & Administrative (65.6) (11.6%) (59.7) (12.0%) ------------ ------ ----------- ------ Operating Earnings $ 36.9 6.5% $ 28.6 5.7% ------------ ------ ----------- ------ Units Closed 3,226 2,948 Unit Sales Price $ 172,536 $ 165,262 % Change 4.4% 3.1% Operating Earnings per Unit $ 11,425 $ 9,697 % Change 17.8% 19.2% </TABLE> <TABLE> <CAPTION> Nine Nine Months Ended Months Ended 12/31/96 12/31/95 ------------------------------ ------------------------------ <S> <C> <C> <C> <C> Home Building Revenues $ 1,704.2 100.0% $ 1,410.5 100.0% Cost of Sales (1,394.1) (81.8%) (1,160.9) (82.3%) Selling, General & Administrative (206.1) (12.1%) (178.0) (12.6%) ----------- ------ ------------ ------ Operating Earnings $ 104.0 6.1% $ 71.6 5.1% ----------- ------ ------------ ------ Units Closed 9,835 8,522 Unit Sales Price $ 169,845 $ 162,927 % Change 4.2% 3.2% Operating Earnings per Unit $ 10,577 $ 8,404 % Change 25.9% (3.7%) </TABLE> -10- <PAGE> 14 The operating earnings for the quarter and nine months ended December 31, 1996 increased as a percentage of revenue and on a per unit basis compared to the same periods last year as a result of Home Building's management focus on operating efficiencies and margin improvement as well as increased closings. Home closings for the quarter rose in every region to total 3,226 units, a 9% increase over 2,948 units for the same quarter last year. Home sales (orders) declined to 2,567 for the quarter this year, 4% less than 2,678 units for the same quarter a year ago. Centex is currently operating fewer neighborhoods than it did a year ago and sales per neighborhood were slightly higher than last year. Home closings for the nine months this year totaled 9,835 units, a 15% increase over 8,522 units for the same period a year ago. Unit orders for the current nine months were 8,319, 11% less than 9,308 units for the same period last year. The backlog of homes sold but not closed at December 31, 1996 was 4,017 units, 16% less than 4,773 units at December 31, 1995. INVESTMENT REAL ESTATE During the quarter ended June 30, 1996, Centex's Home Building subsidiary completed a business combination transaction and reorganization with Vista Properties, Inc. that increased Centex's ownership of Vista's common stock from approximately 53% to 99.975%. Under the terms of the combination transaction, Centex's Home Building assets and operations were contributed to Vista in exchange for 12.4 million shares of Vista's common stock. As a result of the combination, Centex's Investment Real Estate portfolio, valued in excess of $125 million, was reduced to a nominal "book basis" after recording certain Vista-related tax benefits. Accordingly, as these properties are developed or sold, the net sales proceeds will be reflected as operating margin. "Negative Goodwill" recorded as a result of the business combination is being amortized to earnings over approximately seven years. All investment property operations are being reported through Centex's "Investment Real Estate" business segment which operates under the Vista Properties Company name. For the quarter ended December 31, 1996, Investment Real Estate had operating earnings of $5.6 million. For the nine month period, operating earnings totaled $12.8 million. -11- <PAGE> 15 FINANCIAL SERVICES The following summarizes Financial Services' results for the quarter and nine months ended December 31, 1996 compared to the quarter and nine months ended December 31, 1995 (dollars in millions): <TABLE> <CAPTION> Nine Nine Quarter Ended Quarter Ended Months Ended Months Ended 12/31/96 12/31/95 12/31/96 12/31/95 ------------ -------------- --------------- -------------- <S> <C> <C> <C> <C> Revenues $ 38.2 $ 33.3 $ 117.1 $ 93.2 --------- ---------- --------- ---------- Operating Earnings $ 7.2 $ 5.2 $ 19.4 $ 12.2 --------- ---------- --------- ---------- Origination Volume $ 1,316 $ 1,207 $ 4,100 $ 3,515 --------- ---------- --------- ---------- Number of Loans Originated Centex-built Homes 2,275 2,108 7,221 5,859 Non-Centex-built Homes 9,438 8,096 28,588 24,180 --------- ---------- --------- ---------- 11,713 10,204 35,809 30,039 ========= ========== ========= ========== </TABLE> Total mortgage loan applications for the quarter reached 14,297, 47% higher than 9,754 applications for the same quarter in the prior fiscal year. Applications for the nine months were 41,776, up 29% from 32,426 for the same period in the prior fiscal year. This increase is primarily due to Centex's recent expansion of its "B & C" (sub-prime) mortgage operation, Nova Credit Corporation, which generally closes fewer of its applications compared to CTX Mortgage's "A" applications. The per loan margin for the quarter this year was $615, a 20% improvement over $512 for the same quarter last year. Although improved, the per loan margins were impacted by start-up costs associated with the rapid expansion of the B & C loan operation, which has opened approximately 30 offices since January 1996. CONTRACTING AND CONSTRUCTION SERVICES The following summarizes Contracting and Construction Services results for the quarter and nine months ended December 31, 1996 compared to the quarter and nine months ended December 31, 1995 (dollars in millions): <TABLE> <CAPTION> Nine Nine Quarter Ended Quarter Ended Months Ended Months Ended 12/31/96 12/31/95 12/31/96 12/31/95 ------------- -------------- ------------ ------------- <S> <C> <C> <C> <C> Revenues $ 270.3 $ 257.6 $ 819.3 $ 774.2 --------- ---------- --------- -------- Operating Loss $ (3.0) $ (2.0) $ (2.7) $ (1.8) --------- ---------- --------- -------- New Contracts Received $ 334 $ 116 $ 831 $ 682 --------- ---------- --------- -------- Backlog of Uncompleted Contracts $ 1,213 $ 1,236 $ 1,213 $ 1,236 --------- ---------- --------- -------- </TABLE> Although Contracting and Construction Services continues to operate in an intensely competitive environment, nonresidential construction is improving as the economy strengthens and profit margins on contracts recently acquired by the group continue to improve. However, reserve provisions relating to certain construction projects obtained in prior years resulted in the current quarter's loss. The Contracting and Construction Services operation provided a positive -12- <PAGE> 16 average net cash flow in excess of Centex's investment in the group of approximately $60 million during both the current quarter and the same quarter last year. CONSTRUCTION PRODUCTS As a result of Centex Construction Products, Inc.'s (CXP) repurchases of its own stock during the quarter ended June 30, 1996, Centex's ownership interest in CXP has increased to more than 50%, (51.2% as of December 31, 1996). Accordingly, beginning with the June 30, 1996 quarter, CXP's financial results have been consolidated with those of Centex and are reflected in Centex's financial statements. Revenues from Construction Products were $59.1 million for the current quarter. CXP's revenues for the same quarter last year, which were not consolidated with Centex, were $55.4 million. For the quarter this year, CXP's total operating earnings minus minority interest resulted in pretax earnings of $8.8 million, net to Centex's ownership interest, a 17% improvement over $7.5 million last year for the same quarter. For the current nine months, CXP's revenues totaled $185.7 million. CXP's revenues for the same period last year, which were not consolidated with Centex, were $177 million. For the current period, CXP's total operating earnings minus minority interest resulted in pretax earnings of $26.6 million, net to Centex's ownership interest, 25% higher than $21.4 million for the same period last year. CXP's record results for this year's quarter and fiscal year-to-date were due primarily to continuing strong demand for CXP's products and higher pricing in all of its business segments. FINANCIAL CONDITION AND LIQUIDITY Centex fulfills its short-term financing requirements with cash generated from its operations and funds available under its credit facilities. These credit facilities also serve as back-up lines for overnight borrowings under its uncommitted bank facilities and commercial paper program. In addition, CTX Mortgage Company has its own $600 million of committed credit facilities and $485 million of uncommitted facilities to finance mortgages which are held during the period they are being securitized and readied for delivery against forward sale commitments. CXP's cash balance represents $54.1 million of the $74 million of consolidated cash balances as of December 31, 1996. Improved earnings accounts for the majority of the remaining increase in cash for the nine months. The Company believes it has adequate resources and sufficient credit facilities to satisfy its current needs and provide for future growth. CAVCO ACQUISITION During the quarter, Centex Real Estate Corporation, a subsidiary of Centex, ("CREC") and Cavco Industries, Inc. ("Cavco"), the largest manufactured housing company in Arizona, entered into a definitive merger agreement providing for CREC's acquisition of approximately 80% of Cavco's outstanding common stock at a price of $26.75 per share. The estimated transaction value is approximately $75 million, all cash, based on the acquisition of about 80% of the anticipated 3.56 million Cavco shares outstanding as of the merger's effective date. Following the merger, the remaining Cavco shares will be owned by Cavco founder Al Ghelfi and his affiliates. The acquisition of Cavco will expand the Company's capacity to serve the growing affordable housing market by creating a strategic base for its entry into the manufactured housing industry. The contemplated merger, the first combination in recent years of a manufactured housing company with a builder of conventional housing, is expected to be completed by the end of March 1997, subject to the approval of Cavco stockholders. -13- <PAGE> 17 OUTLOOK The Company expects its Home Building operation to report record earnings for fiscal 1997. Results from Financial Services should show substantial improvement over fiscal 1996 results. CXP is also expected to have a record year. The results from the new Investment Real Estate division should add significantly to earnings. As a result, the Company expects its fiscal 1997 financial results to be the highest in its history. ------------------------------ The information contained in this report includes forward looking statements involving a number of risks and uncertainties. In addition to the factors discussed, other determinants that could cause actual results to differ include: increases in interest rates; business conditions; growth in the home building, financial services, contracting and construction services, and construction products industries and the economy in general; competitive factors; and the cost of building materials. These and other factors are described in the Joint Annual Report on Form 10-K of Centex Corporation and 3333 Holding Corporation and Centex Development Company, L.P., and in the Annual Report on Form 10-K for Centex Construction Products, Inc., for the fiscal year ended March 31, 1996. Both reports are filed with the Securities and Exchange Commission. -14- <PAGE> 18 CENTEX CORPORATION PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On October 2, 1996, the Board of Directors of Centex adopted a new stockholder rights plan ("Plan") to replace the original rights plan which expired on October 1, 1996. In connection with the Plan, the Board authorized and declared a dividend of one right ("Right") for each share of Common Stock, par value $.25 per share, of Centex ("Common Stock") to all stockholders of record at the close of business on October 15, 1996, as previously reported at Item 5 of Centex's Current Report on Form 8-K dated October 3, 1996 (the "Current Report"). The terms of the Rights are set forth in a Rights Agreement, dated as of October 2, 1996, between Centex and ChaseMellon Shareholder Services, L.L.C., as rights agent (the "Rights Agreement"). Each Right entitles its holder to purchase one one-hundredth of a share of a new series of preferred stock designated "Junior Participating Preferred Stock, Series D" at an exercise price of $135. The Rights will become exercisable upon the earlier of 10 days after the first public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the then outstanding Common Stock, or 10 business days after a person or group announces an offer the consummation of which would result in such person or group beneficially owning 15 percent or more of the then outstanding Common Stock (even if no purchases actually occur), unless such time periods are deferred by appropriate Board action. Although FMR Corp. currently owns over 15 percent of the outstanding Common Stock, the Plan excludes FMR Corp. from causing the rights to become exercisable until such time as FMR Corp., together with certain affiliated and associated persons, collectively own 20 percent or more of the then outstanding Common Stock. If Centex is involved in a merger or other business combination at any time after a person or group has acquired beneficial ownership of 15 percent or more (or, in the case of FMR Corp., 20 percent or more) of the then outstanding Common Stock, the Rights will entitle a holder to buy a number of shares of common stock of the acquiring company having a market value of twice the exercise price of each Right. If any person or group acquires beneficial ownership of 15 percent or more (or, in the case of FMR Corp., 20 percent or more) of the then outstanding Common Stock, the Rights will entitle a holder (other than such person or any member of such group) to buy a number of additional shares of Common Stock having a market value of twice the exercise price of each Right. Alternatively, if a person or group has acquired 15 percent or more (or, in the case of FMR Corp., 20 percent or more) of the then outstanding Common stock, but less than 50 percent of the then outstanding Common Stock, Centex may at its option exchange each Right of a holder (other than such person or any member of such group) for one share of Common Stock. In general, the rights are redeemable at $0.01 per right until 15 days after the Rights become exercisable as described above. Unless earlier redeemed, the Rights will expire on October 12, 2006. A copy of the Rights Agreement was filed as Exhibit 4 to the Current Report and to Centex's Registration Statement on Form 8-A dated October 3, 1996 (File No. 1-6776) in respect of the Rights, which was declared effective by the Securities and Exchange Commission. A summary of the Rights was mailed to each shareholder of record. In connection with the adoption of the Plan, on October 2, 1996, the Board of Directors of Centex established a series of 1,000,000 shares of preferred stock, designated as Junior Participating Preferred Stock, Series D. A copy of the Certificate of Designations of Junior Participating Preferred Stock, Series D is filed as Exhibit 3 to this Form 10-Q. -15- <PAGE> 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3 - Certificate of Designations of Junior Participating Preferred Stock, Series D of Centex Corporation Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Registrant filed a report on Form 8-K on October 8, 1996 reporting the renewal of its stockholder rights plan. All other items required under Part II are omitted because they are not applicable. -16- <PAGE> 20 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. CENTEX CORPORATION ------------------------------------------- Registrant February 12, 1997 /s/ David W. Quinn ------------------------------------------- David W. Quinn Vice Chairman and Chief Financial Officer (principal financial officer) February 12, 1997 /s/ Michael S. Albright ------------------------------------------- Michael S. Albright Vice President - Finance and Administration (chief accounting officer) -17- <PAGE> 21 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. PART I. FINANCIAL INFORMATION CONDENSED COMBINING FINANCIAL STATEMENTS ITEM 1. The condensed combining financial statements include the accounts of 3333 Holding Corporation and subsidiary and Centex Development Company, L.P. (collectively the "Companies"), and have been prepared by the Companies, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Companies believe that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed combining financial statements be read in conjunction with the financial statements and the notes thereto included in the Companies' latest annual report on Form 10-K. In the opinion of the Companies, all adjustments necessary to present fairly the information in the following condensed financial statements of the Companies have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. -18- <PAGE> 22 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF OPERATIONS (dollars in thousands, except per share/unit data) (unaudited) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1996 1995 ------------------------------------------- ----------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY ------------ ------------- ------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 4,026 $ 3,932 $ 307 $ 3,508 $ 3,371 $ 465 Costs and Expenses 3,382 3,224 371 3,315 3,187 456 ------- ------- ------- ------- ------- ------- Earnings (Loss) Before Income Taxes 644 708 (64) 193 184 9 Income Taxes - - - - - - ------- ------- ------- ------- ------- ------- NET EARNINGS (LOSS) $ 644 $ 708 $ (64) $ 193 $ 184 $ 9 ======= ======= ======= ======= ======= ======= EARNINGS (LOSS) PER SHARE/UNIT (Average Outstanding Shares, 1,000; Units, 1,000) $ 708 $ (64) $ 184 $ 9 ======= ======= ======= ======= </TABLE> See notes to condensed combining financial statements. -19- <PAGE> 23 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF OPERATIONS (dollars in thousands, except per share/unit data) (unaudited) <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1996 1995 ---------------------------------------- ----------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY -------- ------------- ------------- -------- ------------- -------------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 8,323 $ 7,945 $ 1,331 $13,989 $13,610 $ 1,546 Costs and Expenses 7,414 7,251 1,116 13,600 13,445 1,322 ------- ------- ------- ------- ------- ------- Earnings Before Income Taxes 909 694 215 389 165 224 Income Taxes - - - - - - ------- ------- ------- ------- ------- ------- NET EARNINGS $ 909 $ 694 $ 215 $ 389 $ 165 $ 224 ======= ======= ======= ======= ======= ======= EARNINGS PER SHARE/UNIT (Average Outstanding Shares, 1,000; Units, 1,000) $ 694 $ 215 $ 165 $ 224 ======= ======= ======= ======= </TABLE> See notes to condensed combining financial statements. -20- <PAGE> 24 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> DECEMBER 31, 1996* MARCH 31, 1996** ------------------------------------------ ------------------------------------------ 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY ---------- -------------- ------------ ---------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Cash $ 687 $ 680 $ 7 $ 231 $ 225 $ 6 Accounts Receivable 402 723 179 360 448 179 Notes Receivable - Centex Corporation and Subsidiaries 7,700 - 7,700 7,700 - 7,700 Other 2,370 2,370 - 3,809 3,809 - Investment in Affiliate - - 767 - - 767 Investment in Real Estate Joint Venture 281 281 - 180 180 - Projects Held for Development & Sale 39,330 39,330 - 38,506 38,506 - Other Assets 3,000 3,000 - - - - ------- ------- ------- ------- ------- ------- $53,770 $46,384 $ 8,653 $50,786 $43,168 $ 8,652 ======= ======= ======= ======= ======= ======= LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Accounts Payable and Accrued Liabilities $ 2,894 $ 2,728 $ 666 $ 2,871 $ 2,558 $ 580 Notes Payable - Centex Corporation and Subsidiaries 7,300 - 7,300 7,600 - 7,600 Other 7,668 7,668 - 3,326 3,326 - Land Sale Deposits 10 10 - - - - ------- ------- ------- ------- ------- ------- Total Liabilities 17,872 10,406 7,966 13,797 5,884 8,180 Stockholders' Equity and Partners' Capital 35,898 35,978 687 36,989 37,284 472 ------- ------- ------- ------- ------- ------- $53,770 $46,384 $ 8,653 $50,786 $43,168 $ 8,652 ======= ======= ======= ======= ======= ======= </TABLE> * Unaudited ** Condensed from audited financial statements. See notes to condensed combining financial statements. -21- <PAGE> 25 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. CONDENSED COMBINING STATEMENT OF CASH FLOWS (dollars in thousands) (unaudited) <TABLE> <CAPTION> For The Nine Months Ended December 31, ------------------------------------------------------------------------------------- 1996 1995 ---------------------------------------- ------------------------------------------- 3333 HOLDING 3333 HOLDING CENTEX CORPORATION CENTEX CORPORATION DEVELOPMENT AND DEVELOPMENT AND COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY -------- -------------- ------------ ----------- -------------- ----------- <S> <C> <C> <C> <C> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net Earnings $ 909 $ 694 $ 215 $ 389 $ 165 $ 224 Net Change in Payables, Accruals, Deposits and Receivables (309) (95) (214) 296 536 (240) Decrease (Increase) in Notes Receivable 1,439 1,439 - (2,731) (2,731) - Increase in Advances to Joint Venture (101) (101) - (151) (151) - Decrease in Projects Held for Development and Sale 4,891 4,891 - 61,793 61,793 - Increase in Other Assets (3,000) (3,000) - - - - -------- -------- ------ -------- -------- -------- 3,829 3,828 1 59,596 59,612 (16) -------- -------- ------ -------- -------- -------- CASH FLOWS - FINANCING ACTIVITIES Decrease in Notes Payable (1,373) (1,373) - (53,509) (53,509) - Capital Distributions (2,000) (2,000) - (6,300) (6,300) - -------- -------- ------ -------- -------- -------- (3,373) (3,373) - (59,809) (59,809) - -------- -------- ------ -------- -------- --------- NET INCREASE (DECREASE) IN CASH 456 455 1 (213) (197) (16) CASH AT BEGINNING OF YEAR 231 225 6 1,422 1,403 19 -------- -------- ------ -------- -------- -------- CASH AT END OF PERIOD $ 687 $ 680 $ 7 $ 1,209 $ 1,206 $ 3 ======== ======== ====== ======== ======== ======== </TABLE> See notes to condensed combining financial statements. -22- <PAGE> 26 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. NOTES TO CONDENSED COMBINING FINANCIAL STATEMENTS DECEMBER 31, 1996 (unaudited) (A) On November 30, 1987 Centex Corporation ("Centex") distributed to a nominee all of the issued and outstanding shares of common stock of 3333 Holding Corporation ("Holding") and warrants to purchase approximately 80% of the Class B units of limited partnership interest in Centex Development Company, L.P. (the "Partnership"). 3333 Development Corporation ("Development"), a wholly-owned subsidiary of Holding, serves as general partner of the Partnership. These securities are held by the nominee on behalf of Centex stockholders and will trade in tandem with the common stock of Centex until such time as they are detached. (B) See Note B to the condensed consolidated financial statements of Centex Corporation and subsidiaries included elsewhere in this Form 10-Q for supplementary condensed combined financial statements for Centex Corporation and Subsidiaries, Holding and subsidiary and the Partnership. (C) The Partnership sells lots to Centex Homes pursuant to certain purchase and sale agreements. Revenues from these sales totaled $3,090,000 and $4,382,000 for the nine months ended December 31, 1996 and 1995, respectively. (D) A summary of changes in stockholders' equity is presented below (dollars in thousands). <TABLE> <CAPTION> For the Nine Months Ended December 31, 1996 ---------------------------------------------------------------------------------------- 3333 Holding Corporation Centex Development Company, L.P. and Subsidiary -------------------------------- -------------------------------------- CLASS B GENERAL LIMITED CAPITAL IN UNITS PARTNERS' PARTNERS' STOCK EXCESS OF RETAINED COMBINED WARRANTS CAPITAL CAPITAL WARRANTS PAR VALUE EARNINGS ---------- --------- ---------- ---------- -------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at March 31, 1996 $ 36,989 $ 500 $ 767 $ 36,017 $ 1 $ 800 $ (329) Capital Distributions (2,000) - - (2,000) - - - Net Earnings 909 - - 694 - - 215 ---------- --------- --------- --------- --------- ---------- --------- BALANCE AT DECEMBER 31, 1996 $ 35,898 $ 500 $ 767 $ 34,711 $ 1 $ 800 $ (114) ========== ========= ========= ========= ========= ========== ========= </TABLE> During the nine months ended December 31, 1996, the Partnership made capital distributions of $2 million to its Limited Partners, which are Centex affiliates. -23- <PAGE> 27 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS On a combined basis, revenues for the quarter ended December 31, 1996 of $4 million included results from the sale of commercial property in Texas and residential property in New Jersey. Revenues of $3.5 million for the quarter ended December 31, 1995 included the sale of commercial property in Texas and residential property in New Jersey. Combined net earnings for the current quarter were $644,000 compared to combined net earnings of $193,000 for the same quarter a year ago. Combined revenues for the nine months ended December 31, 1996 of $8.3 million included results from the sale of commercial property in Texas and residential property in Illinois and New Jersey. Revenues of $14 million for the nine months ended December 31, 1995 included the sale of commercial property in Texas and residential property in Florida and New Jersey. Combined net earnings for this period were $909,000 compared to combined net earnings of $389,000 for the same period last year. The improvement in earnings relates to the higher gross margin on real estate sales in the periods ended December 31, 1996 compared to the same periods last year. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended December 31, 1996, the Partnership made capital distributions of $2 million to its Limited Partners, which are Centex affiliates. Holding, Development and the Partnership believe that they will be able to provide or obtain the necessary funding for their current operations and future expansion needs. The revenues, earnings and liquidity of these companies are largely dependent on future land sales, the timing of which is uncertain. Accordingly, the Companies' results of operations will vary significantly from period to period. The ability to obtain external debt or equity capital is subject to the provisions of Holding's loan agreement with Centex and the Partnership Agreement governing the Partnership. -24- <PAGE> 28 3333 HOLDING CORPORATION CENTEX DEVELOPMENT COMPANY, L.P. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27.1 - Financial Data Schedule Exhibit 27.2 - Financial Data Schedule (b) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1996 All other items required under Part II are omitted because they are not applicable. -25- <PAGE> 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. 3333 HOLDING CORPORATION --------------------------- Registrant February 12, 1997 /s/ J. Stephen Bilheimer --------------------------- J. Stephen Bilheimer President February 12, 1997 /s/ Kimberly Pinson --------------------------- Kimberly Pinson Vice President (chief accounting officer) -26- <PAGE> 30 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. CENTEX DEVELOPMENT COMPANY, L.P. ---------------------------------- Registrant By: 3333 Development Corporation, General Partner February 12, 1997 /s/ J. Stephen Bilheimer ---------------------------------- J. Stephen Bilheimer President February 12, 1997 /s/ Kimberly Pinson ---------------------------------- Kimberly Pinson Vice President (chief accounting officer) -27- <PAGE> 31 EXHIBIT INDEX ------------- <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 3 - Certificate of Designations of Junior Participating Preferred Stock, Series D of Centex Corporation 27 - Financial Data Schedule 27.1 - Financial Data Schedule 27.2 - Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <DESCRIPTION>CENTEX CORPORATIONS PREFERENCES <TEXT> <PAGE> 1 EXHIBIT 3 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF JUNIOR PARTICIPATING PREFERRED STOCK, SERIES D of CENTEX CORPORATION Pursuant to Section 78.1955 of the General Corporation Law of the State of Nevada We, Laurence E. Hirsch, Chairman of the Board and Chief Executive Officer, and Raymond G. Smerge, Vice President, Chief Legal Officer and Secretary, of Centex Corporation, a corporation organized and existing under the General Corporation Law of the State of Nevada (the "Corporation"), in accordance with the provisions of Section 78.1955 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Restated Articles of Incorporation of the said Corporation, the said Board of Directors on October 2, 1996, adopted the following resolution creating a series of 1,000,000 shares of Preferred Stock designated as Junior Participating Preferred Stock, Series D: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Articles of Incorporation (as hereafter amended or supplemented, the "Articles of Incorporation"), a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Junior Participating Preferred Stock, Series D", par value $.25 per share (the "Series D Preferred Stock"), and the number of shares constituting such series shall be 1,000,000. Section 2. Dividends and Distributions. (a) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series D Preferred Stock with respect to dividends, the holders of shares of Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, quarterly dividends payable in cash on the 1st day of January, April, July and September in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series D Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times <PAGE> 2 the aggregate per share amount (payable-in-kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.25 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series D Preferred Stock. In the event the Corporation shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series D Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series D Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series D Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series D Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series D Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series D Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series D Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. -2- <PAGE> 3 Section 3. Voting Rights. The holders of shares of Series D Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series D Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series D Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) (i) If at any time dividends on any Series D Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series D Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series D Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series D Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(c) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of -3- <PAGE> 4 such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series D Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this subparagraph (c)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this subparagraph (c)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been -4- <PAGE> 5 elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in subparagraph (c)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this subparagraph (c) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Articles of Incorporation or bylaws irrespective of any increase made pursuant to the provisions of subparagraph (c)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Articles of Incorporation or bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (d) Except as set forth herein, holders of Series D Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series D Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series D Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series D Preferred Stock, except dividends paid ratably on the Series D Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; -5- <PAGE> 6 (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series D Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series D Preferred Stock, or any shares of stock ranking on a parity with the Series D Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under subparagraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series D Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D unless, prior thereto, the holders of shares of Series D Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared to the date of such payment, provided that the holders of shares of Series D Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (ii) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series D Preferred Stock, except distributions made ratably on the Series D Preferred Stock and all such parity stock in proportion to the total amounts to -6- <PAGE> 7 which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event under the proviso in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series D Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series D Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption; No Sinking Fund. (a) The shares of Series D Preferred Stock shall not be redeemable. (b) The shares of Series D Preferred Stock shall not be subject to or entitled to the operation of a retirement or sinking fund. Section 9. Ranking. The Series D Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Articles of Incorporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series D Preferred Stock so as to affect them adversely without the -7- <PAGE> 8 affirmative vote of the holders of two-thirds or more of the outstanding shares of Series D Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series D Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series D Preferred Stock. -8- <PAGE> 9 IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed in its corporate name on this 4th day of October, 1996. CENTEX CORPORATION By: /s/ LAURENCE E. HIRSCH ---------------------------- Laurence E. Hirsch, Chairman of the Board and Chief Executive Officer Before me on this 4th day of October, 1996, personally appeared Laurence E. Hirsch, Chairman of the Board and Chief Executive Officer of Centex Corporation, and acknowledged to me that he executed the foregoing certificate for the purposes therein expressed. [Notarial Seal] /s/ WENDY N. MARTIN --------------------------------------- Notary Public, State of Texas Wendy N. Martin --------------------------------------- Typed or Printed Name of Notary Attest: /s/ RAYMOND G. SMERGE - -------------------------- Raymond G. Smerge, Vice President, Chief Legal Officer and Secretary Before me on this 4th day of October, 1996, personally appeared Raymond G. Smerge, Vice President, Chief Legal Officer and Secretary of Centex Corporation, and acknowledged to me that he executed the foregoing certificate for the purposes therein expressed. [Notarial Seal] /s/ WENDY N. MARTIN --------------------------------------- Notary Public, State of Texas Wendy N. Martin --------------------------------------- Typed or Printed Name of Notary -9- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA FOR CENTEX CORP. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Centex Corporation's December 31, 1996, Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <CIK> 0000018532 <NAME> CENTEX CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1997 <PERIOD-START> APR-01-1996 <PERIOD-END> DEC-31-1996 <CASH> 73,981 <SECURITIES> 0 <RECEIVABLES> 957,597 <ALLOWANCES> 0 <INVENTORY> 1,063,126 <CURRENT-ASSETS> 0 <PP&E> 391,888 <DEPRECIATION> 188,357 <TOTAL-ASSETS> 2,600,521 <CURRENT-LIABILITIES> 0 <BONDS> 224,504 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 7,196 <OTHER-SE> 795,968 <TOTAL-LIABILITY-AND-EQUITY> 2,600,521 <SALES> 2,833,121 <TOTAL-REVENUES> 2,833,121 <CGS> 2,648,537 <TOTAL-COSTS> 2,648,537 <OTHER-EXPENSES> 38,660 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 26,760 <INCOME-PRETAX> 119,164 <INCOME-TAX> 41,642 <INCOME-CONTINUING> 77,522 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 77,522 <EPS-PRIMARY> 2.64 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA FOR 3333 HOLDING CORP. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from 3333 Holding Corporation's December 31, 1996, Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <CIK> 0000818762 <NAME> 3333 HOLDING CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1997 <PERIOD-START> APR-01-1996 <PERIOD-END> DEC-31-1996 <CASH> 7 <SECURITIES> 0 <RECEIVABLES> 7,879 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 0 <PP&E> 0 <DEPRECIATION> 0 <TOTAL-ASSETS> 8,653 <CURRENT-LIABILITIES> 0 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1 <OTHER-SE> 686 <TOTAL-LIABILITY-AND-EQUITY> 8,653 <SALES> 1,331 <TOTAL-REVENUES> 1,331 <CGS> 1,116 <TOTAL-COSTS> 1,116 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 215 <INCOME-TAX> 0 <INCOME-CONTINUING> 215 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 215 <EPS-PRIMARY> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA FOR CENTEX DEVELOPMENT CO. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Centex Development Company L.P.'s December 31, 1996, Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <CIK> 0000818764 <NAME> CENTEX DEVELOPMENT COMPANY, L.P. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-1997 <PERIOD-START> APR-01-1996 <PERIOD-END> DEC-31-1996 <CASH> 680 <SECURITIES> 0 <RECEIVABLES> 3,093 <ALLOWANCES> 0 <INVENTORY> 39,330 <CURRENT-ASSETS> 0 <PP&E> 0 <DEPRECIATION> 0 <TOTAL-ASSETS> 46,384 <CURRENT-LIABILITIES> 0 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 500 <OTHER-SE> 35,478 <TOTAL-LIABILITY-AND-EQUITY> 46,384 <SALES> 7,945 <TOTAL-REVENUES> 7,945 <CGS> 7,251 <TOTAL-COSTS> 7,251 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 694 <INCOME-TAX> 0 <INCOME-CONTINUING> 694 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 694 <EPS-PRIMARY> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

DE

https://www.sec.gov/Archives/edgar/data/315189/0000315189-97-000003.txt

-----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, M69x6+HR6h/2x4txlpDV8xF1EGVgPH23ZlFjsIAyY3NBKmNQNXp87sYJ5sG3J3rT BF668nS2EI5BLT9DTKFa8g== <SEC-DOCUMENT>0000315189-97-000003.txt : 19970310 <SEC-HEADER>0000315189-97-000003.hdr.sgml : 19970310 ACCESSION NUMBER: 0000315189-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970307 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEERE & CO CENTRAL INDEX KEY: 0000315189 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 362382580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04121 FILM NUMBER: 97552845 BUSINESS ADDRESS: STREET 1: JOHN DEERE RD CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097658000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> - ----------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------- FORM 10-Q ---------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1997 ---------------------------- Commission file no: 1-4121 ---------------------------- DEERE & COMPANY Delaware 36-2382580 (State of incorporation) (IRS employer identification no.) John Deere Road Moline, Illinois 61265 (Address of principal executive offices) Telephone Number: (309) 765-8000 --------------------------------- 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 At January 31, 1997, 255,285,498 shares of common stock, $1 par value, of the registrant were outstanding. - ----------------------------------------------------------------- Page 1 of 22 Pages. Index to Exhibits: Page 19. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY CONSOLIDATED STATEMENT OF CONSOLIDATED INCOME (Deere & Company and Consolidated Subsidiaries) Millions of dollars except Three Months Ended per share amounts January 31 (Unaudited) 1997 1996 Net Sales and Revenues Net sales of equipment $2,002.6 $1,936.6 Finance and interest income 192.5 180.2 Insurance and health care premiums 162.0 163.4 Investment income 15.0 16.5 Other income 23.9 20.8 - --------------------------------------------------------------- Total 2,396.0 2,317.5 - --------------------------------------------------------------- Costs and Expenses Cost of goods sold 1,529.6 1,501.2 Research and development expenses 86.5 80.0 Selling, administrative and general expenses 261.8 238.4 Interest expense 94.9 98.7 Insurance and health care claims and benefits 123.8 127.3 Other operating expenses 14.1 13.6 - --------------------------------------------------------------- Total 2,110.7 2,059.2 - --------------------------------------------------------------- Income of Consolidated Group Before Income Taxes 285.3 258.3 Provision for income taxes 106.1 93.5 Income of Consolidated Group 179.2 164.8 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit (.5) Insurance Health care Other (2.0) 1.4 - --------------------------------------------------------------- Total (2.5) 1.4 - --------------------------------------------------------------- Net Income $ 176.7 $ 166.2 - --------------------------------------------------------------- Net income per share, primary and fully diluted $ .69 $ .63 See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY EQUIPMENT OPERATIONS STATEMENT OF CONSOLIDATED INCOME (Deere & Company with Financial Services on the Equity Basis) Millions of dollars except Three Months Ended per share amounts January 31 (Unaudited) 1997 1996 Net Sales and Revenues Net sales of equipment $2,002.6 $1,936.6 Finance and interest income 29.4 30.5 Insurance and health care premiums Investment income Other income 11.9 5.8 - ----------------------------------------------------------------- Total 2,043.9 1,972.9 - ----------------------------------------------------------------- Costs and Expenses Cost of goods sold 1,535.7 1,507.7 Research and development expenses 86.5 80.0 Selling, administrative and general expenses 183.4 167.5 Interest expense 20.5 27.0 Insurance and health care claims and benefits Other operating expenses .5 6.9 - ----------------------------------------------------------------- Total 1,826.6 1,789.1 - ----------------------------------------------------------------- Income of Consolidated Group Before Income Taxes 217.3 183.8 Provision for income taxes 81.9 67.7 Income of Consolidated Group 135.4 116.1 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit 32.9 34.5 Insurance 9.0 9.6 Health care 1.4 4.6 Other (2.0) 1.4 - ----------------------------------------------------------------- Total 41.3 50.1 - ----------------------------------------------------------------- Net Income $ 176.7 $ 166.2 - ----------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY FINANCIAL SERVICES STATEMENT OF CONSOLIDATED INCOME Millions of dollars except per share amounts Three Months Ended January 31 (Unaudited) 1997 1996 Net Sales and Revenues Net sales of equipment Finance and interest income $164.4 $151.4 Insurance and health care premiums 173.0 173.5 Investment income 15.0 16.5 Other income 13.2 16.2 - --------------------------------------------------------------- Total 365.6 357.6 - --------------------------------------------------------------- Costs and Expenses Cost of goods sold Research and development expenses Selling, administrative and general expenses 83.1 75.3 Interest expense 75.6 73.4 Insurance and health care claims and benefits 125.3 127.9 Other operating expenses 13.6 6.5 - --------------------------------------------------------------- Total 297.6 283.1 - --------------------------------------------------------------- Income of Consolidated Group Before Income Taxes 68.0 74.5 Provision for income taxes 24.2 25.8 Income of Consolidated Group 43.8 48.7 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit (.5) Insurance Health care Other - --------------------------------------------------------------- Total (.5) - --------------------------------------------------------------- Net Income $ 43.3 $ 48.7 - --------------------------------------------------------------- DEERE & COMPANY CONSOLIDATED CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company and Consolidated Subsidiaries) Millions of dollars (Unaudited) Jan 31 Oct 31 Jan 31 Assets 1997 1996 1996 Cash and short-term investments $ 366.1 $ 291.5 $ 364.2 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 366.1 291.5 364.2 Marketable securities 878.1 869.4 855.7 Receivables from unconsolidated subsidiaries and affiliates 19.6 13.1 4.6 Trade accounts and notes receivable - net 3,016.8 3,152.7 3,377.6 Financing receivables - net 6,132.9 5,912.2 5,502.3 Other receivables 467.2 549.6 488.5 Equipment on operating leases - net 481.1 429.8 271.6 Inventories 1,193.7 828.9 979.8 Property and equipment - net 1,331.8 1,351.7 1,294.0 Investments in unconsolidated subsidiaries and affiliates 132.4 127.4 172.8 Intangible assets - net 282.5 285.9 315.9 Deferred income taxes 646.4 653.0 625.1 Other assets and deferred charges 192.4 187.5 194.8 - ---------------------------------------------------------------- Total $15,141.0 $14,652.7 $14,446.9 - ---------------------------------------------------------------- Liabilities and Stockholders' Equity Short-term borrowings $ 3,834.1 $ 3,144.1 $ 3,774.4 Payables to unconsolidated subsidiaries and affiliates 40.2 27.6 24.1 Accounts payable and accrued expenses 2,295.6 2,676.2 2,234.8 Insurance and health care claims and reserves 428.1 437.6 462.0 Accrued taxes 201.5 132.4 149.1 Deferred income taxes 9.9 9.4 16.9 Long-term borrowings 2,478.4 2,425.4 2,215.4 Retirement benefit accruals and other liabilities 2,279.2 2,242.8 2,343.2 - ---------------------------------------------------------------- Total liabilities 11,567.0 11,095.5 11,219.9 - ---------------------------------------------------------------- Common stock, $1 par value (issued shares at January 31, 1997 - 263,846,284) 1,766.9 1,770.1 1,743.5 Retained earnings 2,425.2 2,299.5 1,804.2 Minimum pension liability adjustment (235.4) (235.4) (300.4) Cumulative translation adjustment (29.2) (14.0) (23.5) Unrealized gain (loss) on marketable securities 15.3 14.0 29.9 Unamortized restricted stock compensation (20.7) (11.1) (11.6) Common stock in treasury, at cost (348.1) (265.9) (15.1) - ---------------------------------------------------------------- Stockholders' equity 3,574.0 3,557.2 3,227.0 - ---------------------------------------------------------------- Total $15,141.0 $14,652.7 $14,446.9 - ---------------------------------------------------------------- See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company with Financial Services on the Equity Basis Jan 31 Oct 31 Jan 31 Millions of dollars (Unaudited) 1997 1996 1996 Assets Cash and short-term investments $ 135.4 $ 80.0 $ 97.3 Cash deposited with unconsolidated subsidiaries 168.5 544.8 118.9 Cash and cash equivalents 303.9 624.8 216.2 Marketable securities Receivables from unconsolidated subsidiaries and affiliates 44.1 105.3 49.7 Trade accounts and notes receivable - net 3,016.8 3,152.7 3,377.6 Financing receivables - net 82.4 103.4 105.0 Other receivables 56.6 4.3 Equipment on operating leases - net 156.0 152.9 120.3 Inventories 1,193.7 828.9 979.8 Property and equipment - net 1,281.5 1,301.3 1,249.0 Investments in unconsolidated subsidiaries and affiliates 1,475.2 1,445.3 1,467.4 Intangible assets - net 273.2 276.3 306.6 Deferred income taxes 595.8 603.2 576.8 Other assets and deferred charges 125.0 117.4 122.9 - ---------------------------------------------------------------- Total $8,547.6 $8,768.1 $8,575.6 - ---------------------------------------------------------------- Liabilities and Stockholders' Equity Short-term borrowings $ 272.1 $ 223.6 $ 615.2 Payables to unconsolidated subsidiaries and affiliates 41.5 27.6 24.1 Accounts payable and accrued expenses 1,573.1 1,975.1 1,531.6 Insurance and health care claims and reserves Accrued taxes 197.2 130.3 149.2 Deferred income taxes 9.5 9.4 15.7 Long-term borrowings 625.4 625.9 692.4 Retirement benefit accruals and other liabilities 2,254.8 2,219.0 2,320.4 - ---------------------------------------------------------------- Total liabilities 4,973.6 5,210.9 5,348.6 - ---------------------------------------------------------------- Common stock, $1 par value (issued shares at January 31, 1997 - 263,846,284) 1,766.9 1,770.1 1,743.5 Retained earnings 2,425.2 2,299.5 1,804.2 Minimum pension liability adjustment (235.4) (235.4) (300.4) Cumulative translation adjustment (29.2) (14.0) (23.5) Unrealized gain (loss) on marketable securities 15.3 14.0 29.9 Unamortized restricted stock compensation (20.7) (11.1) (11.6) Common stock in treasury, at cost (348.1) (265.9) (15.1) - ---------------------------------------------------------------- Stockholders' equity 3,574.0 3,557.2 3,227.0 - ---------------------------------------------------------------- Total $8,547.6 $8,768.1 $8,575.6 - ---------------------------------------------------------------- DEERE & COMPANY CONDENSED CONSOLIDATED FINANCIAL SERVICES BALANCE SHEET Jan 31 Oct 31 Jan 31 Millions of dollars (Unaudited) 1997 1996 1996 Assets Cash and short-term investments $ 230.8 $ 211.6 $ 267.0 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 230.8 211.6 267.0 Marketable securities 878.1 869.4 855.7 Receivables from unconsolidated subsidiaries and affiliates 1.7 Trade accounts and notes receivable - net Financing receivables - net 6,050.5 5,808.8 5,397.3 Other receivables 467.2 492.9 485.2 Equipment on operating leases - net 325.1 276.8 151.3 Inventories Property and equipment - net 50.3 50.4 45.1 Investments in unconsolidated subsidiaries and affiliates 5.7 6.3 Intangible assets - net 9.3 9.7 9.3 Deferred income taxes 50.5 49.7 48.3 Other assets and deferred charges 67.4 70.2 71.8 - ---------------------------------------------------------------- Total $8,136.6 $7,845.8 $7,331.0 - ---------------------------------------------------------------- Liabilities and Stockholders' Equity Short-term borrowings $3,562.0 $2,920.6 $3,159.3 Payables to unconsolidated subsidiaries and affiliates 193.4 637.0 164.0 Accounts payable and accrued expenses 722.6 701.1 704.2 Insurance and health care claims and reserves 428.1 437.6 462.0 Accrued taxes 4.4 2.1 Deferred income taxes .3 1.2 Long-term borrowings 1,853.0 1,799.5 1,523.0 Retirement benefit accruals and other liabilities 24.3 23.7 22.7 - ---------------------------------------------------------------- Total liabilities 6,788.1 6,521.6 6,036.4 - ---------------------------------------------------------------- Common stock, $1 par value (issued shares at January 31, 1997 - 263,846,284) 209.4 209.4 209.4 Retained earnings 1,126.5 1,103.2 1,060.2 Minimum pension liability adjustment Cumulative translation adjustment (2.7) (2.4) (4.9) Unrealized gain (loss) on marketable securities 15.3 14.0 29.9 Unamortized restricted stock compensation Common stock in treasury, at cost - ---------------------------------------------------------------- Stockholders' equity 1,348.5 1,324.2 1,294.6 - ---------------------------------------------------------------- Total $8,136.6 $7,845.8 $7,331.0 - ---------------------------------------------------------------- DEERE & COMPANY CONSOLIDATED CONDENSED STATEMENT OF (Deere & Company and CONSOLIDATED CASH FLOWS Consolidated Subsidiaries) Three Months Ended January 31 Millions of dollars (Unaudited) 1997 1996 Cash Flows from Operating Activities Net income $ 176.7 $ 166.2 Adjustments to reconcile net income to net cash provided by (used for) operating activities (374.7) (551.3) - --------------------------------------------------------------- Net cash provided by (used for) operating activities (198.0) (385.1) - --------------------------------------------------------------- Cash Flows from Investing Activities Collections and sales of financing receivables 1,459.5 1,154.1 Proceeds from maturities and sales of marketable securities 25.1 26.1 Cost of financing receivables acquired (1,686.5) (1,318.9) Purchases of marketable securities (32.3) (12.2) Purchases of property and equipment (68.1) (39.4) Cost of operating leases acquired (89.4) (48.5) Acquisitions of businesses (6.8) (32.4) Other 72.5 19.0 - --------------------------------------------------------------- Net cash used for investing activities (326.0) (252.2) - --------------------------------------------------------------- Cash Flows from Financing Activities Increase in short-term borrowings 616.7 681.1 Change in intercompany receivables/payables Proceeds from long-term borrowings 145.0 50.0 Principal payments on long-term borrowings (10.3) (49.3) Proceeds from issuance of common stock 3.2 11.9 Repurchases of common stock (100.2) (2.0) Dividends paid (51.6) (52.4) Other (.1) (.1) - --------------------------------------------------------------- Net cash provided by (used for) financing activities 602.7 639.2 - --------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (4.1) (1.4) Net Increase (Decrease) in Cash and Cash Equivalents 74.6 .5 Cash and Cash Equivalents at Beginning of Period 291.5 363.7 - --------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 366.1 $ 364.2 - --------------------------------------------------------------- See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED STATEMENT OF (Deere & Company with CONSOLIDATED CASH FLOWS Financial Services on the Equity Basis) Three Months Ended Millions of dollars (Unaudited) January 31 Cash Flows from Operating Activities 1997 1996 Net income $ 176.7 $ 166.2 Adjustments to reconcile net income to net cash provided by (used for) operating activities (420.5) (560.6) - ---------------------------------------------------------------- Net cash provided by (used for) operating activities (243.8) (394.4) - ---------------------------------------------------------------- Cash Flows from Investing Activities Collections and sales of financing receivables 28.1 18.8 Proceeds from maturities and sales of marketable securities Cost of financing receivables acquired (7.4) (4.5) Purchases of marketable securities Purchases of property and equipment (65.8) (33.2) Cost of operating leases acquired (18.4) (16.0) Acquisitions of businesses (6.8) (32.4) Other 21.7 (29.8) - ---------------------------------------------------------------- Net cash used for investing activities (48.6) (97.1) - ---------------------------------------------------------------- Cash Flows from Financing Activities Increase in short-term borrowings 65.6 213.8 Change in intercompany receivables/payables 69.0 8.1 Proceeds from long-term borrowings Principal payments on long-term borrowings (10.3) (1.3) Proceeds from issuance of common stock 3.2 11.9 Repurchases of common stock (100.2) (2.0) Dividends paid (51.6) (52.4) Other (.1) (.1) - ---------------------------------------------------------------- Net cash provided by (used for) financing activities (24.4) 178.0 - ---------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (4.1) (1.4) Net Increase (Decrease) in Cash and Cash Equivalents (320.9) (314.9) Cash and Cash Equivalents at Beginning of Period 624.8 531.1 - ---------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 303.9 $ 216.2 - ---------------------------------------------------------------- DEERE & COMPANY CONDENSED STATEMENT OF FINANCIAL SERVICES CONSOLIDATED CASH FLOWS Three Months Ended January 31 Millions of dollars (Unaudited) 1997 1996 Cash Flows from Operating Activities Net income $ 43.3 $ 48.7 Adjustments to reconcile net income to net cash provided by (used for) operating activities 22.5 3.4 - ---------------------------------------------------------------- Net cash provided by (used for) operating activities 65.8 52.1 - ---------------------------------------------------------------- Cash Flows from Investing Activities Collections and sales of financing receivables 1,431.4 1,135.4 Proceeds from maturities and sales of marketable securities 25.1 26.1 Cost of financing receivables acquired (1,679.1) (1,314.4) Purchases of marketable securities (32.3) (12.2) Purchases of property and equipment (2.3) (6.1) Cost of operating leases acquired (71.0) (32.5) Acquisitions of businesses Other 50.8 48.7 - ---------------------------------------------------------------- Net cash used for investing activities (277.4) (155.0) - ---------------------------------------------------------------- Cash Flows from Financing Activities Increase in short-term borrowings 551.1 467.3 Change in intercompany receivables/payables (445.3) (349.3) Proceeds from long-term borrowings 145.0 50.0 Principal payments on long-term borrowings (48.0) Proceeds from issuance of common stock Repurchases of common stock Dividends paid (20.0) (42.8) Other - ---------------------------------------------------------------- Net cash provided by (used for) financing activities 230.8 77.2 - ---------------------------------------------------------------- Effect of Exchange Rate Changes on Cash Net Increase (Decrease) in Cash and Cash Equivalents 19.2 (25.7) Cash and Cash Equivalents at Beginning of Period 211.6 292.7 - ---------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 230.8 $ 267.0 - ---------------------------------------------------------------- Notes to Interim Financial Statements (1) The consolidated financial statements of Deere & Company and consolidated subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year. (2) The Company's consolidated financial statements and some information in the notes and related commentary are presented in a format which includes data grouped as follows: Equipment Operations - These data include the Company's agricultural equipment, industrial equipment and commercial and consumer equipment operations with Financial Services reflected on the equity basis. Data relating to the above equipment operations, including the consolidated group data in the income statement, are also referred to as "Equipment Operations" in this report. Financial Services - These data include the Company's credit, insurance and health care operations. Consolidated - These data represent the consolidation of the Equipment Operations and Financial Services in conformity with Financial Accounting Standards Board (FASB) Statement No. 94. References to "Deere & Company" or "the Company" refer to the entire enterprise. (3) An analysis of the Company's retained earnings follows in millions of dollars: Three Months Ended January 31 1997 1996 Balance, beginning of period........... $2,299.5 $1,690.3 Net income............................. 176.7 166.2 Dividends declared..................... (51.0) (52.3) Balance, end of period................. $2,425.2 $1,804.2 (4) An analysis of the cumulative translation adjustment follows in millions of dollars: Three Months Ended January 31 1997 1996 Balance, beginning of period............ $(14.0) $(11.6) Translation adjustment.................. (12.4) (11.4) Income taxes applicable to translation adjustments (2.8) (.5) Balance, end of period.................. $(29.2) $(23.5) (5) Substantially all inventories owned by Deere & Company and its United States equipment subsidiaries are valued at cost on the last-in, first-out (LIFO) basis. If all of the Company's inventories had been valued on an approximate first-in, first-out (FIFO) basis, estimated inventories by major classification in millions of dollars would have been as follows: January 31 October 31 January 31 1997 1996 1996 Raw materials and supplies.............. $ 238 $ 228 $ 234 Work-in-process......... 459 397 412 Finished machines and parts................. 1,527 1,232 1,342 Total FIFO value........ 2,224 1,857 1,988 Adjustment to LIFO basis................. 1,030 1,028 1,008 Inventories............. $1,194 $ 829 $ 980 (6) During the first three months of 1997, the Financial Services subsidiaries and the Equipment Operations received proceeds from the sale of retail notes of $4 million. At January 31, 1997, the net unpaid balance of all retail notes previously sold by the Financial Services subsidiaries and the Equipment Operations was $1,137 million. At January 31, 1997, the Company's maximum exposure under all credit receivable recourse provisions was $194 million for all retail notes sold. Certain foreign subsidiaries have pledged assets with a balance sheet value of $31 million as collateral for borrowings as of January 31, 1997. At January 31, 1997, the Company had commitments of approximately $95 million for construction and acquisition of property and equipment. (7) Dividends declared and paid on a per share basis were as follows: Three Months Ended January 31 1997 1996 Dividends declared.......... $.20 $.20 Dividends paid.............. $.20 $.20 (8) Worldwide net sales and revenues and operating profit in millions of dollars follow: Three Months Ended January 31 % 1997 1996 Change Net sales: Agricultural equipment..... $1,273 $1,186 + 7 Industrial equipment......... 461 443 + 4 Commercial and consumer equipment.................. 269 308 -13 Total net sales.......... 2,003 1,937 + 3 Financial Services revenues.. 354 347 + 2 Other revenues............... 39 34 +15 Total net sales and revenues............. $2,396 $2,318 + 3 United States and Canada: Equipment net sales......... $1,415 $1,397 + 1 Financial Services revenues................. 354 347 + 2 Total.................. 1,769 1,744 + 1 Overseas net sales............ 588 540 + 9 Other revenues................ 39 34 +15 Total net sales and revenues.............. $2,396 $2,318 + 3 Operating profit: Agricultural equipment...... $ 195 $ 148 +32 Industrial equipment........ 38 52 -27 Commercial and consumer equipment................. 4 21 -81 Equipment Operations........ 237 221 + 7 Financial Services*......... 68 75 - 9 Total operating profit.. 305 296 + 3 Interest and corporate expenses-net................ (22) (37) -41 Income taxes.................. (106) (93) +14 Net income.............. $ 177 $ 166 + 6 * Operating profit is defined as income before interest expense, foreign exchange gains and losses, income taxes and certain Corporate expenses, except for the operating profit of Financial Services which includes the effect of interest expense. (9) The calculation of primary net income per share is based on the average number of shares outstanding during the three months ended January 31, 1997 and 1996 of 256,129,000 and 262,229,000, respectively. The calculation of fully diluted net income per share recognizes the dilutive effect of the assumed exercise of stock options, stock appreciation rights, contingent shares and conversion of convertible debentures. The effect of the fully diluted calculation was immaterial. (10) In December 1996, the Company granted options to employees for the purchase of 1,471,575 shares of common stock at an exercise price of $42.69 per share. At January 31, 1997, options for 7,633,762 shares were outstanding at option prices in a range of $12.25 to $47.36 per share and a weighted- average exercise price of $29.80 per share. A total of 14,767,056 shares remained available for the granting of future options. (11) In December 1996, the Company granted 271,455 shares of restricted stock under the Company's restricted stock plans for key employees. The market value of the restricted stock at the time of grant totaled $11.6 million and was recorded as unamortized restricted stock compensation in a separate component of stockholders' equity. At January 31, 1997, 962,885 restricted shares were outstanding and 3,478,817 shares remained available for award under all restricted stock plans. (12) The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability, retail credit matters and patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operations. (13) In the first quarter of 1997, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future cash flows from the use of the asset are less than the carrying amount, the asset must be written down to fair value. The adoption of this Statement had no effect on the Company's financial position or results of operations. (14) In the first quarter of 1997, the Company adopted FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement defines a new "fair value" method of accounting for stock-based compensation expense, and requires certain additional disclosures at year end for these plans. The Statement also allows the retention of the previous "intrinsic value" method of accounting for expense recognition under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company retained the intrinsic value method and, therefore, the new standard had no effect on the Company's financial position or results of operations. (15) In the first quarter of 1997, the Company adopted FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement provides the conditions for distinguishing sales of financial assets from secured borrowings and gives the criteria for recognizing extinguishments of liabilities. The adoption of this Statement had no effect on the Company's financial position or results of operations. (16) In February 1996, the Company announced its intention to repurchase up to $500 million of Deere & Company common stock. At the Company's discretion, repurchases of common stock are being made from time to time in the open market and through privately negotiated transactions. During the first quarter of 1997, the Company repurchased $67 million of common stock related to this program and $33 million for ongoing stock option and restricted stock plans. At January 31, 1997, the Company had repurchased a total of $267 million of common stock related to the stock repurchase program. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Deere & Company achieved record first quarter worldwide net income of $176.7 million or $.69 per share compared with $166.2 million or $.63 per share in the first quarter of 1996. First quarter net income increased six percent, while net income per share increased 10 percent due to the Company's previously announced share repurchase program. The higher profits resulted from strong worldwide retail demand for the Company's products, especially new tractors and combines. Operating margins also improved, reflecting the results of the Company's continuous improvement and quality initiatives. Worldwide net sales and revenues for the first quarter increased three percent to $2,396 million compared with $2,318 million for the first quarter of 1996. Net sales of agricultural, industrial and commercial and consumer equipment were $2,003 million for the quarter compared with $1,937 million last year, a gain of three percent. Export sales from the United States benefited from increased sales to the former Soviet Union and totaled $392 million for the quarter compared to $308 million for the same period last year. Overseas net sales and comparable physical volume of sales both increased approximately nine percent from last year's strong first quarter levels. Overall, the Company's comparable physical volume of sales to dealers (excluding the sales by the newly consolidated Mexican subsidiaries) was up slightly compared to last year. The Company's worldwide Equipment Operations, which exclude the Financial Services subsidiaries and unconsolidated affiliates, had income of $135.4 million for the first quarter compared with $116.1 million for the same period last year. Worldwide equipment operating profit increased to $237 million or 12 percent of net sales in the first quarter compared with $221 million or 11 percent of net sales last year. Worldwide agricultural equipment operating profit increased 32 percent to $195 million for the quarter compared with $148 million last year, reflecting higher sales volumes as well as improved operating margins, in both the Company's North American and overseas operations. Worldwide industrial equipment operating profit totaled $38 million, lower than last year's levels due to costs associated with growth initiatives. These costs included the continued development of new, more fuel-efficient engines, start-up expenses associated with the major engine facility in Torreon, Mexico and costs from the introduction of new industrial products. However, sales related to construction equipment products continued at strong levels in the first quarter. Worldwide commercial and consumer equipment operating profit totaled $4 million, down from last year's first quarter levels, reflecting a 13 percent decline in net sales primarily as a result of lower shipping activity associated with the Company's asset control efforts. These efforts include a program started during the fourth quarter of 1996, that focuses on providing products closer to the required customer delivery dates, thereby enabling the Company to reduce its level of asset investment. Overseas operating profit totaled $69 million, up 17 percent from last year, reflecting strong sales demand and improved operating efficiencies. Additional information on business segments is presented in Note 8 to the interim financial statements. The Company's asset management initiatives continued to show excellent results with Equipment Operations' asset levels as a percent of the last 12 months net sales totaling 72 percent at the end of the first quarter of 1997 compared with 79 percent a year ago. Trade receivables and Company inventories totaled $4,211 million at January 31 compared with $4,357 million at the end of the same period last year. Net income of the Company's credit operations was $32.9 million for the first quarter of 1997 compared to $34.5 million last year. The higher income from a larger average receivable and lease portfolio financed was more than offset by lower financing spreads and higher expenditures associated with several growth initiatives. Total revenues of the credit operations increased seven percent from $166 million in the first quarter of 1996 to $178 million in the first quarter of 1997. The average balance of receivables and leases financed was 14 percent higher than in the first three months of last year. Interest expense increased three percent compared with the first quarter of 1996 primarily as a result of an increase in average borrowings. The credit subsidiaries' consolidated ratio of earnings to fixed charges was 1.69 to 1 during the first three months this year compared with 1.73 to 1 in the comparable period of 1996. Net income from insurance operations was $9.0 million in the first quarter of 1997 compared with $9.6 million last year, reflecting a small gain from the sale of the personal lines book of business last year. However, underwriting results improved in the first quarter of this year compared to last year. For the three-month period, insurance premiums decreased 13 percent in 1997 compared with the same period last year, while total claims, benefits, and selling, administrative and general expenses decreased 15 percent this year. Net income from health care operations was $1.4 million in the first quarter of 1997 compared with $4.6 million last year. Although managed care membership grew by 19 percent from a year ago, earnings decreased this year primarily due to higher selling, administrative and general expenses associated with several new business initiatives and a higher medical cost ratio. Health care premiums and administrative services revenues increased 15 percent in the first three months of 1997 compared with the same period last year, while total claims, benefits, and selling, administrative and general expenses increased 22 percent this year. Outlook The Company's first quarter sales and revenues were in line with the Company's expectations and provide a solid base for strong full-year activity. The remainder of 1997 should benefit from a moderately growing domestic economy, healthy agricultural markets and generally high levels of farmer confidence. Additionally, improving dietary trends and rapid income growth in many developing nations continue to stimulate strong demand for farm commodities, resulting in the need for high levels of future plantings. Although grain and oilseed prices have declined from the historical highs experienced in early 1996, they remain at relatively good levels. Additionally, most domestic livestock producers have benefited from lower grain prices. In 1996, many United States farmers received substantial direct government payments provided by the new farm bill. These payments were unrelated to farm income and are expected to continue during 1997. Based on these factors, as well as continued strong overseas demand and excellent customer response to the many new and innovative products introduced last year, the Company expects 1997 to be another strong year for its agricultural equipment division. Retail demand for industrial equipment should remain strong during 1997 as moderate economic growth and projected low inflation rates should result in relatively favorable mortgage rates and continued good housing demand this year. Additionally, commercial and consumer equipment industry volumes are projected to increase assuming sales recover from the weather related problems in 1996. Financial Services operations are also expected to remain at favorable levels, reflecting both the healthy demand for the Company's products and good economic conditions. Based on this outlook, the 1997 planned comparable physical volume of sales has been increased and is now expected to be six percent higher than last year. Second quarter physical volume is also forecasted to increase, and is expected to be 12 percent higher than a year ago. Overall, the outlook for the Company's businesses remains very positive. Although the Company is investing in numerous strategic growth opportunities throughout the world, its overall net sales and revenues and operating margins should continue at strong levels in response to its continuous improvement initiatives. Additionally, the Company's excellent worldwide dealer organization provides strong and critically important linkage to assist the Company in exceeding customers' expectations, while reinforcing its commitment to high levels of customer satisfaction. Based on these factors, the Company expects continued excellent operating performance during the remainder of 1997. Safe Harbor Statement Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under the "Outlook" heading that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. The Company's businesses include Equipment Operations (agricultural, industrial and commercial and consumer) and Financial Services (credit, insurance and health care). Forward-looking statements relating to these businesses involve certain factors that are subject to change, including: the many interrelated factors that affect farmers' confidence, including worldwide demand for agricultural products, world grain stocks, commodities prices, weather, animal diseases, crop pests, harvest yields, real estate values and government farm programs; general economic conditions and housing starts; legislation, primarily legislation relating to agriculture, the environment, commerce and government spending on infrastructure; actions of competitors in the various industries in which the Company competes; production difficulties, including capacity and supply constraints; dealer practices; labor relations; interest and currency exchange rates; accounting standards; and other risks and uncertainties. The Company's outlook is based upon assumptions relating to the factors described in the preceding sentence. During the spring, weather is especially important to equipment sales. Further information concerning the Company and its businesses, including factors that potentially could materially affect the company's financial results, is included in the Company's most recent annual report on Form 10-K as filed with the Securities and Exchange Commission. CAPITAL RESOURCES AND LIQUIDITY The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company's Equipment Operations, Financial Services operations and the consolidated totals. Equipment Operations The Company's equipment businesses are capital intensive and are subject to large seasonal variations in financing requirements for trade receivables from dealers and inventories. Accordingly, to the extent necessary, funds provided from operations are supplemented from external borrowing sources. In the first quarter of 1997, negative cash flows from operating activities of $244 million resulted primarily from an increase in Company-owned inventories and a decrease in accounts payable and accrued expenses. Partially offsetting these operating cash outflows were positive cash flows from net income and the reduction in trade and other receivables. The resulting net cash requirement for operating activities, along with repurchases of common stock, purchases of property and equipment and payment of dividends, were provided primarily from a decrease in cash and cash equivalents and an increase in borrowings. Negative cash flows from operating activities of $394 million in the first quarter of 1996 resulted from the normal seasonal increases in Company-owned inventories and trade receivables, and annual volume discount program payments made to dealers. Partially offsetting these operating cash outflows were positive cash flows from net income and dividends received from the Financial Services operations. The resulting net cash requirement for operating activities, along with payment of dividends, purchases of property and equipment, and acquisitions of businesses were provided primarily from an increase in borrowings and a decrease in cash and cash equivalents. Net trade accounts and notes receivable, which largely represent dealers' inventories financed by the Company, decreased $136 million during the first quarter and $361 million compared to one year ago. North American agricultural, industrial and commercial and consumer equipment trade receivables decreased approximately $30 million, $190 million and $105 million, respectively, compared with the levels 12 months earlier. Total overseas trade receivables were approximately $35 million lower than a year ago. The ratios of worldwide net trade accounts and note receivables to the last 12 months' net sales were 31 percent at January 31, 1997, 31 percent at October 31, 1996 and 37 percent at January 31, 1996. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was eight percent at January 31, 1997, eight percent at October 31, 1996 and nine percent at January 31, 1996. Company-owned inventories at January 31, 1997 have increased by $365 million compared with the end of the previous fiscal year and $214 million compared to one year ago, reflecting a seasonal increase in the first quarter, increased production and sales volumes from a year ago, the commercial and consumer equipment division's program to provide products closer to required customer delivery dates (see page 10), consolidation of the Mexican subsidiaries in October 1996 and increased inventory in- transit due to equipment being shipped overseas. Total interest-bearing debt of the Equipment Operations was $898 million at January 31, 1997 compared with $849 million at the end of fiscal year 1996 and $1,308 million at January 31, 1996. The ratio of total debt to total capital (total interest-bearing debt and stockholders' equity) was 20 percent, 19 percent and 29 percent at January 31, 1997, October 31, 1996 and January 31, 1996, respectively. Deere & Company retired $10 million of medium-term notes during the first quarter of 1997. Financial Services The Financial Services' credit subsidiaries rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the credit subsidiaries periodically sell substantial amounts of retail notes. The insurance and health care operations generate their funds through internal operations and have no external borrowings. During the first quarter of 1997, the aggregate cash provided from operating and financing activities was used primarily to increase financing receivables. Cash provided from Financial Services operating activities was $66 million in the current quarter. Cash provided by financing activities totaled $231 million in 1997, resulting from a $251 million increase in total borrowings, which was partially offset by payment of a $20 million dividend to the Equipment Operations. Cash used for investing activities totaled $277 million in the current quarter, primarily due to the cost of financing receivables and leases acquired exceeding collections. Cash and cash equivalents increased $19 million during the first quarter. In the first quarter of 1996, the aggregate cash provided from operating and financing activities was used primarily to increase financing receivables. Cash provided from Financial Services operating activities was $52 million in the first quarter of 1996. Cash provided by financing activities totaled $77 million in 1996, resulting from a $120 million increase in total borrowings, which was partially offset by payment of a $43 million dividend to the Equipment Operations. Cash used for investing activities totaled $155 million in 1996, primarily due to the cost of financing receivables acquired exceeding collections. Cash and cash equivalents decreased $26 million during the first quarter of last year. Marketable securities consist primarily of debt securities held by the insurance and health care operations in support of their obligations to policyholders. During the first quarter and last 12 months, marketable securities have increased $9 million and $22 million, respectively, from the investment of the insurance operation's positive cash flows. Financing receivables and leases increased by $290 million in the first quarter of 1997 and $827 million during the past 12 months. These receivables and leases consist of retail notes originating in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere- related customers, revolving charge accounts, wholesale notes receivable, and financing and operating leases. The credit subsidiaries' receivables and leases increased during the last 12 months due to the cost of financing receivables and leases acquired exceeding collections, which was partially offset by the sale of retail notes during the same period. Total acquisitions of financing receivables and leases were 30 percent higher in the first quarter of 1997 compared with the same period last year. This significant increase resulted from increased acquisitions of retail notes, wholesale receivables, leases and revolving charge accounts. At January 31, 1997, the levels of retail notes, wholesale receivables, leases and revolving charge accounts were all higher than one year ago. Financing receivables and leases administered by the credit subsidiaries, which include receivables previously sold, amounted to $7,512 million at January 31, 1997 compared with $7,487 million at October 31, 1996 and $6,618 million at January 31, 1996. At January 31, 1997, the unpaid balance of all retail notes previously sold was $1,137 million compared with $1,390 million at October 31, 1996 and $1,051 million at January 31, 1996. Additional sales of retail notes are expected to be made in the future. Total outside interest-bearing debt of the credit subsidiaries was $5,415 million at January 31, 1997 compared with $4,720 million at the end of fiscal year 1996 and $4,682 million at January 31, 1996. Total outside borrowings increased during the first quarter of 1997 and the past 12 months, generally corresponding with the level of the financing receivable and lease portfolio, the level of cash and cash equivalents and the change in payables owed to the Equipment Operations. The credit subsidiaries' ratio of total interest-bearing debt to stockholder's equity was 6.5 to 1 at January 31, 1997 compared with 6.3 to 1 at October 31, 1996 and 6.2 to 1 at January 31, 1996. The Capital Corporation issued $145 million of medium-term notes during the first quarter of 1997. Consolidated The Company maintains unsecured lines of credit with various banks in North America and overseas. Some of the lines are available to both the Equipment Operations and certain credit subsidiaries. Worldwide lines of credit totaled $4,434 million at January 31, 1997, $1,624 million of which were unused. For the purpose of computing unused credit lines, total short-term borrowings, excluding the current portion of long-term borrowings, were considered to constitute utilization. Included in the total credit lines is a long-term credit agreement commitment totaling $3,675 million. Stockholders' equity was $3,574 million at January 31, 1997 compared with $3,557 million at October 31, 1996 and $3,227 million at January 31, 1996. The increase of $17 million in the first three months of 1997 resulted primarily from net income of $177 million, partially offset by an increase in common stock in treasury of $82 million related to the Company's stock repurchase and employee benefit programs, dividends declared of $51 million, a $15 million change in the cumulative translation adjustment and a $10 million increase in unamortized restricted stock compensation. The Board of Directors at its meeting on February 26, 1997 declared a quarterly dividend of 20 cents per share payable May 1, 1997 to stockholders of record on March 31, 1997. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note (12) to the Interim Financial Statements. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See the index to exhibits immediately preceding the exhibits filed with this report. Certain instruments relating to long-term debt constituting less than 10% of the registrant's total assets are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A)of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. (b) Reports on Form 8-K Current Report on Form 8-K dated November 26, 1996 (Item 7). 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. DEERE & COMPANY Date: March 7, 1997 By s/ Robert W. Lane Robert W. Lane Senior Vice President, Principal Financial Officer and Principal Accounting Officer INDEX TO EXHIBITS Number Page 2 Not applicable - 3 Not applicable - 4 Not applicable - 10 Not applicable - 11 Computation of net income per share 20 12 Computation of ratio of earnings to fixed charges 21 15 Not applicable - 18 Not applicable - 19 Not applicable - 22 Not applicable - 23 Not applicable - 24 Not applicable - 27 Financial data schedule 22 99 Not applicable - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> Exhibit 11 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE (Shares and dollars in thousands except per share amounts) For the Three Months Ended January 31 1997 1996 1. Net income................................$176,707 $166,244 2. Adjustment - Interest expense, after tax benefit, applicable to convertible debentures outstanding.................. 1 5 3. Net income applicable to common stock - before interest applicable to convertible debentures..................$176,708 $166,249 PRIMARY NET INCOME PER COMMON SHARE: Shares: 4. Weighted-average number of common shares outstanding.................... 256,129 262,229 5. Incremental shares: Dilutive common stock options......... 2,357 2,184 Dilutive stock appreciation rights.... 19 57 Dilutive contingent shares............ 122 Total incremental shares............ 2,498 2,241 6. Primary net income per common share (1 divided by 4)........................$ .69* $ .63* FULLY DILUTED NET INCOME PER COMMON SHARE: Shares: 7. Weighted-average number of common shares outstanding.................... 256,129 262,229 8. Incremental shares: Dilutive common stock options......... 2,361 2,485 Dilutive stock appreciation rights.... 20 61 Dilutive contingent shares............ 122 9. Common equivalent shares from assumed conversion of convertible debentures: 5-1/2% debentures due 2001............ 37 52 10. Total................................. 258,669 264,827 11. Fully diluted net income per common share (3 divided by 10).................$ .69* $ .63* ____________ * Net income per common share outstanding was used in the designated calculations since the dilutive effects of common stock options, stock appreciation rights, contingent shares and assumed conversion of convertible debentures were immaterial. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Three Months Ended Year Ended January 31 October 31 1997 1996 1996 (In thousands of dollars) Earnings: Income of consolidated group before income taxes and changes in accounting $285,254 $258,288 $1,286,634 Dividends received from less-than-fifty-percent owned affiliates 1,228 5,454 7,937 Fixed charges net of capitalized interest 97,004 100,403 410,764 Total earnings $383,486 $364,145 $1,705,335 Fixed charges: Interest expense of con- solidated group (includes capitalized interest) $ 94,855 $ 98,738 $ 402,168 Portion of rental charges deemed to be interest 2,149 1,665 8,596 Total fixed charges $ 97,004 $100,403 $ 410,764 Ratio of earnings to fixed charges* 3.95 3.63 4.15 The computation of the ratio of earnings to fixed charges is based on applicable amounts of the Company and its consolidated subsidiaries plus dividends received from less-than fifty percent owned affiliates. "Earnings" consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges excluding capitalized interest. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense which is deemed to be representative of the interest factor, and capitalized interest. * The Company has not issued preferred stock. Therefore, the ratios of earnings to combined fixed charges and preferred stock dividends are the same as the ratios presented above. EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended October 31 1995 1994 1993 1992 (In thousands of dollars) Earnings: Income of consolidated group before income taxes and changes in accounting $1,092,751 $ 920,920 $ 272,345 $ 43,488 Dividends received from less-than- fifty-percent owned affiliates 2,023 2,329 1,706 2,325 Fixed charges net of capitalized interest 399,056 310,047 375,238 420,133 Total earnings $1,493,830 $1,233,296 $ 649,289 $ 465,946 Fixed charges: Interest expense of consolidated group (includes capitalized interest) $ 392,408 $ 303,080 $ 369,325 $ 415,205 Portion of rental charges deemed to be interest 6,661 7,008 6,127 6,720 Total fixed charges $ 399,069 $ 310,088 $ 375,452 $ 421,925 Ratio of earnings to fixed charges* 3.74 3.98 1.73 1.10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <RESTATED> <CIK> 0000315189 <NAME> DEERE&COMPANY <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1997 <PERIOD-START> NOV-01-1996 <PERIOD-END> JAN-31-1997 <EXCHANGE-RATE> 1 <CASH> 366 <SECURITIES> 878 <RECEIVABLES> 9,767 <ALLOWANCES> 130 <INVENTORY> 1,194 <CURRENT-ASSETS> 0 <PP&E> 4,261 <DEPRECIATION> 2,929 <TOTAL-ASSETS> 15,141 <CURRENT-LIABILITIES> 0 <BONDS> 2,478 <COMMON> 1,767 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,807 <TOTAL-LIABILITY-AND-EQUITY> 15,141 <SALES> 2,003 <TOTAL-REVENUES> 2,396 <CGS> 1,530 <TOTAL-COSTS> 1,754 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 9 <INTEREST-EXPENSE> 95 <INCOME-PRETAX> 285 <INCOME-TAX> 106 <INCOME-CONTINUING> 177 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 177 <EPS-PRIMARY> .69 <EPS-DILUTED> .69 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/940944/0000940944-97-000027.txt

-----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, IP+qWopMRRxdMJt/dSLmsZNQPBftvbXEKA+MECJ5W9Y/bHp6lrpQQcE1eR89vgNN 4gqLiiJ56LukZxCrVbBX7w== <SEC-DOCUMENT>0000940944-97-000027.txt : 19970325 <SEC-HEADER>0000940944-97-000027.hdr.sgml : 19970325 ACCESSION NUMBER: 0000940944-97-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970223 FILED AS OF DATE: 19970324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DARDEN RESTAURANTS INC CENTRAL INDEX KEY: 0000940944 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 593305930 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13666 FILM NUMBER: 97561374 BUSINESS ADDRESS: STREET 1: 5900 LAKE ELLENOR DR CITY: ORLANDO STATE: FL ZIP: 32809 BUSINESS PHONE: 4072454000 MAIL ADDRESS: STREET 1: 5900 LAKE ELLENOR DRIVE CITY: ORLANDO STATE: FL ZIP: 32809 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL MILLS RESTAURANTS INC DATE OF NAME CHANGE: 19950313 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FISCAL YEAR 1997 3RD QUARTER 10Q DARDEN RESTAURANT <TEXT> 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 February 23, 1997 [ ] 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 1-13666 DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5900 Lake Ellenor Drive, 32809 Orlando, Florida (Zip Code) (Address of principal executive offices) 407-245-4000 (Registrant's telephone number, including area code) 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._X_ Yes ___ No APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of common stock outstanding as of March 13, 1997: 152,980,212 (excluding 6,941,369 shares held in treasury). <PAGE> DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 2 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 Index to Exhibits 13 <PAGE> PART I-FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <CAPTION> Thirteen Weeks Ended February 23, 1997 February 25, 1996 - -------------------------------------------------------------------- <S> <C> <C> Sales....................... $800,846 $795,111 Costs and Expenses: Cost of sales: Food and beverages........ 277,824 262,230 Restaurant labor.......... 258,555 237,076 Restaurant expenses....... 116,908 106,973 -------- -------- Total Cost of Sales...... $653,287 $606,279 Selling, general and 85,245 95,092 administrative............ Depreciation and amortization 35,067 31,711 Interest, net............... 5,634 5,532 -------- -------- Total Costs and Expenses. $779,233 $738,614 -------- -------- Earnings before Income Taxes 21,613 56,497 Income Taxes................ (5,890) (20,889) -------- -------- Net Earnings................ $ 15,723 $ 35,608 ======== ======== Earnings per Share.......... $ 0.10 $ 0.22 ======= ======= Average Number of Common Shares Outstanding........ 154,200 159,100 ======== ======== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <CAPTION> Thirty-Nine Weeks Ended February 23, 1997 February 25, 1996 - -------------------------------------------------------------------- <S> <C> <C> Sales....................... $2,355,158 $2,362,316 Costs and Expenses: Cost of sales: Food and beverages........ 803,621 780,544 Restaurant labor.......... 757,763 707,715 Restaurant expenses....... 360,090 343,078 ---------- ---------- Total Cost of Sales...... $1,921,474 $1,831,337 Selling, general and 277,636 280,299 administrative............ Depreciation and amortization 105,170 99,833 Interest, net............... 16,191 16,346 Restructuring............... 75,000 ---------- ---------- Total Costs and Expenses. $2,320,471 $2,302,815 Earnings before Income Taxes 34,687 59,501 Income Taxes................ (9,660) (19,628) ----------- ---------- Net Earnings................ $ 25,027 $ 39,873 ========== ========== Earnings per Share.......... $ 0.16 $ 0.25 ========== ========== Average Number of Common Shares Outstanding........ 156,500 158,800 ========== ========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> (Unaudited) February 23, 1997 May 26, 1996 - ---------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents........ $ 28,787 $ 30,343 Receivables...................... 30,704 24,772 Prepaid income taxes............. 9,555 Inventories...................... 147,426 120,725 Net assets held for disposal..... 42,341 31,762 Prepaid expenses and other current assets................. 14,770 17,298 Deferred income taxes............ 50,789 63,080 ---------- ---------- Total Current Assets......... $ 324,372 $ 287,980 Land, Buildings and Equipment....... 1,680,506 1,702,861 Other Assets........................ 94,363 97,663 ---------- ---------- Total Assets................. $2,099,241 $2,088,504 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.................. $ 152,463 $ 128,196 Short-term debt................... 79,300 72,600 Current portion of long-term debt. 4 54 Accrued payroll................... 56,525 53,677 Accrued income taxes.............. 12,522 Other accrued taxes............... 19,844 18,921 Other current liabilities......... 155,189 159,336 ---------- ---------- Total Current Liabilities.... $ 463,325 $ 445,306 Long-term Debt...................... 313,757 301,151 Deferred Income Taxes............... 101,429 101,109 Other Liabilities................... 18,573 18,301 ---------- ---------- Total Liabilities............ $ 897,084 $ 865,867 ---------- ---------- Stockholders' Equity: Common stock and surplus......... $1,267,944 $1,266,212 Retained earnings................ 80,451 61,708 Treasury stock................... (69,042) (25,037) Cumulative foreign currency adjustment..................... (9,691) (10,351) Unearned compensation............ (67,505) (69,895) ---------- ---------- Total Stockholders' Equity... $1,202,157 $1,222,637 ---------- ---------- Total Liabilities and Stockholders' Equity............................ $2,099,241 $2,088,504 ========== ========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <CAPTION> Thirteen Weeks Ended February 23, February 25, 1997 1996 - ------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings............................ $15,723 $ 35,608 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization.......... 35,067 31,711 Amortization of unearned compensation and loan costs............................. 960 510 Change in current assets and liabilities 28,461 75,795 Change in other liabilities ........... 91 1,282 Loss on disposal of land, buildings and equipment.............................. 1,593 1,348 Deferred income taxes.................. 4,581 (2,597) Other, net............................. (71) (207) -------- -------- Net Cash Provided by Operating Activities $ 86,405 $143,450 -------- -------- Cash Flows--Investment Activities Purchases of land, buildings and equipment (42,548) (62,305) Purchases of intangibles................ (88) Decrease in other assets................ 247 2,241 Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)......................... 9,569 11,213 Net Cash Used by Investment Activities $(32,820) $(48,851) Cash Flows--Financing Activities Proceeds from issuance of common stock.. 337 2,104 Income tax benefit credited to equity... 71 Purchases of treasury stock............. (34,813) ESOP note receivable repayment.......... 1,000 200 Decrease in short-term debt............. (11,000) (52,100) Proceeds from issuance of long-term debt 248,303 Repayment of long-term debt............. (1,000) (250,027) Payment of interest rate swap settlement costs................................. (27,670) Payment of loan costs................... (1,850) -------- -------- Net Cash Used by Financing Activities $(45,405) $(81,040) -------- -------- Increase in Cash and Cash Equivalents..... 8,180 13,559 Cash and Cash Equivalents - Beginning of Period.................................. 20,607 16,991 -------- -------- Cash and Cash Equivalents - End of Period. $ 28,787 $ 30,550 ======== ======== Cash Flow from Changes in Current Assets and Liabilities: Receivables............................. (1,805) (7,947) Prepaid income taxes.................... 1,670 4,284 Inventories............................. (7,524) 25,183 Net assets held for disposal............ (485) Prepaid expenses and other current assets 3,170 2,640 Accounts payable........................ 22,805 27,516 Accrued payroll......................... 3,246 1,643 Accrued income taxes.................... 1,849 Other accrued taxes..................... (2,106) (2,237) Other current liabilities............... 9,005 23,349 -------- -------- Change in Current Assets and Liabilities.. $ 28,461 $ 75,795 ======== ======== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> <PAGE> <TABLE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> Thirty-Nine Weeks Ended February 23, February 25, 1997 1996 - -------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings............................ $ 25,027 $ 39,873 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization.......... 105,170 99,833 Amortization of unearned compensation and 2,781 1,038 loan costs............................ Change in current assets and liabilities (20,806) 4,869 Change in other liabilities ........... 272 2,457 Loss on disposal of land, buildings and 4,461 4,335 equipment............................. Deferred income taxes.................. 12,611 1,727 Non-cash restructuring expenses........ 71,225 Other, net............................. 10 1,443 -------- -------- Net Cash Provided by Operating Activities...................... $129,526 $226,800 -------- -------- Cash Flows--Investment Activities Purchases of land, buildings and equipment (125,948) (148,210) Purchases of intangibles.............. (617) (969) Decrease in other assets.............. 1,265 44 Proceeds from disposal of land, buildings and equipment (including net assets held for disposal).................... 22,303 13,435 Net Cash Used by Investment Activities...................... $(102,997) $(135,700) Cash Flows--Financing Activities Proceeds from issuance of common stock.. 1,275 5,224 Income tax benefit credited to equity... 360 Dividends paid.......................... (6,284) (6,332) Purchases of treasury stock............. (44,005) ESOP note receivable repayment.......... 1,600 1,100 Increase (decrease) in short-term debt.. 6,700 (49,400) Proceeds from issuance of long-term debt 16,900 248,303 Repayment of long-term debt............. (4,454) (250,059) Payment of interest rate swap settlement costs................................. (27,670) Payment of loan costs................... (177) (1,850) -------- -------- Net Cash Used by Financing Activities $(28,085) $(80,684) -------- -------- Increase (Decrease) in Cash and Cash Equivalents............................. (1,556) 10,416 Cash and Cash Equivalents - Beginning of Period 30,343 20,134 -------- -------- Cash and Cash Equivalents - End of Period. $ 28,787 $ 30,550 ======== ======== Cash Flow from Changes in Current Assets and Liabilities: Receivables............................. (5,932) (9,547) Prepaid income taxes.................... (9,555) Inventories............................. (26,701) 16,777 Net assets held for disposal............ (2,194) Prepaid expenses and other current assets 2,528 11,164 Accounts payable........................ 24,267 (10,562) Accrued payroll......................... 2,848 (1,644) Accrued income taxes.................... (12,522) (10,101) Other accrued taxes..................... 923 (800) Other current liabilities............... 3,338 11,776 -------- -------- Change in Current Assets and Liabilities.. $(20,806) $ 4,869 ======== ======== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> <PAGE> DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 1 - Background These consolidated financial statements do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the thirteen and thirty-nine weeks ended February 23, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending May 25, 1997. These statements should be read in conjunction with the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended May 26, 1996. The accounting policies used in preparing these consolidated financial statements are the same as those described in our annual report on Form10-K. Note 2 - Consolidated Statements of Cash Flows During the thirteen and thirty-nine weeks ended February 23, 1997, Darden paid $8,975 and $18,109, respectively, for interest (net of amount capitalized) and $471 and $19,669, respectively, for income taxes. Note 3 - Restructuring Expense Darden recorded restructuring expense of $75,000 during the thirty-nine weeks ended February 25, 1996 related to the closing of all China Coast restaurants. These expenses resulted in a reduction of net earnings of approximately $44,800 ($.28 per share) and primarily relate to the write-down of land, buildings and equipment to net realizable value. These restructuring actions are expected to be substantially completed in fiscal 1997. As of February 23, 1997, $10,722 of cash payments had been charged against the restructuring reserve. Note 4 - Subsequent Event The Company's Board of Directors approved a fourth quarter fiscal 1997 charge totaling $230,100 representing a $159,200 asset impairment write-down under Statement of Financial Accounting Standards No. 121 (SFAS 121) and $70,900 in other restructuring and administrative expenses, including the closing of certain restaurant properties. The asset impairment portion of the charge relates primarily to low performing restaurant properties and other long-lived assets including those restaurants closed in the fourth quarter. The total charge also provides for a planned change in the method of operating in Canada from all company-owned restaurants to franchising. These expenses will result in a reduction of annual and fourth quarter fiscal 1997 net earnings of $145,491 ($0.94 per share). <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations <TABLE> The following table sets forth selected restaurant operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the thirteen and thirty-nine weeks ended February 23, 1997 and February 25, 1996. <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------------------------------- February February February February 23, 1997 25, 1996 23, 1997 25, 1996 ---------------------------------------------- <S> <C> <C> <C> <C> Sales............................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverages............... 34.7 33.0 34.1 33.0 Restaurant labor................. 32.3 29.8 32.2 30.0 Restaurant expenses.............. 14.6 13.4 15.3 14.5 ----- ----- ----- ----- Total Cost of Sales.......... 81.6% 76.2% 81.6% 77.5% Selling, general and administrative. 10.6 12.0 11.8 11.9 Depreciation and amortization....... 4.4 4.0 4.4 4.2 Interest, net....................... 0.7 0.7 0.7 0.7 ----- ----- ----- ----- Total Costs and Expenses before Restructuring Expenses................... 97.3% 92.9% 98.5% 94.3% Restructuring....................... 0.0 0.0 0.0 3.2 ----- ----- ----- ----- Total Costs and Expenses after Restructuring Expenses................... 97.3% 92.9% 98.5% 97.5% ----- ----- ----- ----- Earnings before Income Taxes........ 2.7 7.1 1.5 2.5 Income Taxes........................ (0.7) (2.6) (0.4) (0.8) ----- ----- ----- ----- Net Earnings ....................... 2.0% 4.5% 1.1% 1.7% ===== ===== ===== ===== Net Earnings before Restructuring Expenses: Earnings before Restructuring Expenses and Income Taxes......... 2.7% 7.1% 1.5% 5.7% Income Taxes before Restructuring Expenses.......................... (0.7) (2.6) (0.4) (2.1) ----- ----- ----- ----- Net Earnings before Restructuring Expenses............................ 2.0% 4.5% 1.1% 3.6% ===== ===== ===== ===== </TABLE> RESULTS OF OPERATIONS <TABLE> Operating results before restructuring expenses for the thirteen and thirty-nine weeks ended February 23, 1997 and February 25, 1996 are summarized below: <CAPTION> (Dollar Amounts in Thousands, Except per Share Data) Thirteen Weeks Ended Thirty-Nine Weeks Ended --------------------------------------------------- February February February February 23, 1997 25, 1996 23, 1997 25, 1996 --------------------------------------------------- <S> <C> <C> <C> <C> Earnings before Restructuring Expenses and Income Taxes......... $21,613 $56,497 $34,687 $134,501 Income Taxes before Restructuring Expenses.......................... (5,890) (20,889) (9,660) (49,779) ------- ------- ------- -------- Net Earnings before Restructuring Expenses.......................... $15,723 $35,608 $25,027 $ 84,722 ======= ======= ======= ======== Earnings per Share before Restructuring Expenses............ $ 0.10 $ 0.22 $ 0.16 $ 0.53 ======= ======= ======= ======== </TABLE> <PAGE> For the fiscal 1997 third quarter ended February 23, 1997, earnings after tax were $15.7 million or ten cents per share, compared to earnings after tax of $35.6 million or 22 cents per share in the third quarter of last fiscal year. The decline in third quarter earnings was mainly attributable to lower earnings at Red Lobster due to actions initiated during the second quarter to enhance long-term performance including new menu items, bolder flavors, lower prices and service improvements. Sales of $800.8 million for the quarter were up almost one percent compared to last year. For the first nine months of fiscal 1997, net earnings were $25.0 million or 16 cents per share, compared to earnings before unusual items of $84.7 million or 53 cents per share in the same fiscal 1996 period. The closing of all China Coast restaurants during the first quarter of fiscal 1996 resulted in a $44.8 million after-tax charge (28 cents per share). Fiscal 1996 nine month earnings including this unusual item amounted to $39.9 million or 25 cents per share. All cost elements as a percentage of sales in the third quarter were affected by Red Lobster's repositioning strategy initiated in the second quarter. Food and beverage costs for the quarter were 34.7% of sales, compared to 33.0% last year, because of the strategy to lower check averages, and increase portions at Red Lobster. Restaurant labor increased to 32.3% of sales, compared to 29.8% last year, due to continued wage inflation and additional training initiatives to improve service at both Red Lobster and The Olive Garden. Restaurant expenses increased to 14.6% of sales compared to 13.4% last year, primarily due to overall inflation in operating costs during a period when sales grew only modestly. As a result, the store-level profit margin decreased to 18.4% in the third quarter, compared to 23.8% in the prior year. The decrease in third-quarter selling, general and administrative expenses to 10.6% of sales, compared to 12.0% of sales last year, was the result of reduced marketing expense at both Red Lobster and The Olive Garden. Food and beverage costs for the first nine months of fiscal 1997 were 34.1% of sales, up from last year's 33.0%. Again, this unfavorable increase was expected and resulted from the strategy to lower check averages and increase portions at Red Lobster. Restaurant labor costs were 32.2%, up from last year's 30.0% due to one-time training costs at Red Lobster to launch the new menu, continued wage inflation and additional training initiatives to improve service at both Red Lobster and The Olive Garden. Restaurant expenses were 15.3% of sales, compared to 14.5% in the prior year. Selling, general and administrative expense decreased to 11.8% of sales, compared to 11.9% in the prior year. The effective tax rate for the first nine months of fiscal 1997 was 28% compared to 33% last year. The decline in the effective tax rate reflects higher tax credits and lower pretax income for the year. DIVISION RESULTS Red Lobster sales of $475.3 million were down slightly compared to the third quarter last year. Same-store sales in the U.S. were down 3.6% in the third quarter as a result of the menu changes implemented in September and a move away from high-priced promotions. The shift of the Thanksgiving holiday into this year's third quarter reduced sales and customer traffic by about one percentage point due to all restaurants being closed for business on Thanksgiving day. Customer reaction to the new menu and service initiatives continues to be positive, and third quarter traffic rose by almost four percent over the same period last year (up five percent without the holiday shift), compared with traffic declines of over three percent for competitive casual dining companies. Because of the short-term costs of the many actions underway to improve Red Lobster's operating performance, third-quarter operating profits were significantly below the prior year. In each month of the quarter, however, earnings and profit margins improved over the prior month. Through the first nine months of fiscal 1997, Red Lobster's sales declined 2.0% to $1.39 billion and same-store sales in the U.S. declined by 4.5%. <PAGE> During the third quarter, Red Lobster opened three restaurants and closed ten for a total of 726 restaurants compared to 716 at the end of the third quarter last year. Red Lobster also relocated five restaurants during the quarter, all of which utilized former China Coast sites, and intends to relocate four more restaurants during the fourth quarter. Also, during the third quarter, 55 restaurants were remodeled with the wharfside decor package at an average cost of under $200,000 each. The balance of restaurants to be remodeled are expected to be completed by the end of the fiscal year. The Olive Garden continued its positive momentum in the third quarter of fiscal 1997 as sales increased 2.5% to $323.9 million. Same-store sales in the U.S. increased 0.6% marking the tenth consecutive quarter of same-store sales increases. As was the case with Red Lobster, the shift of the Thanksgiving holiday into the third quarter reduced same-store sales by about one percentage point. The Olive Garden's third-quarter operating profits were slightly ahead of last year. Through the first nine months of fiscal 1997, The Olive Garden's sales increased 3.5% to $962.4 million and same-store sales in the U.S. increased by 1.2%. During the third quarter, The Olive Garden opened one restaurant and closed three for a total of 489 restaurants at the end of the third quarter, compared to 480 restaurants last year. The initial Bahama Breeze restaurant in Orlando celebrated its one-year anniversary with record sales in February. A second restaurant is under construction in the Orlando market and is expected to open in the fourth quarter. The Company hopes to build two to three more Bahama Breeze restaurants in fiscal 1998. <TABLE> The table below details the number of restaurants open at the end of the third quarter fiscal year 1997, compared with the number open at the end fiscal year 1996 and the end of last fiscal year's third quarter. <CAPTION> NUMBER OF RESTAURANTS February 23, 1997 May 26, 1996 February 25, 1996 ----------------- ------------ ----------------- <S> <C> <C> <C> Red Lobster - USA 674 677 664 Red Lobster - Canada 52 52 52 ----- ----- ----- Total 726 729 716 Olive Garden - USA 473 471 464 Olive Garden - Canada 16 16 16 ----- ----- ----- Total 489 487 480 Bahama Breeze 1 1 1 ----- ----- ----- Total 1,216 1,217 1,197 ===== ===== ===== </TABLE> Darden recently completed market optimization studies for Red Lobster and The Olive Garden that assessed the strength of each restaurant location, its financial performance and other factors to determine the optimal number and location of restaurants in major markets. The result is a planned fourth-quarter pretax charge of $230.1 million which will include a write-down of assets under SFAS 121 of $159.2 million for operations in both the U.S. and Canada and other restructuring and administrative actions aggregating $70.9 million. The total cash flow effect is expected to be modestly positive. The fourth-quarter charge covers the following actions: The write-down of certain restaurant operating assets to their net realizable value as required under SFAS 121. <PAGE> The immediate closing of the Company's poorest performing restaurants in the U.S., including 24 Red Lobster and 12 The Olive Garden restaurants. A change in the method of operating in Canada from all company-operated restaurants to franchising. The Company plans to pursue franchising arrangements for its existing 52 Red Lobster and 16 The Olive Garden restaurants in Canada with appropriately capitalized and experienced operators, but no franchising arrangements have been finalized as of the date of filing this report. The write-off of outdated restaurant decor, smallwares and equipment, including point-of-sale computer systems in the restaurants. PART II-OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 11 Determination of Common Shares and Common Share Equivalents Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. On December 11, 1996, the Company filed a current report on Form 8-K to announce certain financial results for the second quarter of fiscal year 1997. <PAGE> 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. DARDEN RESTAURANTS, INC. Dated: March 21, 1997 By: /s/ C. L. Whitehill ---------------------- C.L. Whitehill Senior Vice President, General Counsel and Secretary Dated: March 21, 1997 By: /s/ James D. Smith --------------------- James D. Smith Senior Vice President - Finance (Principal financial and accounting officer) <PAGE> INDEX TO EXHIBITS Exhibit Number Exhibit Title Page 11 Determination of Common Shares and Common Share Equivalents 14 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 15 27 Financial Data Schedule 16 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>DETERMINATION OF COMMON SHARES & EQUIVALENTS <TEXT> <TABLE> Exhibit 11 DARDEN RESTAURANTS, INC. DETERMINATION OF COMMON SHARES AND COMMON SHARE EQUIVALENTS (In Thousands) <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------------------------------- February February February February 23, 1997 25, 1996 23, 1997 25, 1996 -------------------------------------------- <S> <C> <C> <C> <C> Computation of Shares: Weighted average number of shares outstanding..................... 154,200 159,100 156,500 158,800 Net shares resulting from the assumed exercise of certain stock options (a)..................... 674(b) 2,900(b) 823(b) 2,300(b) ------- ------- ------- ------- Total common shares and common share equivalents..................... 154,874 162,000 157,323 161,100 ======= ======= ======= ======= <FN> Notes to Exhibit: (a)Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. (b)Common share equivalents for the thirteen and thirty-nine weeks ended February 23, 1997 and February 25, 1996 are not material. As a result, earnings per share has been computed using the weighted average number of shares outstanding. </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF EARNINGS TO FIXED CHARGES <TEXT> <TABLE> Exhibit 12 DARDEN RESTAURANTS, INC. COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands) <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------------------------------- February February February February 23, 1997 25, 1996 23, 1997 25, 1996 -------------------------------------------- <S> <C> <C> <C> <C> Consolidated Earnings from Operations before Restructuring Charges and Income Taxes................... $21,613 $56,497 $34,687 $134,501 Plus Fixed Charges................. 9,979 10,293 29,593 31,002 Less Capitalized Interest.......... (162) (421) (866) (1,494) ------- ------- ------- -------- Consolidated Earnings from Operations before Restructuring Charges and Income Taxes Available to Cover Fixed Charges.................. $31,430 $66,369 $63,414 $164,009 ======= ======= ======= ======== Ratio of Consolidated Earnings to Fixed Charges........................ 3.15 6.45 2.14 5.29 ======= ======= ======= ======== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FDS FOR SECOND QUARTER FISCAL YEAR 1997 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the consolidated financial statements of Darden Restaurants, Inc. and Subsidiaries and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAY-25-1997 <PERIOD-END> FEB-23-1997 <CASH> $28,787 <SECURITIES> 0 <RECEIVABLES> 30,704 <ALLOWANCES> 0 <INVENTORY> 147,426 <CURRENT-ASSETS> 324,372 <PP&E> 2,445,038 <DEPRECIATION> 764,532 <TOTAL-ASSETS> 2,099,241 <CURRENT-LIABILITIES> 463,325 <BONDS> 313,761 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,267,944 <OTHER-SE> (65,787) <TOTAL-LIABILITY-AND-EQUITY> 897,084 <SALES> 2,355,158 <TOTAL-REVENUES> 2,355,158 <CGS> 803,621 <TOTAL-COSTS> 1,921,474 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 16,191 <INCOME-PRETAX> 34,687 <INCOME-TAX> 9,660 <INCOME-CONTINUING> 25,027 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 25,027 <EPS-PRIMARY> 0.16 <EPS-DILUTED> 0.16 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

EMR

https://www.sec.gov/Archives/edgar/data/32604/0000032604-97-000002.txt

-----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, VTKj28ieQn0QB1ERpitydDYRPoBxyt4QImGumMKsknnwXdvqFN2HQC36Mp2JAhUC kO36Db1qxRHAbBur+WgXug== <SEC-DOCUMENT>0000032604-97-000002.txt : 19970222 <SEC-HEADER>0000032604-97-000002.hdr.sgml : 19970222 ACCESSION NUMBER: 0000032604-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERSON ELECTRIC CO CENTRAL INDEX KEY: 0000032604 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 430259330 STATE OF INCORPORATION: MO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00278 FILM NUMBER: 97530965 BUSINESS ADDRESS: STREET 1: 8000 W FLORISSANT AVE STREET 2: P O BOX 4100 CITY: ST LOUIS STATE: MO ZIP: 63136 BUSINESS PHONE: 3145532000 MAIL ADDRESS: STREET 1: 8000 W. FLORISSANT STREET 2: P.O. BOX 4100 CITY: ST LOUIS STATE: MO ZIP: 63136 FORMER COMPANY: FORMER CONFORMED NAME: EMERSON ELECTRIC MANUFACTUING CO DATE OF NAME CHANGE: 19730710 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 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 1-278 EMERSON ELECTRIC CO. (Exact name of registrant as specified in its charter) Missouri 43-0259330 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8000 W. Florissant Ave. P.O. Box 4100 St. Louis, Missouri 63136 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 553-2000 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, and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Common stock outstanding at December 31, 1996: 223,512,604 shares. 1 <PAGE> PART I. FINANCIAL INFORMATION FORM 10-Q Item 1. Financial Statements. EMERSON ELECTRIC CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (Dollars in millions except per share amounts; unaudited) Three Months Ended December 31, --------------------- 1996 1995 ---------- -------- Net sales $ 2,830.6 2,565.8 ---------- -------- Costs and expenses: Cost of sales 1,805.4 1,650.4 Selling, general and administrative expenses 583.3 517.0 Interest expense 27.5 30.1 Other deductions, net 9.1 6.4 ---------- -------- Total costs and expenses 2,425.3 2,203.9 ---------- -------- Income before income taxes 405.3 361.9 Income taxes 150.4 131.4 ---------- -------- Net earnings $ 254.9 230.5 ========== ======== Earnings per common share $ 1.14 1.03 ========== ======== Cash dividends per common share $ .54 .49 ========== ======== Average number of shares used in computing earnings per common share (in thousands) 223,704 224,053 ========== ======== See accompanying notes to consolidated financial statements. 2 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q CONSOLIDATED BALANCE SHEETS (Dollars in millions except per share amounts; unaudited) December 31, September 30, ASSETS 1996 1996 ------ --------- ------- CURRENT ASSETS Cash and equivalents $ 181.9 149.0 Receivables, less allowances of $51.7 and $50.3 2,016.4 1,979.8 Inventories 1,816.9 1,743.9 Other current assets 314.2 314.5 --------- ------- Total current assets 4,329.4 4,187.2 --------- ------- PROPERTY, PLANT AND EQUIPMENT, NET 2,490.6 2,450.8 --------- ------- OTHER ASSETS Excess of cost over net assets of purchased businesses 2,865.4 2,779.2 Other 1,011.0 1,063.8 --------- ------- Total other assets 3,876.4 3,843.0 --------- -------- $10,696.4 10,481.0 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Short-term borrowings and current maturities of long-term debt $ 1,201.3 967.0 Accounts payable 620.6 791.3 Accrued expenses 1,035.6 1,063.3 Income taxes 259.0 199.5 --------- ------- Total current liabilities 3,116.5 3,021.1 --------- ------- LONG-TERM DEBT 773.2 772.6 --------- ------- OTHER LIABILITIES 1,311.8 1,333.9 --------- ------- STOCKHOLDERS' EQUITY Preferred stock of $2.50 par value per share. Authorized 5,400,000 shares; issued - none - - Common stock of $1 par value per share. Authorized 400,000,000 shares; issued 238,338,503 shares 238.3 238.3 Additional paid in capital 6.2 12.3 Retained earnings 5,841.7 5,707.7 Cumulative translation adjustments 27.4 (29.2) Cost of common stock in treasury, 14,825,899 shares and 14,618,576 shares (618.7) (575.7) --------- ------- Total stockholders' equity 5,494.9 5,353.4 --------- -------- $10,696.4 10,481.0 ========= ======== See accompanying notes to consolidated financial statements. 3 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (Dollars in millions; unaudited) 1996 1995 --------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 184.1 140.2 INVESTING ACTIVITIES Capital expenditures (113.7) (106.4) Purchases of businesses, net of cash and equivalents acquired (14.6) (47.8) Other, net (65.9) (14.0) --------- ------- Net cash used in investing activities (194.2) (168.2) --------- ------- FINANCING ACTIVITIES Net increase in short-term borrowings 221.8 54.5 Proceeds from long-term debt 5.5 249.2 Principal payments on long-term debt (5.7) (8.7) Dividends paid (120.9) (109.8) Net purchases of treasury stock (59.5) (44.7) --------- ------- Net cash provided by financing activities 41.2 140.5 --------- ------- Effect of exchange rate changes on cash and equivalents 1.8 (1.9) --------- ------- INCREASE IN CASH AND EQUIVALENTS 32.9 110.6 Beginning cash and equivalents 149.0 117.3 --------- ------- ENDING CASH AND EQUIVALENTS $ 181.9 227.9 ========= ======= See accompanying notes to consolidated financial statements. 4 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Notes to Consolidated Financial Statements 1. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation of the results for the interim periods presented. These adjustments consist only of normal recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. 2. Other Financial Information (Dollars in millions; unaudited) December 31, September 30, Inventories 1996 1996 ----------- --------- ------- Finished products $ 766.3 720.7 Raw materials and work in process 1,050.6 1,023.2 --------- ------- $ 1,816.9 1,743.9 ========= ======= December 31, September 30, Property, plant and equipment, net 1996 1996 ---------------------------------- --------- ------- Property, plant and equipment, at cost $ 5,001.7 4,865.6 Less accumulated depreciation 2,511.1 2,414.8 --------- ------- $ 2,490.6 2,450.8 ========= ======= 3. In February 1997, stockholders approved an increase in authorized common stock, which will allow the Company to execute the two- for-one stock split announced in November. Stockholders of record February 21, 1997, will receive one additional share of common stock for each share held, to be distributed March 10, 1997. Assuming retroactive application of the split, pro forma earnings per share would have been $.57 and $.51 for the three months ended December 31, 1996 and 1995, respectively. The accompanying financial statements have not been restated to reflect the split since it has not yet been consummated. 5 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Results of Operations Sales, net earnings and earnings per share for the first quarter of fiscal 1997 were the highest for any first quarter in the Company's history. Net sales for the quarter ended December 31, 1996 were $2,830.6 million, an increase of 10.3 percent over net sales of $2,565.8 million for the quarter ended December 31, 1995. All businesses reported higher sales reflecting solid international and moderate domestic demand, and the contribution of 1996 acquisitions. Excluding the negative impact of currency, underlying international sales showed good improvement due to very strong export sales and continued strength in Asia-Pacific and Latin America. In the Commercial and Industrial segment, sales of the electronics business were very strong, driven by contributions from all geographic areas and product lines, and the business continues to report robust growth in orders. The process business reported modest sales growth as very strong export sales were offset by sluggish domestic demand. Industrial motors and drives achieved modest sales growth benefiting from strong international demand, which was partially offset by currency. The industrial components and equipment business reported modest sales growth due to very strong export sales partially offset by weak European demand. In the Appliance and Construction-Related segment, the underlying tools business achieved robust sales growth due to higher than expected Sears demand during the holiday season. The heating, ventilating and air- conditioning business reported a modest increase, limited by inventory adjustments among international customers and weakening European currencies. Moderate gains in the fractional motors and appliance components business reflected slowing in the domestic appliance markets, which were at fairly healthy levels last quarter. Cost of sales for the first quarter was $1,805.4 million or 63.8 percent of sales, compared with $1,650.4 million, or 64.3 percent of sales, for the first quarter of 1996. Selling, general and administrative expenses for the three months ended December 31, 1996 were $583.3 million, or 20.6 percent of sales, compared to $517.0 million, or 20.2 percent of sales for the same period a year ago. Operating profit margins benefited from continuing cost reduction efforts and productivity improvement programs. 6 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Financial Condition A comparison of key elements of the Company's financial condition at the end of the first quarter as compared to the end of the prior fiscal year follows: December 31, September 30, 1996 1996 -------- -------- Working capital (in millions) $1,212.9 1,166.1 Current ratio 1.4 to 1 1.4 to 1 Total debt to total capital 26.4% 24.5% Net debt to net capital 24.6% 22.9% The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 15.8 times for the quarter ended December 31, 1996 compared to 13.0 times for the same period one year earlier. The increase in the interest coverage ratio reflects earnings growth and a reduction in interest rates. In the first quarter of fiscal 1997, the Company entered into a five year interest rate swap which fixed the rate on $250 million of commercial paper at 6.1 percent. Cash and equivalents increased by $32.9 million during the three months ended December 31, 1996. Cash flow provided by operating activities of $184.1 million and an increase in borrowings of $221.6 million were used primarily to fund capital expenditures of $113.7 million and pay dividends of $120.9 million. The Company is in a strong financial position, continues to generate strong operating cash flows, and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing the capital structure on a short and long-term basis. Statements in this report that are not strictly historical may be "forward looking" statements, which involve risks and uncertainties. These include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others, which are set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. 7 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). 3(a) Restated Articles of Incorporation of Emerson Electric Co., incorporated by reference to Emerson Electric Co. 1989 Form 10-K, Exhibit 3(a). 3(b) Bylaws of Emerson Electric Co., as amended through May 3, 1994, incorporated by reference to Emerson Electric Co. 1994 Form 10-K, Exhibit 3(b). 27 Financial Data Schedule. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 1996. SIGNATURE 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. EMERSON ELECTRIC CO. Date: February 13, 1997 By /s/ Walter J. Galvin ----------------------- Walter J. Galvin Senior Vice President - Finance and Chief Financial Officer (on behalf of the registrant and as Chief Financial Officer) 8 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 EXHIBIT 27 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMERSON ELECTRIC CO. CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FILED WITH THE COMPANY'S 1997 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 181,900 <SECURITIES> 0 <RECEIVABLES> 2,068,100 <ALLOWANCES> 51,700 <INVENTORY> 1,816,900 <CURRENT-ASSETS> 4,329,400 <PP&E> 5,001,700 <DEPRECIATION> 2,511,100 <TOTAL-ASSETS> 10,696,400 <CURRENT-LIABILITIES> 3,116,500 <BONDS> 773,200 <COMMON> 238,300 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 5,256,600 <TOTAL-LIABILITY-AND-EQUITY> 10,696,400 <SALES> 2,830,600 <TOTAL-REVENUES> 2,830,600 <CGS> 1,805,400 <TOTAL-COSTS> 1,805,400 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 27,500 <INCOME-PRETAX> 405,300 <INCOME-TAX> 150,400 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 254,900 <EPS-PRIMARY> 1.14 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

ETS

https://www.sec.gov/Archives/edgar/data/846909/0000846909-97-000001.txt

-----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, Fzt+UQJpIoAhxPMC4BH375HXp9fI5JWdyxbtc9u5fBioBHOVeFVG7Bvyb08cazmw fbQbMTZPR+pJLkXQn6G+KA== <SEC-DOCUMENT>0000846909-97-000001.txt : 19970115 <SEC-HEADER>0000846909-97-000001.hdr.sgml : 19970115 ACCESSION NUMBER: 0000846909-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABLETRON SYSTEMS INC CENTRAL INDEX KEY: 0000846909 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 042797263 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10228 FILM NUMBER: 97505901 BUSINESS ADDRESS: STREET 1: 35 INDUSTRIAL WAY CITY: EAST ROCHESTER STATE: NH ZIP: 03867 BUSINESS PHONE: 6033329400 MAIL ADDRESS: STREET 1: 35 INDUSTRIAL WAY CITY: ROCHESTER STATE: NH ZIP: 03867 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FOR THE PERIOD ENDING NOVEMBER 30, 1996 <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington , D.C. 20549 Form 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended November 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-10228 CABLETRON SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2797263 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 35 Industrial Way, Rochester, New Hampshire 03867 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (603) 332-9400 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 - As of January 6, 1997 there were 155,819,755 shares of the Registrant's common stock outstanding. This document contains 13 pages Exhibit index on page 11 <PAGE> INDEX CABLETRON SYSTEMS, INC. Page Facing Page 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (All Financial Statements for prior periods have been restated to reflect the acquisitions of Network Express, Inc. and ZeitNet, Inc.) Consolidated Balance Sheets - November 30, 1996 (unaudited) and February 29, 1996 (audited) 3 Consolidated Statements of Income - Three and nine months ended November 30, 1996 and 1995 (unaudited) 4 Consolidated Statements of Cash Flows - Nine months ended November 30, 1996 and 1995 (unaudited) 5 Notes to Consolidated Financial Statements - November 30, 1996 (All notes have been restated to reflect the acquisitions) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Index to the Exhibits 12 Exhibit 11 - Statement re: Computation of Per Share Earnings 13 <PAGE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements CABLETRON SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands of dollars) (unaudited) (audited) 11/30/96 2/29/96 Assets Current assets: Cash and cash equivalents ...................... $ 176,443 $ 105,467 Short-term investments ......................... 175,795 172,896 Accounts receivable, net ....................... 220,371 151,263 Inventories .................................... 177,258 159,678 Deferred taxes ................................. 58,767 38,315 Prepaid expenses and other assets .............. 36,892 31,528 ---------- ---------- Total current assets ...................... 845,526 659,147 ---------- ---------- Long-term investments ............................... 163,724 153,424 Property, plant and equipment, net .................. 185,110 153,210 Long-term deferred taxes ............................ 14,375 23,473 Other assets ........................................ --- 3,022 ---------- ---------- Total assets ........................................ $1,208,735 $ 992,276 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable ............................... $ 50,057 $ 36,432 Accrued expenses ............................... 145,046 115,660 Other current liabilities ...................... --- 1,275 Income taxes payable ........................... 17,228 18,536 ---------- ---------- Total current liabilities ................. 212,331 171,903 ---------- ---------- Deferred taxes ...................................... 1,068 9,088 ---------- ---------- Total liabilities ................................... 213,399 180,991 ---------- ---------- Stockholders' equity: Preferred stock, $1.00 par value. Authorized 2,000 shares; none issued .................... --- --- Common stock $0.01 par value. Authorized 240,000 shares; issued and outstanding 151,676 and 150,508 respectively.............. 1,517 1,505 Additional paid-in capital ..................... 206,851 188,700 Retained earnings .............................. 786,037 622,129 ---------- ---------- 994,405 812,334 Cumulative translation adjustment .............. 931 (1,049) ---------- ---------- Total stockholders' equity .......................... 995,336 811,285 ---------- ---------- Total liabilities and stockholders' equity .......... $1,208,735 $ 992,276 ========== ========== <PAGE> <TABLE> CABLETRON SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars except per share amounts) <CAPTION> (unaudited) Three Months Ended Nine Months Ended November 30, November 30, 1996 1995 1996 1995 --- ---- ---- ---- <S> <C> <C> <C> <C> Net sales ......................................... $359,016 $282,838 $1,018,062 $793,586 Cost of sales ..................................... 146,299 115,503 415,585 323,758 -------- -------- ---------- -------- Gross profit ................................. 212,717 167,335 602,477 469,828 -------- -------- ---------- -------- Operating expenses: Research and development ..................... 39,783 32,405 116,551 90,017 Selling, general and administrative .......... 72,625 56,608 205,214 157,640 Nonrecurring items ........................... --- --- 43,024 --- -------- -------- ---------- --------- Total operating expenses ................ 112,408 89,013 364,789 247,657 -------- -------- ---------- -------- Income from operations .................. 100,309 78,322 237,688 222,171 Interest income ................................... 4,943 5,088 14,285 13,000 -------- -------- ---------- -------- Income before income taxes .............. 105,252 83,410 251,973 235,171 Income taxes ...................................... 36,219 29,379 87,307 82,482 -------- -------- -------- -------- Net income ........................................ $ 69,033 $ 54,031 $ 164,666 $152,689 ======== ========= =========== ======== Net income per common share ....................... $ 0.46 $ 0.36 $ 1.09 $ 1.03 ======== ========= =========== ======== Weighted average number of shares outstanding ....................................... 151,465 149,642 151,140 148,728 ======== ======== ========== ======== </TABLE> <PAGE> CABLETRON SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited) Nine Months Ended November 30, 1996 1995 ---- ---- Cash flows from operating activities: Net income ........................................ $ 164,666 $ 152,689 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................. 36,933 26,041 Provision for losses on accounts receivable ... 7,276 (297) Deferred taxes ................................ (19,376) (24) Gain/loss on disposal of property ............. 83 (75) Forgiveness of Notes Receivable from Shareholders ................................ --- 151 Changes in assets and liabilities: Accounts receivable ........................ (71,281) (35,936) Inventories ................................ (17,086) (38,064) Prepaid expenses and other assets .......... (2,175) (12,910) Accounts payable and accrued expenses ...... 37,753 39,598 Income taxes payable ....................... (1,148) 9,051 --------- --------- Net cash provided by operating activities ...... 135,645 140,224 --------- --------- Cash flows from investing activities: Capital expenditures .............................. (68,176) (49,982) Purchase of available-for-sale securities ......... (169,349) (57,623) Purchase of held-to-maturity securities ........... (170,595) (213,974) Maturities of marketable securities ............... 326,729 198,642 --------- --------- Net cash used in investing activities .......... (81,391) (122,937) --------- --------- Cash flows from financing activities: Common stock issued to employee stock purchase plan 3,019 1,522 Net proceeds from sale of stock (Network Express/ZeitNet) ......................... --- 38,097 Proceeds from stock option exercise ............... 13,110 12,750 Proceeds from purchases of common stock ........... 544 --- --------- --------- Net cash provided by financing activities ...... 16,673 52,369 --------- --------- Effect of exchange rate changes on cash .............. 49 68 --------- --------- Net increase in cash and cash equivalents ............ 70,976 69,724 Cash and cash equivalents, beginning of period ....... 105,467 247,246 --------- --------- Cash and cash equivalents, end of period ............. $ 176,443 $ 316,970 ========= ========= Cash paid during the year for: Income taxes ...................................... $ 101,318 $ 44,928 ========= ========= <PAGE> NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 2 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. The accompanying financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended February 29, 1996. Historical financial statements have been restated to give retroactive effect for the acquisitions of Network Express, Inc. and ZeitNet, Inc., both of which have been accounted for as poolings of interests. 2. Inventories Inventories consist of: 11/30/96 2/29/96 Raw materials $ 35,592 $ 51,771 Work in process 54,290 39,176 Finished goods 87,376 68,731 -------- -------- Total inventories $177,258 $159,678 ======== ======== 3. Stock Split On October 28, 1996, Cabletron Systems, Inc. announced that its Board of Directors had authorized a 2-for-1 split of its common stock to be effected in the form of a 100 percent stock dividend. Presentation of common stock outstanding and earnings per share on the attached financial statements have been adjusted to reflect this 2-for-1 common stock split, which took effect on November 26, 1996. 4. Subsequent events On December 10, 1996 the Company acquired Netlink, Inc. a provider of frame relay access solutions for multi-protocol, mission critical networks. Under the terms of the merger agreement, 4,514,638 shares of post-split Cabletron common stock were exchanged for all outstanding shares of Netlink on a fully diluted basis. This merger transaction was accounted for as a pooling of interests. <PAGE> 5. Proposed acquisitions On December 2, 1996, the Company announced it had entered into a merger agreement to acquire privately-held The OASys Group Inc. a leading supplier of software targeted at managing telecommunications devices and connections used in high-speed, fiber-optic networks. Under the terms of the merger agreement approximately 240,000 shares of post-split Cabletron common stock will be exchanged for all outstanding shares of OASys. The issusance of the shares to OASys upon consummation of the merger is not expected to have a materially dilutive effect on earnings. The transaction will be accounted for as a purchase and is expected to qualify as a tax-free reorganization. The merger is subject to approval by the shareholders of OASys. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cabletron Systems' worldwide net sales of $359.0 million for the three months ended November 30, 1996 represented a 26.9 percent increase over net sales of $282.8 million reported in the third quarter of the preceding fiscal year. The increase was primarily the result of higher sales of the Company's Multi Media Access Center (MMAC ) product family, including the Company's MMAC Plus, an intelligent switching hub, and small stackable hubs. As a percentage of net sales, international sales were 30.0 percent in the fiscal quarter ended November 30, 1996 compared to 29.6 percent for the same quarter of the preceding year. Gross profit as a percentage of net sales for the three months ended November 30, 1996 was 59.3 percent, up 0.1 percent as compared to the same quarter of the preceding fiscal year. Spending for research and development was $39.8 million, or 11.1 percent of net sales, compared to $32.4 million, or 11.5 percent of net sales, for the same quarter of the preceding year. The higher dollar spending for research and development reflected the hiring of additional software and hardware engineers and associated costs related to the development of new products. Selling, general and administrative expenses for the three months ended November 30, 1996 increased to $72.6 million compared to $56.6 million for the same period of the preceding year. The dollar increase in expenses was due predominately to increased sales volume. Expenses for selling, general and administration as a percentage of net sales increased 0.2 percent over the same period of the preceding year. Net interest income in the current period was $4.9 million, compared to $5.1 million in the same period of the preceding year. Interest income in both periods reflect returns on invested cash, marketable securities and investments. The decrease in interest income resulted from lower interest rates earned on investment. Income before income taxes was $105.3 million or 29.3% of net sales compared to $83.4 million or 29.5% of net sales for the same period of the prior fiscal year. Net income for the three months ended November 30, 1996 was $69.0 million compared to $54.0 million for the same period of the preceding year. Liquidity and Capital Resources Cash, cash equivalents, marketable securities and long-term investment increased $84.2 million from $431.8 million at February 29, 1996 to $516.0 million at November 30, 1996, primarily as the result of favorable operating results offset in part by capital investments for future development and sales growth. Accounts receivable at November 30, 1996 were $220.4 million compared to $151.3 million at February 29, 1996. Average days sales outstanding were 53 days for the three months ended November 30, 1996 compared to 43 days for the fiscal year ended February 29, 1996. The increase was a result of the Company offering less stringent payment terms for some of its higher volume customers and shipment of products shifting towards the latter part of the quarter. <PAGE> The Company has historically maintained higher levels of inventory than its competitors in the networking industry in order to implement its policy of shipping most orders requiring immediate delivery within 24 to 48 hours. Worldwide inventories at November 30, 1996 were $177.3 million, or 104 days of inventory, compared to $159.7 million, or 112 days of inventory at the end of the prior fiscal year. Capital expenditures for the first nine months of fiscal 1997 were $68.2 million compared to $50.0 million for the same period of the preceding year. Capital expenditures included approximately $46.1 million for equipment costs, of which $27.2 million was for computer and computer related equipment, and $8.3 million for manufacturing related equipment. Current liabilities at November 30, 1996 were $212.3 million compared to $171.9 million at the end of the prior fiscal year. This increase was mainly due to the growth in operations and the timing of disbursements. In the opinion of management, internally generated funds from operations and existing cash, cash equivalents and short-term investments will prove adequate to support the Company's working capital and capital expenditure requirements for the next twelve months. <PAGE> New Accounting Pronouncement In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which established financial accounting and reporting standards for stock-based employee compensation plans. Companies are encouraged, rather than required, to adopt a new method that accounts for stock compensation awards based on their fair value using an option pricing model. Companies that do not adopt this new method will be required to make pro forma footnote disclosures of net income as if the fair value-based method of accounting required by SFAS No. 123 had been applied. The Company is required to adopt SFAS No. 123 beginning in fiscal 1997. Adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations because the Company intends to make pro forma footnote disclosures instead of adopting the new accounting method. <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material developments in legal proceedings related to the Company. See the Company's Quarterly Report on Form 10-Q for the period ended August 31, 1996. Item 6. Exhibits and Reports on Form 8-K. [a] Exhibit 11 - Statement re: Computation of Per Share Earnings (page 13 of this report) (b) Cabletron filed the following Reports on Form 8-K during the quarter ended November 30, 1996. 1. Current report on Form 8-K/A-2 dated November 20, 1996. Such report disclosed restated historical financial statements of the Company to reflect previous acquisitions which were accounted for as poolings of interest. 2. Current report on Form 8-K/A dated October 25, 1996. Such report disclosed restated historical financial statements of the Company to reflect previous acquisitions which were accounted for as poolings of interest. 3. Current report on Form 8-K dated October 24, 1996. Such report disclosed restated historical financial statements of the Company to reflect previous acquisitions which were accounted for as poolings of interest. <PAGE> 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. CABLETRON SYSTEMS, INC. (Registrant) January 14, 1997 /s/ Craig R. Benson Date Craig R. Benson Chairman of the Board, Treasurer, and Chief Operating Officer January 14, 1997 /s/ David J. Kirkpatrick Date David J. Kirkpatrick Director of Finance and Chief Financial Officer <PAGE> EXHIBIT INDEX Exhibit Page No. Exhibit No. 11.1 Statement regarding computation of per share earnings 13 <PAGE> <TABLE> EXHIBIT 11.1 CABLETRON SYSTEMS, INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS For periods ended November 30, 1996 and 1995 (in thousands of dollars, except per share amounts) <CAPTION> (unaudited) Three Months Ended Nine Months Ended November 30, November 30, 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Income Per Common Share - (non-dilutive) Net income ............................................... $ 69,033 $ 54,031 $164,666 $152,689 ======== ======== ======== ======== Weighted average common shares outstanding ............... 151,465 149,642 151,140 148,728 ======== ======== ======== ======== Reported net income per common share ..................... $ 0.46 $ 0.36 $ 1.09 $ 1.03 ======== ======== ======== ======== Net Income Per Common Share - (full dilution) Net income ............................................... $ 69,033 $ 54,031 $164,666 $152,689 ======== ======== ======== ======== Weighted average common shares outstanding ............... 151,465 149,642 151,140 148,728 Add net additional common shares upon assumed exercise of common stock options ........................ 3,414 3,970 4,921 3,970 -------- -------- -------- -------- Adjusted average common shares outstanding ............... 154,879 153,612 156,061 152,698 ======== ======== ======== ======== Net income per common share - (full dilution) ............ $ 0.45 $ 0.35 $ 1.06 $ 1.00 ======== ======== ======== ======== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>ART 5 FDS FOR 3RD QUARTER <FLAWED> <TEXT> WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the consolidated balance sheet, consolidated statement of operations and consolidated statement of cash flows included in the Company's Form 10-Q for the period ending November 30, 1996, and is qualified in its entirety by reference to such financial statements. </LEGEND> <CIK> 0000846909 <NAME> CABLETRON SYSTEMS, INC. <MULTIPLIER> 1,000 <CURRENCY> U.S. Dollars <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-28-1997 <PERIOD-START> MAR-01-1996 <PERIOD-END> NOV-30-1996 <EXCHANGE-RATE> 0 <CASH> 176,443 <SECURITIES> 175,795 <RECEIVABLES> 234,069 <ALLOWANCES> 13,698 <INVENTORY> 177,258 <CURRENT-ASSETS> 845,526 <PP&E> 339,204 <DEPRECIATION> 154,094 <TOTAL-ASSETS> 1,208,735 <CURRENT-LIABILITIES> 212,331 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,517 <OTHER-SE> 993,819 <TOTAL-LIABILITY-AND-EQUITY> 1,208,735 <SALES> 1,018,062 <TOTAL-REVENUES> 1,018,062 <CGS> 415,585 <TOTAL-COSTS> 780,374 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 251,973 <INCOME-TAX> 87,307 <INCOME-CONTINUING> 164,666 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 164,666 <EPS-PRIMARY> 1.09 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

GAS

https://www.sec.gov/Archives/edgar/data/1004155/0001004155-97-000002.txt

-----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, AKgkK66k02peVV0gcVyoOXqPNelXFFgyjDh2zL9DgaNYpI+I/i6cWwAuU0tIy28m C2g9H8GiWd1JzelrKvl+cg== <SEC-DOCUMENT>0001004155-97-000002.txt : 19970222 <SEC-HEADER>0001004155-97-000002.hdr.sgml : 19970222 ACCESSION NUMBER: 0001004155-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL RESOURCES INC CENTRAL INDEX KEY: 0001004155 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 582210952 STATE OF INCORPORATION: GA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14174 FILM NUMBER: 97534265 BUSINESS ADDRESS: STREET 1: 303 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045844000 MAIL ADDRESS: STREET 1: 303 PEACHTREE ST STREET 2: STE 400 CITY: ATLANTA STATE: GA ZIP: 30308 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1996 Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification Number 1-14174 AGL RESOURCES INC. 58-2210952 ( A Georgia Corporation) 303 PEACHTREE STREET, NE ATLANTA, GEORGIA 30308 404-584-9470 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 31, 1996. Common Stock, $5.00 Par Value Shares Outstanding at December 31, 1996 .............................55,867,649 Page 1 of 20 Pages <PAGE> AGL RESOURCES INC. Quarterly Report on Form 10-Q For the Quarter Ended December 31, 1996 Table of Contents Item Page Number PART I -- FINANCIAL INFORMATION Number 1 Financial Statements (Unaudited) Condensed Consolidated Income Statements 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II -- OTHER INFORMATION 1 Legal Proceedings 15 5 Other Information 15 6 Exhibits and Reports on Form 8-K 19 SIGNATURES 20 Page 2 of 20 Pages <PAGE> PART I -- FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (MILLIONS, EXCEPT PER SHARE DATA) Three Months Twelve Months --------------- ------------------ 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Operating Revenues ........................... $ 379.6 $ 330.7 $ 1,277.5 $ 1,068.7 Cost of Gas .................................. 231.1 189.7 766.9 575.0 - ----------------------------------------------------------------------------------------- Operating Margin ............................. 148.5 141.0 510.6 493.7 - ----------------------------------------------------------------------------------------- Other Operating Expenses Operating expenses ......................... 88.3 81.5 345.2 330.0 Restructuring costs ........................ 25.8 - ----------------------------------------------------------------------------------------- Total other operating expenses ........... 88.3 81.5 345.2 355.8 - ----------------------------------------------------------------------------------------- Operating Income ............................. 60.2 59.5 165.4 137.9 - ----------------------------------------------------------------------------------------- Other Income ................................. 2.4 1.2 13.2 1.8 - ----------------------------------------------------------------------------------------- Income Before Interest and Income Taxes ...... 62.6 60.7 178.6 139.7 - ----------------------------------------------------------------------------------------- Interest Expense and Preferred Stock Dividends Interest expense ........................... 13.6 12.8 49.9 47.1 Dividends on preferred stock of subsidiary . 1.1 1.1 4.4 4.4 - ----------------------------------------------------------------------------------------- Total interest expense and preferred stock dividends .............................. 14.7 13.9 54.3 51.5 - ----------------------------------------------------------------------------------------- Income Before Income Taxes ................... 47.9 46.8 124.3 88.2 - ----------------------------------------------------------------------------------------- Income Taxes ................................. 18.3 17.7 48.2 33.4 - ----------------------------------------------------------------------------------------- Net Income ................................... $ 29.6 $ 29.1 $ 76.1 $ 54.8 ========================================================================================= Earnings Per Share of Common Stock $ 0.53 $ 0.53 $ 1.37 $ 1.03 Cash Dividends Paid Per Share of Common Stock $ 0.27 $ 0.265 $ 1.065 $ 1.045 Weighted Average Number of Common Shares Outstanding 55.8 55.1 55.5 53.5 </TABLE> See notes to condensed consolidated financial statements. Page 3 of 20 Pages <PAGE> <TABLE> <CAPTION> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (MILLIONS) September December 31, 30, --------------------------------- ASSETS 1996 1995 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current Assets Cash and cash equivalents ............................ $ 1.1 $ 5.8 $ 8.7 Receivables (less allowance for uncollectible accounts of $3.9 at December 31, 1996, $5.2 at December 31, 1995, and $2.7 at September 30, 1996) .............. 222.3 198.2 93.6 Inventories Natural gas stored underground ..................... 113.1 87.4 144.0 Liquefied natural gas .............................. 17.4 11.6 16.8 Materials and supplies ............................. 6.5 8.5 8.1 Other .............................................. 2.8 2.0 3.0 Deferred purchased gas adjustment .................... 31.4 7.5 4.7 Other ................................................ 10.0 9.2 10.3 - -------------------------------------------------------------------------------------------- Total current assets ............................... 404.6 330.2 289.2 - -------------------------------------------------------------------------------------------- Property, Plant and Equipment Utility plant ........................................ 1,982.7 1,943.1 1,969.0 Less accumulated depreciation ........................ 615.8 595.8 607.8 - -------------------------------------------------------------------------------------------- Utility plant - net ................................ 1,366.9 1,347.3 1,361.2 - -------------------------------------------------------------------------------------------- Nonutility property .................................. 88.0 14.9 80.5 Less accumulated depreciation ........................ 27.0 2.4 26.3 - -------------------------------------------------------------------------------------------- Nonutility property - net .......................... 61.0 12.5 54.2 - -------------------------------------------------------------------------------------------- Total property, plant and equipment - net .......... 1,427.9 1,359.8 1,415.4 - -------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Unrecovered environmental response costs ............. 40.7 34.7 38.0 Investment in joint ventures ......................... 36.4 32.6 35.5 Unrecovered Integrated Resource Plan costs ........... 9.6 7.5 10.0 Other ................................................ 37.2 32.6 36.6 - -------------------------------------------------------------------------------------------- Total deferred debits and other assets ............. 123.9 107.4 120.1 - -------------------------------------------------------------------------------------------- Total Assets ........................................... $ 1,956.4 $ 1,797.4 $ 1,824.7 ============================================================================================ </TABLE> See notes to condensed consolidated financial statements. Page 4 of 20 Pages <PAGE> <TABLE> <CAPTION> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (MILLIONS) September December 31, 30, --------------------------------- LIABILITIES AND CAPITALIZATION 1996 1995 1996 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current Liabilities Accounts payable-trade .............................. $ 108.7 $ 83.1 $ 73.7 Short-term debt ..................................... 188.8 156.3 152.0 Customer deposits ................................... 29.9 29.8 27.8 Interest ............................................ 18.4 17.5 25.7 Taxes ............................................... 24.2 10.9 16.0 Other ............................................... 33.0 35.2 27.3 - ------------------------------------------------------------------------------------------- Total current liabilities ......................... 403.0 332.8 322.5 - ------------------------------------------------------------------------------------------- Accumulated Deferred Income Taxes ..................... 171.3 141.0 168.5 - ------------------------------------------------------------------------------------------- Long-Term Liabilities Accrued environmental response costs ................ 31.3 28.6 30.4 Accrued pension costs ............................... 6.6 9.8 4.9 Accrued postretirement benefits costs ............... 34.5 31.4 36.2 Deferred credits .................................... 60.4 64.5 60.9 - ------------------------------------------------------------------------------------------- Total long-term liabilities ....................... 132.8 134.3 132.4 - ------------------------------------------------------------------------------------------- Capitalization Long-term debt ...................................... 584.5 554.5 554.5 Preferred stock of subsidiary, cumulative $100 par or stated value, shares issued and outstanding of 0.6 at December 31, 1996, December 31, 1995, and September 30, 1996 ................................ 58.5 58.5 58.5 Common stock, $5 par value, shares issued and outstanding of 55.9 at December 31, 1996, 55.2 at . 606.3 576.3 588.3 December 31, 1995, and 55.7 at September 30, 1996 - ------------------------------------------------------------------------------------------- Total capitalization .............................. 1,249.3 1,189.3 1,201.3 - ------------------------------------------------------------------------------------------- Total Liabilities and Capitalization .................. $ 1,956.4 $ 1,797.4 $ 1,824.7 =========================================================================================== </TABLE> See notes to condensed consolidated financial statements. Page 5 of 20 Pages <PAGE> <TABLE> <CAPTION> AGL RESOURCES INC. AND SUBISIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 1996 (MILLIONS) Three Months Twelve Months ----------------- ------------------- 1996 1995 1996 1995 - ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Cash Flows from Operating Activities Net income .............................. $ 29.6 $ 29.1 $ 76.1 $ 54.8 Adjustments to reconcile net income to net cash flow from operating activities Depreciation and amortization ......... 17.4 16.6 68.3 63.4 Deferred income taxes ................. 2.6 2.3 26.3 19.6 Non-cash compensation expense ......... 0.3 1.8 0.1 5.6 Noncash restructuring costs ........... 8.4 Other ................................. (0.2) (0.6) (0.8) (2.1) Changes in certain assets and liabilities (82.3) (114.8) (54.6) 6.9 - ------------------------------------------------------------------------------------ Net cash flow from operating activities ........................ (32.6) (65.6) 115.4 156.6 - ------------------------------------------------------------------------------------ Cash Flows from Financing Activities Sale of common stock, net of expenses ... 1.6 0.3 3.1 50.2 Short-term borrowings, net .............. 36.8 105.3 32.5 7.7 Redemptions of long-term debt ........... (15.0) Sale of long-term debt .................. 30.0 30.0 Dividends paid on common stock .......... (13.9) (12.2) (50.8) (45.7) - ------------------------------------------------------------------------------------ Net cash flow from financing activities ........................ 54.5 93.4 14.8 (2.8) - ------------------------------------------------------------------------------------ Cash Flows from Investing Activities Utility plant expenditures .............. (29.0) (27.1) (134.0) (122.2) Cash received from joint ventures ....... 0.1 2.9 Investment in joint ventures ............ (1.2) (2.3) (32.6) Other ................................... 0.6 1.4 (1.5) 2.6 - ------------------------------------------------------------------------------------ Net cash flow from investing activities ........................ (29.5) (25.7) (134.9) (152.2) - ------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents .................. (7.6) 2.1 (4.7) 1.6 Cash and cash equivalents at beginning of period ............ 8.7 3.7 5.8 4.2 - ------------------------------------------------------------------------------------ Cash and cash equivalents at end of period .................. $ 1.1 $ 5.8 $ 1.1 $ 5.8 ==================================================================================== Cash Paid During the Year for Interest ................................ $ 21.0 $ 20.8 $ 46.4 $ 48.4 Income taxes ............................ $ 0.2 $ 19.5 $ 20.3 </TABLE> See notes to condensed consolidated financial statements. Page 6 of 20 Pages <PAGE> AGL RESOURCES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Implementation of Holding Company Reorganization On March 6, 1996, following shareholder approval of a corporate restructuring, AGL Resources Inc. (AGL Resources) became the parent company of Atlanta Gas Light Company (AGLC) and its subsidiaries. The consolidated financial statements of AGL Resources include the financial statements of AGLC, Chattanooga Gas Company (Chattanooga) and AGL Resources' nonregulated subsidiaries as though AGL Resources had existed in all periods shown and had owned all of AGLC's outstanding common stock prior to March 6, 1996. As a result of the restructuring, AGL Resources engages in utility activities through AGLC and its wholly owned subsidiary, Chattanooga. Unless noted specifically or otherwise required by the context, references to AGLC or the utility include the operations and activities of AGLC and Chattanooga. AGL Resources engages in nonregulated business activities through AGL Energy Services, Inc. (AGL Energy Services), a gas supply services company; AGL Investments, Inc. (AGL Investments), a subsidiary established to develop and manage certain nonregulated business opportunities; The Energy Spring, Inc. (Energy Spring), a retail energy marketing company; and their subsidiaries. AGL Resources Service Company (Service Company), provides corporate support services to AGL Resources and its subsidiaries. Ownership of AGLC's nonregulated business, Georgia Gas Company (natural gas production activities), has been transferred to AGL Energy Services. Ownership of AGLC's other nonregulated businesses, Georgia Energy Company (natural gas vehicle conversions), Georgia Gas Service Company (propane sales) and Trustees Investments, Inc. (real estate holdings), has been transferred to AGL Investments. AGLC's interest in Sonat Marketing Company L.P. has been transferred to AGL Gas Marketing, Inc., a wholly owned subsidiary of AGL Investments. In addition, AGL Investments has established two wholly owned subsidiaries: AGL Power Services, Inc., which owns a 35% interest in Sonat Power Marketing L.P., and AGL Consumer Services, Inc., an energy-related consumer products and services company. Service Company was formed during fiscal 1996 to provide corporate support services to AGL Resources and its subsidiaries. The transfer of related assets and accumulated deferred income tax liabilities from AGLC to Service Company and other nonregulated subsidiaries was effected through noncash dividends of $34.3 million during the fourth quarter of fiscal 1996 and $4.8 million during the first quarter of fiscal 1997. As a result of those noncash dividends, utility plant-net decreased and nonutility property-net increased by approximately $48.4 million. Expenses of Service Company are allocated to AGL Resources and its subsidiaries. 2. Interim Financial Statements In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all normal recurring accruals necessary for a fair statement of the results of the interim periods reflected. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted from these condensed consolidated financial statements pursuant to applicable rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the annual reports on Form 10-K of AGL Resources for the fiscal year ended September 30, 1996, and of AGLC for the fiscal years ended September 30, 1996 and 1995. Certain 1995 amounts have been reclassified for comparability with 1996 amounts. Page 7 of 20 Pages <PAGE> 3 . Earnings AGL Resources' principal business is the distribution of natural gas to customers in central, northwest, northeast and southeast Georgia and the Chattanooga, Tennessee area through its natural gas distribution subsidiary, AGLC. Since consumption of natural gas is dependent to a large extent on weather, the majority of AGL Resources' income is realized during the winter months. Earnings for a three-month period are not indicative of the earnings for a twelve-month period. On October 3, 1995, AGLC implemented revised firm service rates pursuant to an order on rehearing of the rate design issues of AGLC's 1993 rate case that was issued by the Georgia Public Service Commission (Georgia Commission) on September 25, 1995. Although neutral with respect to total annual margins, the new rates shift margins from heating months (November - March) into non-heating months, thereby affecting the comparisons of earnings for the twelve-month periods ended December 31, 1996, and 1995. 4. Environmental Matters - AGLC AGLC has identified nine sites in Georgia where it currently owns all or part of a manufactured gas plant (MGP) site. In addition, AGLC has identified three other sites in Georgia which AGLC does not now own, but which may have been associated with the operation of MGPs by AGLC or its predecessors. There are also three sites in Florida which have been investigated by environmental authorities in connection with which AGLC may be contacted as a potentially responsible party. AGLC's response to MGP sites in Georgia is proceeding under two state regulatory programs. First, AGLC has entered into consent orders with the Georgia Environmental Protection Division (EPD) with respect to four sites: Augusta, Griffin, Savannah and Valdosta. Under these consent orders, AGLC is obliged to investigate and, if necessary, remediate impacts at the site. AGLC developed a proposed Corrective Action Plan (CAP) for the Griffin site and has now conducted certain follow-up investigations in response to EPD's comments. Assessment activities were conducted at Augusta and are planned for Savannah during January 1997. In addition, AGLC is in the process of planning certain interim remedial measures at the Augusta MGP site. Those measures are expected to be implemented principally during fiscal 1997. Second, AGLC's response to all Georgia sites is proceeding in substantial compliance with Georgia's Hazardous Site Response Act (HSRA). AGLC submitted to EPD formal notifications pertaining to all of its owned MGP sites, and EPD had listed seven sites (Athens, Augusta, Brunswick, Griffin, Savannah, Valdosta and Waycross) on the state's Hazardous Site Inventory (HSI). EPD has not listed the Macon site on the HSI at this time. EPD has also listed the Rome site, which AGLC has acquired, on the HSI. Under the HSRA regulations, the four sites subject to consent orders are presumed to require corrective action; EPD will determine whether corrective action is required at the four remaining sites (Athens, Brunswick, Rome and Waycross) in due course. In that respect, however, AGLC has submitted Compliance Status Reports (CSRs) for the Athens, Brunswick and Rome MGP sites, and AGLC has concluded that these sites do not meet applicable risk reduction standards. Accordingly, some degree of response action is likely to be required at those sites. AGLC has estimated that, under the most favorable circumstances reasonably possible, the future cost to AGLC of investigating and remediating the former MGP sites could be as low as $31.3 million. Alternatively, AGLC has estimated that, under reasonably possible unfavorable circumstances, the future cost to AGLC of investigating and remediating the former MGP sites could be as high as $117.3 million. Those estimates have been adjusted from the September 30, 1996 estimates to reflect settlements of property damage claims at certain sites. If additional sites were added to those for which corrective action now appears reasonably likely, or if substantially more stringent cleanups were required, or if site conditions are markedly worse than those now anticipated, the costs could be higher. In addition, those costs do not include other expenses, such as property damage claims, for which AGLC may ultimately Page 8 of 20 Pages <PAGE> be held liable, but for which neither the existence nor the amount of such liabilities can be reasonably forecast. Within the stated range of $31.3 million to $117.3 million, no amount within the range can be reliably identified as a better estimate than any other estimate. Therefore, a liability at the low end of this range and a corresponding regulatory asset have been recorded in the financial statements. AGLC has two means of recovering the expenses associated with the former MGP sites. First, the Georgia Commission has approved the recovery by AGLC of Environmental Response Costs, as defined, pursuant to an Environmental Response Cost Recovery Rider (ERCRR). For purposes of the ERCRR, Environmental Response Costs include investigation, testing, remediation and litigation costs and expenses or other liabilities relating to or arising from MGP sites. In connection with the ERCRR, the staff of the Georgia Commission has undertaken a financial and management process audit related to the MGP sites, cleanup activities at the sites and environmental response costs that have been incurred for purposes of the ERCRR. On October 10, 1996, the Georgia Commission issued an order to prohibit funds collected through the ERCRR from being used for the payment of any damage award, including punitive damages, as a result of any litigation associated with any of the MGP sites in which AGLC is involved. AGLC is currently pursuing judicial review of the October 10, 1996 order. Second, AGLC intends to seek recovery of appropriate costs from its insurers and other potentially responsible parties. With respect to its insurers, in 1991, AGLC filed a declaratory judgement action against 23 of its insurance companies. After the trial court entered a judgement adverse to AGLC and AGLC appealed that ruling, the Eleventh Circuit Court of Appeals held that the case did not present a case or controversy when filed, and the case was remanded with instructions to dismiss. Since the Eleventh Circuit's decision, AGLC has settled with, or is close to settlement with, most of the major insurers. AGLC has not determined what actions it will take with respect to non-settling insurers. See Part I, Item 2 and Part II, Item 5, "Other Information - Environmental Matters," of this Form 10-Q for additional information regarding environmental response activities associated with MGP sites. 5. Competition - AGLC AGLC competes to supply natural gas to interruptible customers who are capable of switching to alternative fuels, including propane, fuel and waste oils, electricity and, in some cases, combustible wood by-products. AGLC also competes to supply gas to interruptible customers who might seek to bypass its distribution system. AGLC can price distribution services to interruptible customers four ways. First, multiple rates are established under the rate schedules of AGLC's tariff approved by the Georgia Commission. If an existing tariff rate does not produce a price competitive with a customer's relevant competitive alternative, three alternate pricing mechanisms exist: Negotiated Contracts, Interruptible Transportation and Sales Maintenance (ITSM) discounts and Special Contracts. On February 17, 1995, the Georgia Commission approved a settlement that permits AGLC to negotiate contracts with customers who have the option of bypassing AGLC's facilities (Bypass Customers) to receive natural gas from other suppliers. The bypass avoidance contracts (Negotiated Contracts) can be renewable, provided the initial term does not exceed five years, unless a longer term specifically is authorized by the Georgia Commission. The rate provided by the Negotiated Contract may be lower than AGLC's filed rate, but not less than AGLC's marginal cost of service to the potential Bypass Customer. Service pursuant to a Negotiated Contract may commence without Georgia Commission action, after a copy of the contract is filed with the Georgia Commission. Negotiated Contracts may be rejected by the Georgia Commission within 90 days of filing; absent such action, however, the Negotiated Contracts remain in effect. None of the Negotiated Contracts filed to date with the Georgia Commission have been rejected. Page 9 of 20 Pages <PAGE> The settlement also provides for a bypass loss recovery mechanism to operate until the earlier of September 30, 1998, or the effective date of new rates for AGLC resulting from a general rate case. Under the recovery mechanism, AGLC is allowed to recover from other customers 75% of the difference between (a) the nongas cost revenue that was received from the potential Bypass Customer during the most recent 12-month period and (b) the nongas cost revenue that is calculated to be received from the lower Negotiated Contract rate applied to the same volumetric level. Concerning the remaining 25% of the difference, AGLC is allowed to retain a 44% share of capacity release revenues in excess of $5 million until AGLC is made whole for discounts from Negotiated Contracts. To the extent there are additional capacity release revenues, AGLC is allowed to retain 15% of such amounts. In addition to Negotiated Contracts, which are designed to serve existing and potential Bypass Customers, AGLC's ITSM Rider continues to permit discounts for short-term transactions to compete with alternative fuels. Revenue shortfalls, if any, from interruptible customers as measured by the test-year interruptible revenues determined by the Georgia Commission in AGLC's 1993 rate case will continue to be recovered under the ITSM Rider. The settlement approved by the Georgia Commission also provides that AGLC may file contracts (Special Contracts) for Georgia Commission approval if the service cannot be provided through the ITSM Rider, existing rate schedules, or Negotiated Contract procedures. A Special Contract, for example, could involve AGLC providing a long-term service contract to compete with alternative fuels where physical bypass is not the relevant competition. Pursuant to the approved settlement, AGLC has filed and is providing service pursuant to 46 Negotiated Contracts. Additionally, the Georgia Commission has approved Special Contracts between AGLC and five interruptible customers. On July 22, 1996, Chattanooga filed a plan with the Tennessee Regulatory Authority (TRA) that permits Chattanooga to negotiate contracts with customers in Tennessee who have long-term competitive options, including bypass. On November 27, 1996, the TRA approved a settlement that permits Chattanooga to negotiate contracts with large commercial or industrial customers who are capable of bypassing Chattanooga's distribution system. The settlement provides for approval on an experimental basis, with the TRA to review the measure two years from the approval date. The pricing terms provided in any such contract may be neither less than Chattanooga's marginal cost of providing service nor greater than the filed tariff rate generally applicable to such service. Chattanooga can recover 50% of the difference between the contract rate and the applicable tariff rate through the balancing account of the purchased gas adjustment provisions of Chattanooga's rate schedules. 6. Corporate Restructuring - AGLC In November 1994 AGL Resources announced a corporate restructuring plan and began its implementation during fiscal 1995. As a result of the restructuring, AGLC combined offices, established centralized customer service centers and reduced the average number of employees through voluntary retirement, severance programs and attrition. Restructuring costs of $43.1 million and $14.7 million, after income taxes, were recorded during fiscal and calendar year 1995, respectively. The principal financial effects of the restructuring charges were to increase obligations with respect to pension benefits and postretirement benefits other than pensions. (The remainder of this page was intentionally left blank.) Page 10 of 20 Pages <PAGE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On March 6, 1996, AGL Resources Inc. (AGL Resources) became the holding company for Atlanta Gas Light Company (AGLC), and its subsidiaries. During calendar 1996, ownership of AGLC's nonregulated businesses was transferred to AGL Resources and its various subsidiaries. The following discussion and analysis reflects the results of operations and financial condition of AGL Resources and factors expected to impact its future operations. See Note 1 in Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Results of Operations Three-Month Periods Ended December 31, 1996 and 1995 Explained below are the major factors that had a significant effect on results of operations for the three-month period ended December 31, 1996, compared with the same period in 1995. Operating revenues increased 14.8% for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) an increase in the cost of the gas supply recovered from customers under the purchased gas provisions of the utility's rate schedules, as explained in the following paragraph, and (2) growth in the number of utility customers served. The increase in operating revenues was offset partly by decreased volumes of gas sold as a result of weather that was 26% warmer than the same period in 1995. The utility balances the cost of gas with revenues collected from customers under the purchased gas provisions of its rate schedules. Underrecoveries or overrecoveries of gas costs are deferred and recorded as current assets or liabilities, thereby eliminating the effect that recovery of gas costs would otherwise have on net income. Cost of gas increased 21.8% for the three-month period ended December 31, 1996, compared with the same period in 1995. The increase in the cost of the utility's gas supply was primarily due to (1) an increase in the cost of gas purchased for system supply and (2) an increase in the cost of gas withdrawn from underground storage. The increase in cost of gas was offset partly by decreased volumes of gas sold as a result of weather that was 26% warmer than the same period in 1995. Operating margin increased 5.3% for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to growth in the number of utility customers served. Weather normalization adjustment riders (WNARs) approved by the Georgia Commission and the TRA stabilized operating margin at the level which would occur with normal weather for the three-month periods ended December 31, 1996 and 1995. As a result of the WNARs, weather conditions experienced do not have a significant impact on the comparability of operating margin. Operating expenses increased 8.3% for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) increased labor and labor-related expenses, (2) increased uncollectible accounts expense and (3) increased depreciation expense recorded as a result of increased property subject to depreciation. Other income increased $1.2 million for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) the recovery from customers of carrying costs not included in base rates related to storage gas inventories, (2) an increase in the recovery of carrying costs attributable to AGLC's Integrated Resource Plan and (3) the recovery of carrying costs attributable to an increase in underrecovered deferred purchased gas costs. Interest expense increased $0.8 million for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to increased amounts of short-term and long-term debt outstanding. Page 11 of 20 Pages <PAGE> Income taxes increased $0.6 million for the three-month period ended December 31, 1996, compared with the same period in 1995 primarily due to increased taxable income. Net income for the three-month period ended December 31, 1996, was $29.6 million, compared with net income of $29.1 million in 1995. Earnings per share of common stock were $0.53 for the three-month periods ended December 31, 1996, and 1995. The increase in net income was primarily due to (1) increased other income and (2) increased operating margin. The increase in net income was offset partly by increased other operating expenses. Twelve-Month Periods Ended December 31, 1996 and 1995 Explained below are the major factors that had a significant effect on results of operations for the twelve-month period ended December 31, 1996, compared with the same period in 1995. Operating revenues increased 19.5% for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) an increase in the cost of the gas supply recovered from customers under the purchased gas provisions of the utility's rate schedules, as explained in the following paragraph and (2) growth in the number of utility customers served. The utility balances the cost of gas with revenues collected from customers under the purchased gas provisions of its rate schedules. Underrecoveries or overrecoveries of gas costs are deferred and recorded as current assets or liabilities, thereby eliminating the effect that recovery of gas costs would otherwise have on net income. Cost of gas increased 33.4% for the twelve-month period ended December 31, 1996, compared with the same period in 1995. The increase in the cost of the utility's gas supply was primarily due to an increase in the cost of gas purchased for system supply. Operating margin increased 3.4% for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) revised firm service rates, effective October 3, 1995, which shift margins from heating months into non-heating months (see Note 3 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q), (2) growth in the number of utility customers served and (3) a revenue increase granted by the TRA effective November 1, 1995. WNARs stabilized operating margin at the level which would occur with normal weather for the twelve-month periods ended December 31, 1996 and 1995. As a result of the WNARs, weather conditions experienced do not have a significant impact on the comparability of operating margin. Operating expenses increased 4.6% for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) increased depreciation expense recorded as a result of increased property subject to depreciation, (2) increased uncollectible accounts expense and (3) expenses associated with the formation of AGL Resources. Total other operating expenses decreased primarily due to restructuring costs of $25.8 million recorded during the twelve-month period ended December 31, 1995. See Note 6 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Other income increased $11.4 million for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to (1) income from a gas marketing joint venture, (2) the recovery of carrying costs attributable to an increase in underrecovered deferred purchased gas costs and (3) recoveries of environmental response costs from insurance carriers and third parties. Interest expense increased $2.8 million for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to increased amounts of short-term and long-term debt outstanding. Income taxes increased $14.8 million for the twelve-month period ended December 31, 1996, compared with the same period in 1995 primarily due to increased taxable income. Page 12 of 20 Pages <PAGE> Net income for the twelve-month period ended December 31, 1996, was $76.1 million, compared with net income of $54.8 million in 1995. Earnings per share of common stock were $1.37 for the twelve-month period ended December 31, 1996, compared with earnings per share of $1.03 in 1995. The increases in net income and earnings per share were primarily due to (1) restructuring costs of $14.7 million (after income taxes) recorded in 1995, (2) increased operating margin and (3) increased other income. The increases in net income and earnings per share were offset partly by increased other operating expenses. The increase in earnings per share was also offset partly by an increase in the average number of common shares outstanding. Financial Condition AGL Resources' primary business is highly seasonal in nature and typically shows a substantial increase in accounts receivable from customers and accounts payable to gas suppliers from September 30 to December 31 as a result of colder weather. The utility also uses gas stored underground and liquefied natural gas to serve its customers during periods of colder weather. As a result, accounts receivable increased $128.7 million and inventory of gas stored underground decreased $30.9 million during the three months ended December 31, 1996. As a result of weather that was 13.2% warmer than normal during the three-month period ended December 31, 1996, significant usage of liquefied natural gas was not necessary to meet system demand. Accounts payable increased $35 million during the three months ended December 31, 1996, primarily due to a $38.4 million increase in accounts payable to gas suppliers. Accounts receivable increased $24.1 million from December 31, 1995 to December 31, 1996, primarily due to increased operating revenues. Inventory of gas stored underground and liquefied natural gas increased $31.5 million from December 31, 1995 to December 31, 1996, primarily due to an increase in the cost of gas injected into storage. Accounts payable increased $25.6 million from December 31, 1995 to December 31, 1996, primarily due to a $14.5 million increase in accounts payable to gas suppliers. The purchasing practices of AGLC are subject to review by the Georgia Commission under legislation enacted by the Georgia General Assembly (Gas Supply Plan Legislation). The Gas Supply Plan Legislation establishes procedures for review and approval, in advance, of gas supply plans for gas utilities and gas cost adjustment factors applicable to firm service customers of gas utilities. Pursuant to AGLC's approved Gas Supply Plan for fiscal year 1997, gas supply purchases are being recovered under the purchased gas provisions of AGLC's rate schedules. The plan also allows recovery from the customers of AGLC of Order 636 transition costs that are currently being charged by AGLC's pipeline suppliers. AGLC currently estimates that its portion of transition costs resulting from FERC Order 636 restructuring proceedings from all of its pipeline suppliers, that have been filed to be recovered to date, could be as high as approximately $113.6 million. This estimate assumes both that FERC approval of Southern Natural Gas Company's restructuring settlement agreement is not overturned on judicial review and that FERC does not alter its Gas Supply Realignment (GSR) recovery policies on remand from the United States Court of Appeals for the District of Columbia Circuit. Such filings currently are pending final FERC approval, and the transition costs are being collected subject to refund. Approximately $85.2 million of such costs have been incurred by AGLC as of December 31, 1996, recovery of which is provided under the purchased gas provisions of AGLC's rate schedules. For further discussion of the effects of FERC Order 636 on AGLC, see Part II, Item 5, "Other Information - Federal Regulatory Matters" of this Form 10-Q. As noted above, AGLC recovers the cost of gas under the purchased gas provisions of its rate schedules. AGLC was in an underrecovery position of $31.4 million as of December 31, 1996, $7.5 million as of December 31, 1995, and $4.7 million as of September 30, 1996. Under the provisions of the utility's rate schedules, any underrecoveries of gas costs are included in current assets and have no effect on net income. Cash and cash equivalents decreased $7.6 million and $4.7 million for the three-month and twelve-month periods ended December 31, 1996, respectively primarily to offset other working capital requirements. Page 13 of 20 Pages <PAGE> The expenditures for plant and other property totaled $29.3 million and $135.2 million for the three-month and twelve-month periods ended December 31, 1996, respectively. Service Company was formed during fiscal 1996 to provide corporate support services to AGL Resources and its subsidiaries. The transfer of related assets and accumulated deferred income tax liabilities from AGLC to Service Company and other nonregulated subsidiaries was effected through noncash dividends of $34.3 million during the fourth quarter of fiscal 1996 and $4.8 million during the first quarter of fiscal 1997. As a result of those noncash dividends, utility plant-net decreased and nonutility property-net increased by approximately $48.4 million. Expenses of Service Company are allocated to AGL Resources and its subsidiaries. AGLC has accrued liabilities of $31.3 million as of December 31, 1996, $28.6 million as of December 31, 1995, and $30.4 million as of September 30, 1996, for estimated future expenditures which are expected to be made over a period of several years in connection with or related to MGP sites. The Georgia Commission has approved the recovery by AGLC of Environmental Response Costs, as defined in Note 4 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q, pursuant to the ERCRR. In connection with the ERCRR, the staff of the Georgia Commission has undertaken a financial and management process audit related to the MGP sites, cleanup activities at the sites and environmental response costs that have been incurred for purposes of the ERCRR. On October 10, 1996, the Georgia Commission issued an order to prohibit funds collected through the ERCRR from being used for the payment of any damage award, including punitive damages, as a result of any litigation associated with any of the MGP sites in which AGLC is involved. AGLC is currently pursuing judicial review of the October 10, 1996, order. On June 16, 1995, approximately 3.0 million shares of common stock were issued and sold at a price of $16.81 per share, resulting in net proceeds of $48.6 million. Proceeds from that sale of common stock were used to finance capital expenditures and for other corporate purposes. Short-term debt increased $36.8 million and $32.5 million for the three-month and twelve-month periods ended December 31, 1996, respectively, primarily to meet increased working capital requirements. Long-term debt outstanding increased $30 million during the three-month and twelve-month periods ended December 31, 1996, as a result of the issuance by AGLC of $30 million in principal amount of Medium-Term Notes, Series C in November 1996. The notes were issued under a registration statement filed with the Securities and Exchange Commission in September 1993 covering the periodic offer and sale of up to $300 million in principal amount of Medium-Term Notes, Series C. As of December 31, 1996, AGLC had issued $224.5 million in principal amount of Medium-Term Notes Series C, with maturity dates ranging from ten to 30 years and with interest rates ranging from 5.9% to 7.2%. The notes are issued under an Indenture dated as of December 1, 1989, as supplemented and modified, and are unsecured and rank on a parity with all other unsecured indebtedness of AGLC. Net proceeds from the issuance of Medium-Term Notes were used to fund capital expenditures, to repay short-term debt and for other corporate purposes. On February 17, 1995, the Georgia Commission approved a settlement that permits AGLC to negotiate contracts with customers who have the option of bypassing AGLC's facilities (Bypass Customers) to receive natural gas from other suppliers. The bypass avoidance contracts (Negotiated Contracts) can be renewable, provided the initial term does not exceed five years, unless a longer term specifically is authorized by the Georgia Commission. The rate provided by the Negotiated Contract may be lower than AGLC's filed rate, but not less than AGLC's marginal cost of service to the potential Bypass Customer. Service pursuant to a Negotiated Contract may commence without Georgia Commission action, after a copy of the contract is filed with the Georgia Commission. Negotiated Contracts may be rejected by the Georgia Commission within 90 days of filing; absent such action, however, the Negotiated Contracts remain in effect. None of the Negotiated Contracts filed to date with the Georgia Commission have been rejected. Page 14 of 20 Pages <PAGE> The settlement also provides for a bypass loss recovery mechanism to operate until the earlier of September 30, 1998, or the effective date of new rates for AGLC resulting from a general rate case. See Note 5 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. On July 22, 1996, Chattanooga filed a plan with the TRA that permits Chattanooga to negotiate contracts with customers in Tennessee who have long-term competitive options, including bypass. On November 27, 1996, the TRA approved a settlement that permits Chattanooga to negotiate contracts with large commercial or industrial customers who are capable of bypassing Chattanooga's distribution system. The settlement provides for approval on an experimental basis, with the TRA to review the measure two years from the approval date. The pricing terms provided in any such contract may be neither less than Chattanooga's marginal cost of providing service nor greater than the filed tariff rate generally applicable to such service. Chattanooga can recover 50% of the difference between the contract rate and the applicable tariff rate through the balancing account of the purchased gas adjustment provisions of Chattanooga's rate schedules. PART II -- OTHER INFORMATION "Part II -- Other Information" is intended to supplement information contained in the Annual Report on Form 10-K for the fiscal year ended September 30, 1996, and should be read in conjunction therewith. Item 1. Legal Proceedings See Item 5. Item 5. Other Information Federal Regulatory Matters Order No. 636 AGLC currently estimates that its portion of transition costs (which include unrecovered gas costs, GSR costs and various stranded costs resulting from unbundling of interstate pipeline sales service) from all of its pipeline suppliers filed with the FERC to date to be recovered could be as high as approximately $113.6 million. AGLC's estimate is based on the most recent estimates of transition costs filed by its pipeline suppliers with the FERC, and assumes both that FERC approval of Southern Natural Gas Company's (Southern) restructuring settlement agreement is not overturned on judicial review and that FERC does not alter its GSR recovery policies on remand from the United States Court of Appeals for the District of Columbia Circuit in United Distribution Cos. v. FERC, in which the court questioned the FERC's GSR recovery policy. Such filings by AGLC's pipeline suppliers are pending final FERC approval. Approximately $85.2 million of transition costs have been incurred by AGLC as of December 31, 1996, and are being recovered from customers under the purchased gas provisions of AGLC's rate schedules. Details concerning the status of the Order No. 636 restructuring proceedings involving the pipelines that serve AGLC directly are set forth below. SOUTHERN GSR Cost Recovery Proceeding. Southern continues to make quarterly and monthly transition cost filings to recover costs from contesting parties to the settlement, and the FERC has ordered that such costs may be recovered by Southern, subject to the outcome of a hearing for contesting parties. However, since AGLC is a consenting party, its GSR and other transition cost charges are in accordance with Southern's restructuring settlement. Assuming the FERC's approval of the settlement is upheld on judicial review, AGLC's share of Southern's transition costs is estimated to be $88 million. This estimate would not be affected by the remand of Order No. 636, unless FERC's approval of the settlement is not upheld on judicial review. As of December 31, 1996, $74.7 million of such costs have already been incurred by AGLC. Page 15 of 20 Pages <PAGE> TENNESSEE GSR Cost Recovery Proceeding. Tennessee Gas Pipeline Company (Tennessee) has continued to make quarterly GSR cost recovery filings with the FERC. On December 26, 1996, Tennessee filed with the FERC to recover an additional $33 million in GSR costs. AGLC protested this filing, but the FERC has not yet acted upon Tennessee's filing. AGLC's estimated liability for GSR costs as a result of Tennessee's filings is approximately $17.4 million, subject to possible reduction based upon the hearing FERC established to investigate Tennessee's costs. AGLC is actively participating in Tennessee's GSR cost recovery proceeding. As of December 31, 1996, $5.7 million of such costs have already been incurred by AGLC. In addition, Tennessee and its customers have reached an agreement in principle which would resolve all outstanding transition cost issues; it is not possible, however, to say when this agreement will be fully documented and filed with the FERC as a settlement, or whether the FERC would approve such a settlement. FERC Rate Proceedings ANR PIPELINE On January 10, 1997, the presiding administrative law judge (ALJ) issued an initial decision in ANR's rate proceeding. The ALJ upheld AGLC's position that ANR's proposed rate for certain transportation services Southern purchases from ANR, for the benefit of AGLC, was excessive. Under the initial decision, Southern would receive approximately $7 million in refunds from ANR, which amount would be flowed through to AGLC. The initial decision would also reduce the rate for future service by approximately $3.5 million annually. AGLC had sought a prospective annual reduction of up to $4.5 million. The initial decision is subject to the possible filing of exceptions before the FERC, and thus is not yet final. Arcadian On December 30, 1996, AGLC filed a petition in the United States Court of Appeals for the Eleventh Circuit, seeking judicial review of the FERC's November 26, 1996, order rejecting AGLC's request for rehearing of the FERC's approval of the settlement between Southern and Arcadian Corporation. On January 6, 1997, AGLC moved to consolidate this appeal with its two prior appeals of the FERC's orders in the Arcadian proceeding, which appeals had been held in abeyance pending action by the FERC on AGLC's rehearing request before the FERC. The court has not yet acted on AGLC's motion, and AGLC's three appeals remain pending before the court. AGLC cannot predict the outcome of these federal proceedings nor can it determine the ultimate effect, if any, such proceedings may have on AGLC. State Regulatory Matters On February 17, 1995, the Georgia Commission approved a settlement that permits AGLC to negotiate contracts with customers who have the option to bypass AGLC's facilities and receive natural gas from other suppliers. A bypass avoidance contract (Negotiated Contract) can be renewable, provided the initial term does not exceed five years, unless a longer term specifically is authorized by the Georgia Commission. The rate provided by the Negotiated Contract may be lower than AGLC's filed rate, but not less than AGLC's marginal cost of service to the potential Bypass Customer. Negotiated Contracts may be rejected by the Georgia Commission within 90 days of filing; none of the Negotiated Contracts filed to date with the Georgia Commission have been rejected. On May 21, 1996, the Georgia Commission adopted a Policy Statement following its November 20, 1995 Notice of Inquiry concerning changes in state regulatory guidelines to respond to trends toward increased competition in natural gas markets. Among other things, the Policy Statement sets up a distinction between competitive and natural monopoly services; favors performance-based regulation in lieu of traditional cost-of-service regulation; calls for unbundling interruptible service; directs the Georgia Commission's staff to develop standards of conduct for utilities and their marketing affiliates; and invites pilot programs for unbundling services to residential and small business customers. Page 16 of 20 Pages <PAGE> Consistent with specific goals in the Georgia Commission's Policy Statement, AGLC filed on June 10, 1996, the Natural Gas Service Provider Selection Plan (the Plan), a comprehensive plan for serving interruptible markets. The Plan proposes further unbundling of services to provide large customers more service options and the ability to purchase only those services they require. Proposed tariff changes would allow AGLC to cease its sales service function and the associated sales obligation for large customers; implement delivery-only service for large customers on a firm and interruptible basis; and provide pooling services to marketers. The Plan also includes proposed standards of conduct for utilities and utility marketing affiliates. Hearings on the proposal are in process before the Georgia Commission with a decision expected by April 1997. Another regulatory reform initiative is before the Georgia General Assembly. The 1996 Georgia General Assembly considered, but delayed action on, The Natural Gas Fair Pricing Act, which would have allowed local gas companies to negotiate contract prices and terms for gas services with large commercial and industrial customers absent Georgia Commission-mandated rates. The Georgia General Assembly stated through resolutions a desire to fashion a more comprehensive approach to deregulation and unbundling of natural gas services in Georgia. Those resolutions, adopted during the 1996 session, created Senate and House committees to study and recommend a comprehensive course of action by December 31, 1996, for deregulating natural gas markets in Georgia. The separate Senate and House study committees conducted joint meetings during September, October and November 1996, with the goal of crafting a comprehensive deregulation bill for the 1997 Georgia General Assembly. The committees issued a joint report in December 1996, setting forth the following findings of fact: (1) unbundling gas services, and providing such services on an open access, non-discriminatory basis, would foster a more competitive market for the local distribution of natural gas; (2) performance-based ratemaking for regulated, monopoly services could produce better results than current cost-of-service ratemaking for consumers of natural gas and for local distribution companies; (3) any company which proposes to serve firm (residential and small business) natural gas consumers should be subject to certification of its financial and technical expertise; (4) safeguards must be in place to ensure pipeline safety and to protect against cross-subsidy, unfair and deceptive acts and practices, and unfair competition as competition develops in the local distribution of natural gas; (5) it is appropriate for a natural gas local distribution company to recover from its firm customers "stranded costs" that the Georgia Commission determines are prudently incurred; and (6) a "one-size-fits-all" approach to introducing competition into Georgia's natural gas markets may not be appropriate, due to the difference in size and markets served of Georgia's natural gas distribution companies. In response to the joint report of the study committees, Senate Bill 215 was introduced in the 1997 Georgia General Assembly. The Bill entitled, the Natural Gas Competition and Deregulation Act, would unbundle services to all of AGLC's natural gas customers, continue AGLC's role as the intrastate transporter of natural gas, allow AGLC to assign firm delivery capacity to certificated marketers who would sell the gas commodity, and create a secondary transportation market for interruptible transportation capacity. AGLC supports both the Plan under consideration by the Georgia Commission and the Bill under consideration by the Georgia General Assembly. AGLC currently makes no profit on the purchase and sale of gas because actual gas costs are passed through to customers under the purchased gas provisions of AGLC's rate schedules. Earnings are provided through revenues received for intrastate transportation of the commodity. Consequently, allowing AGLC to cease its sales service function and the associated sales obligation would not adversely affect AGLC's ability to earn a return on its distribution system investment. In addition, allowing gas to be sold to all customers by numerous marketers, including nonregulated subsidiaries of AGL Resources, would provide new business opportunities. On July 22, 1996, Chattanooga filed a plan with the TRA that permits Chattanooga to negotiate contracts with customers in Tennessee who have long-term competitive options, including bypass. On November 27, 1996, the TRA approved a settlement that permits Chattanooga to negotiate contracts with large commercial or industrial customers who are capable of bypassing Chattanooga's distribution system. The settlement provides for approval on an experimental basis, with the TRA to review the measure two years from the approval date. The pricing terms provided in any such contract Page 17 of 20 Pages <PAGE> may be neither less than Chattanooga's marginal cost of providing service nor greater than the filed tariff rate generally applicable to such service. Chattanooga can recover 50% of the difference between the contract rate and the applicable tariff rate through the balancing account of the purchased gas adjustment provisions of Chattanooga's rate schedules. Environmental Matters AGLC has identified nine sites in Georgia where it currently owns all or part of an MGP site. In addition, AGLC has identified three other sites in Georgia which AGLC does not now own, but which may have been associated with the operation of MGPs by AGLC or its predecessors. There are also three sites in Florida which have been investigated by environmental authorities in connection with which AGLC may be contacted as a potentially responsible party. AGLC's response to MGP sites in Georgia is proceeding under two state regulatory programs. First, AGLC has entered into consent orders with the EPD with respect to four sites: Augusta, Griffin, Savannah and Valdosta. Under these consent orders, AGLC is obliged to investigate and, if necessary, remediate impacts at the site. AGLC developed a proposed CAP for the Griffin site and has now conducted certain follow-up investigations in response to EPD's comments. Assessment activities were conducted at Augusta and are planned for Savannah during January 1997. In addition, AGLC is in the process of planning certain interim remedial measures at the Augusta MGP site. Those measures are expected to be implemented principally during fiscal 1997. Second, AGLC's response to all Georgia sites is proceeding in substantial compliance with Georgia's HSRA. AGLC submitted to EPD formal notifications pertaining to all of its owned MGP sites, and EPD had listed seven sites (Athens, Augusta, Brunswick, Griffin, Savannah, Valdosta and Waycross) on the state's HSI. EPD has not listed the Macon site on the HSI at this time. EPD has also listed the Rome site, which AGLC has acquired, on the HSI. Under the HSRA regulations, the four sites subject to consent orders are presumed to require corrective action; EPD will determine whether corrective action is required at the four remaining sites (Athens, Brunswick, Rome and Waycross) in due course. In that respect, however, AGLC has submitted CSRs for the Athens, Brunswick and Rome MGP sites, and AGLC has concluded that these sites do not meet applicable risk reduction standards. Accordingly, some degree of response action is likely to be required at those sites. AGLC has estimated that, under the most favorable circumstances reasonably possible, the future cost to AGLC of investigating and remediating the former MGP sites could be as low as $31.3 million. Alternatively, AGLC has estimated that, under reasonably possible unfavorable circumstances, the future cost to AGLC of investigating and remediating the former MGP sites could be as high as $117.3 million. Those estimates have been adjusted from the September 30, 1996 estimates to reflect settlements of property damage claims at certain sites. If additional sites were added to those for which action now appears reasonably likely, or if substantially more stringent cleanups were required, or if site conditions are markedly worse than those now anticipated, the costs could be higher. In addition, those costs do not include other expenses, such as property damage claims, for which AGLC may ultimately be held liable, but for which neither the existence nor the amount of such liabilities can be reasonably forecast. Within the stated range of $31.3 million to $117.3 million, no amount within the range can be reliably identified as a better estimate than any other estimate. Therefore, a liability at the low end of this range and a corresponding regulatory asset have been recorded in the financial statements. AGLC has two means of recovering the expenses associated with the former MGP sites. First, the Georgia Commission has approved the recovery by AGLC of Environmental Response Costs, as defined, pursuant to AGLC's ERCRR. For purposes of the ERCRR, Environmental Response Costs include investigation, testing, remediation and litigation costs and expenses or other liabilities relating to or arising from MGP sites. In connection with the ERCRR, the staff of the Georgia Commission has undertaken a financial and management process audit related to the MGP sites, cleanup activities at the sites and environmental response costs that have been incurred for purposes of the ERCRR. On October 10, 1996, the Georgia Commission issued an order to prohibit funds collected through the ERCRR from being used for the payment of any damage award, including punitive damages, as a result of any litigation associated with any of the MGP sites in which AGLC is involved. AGLC is currently pursuing judicial review of the October 10, 1996, order. Page 18 of 20 Pages <PAGE> Second, AGLC intends to seek recovery of appropriate costs from its insurers and other potentially responsible parties. See Note 4 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Other Legal Proceedings With regard to other legal proceedings, AGL Resources is a party, as both plaintiff and defendant, to a number of other suits, claims and counterclaims on an ongoing basis. Management believes that the outcome of all litigation in which it is involved will not have a material adverse effect on the consolidated financial statements of AGL Resources. New Joint Venture and Propane Company Acquisition During December 1996, AGL Resources signed a letter of intent with Transco to form a joint venture, which would be known as Cumberland Pipeline Company, to operate and market interstate pipeline capacity. The transaction is subject to various corporate and regulatory approvals. Initially, the 135-mile Cumberland pipeline will include existing pipeline infrastructure owned by the two companies. Projected to enter service by November 1, 2000, Cumberland will provide service to AGLC, Chattanooga and other markets throughout the eastern Tennessee Valley and northwest Georgia and northeast Alabama. Affiliates of Transco and AGL Resources each will own 50% of the new pipeline company, and an affiliate of Transco will serve as operator. The project will be submitted to the FERC for approval in the fourth quarter of 1997. Effective February 1, 1997, Georgia Gas Service Company (Georgia Gas Service), a subsidiary of AGL Investments, acquired, through a wholly-owned subsidiary, eight related companies (the Jordan Gas Propane Companies). The acquisition of the Jordan Gas Propane Companies is expected to increase the retail sales of Georgia Gas Service's propane operations from 7 million gallons annually to approximately 20 million gallons annually. As a result of the acquisition, Georgia Gas Service will serve approximately 38,000 customers in northwest Georgia and northern Alabama. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.2 - Bylaws. 10.1 - Executive Compensation Plans and Arrangements. 10.1.a - Second Amendment to the AGL Resources Inc. Long-Term Stock IncentivePlan of 1990. 10.1.b - Fourth Amendment to the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990. 10.1.c - Fifth Amendment to the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990. 10.1.d - First Amendment to the AGL Resources Inc. Nonqualified Savings Plan. 27 - Financial Data Schedule. (b) Reports on Form 8-K. None. Page 19 of 20 Pages <PAGE> 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. AGL Resources Inc. (Registrant) Date February 14, 1997 /s/ David R. Jones David R. Jones President and Chief Executive Officer Date February 14, 1997 /s/ J. Michael Riley J. Michael Riley Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Page 20 of 20 Pages <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>AGL RESOURCES INC. <TEXT> <TABLE> <S> <C> <ARTICLE> UT <CIK> 0001004155 <NAME> AGL RESOURCES INC. <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-START> OCT-01-1996 <PERIOD-END> DEC-31-1996 <BOOK-VALUE> PER-BOOK <TOTAL-NET-UTILITY-PLANT> 1,367 <OTHER-PROPERTY-AND-INVEST> 61 <TOTAL-CURRENT-ASSETS> 404 <TOTAL-DEFERRED-CHARGES> 107 <OTHER-ASSETS> 17 <TOTAL-ASSETS> 1,956 <COMMON> 279 <CAPITAL-SURPLUS-PAID-IN> 173 <RETAINED-EARNINGS> 154 <TOTAL-COMMON-STOCKHOLDERS-EQ> 606 <PREFERRED-MANDATORY> 56 <PREFERRED> 3 <LONG-TERM-DEBT-NET> 585 <SHORT-TERM-NOTES> 189 <LONG-TERM-NOTES-PAYABLE> 0 <COMMERCIAL-PAPER-OBLIGATIONS> 0 <LONG-TERM-DEBT-CURRENT-PORT> 0 <PREFERRED-STOCK-CURRENT> 0 <CAPITAL-LEASE-OBLIGATIONS> 0 <LEASES-CURRENT> 0 <OTHER-ITEMS-CAPITAL-AND-LIAB> 517 <TOT-CAPITALIZATION-AND-LIAB> 1,956 <GROSS-OPERATING-REVENUE> 379 <INCOME-TAX-EXPENSE> 18 <OTHER-OPERATING-EXPENSES> 88 <TOTAL-OPERATING-EXPENSES> 319 <OPERATING-INCOME-LOSS> 60 <OTHER-INCOME-NET> 2 <INCOME-BEFORE-INTEREST-EXPEN> 45 <TOTAL-INTEREST-EXPENSE> 14 <NET-INCOME> 31 <PREFERRED-STOCK-DIVIDENDS> 1 <EARNINGS-AVAILABLE-FOR-COMM> 30 <COMMON-STOCK-DIVIDENDS> 15 <TOTAL-INTEREST-ON-BONDS> 11 <CASH-FLOW-OPERATIONS> (33) <EPS-PRIMARY> 0.53 <EPS-DILUTED> 0.53 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>3 <TEXT> BYLAWS OF AGL RESOURCES INC. ARTICLE I SHAREHOLDERS SECTION 1.1. Annual Meetings. The annual meeting of the Shareholders of the Corporation shall be held each year for the purposes of electing Directors and of transacting such other business as properly may be brought before the meeting. To be properly brought before the meeting, business must be brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any Shareholder of the Corporation entitled to vote at the meeting who complies with the procedures set forth in Sections 1.2 through 1.2.2 of this Article; provided, in each case, that such business proposed to be conducted is, under the law, an appropriate subject for Shareholder action. SECTION 1.2. Notice of Business to Be Brought Before Annual Meetings. For business to be properly brought before an annual meeting by a Shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, in the case of an annual meeting of Shareholders, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, in accordance with Securities and Exchange Commission Rule 14a-8(a)(3)(i), not less than 120 calendar days prior to the date of the Corporation's proxy statement released to Shareholders in connection with the previous year's annual meeting of Shareholders, except that if no annual meeting of Shareholders was held in the previous year or if the date of the annual meeting of Shareholders has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, the notice shall be received at the principal executive offices of the Corporation not less than the later of (i) 150 calendar days prior to the date of the contemplated annual meeting or (ii) the date which is 10 calendar days after the date of the first public announcement or other notification to the Shareholders of the date of the contemplated annual meeting. SECTION 1.2.1. Notice of Business to Be Brought Before Special Meetings. In the case of special meetings of Shareholders, held pursuant to Section 1.3 of this Article, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, in accordance with Securities and Exchange Commission Rule 14a-8(a)(3)(i), not less than 120 calendar days prior to the date of the special meeting. SECTION 1.2.2. Contents of Notice. A Shareholder's notice to the Secretary shall set forth as to each matter such Shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -1- <PAGE> conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the Shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by such Shareholder; (iv) the dates upon which the Shareholder acquired such shares; (v) documentary support for any claim of beneficial ownership, (vi) any material interest of such Shareholder in such business; (vii) a statement in support of the matter and any other information required by said Rule 14a-8; and (viii) as to each person whom the Shareholder proposes to nominate for election or reelection as Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and Rule 14a-1 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected). SECTION 1.2.3. Determination of Validity of Notice. The chairman of an annual meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of Sections 1.2 through 1.2.2 of this Article, and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted, or in the case of persons so nominated, not be eligible for election. SECTION 1.3. Special Meetings. The Corporation shall hold a special meeting of Shareholders on call of the Board of Directors or the Executive Committee, the Chairman of the Board of Directors, the President, or, upon delivery to the Corporation's Secretary of a signed and dated written request setting out the purpose or purposes for the meeting, on call of the holders of 100% of the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. Only business within the purpose or purposes described in the notice of special meeting required by Section 1.5 below may be conducted at a special meeting of the Shareholders. SECTION 1.4. Date, Time and Place of Meetings. Annual meetings of the Shareholders shall be held on such date and at such time and place, within or without the State of Georgia, as may be fixed by the Board of Directors. Special meetings of Shareholders shall be held on such date and at such time and place, within or without the State of Georgia, as may be fixed from time to time by the Board of Directors. The date, time and place of all meetings shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. If no designation is made, the place of the meeting shall be the principal executive offices of the Corporation. SECTION 1.5. Notice of Meetings. The Secretary or an Assistant Secretary shall deliver, either personally or by mailing it, postage prepaid, a written notice of the place, day, and time of all meetings of the Shareholders not less than ten (10) nor more than sixty (60) days before the meeting date to each Shareholder of record entitled to vote at such meeting. Unless otherwise required or permitted by law, written notice is effective when mailed, if mailed with postage prepaid and correctly addressed to the Shareholder's address shown in the Corporation's current record of Shareholders. It shall not be necessary that notice of an annual meeting include a description of the purpose or purposes for which the meeting is called. In the case of a special meeting, the purpose corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -2- <PAGE> or purposes for which the meeting is called shall be included in the notice of the special meeting. If an annual or special Shareholders' meeting is adjourned to a different date, time, or place, notice of the new date, time, or place need not be given if the new date, time, or place is announced at the meeting before adjournment. However, if a new record date for the adjourned meeting is or must be fixed under Section 1.9 herein, notice of the adjourned meeting must be given to persons who are Shareholders as of the new record date. SECTION 1.6. Record Date. The Board of Directors, in order to determine the Shareholders entitled to notice of or to vote at any meeting of the Shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, shall fix in advance a record date that may not be more than seventy (70) days before the meeting or action requiring a determination of Shareholders. Only such Shareholders as shall be Shareholders of record on the date fixed shall be entitled to such notice of or to vote at such meeting or any adjournment thereof, or to receive payment of any such dividend or other distribution or allotment of any rights, or to exercise any such rights in respect of stock, or to take any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. The record date shall apply to any adjournment of the meeting except that the Board of Directors shall fix a new record date for the adjourned meeting if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 1.6. Shareholders' List for Meeting. After fixing a record date for a meeting, the Corporation shall prepare an alphabetical list of the names of all Shareholders who are entitled to notice of the Shareholders' meeting. The list shall be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each Shareholder. The Corporation shall make the Shareholders' list available for inspection by any Shareholder, his agent, or his attorney at the time and place of the meeting. SECTION 1.8. Quorum. Subject to any express provision of law or the Articles of Incorporation, a majority of the votes entitled to be cast by all shares voting together as a group shall constitute a quorum for the transaction of business at all meetings of the Shareholders. Whenever a class of shares or series of shares is entitled to vote as a separate voting group on a matter, a majority of the votes entitled to be cast by each voting group so entitled shall constitute a quorum for purposes of action on any matter requiring such separate voting. Once a share is represented, either in person or by proxy, for any purpose at a meeting other than solely to object to holding a meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is set for the adjourned meeting. SECTION 1.9. Adjournment of Meetings. The holders of a majority of the voting shares represented at a meeting, or the Chairman of the Board or the President, whether or not a quorum is present, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -3- <PAGE> present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Shareholder of record entitled to vote at the adjourned meeting. SECTION 1.10. Vote Required. When a quorum exists, action on a matter (other than the election of Directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation, a bylaw authorized by the Articles of Incorporation or express provision of law requires a greater number of affirmative votes. Unless otherwise provided in the Articles of Incorporation, Directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Shareholders do not have the right to cumulate their votes unless the Articles of Incorporation so provide. SECTION 1.11. Voting Entitlement of Shares. Unless otherwise provided in the Articles of Incorporation, each Shareholder, at every meeting of the Shareholders, shall be entitled to cast one vote, either in person or by written proxy, for each share standing in his or her name on the books of the Corporation as of the record date. A Shareholder may vote his shares in person or by proxy. An appointment of proxy is effective when received by the Secretary of the Corporation or other officer or agent authorized to tabulate votes and is valid for eleven (11) months unless a longer period is expressly provided in the appointment of proxy form. An appointment of proxy is revocable by the Shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. ARTICLE II BOARD OF DIRECTORS SECTION 2.1. General Powers. Subject to the Articles of Incorporation, and Bylaws approved by the Shareholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation managed under the direction of, the Board of Directors. SECTION 2.2. Number and Tenure. The Board of Directors shall consist of at least five (5) members and not more than fifteen (15) members, the exact number of Directors to be fixed from time to time by resolution of the Board of Directors of the Corporation. No decrease in the number or minimum number of Directors, through amendment of the Articles of Incorporation or of the Bylaws or otherwise, shall have the effect of shortening the term of any incumbent Director. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with the term of office of one class expiring each year. At the first annual meeting of shareholders, the Directors shall be divided into three classes, as nearly equal in size as may be, with the Directors of one class to be elected to hold office for a term expiring at the third annual meeting following the election and until their successors shall have been duly elected and qualified; with the Directors of corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -4- <PAGE> the second class to be elected to serve for a term expiring at the second annual meeting following the election and until their successors shall have been duly elected and qualified; and the Directors of the third class to be elected to serve for a term expiring at the first annual meeting following the election and until their successors shall have been duly elected and qualified. Thereafter, Directors shall be elected for terms of three years, and until their successors have been duly elected and qualified or until there is a decrease in the number of Directors. SECTION 2.3. Qualifications of Directors. Directors shall be natural persons who have attained the age of 18 years who shall own at least 100 shares of the Common Stock of the Corporation but need not be residents of the State of Georgia. SECTION 2.3.1. Re-election After Termination of Principal Employment. If any Director ceases to hold the position in his or her principal employment profession, trade or calling that he or she held at he beginning of the current term for which he or she was elected a Director, such person shall not be eligible for re-election to the Board of Directors after the expiration of such current term unless the Board of Directors decides that such person should be eligible for re-election. SECTION 2.3.2. Terminating Events; Honorary Directors. Any Director who either (i) attains his or her seventieth (70th) birthday or (ii) retires from or discontinues his or her employment with the Corporation, whichever first occurs, shall thereafter, upon completion of the term for which he or she was elected a Director, cease to be an active Director; provided, however, anyone who, upon his or her retirement is Chairman of the Board or President of the Corporation may, notwithstanding the above provisions of this Section, continue to serve as an active Director until his attains his seventieth (70th) birthday, and thereafter until completion of the term for which he or she was elected a Director. SECTION 2.3.3. Honorary Directors. Upon appointment by the Board of Directors, a Director who ceases to be an active Director because of age or retirement, or any other person who shall be so elected by the Board of Directors, shall become an Honorary Director for such term or terms as the Board of Directors may determine, but subject to removal from the position of Honorary Director at any time at the pleasure of the Board. Except for the regular November meeting of the Board of Directors, Honorary Directors will not be expected to attend meetings of the Board unless specially invited. The expenses of Honorary Directors in attending such November meeting or any other meeting of the Board of Directors to which they are specially invited will be reimbursed by the Corporation but they will not receive fees for attending such meetings. Honorary Directors may participate in an advisory capacity in all discussions and deliberations of the Board of Directors, but shall have no vote at the meetings which they attend in accordance with the foregoing provisions. An Honorary Director shall not be included in any calculation of the number of active Directors authorized and serving under Section 2.2. SECTION 2.4. Vacancies. Unless the Articles of Incorporation provide otherwise, if a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of Directors, the vacancy may be filled only by the Board of Directors, or, if the Directors remaining in office constitute fewer than a quorum of the Board, by the affirmative vote of a corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -5- <PAGE> majority of all Directors remaining in office. If the vacant office was held by a Director elected by a voting group of Shareholders, only the remaining Directors elected by that voting group are entitled to vote to fill the vacancy. SECTION 2.5. Meetings. The Board of Directors shall meet annually, without notice of the date, time, place or purpose of the meeting, immediately following and at the same place as the annual meeting of Shareholders. Regular meetings of the Board of Directors or any committee may be held between annual meetings without notice at such time and at such place, within or without the State of Georgia, as from time to time shall be determined by the Board or committee, as the case may be. A majority of the Board of Directors, the Chairman of the Board, the President or the Executive Committee may call a special meeting of the Directors at any time by giving each Director two (2) days notice of the date, time and place of the meeting. Such notice may be given orally or in writing in accordance with the provisions of Section 4.1. Unless otherwise provided in the Articles of Incorporation, these Bylaws or by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting need be specified in the notice or any waiver of notice. SECTION 2.6. Quorum and Voting. At all meetings of the Board of Directors or any committee thereof, a majority of the number of Directors prescribed, or if no number is prescribed, the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business. The affirmative vote of a majority of the Directors present at any meeting at which there is a quorum at the time of such act shall be the act of the Board or of the committee, except as might be otherwise specifically provided by statute or by the Articles of Incorporation or Bylaws. In the absence of a quorum, the Directors present by majority vote may adjourn the meeting from time to time without notice other than by verbal announcement at the meeting until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 2.7. Action Without Meeting. Unless the Articles of Incorporation or Bylaws provide otherwise, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if the action is taken by all members of the Board or committee, as the case may be. The action must be evidenced by one or more written consents describing the action taken, signed by each Director, and filed with the minutes of the proceedings of the Board or committee or filed with the corporate records. SECTION 2.8. Remote Participation in a Meeting. Unless otherwise restricted by the Articles of Incorporation or the Bylaws, any meeting of the Board of Directors may be conducted by the use of any means of communication by which all Directors participating may simultaneously hear each other during the meeting. A Director participating in a meeting by this means is deemed to be present in person at the meeting. corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -6- <PAGE> SECTION 2.9. Compensation of Directors. The Board of Directors may fix the compensation of the Directors for their services as Directors. Compensation shall be fixed from time to time by a resolution of the Board of Directors, and may be on the basis of an annual sum or a fixed sum for attendance at each regular or special meeting and every adjournment thereof, or a combination of these methods. Members may be reimbursed for all reasonable traveling expenses incurred in attending meetings. No provision of these Bylaws shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 2.10. Removal of Directors by Shareholders. Subject to the requirements of Section 14-2-808 of the Georgia Business Corporation Code (the "Code") for the removal of Directors elected by cumulative voting, voting group or staggered terms, any one or more Directors may be removed from office, only with cause, at any meeting of Shareholders with respect to which notice of such purpose has been given, by the affirmative vote of the holder or holders of a majority of the outstanding shares of the Corporation. SECTION 2.11. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of Shareholders (i) by the Board of Directors or at the direction of the Board by any nominating committee or person appointed by the Board or (ii) by any Shareholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in Sections 1.2 through 1.2.2 of these Bylaws. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. Such notice to the Secretary shall set forth the information required in Section 1.2.2 of these Bylaws. The Corporation may require any proposed nominee to furnish such other information as reasonably may be required by the Corporation to determine the eligibility of such proposed nominee to serve as a Director of the Corporation. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 2.15. Indemnification. The indemnification authorized in the Articles of Incorporation shall be subject to the following provisions and procedures: SECTION 2.15.1. Determination of Eligibility for Indemnification. In the case of actions brought by or in the right of the Corporation, a Director's right to indemnification as authorized in the Articles of Incorporation shall be determined: (i) If there are two or more directors not at the time parties to the proceeding ("Disinterested Directors"), by the board of directors by a majority vote of all the Disinterested Directors (a majority of whom shall for such purpose constitute a quorum), or by a majority of the members of a committee of two or more Disinterested Directors appointed by such a vote; corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -7- <PAGE> (ii) By special legal counsel: (a) Selected in the manner prescribed in paragraph (i) of this subsection; or (b) If there are fewer than two Disinterested Directors, the Board of Directors (in which selection directors who do not qualify as Disinterested Directors may participate); or (iii)By the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the determination. SECTION 2.15.2. Rights Not Exclusive. The rights to indemnification and advance of expenses granted in the Articles of Incorporation and in these Bylaws are not exclusive, and do not limit the Corporation's power to pay or reimburse expenses to which a Director may be entitled, whether by agreement vote of shareholders or Disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office, and do not limit the Corporation's power to pay or reimburse expenses incurred by a Director in connection with his appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent to the proceeding. SECTION 2.15.3. Insurance. The Corporation and its officers shall have the power to purchase and maintain insurance on behalf of an individual who is or was a Director, officer, employee or agent of the Corporation or who, while a Director, officer, employee, or agent of the Corporation, is or was serving as a Director, officer, partner, trustee employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against liability asserted against or incurred by him in that capacity or arising from his status as a Director, officer, employee or agent, whether or not the Corporation would have the power to indemnify him against the same liability under the provisions of these Bylaws. SECTION 2.15.4. Reports to Shareholders. If the Corporation indemnifies or advances expenses to a Director, otherwise than by action of the shareholders or by an insurance carrier pursuant to insurance maintained by the Corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next annual shareholders' meeting. ARTICLE III COMMITTEES SECTION 3.1. Committees. The Board of Directors may, by resolution, designate from among its members one or more committees, each committee to consist of one or more Directors, except that committees appointed to take action with respect to indemnification of Directors, Directors' conflicting interest transactions or derivative proceedings shall consist of two corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -8- <PAGE> or more Directors qualified to serve pursuant to the Code. Any such committee, to the extent specified by the Board of Directors, Articles of Incorporation or Bylaws, shall have and may exercise all of the authority of the Board of Directors in the management of the business affairs of the Corporation, except that it may not (i) approve or propose to Shareholders action that the Code requires to be approved by Shareholders; (ii) fill vacancies on the Board of Directors or any of its committees; (iii) amend the Articles of Incorporation; (iv) adopt, amend, or repeal Bylaws; or (v) approve a plan of merger not requiring Shareholder approval. All action by any committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors, except that no rights of third person shall be affected by any such revision or alteration. Vacancies in any committee shall be filled by the Board of Directors. SECTION 3.2. Meetings of Committees. Regular meetings of any committee may be held without notice at such time and at such place, within or without the State of Georgia, as from time to time shall be determined by such committee. The Chairman of the Board of Directors, the President, the Board of Directors or the committee by vote at a meeting, or by two members of any committee in writing without a meeting, may call a special meeting of any such committee at any time by giving each such committee member two (2) days notice of the date, time and place of the meeting. Such notice may be given orally or in writing in accordance with the provisions of Section 4.1. Unless otherwise provided in the Articles of Incorporation, these Bylaws or by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of any such committee need be specified in the notice or any waiver of notice. SECTION 3.3. Quorum of Committee. At all meetings of any committee a majority of the total number of its members shall constitute a quorum for the transaction of business. Except in cases in which it is by law, by the Articles of Incorporation, by these Bylaws, or by resolution of the Board of Directors otherwise provided, a majority of such quorum shall decide any questions that may come before the meeting. In the absence of a quorum, the members of the committee present by majority vote may adjourn the meeting from time to time, without notice other than by verbal announcement at the meeting, until a quorum shall attend. SECTION 3.4. Compensation of Committee Members. The Board of Directors may fix the compensation of the Directors for their services as members of committees of the Board of Directors. Compensation shall be fixed from time to time by a resolution of the Board of Directors, and may be on the basis of an annual sum or a fixed sum for attendance at each regular or special meeting and every adjournment thereof, or a combination of these methods. Members of committees shall be reimbursed for all reasonable traveling expenses incurred in attending meetings. No provision of these Bylaws shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.5. Executive Committee. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate an Executive Committee of three or more Directors, which designation shall include the Chairman of the Board of Directors and the President. Each Director of the Corporation who is not designated as a member of the Executive corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -9- <PAGE> Committee hereby is designated as an alternate member of the Executive Committee, who may act in the place and stead of any absent member or members at any meeting of such Executive Committee in the event (i) a quorum of the Executive Committee is not present and (ii) the Chairman of the Board or, in his absence, the President, appoints such alternate member to act for that meeting as a member of the Executive Committee; and such alternate member shall serve only at the meeting for which such appointment is made, but shall have at that meeting all the powers of a regular member of the Executive Committee. During the intervals between the meetings of the Board of Directors the Executive Committee shall have and may exercise all of the authority of the Board of Directors in the management of the business affairs of the Corporation to the extent authorized by the resolution providing for such Executive Committee or by subsequent resolution adopted by a majority of the whole Board of Directors, except that it may not (i) approve or propose to Shareholders action that the Code requires to be approved by Shareholders; (ii) fill vacancies on the Board of Directors or any of its committees; (iii) amend the Articles of Incorporation; (iv) adopt, amend, or repeal bylaws; or (v) approve a plan of merger not requiring Shareholder approval. SECTION 3.5.1. Honorary Members of Executive Committee. Upon appointment by the Board of Directors, a Director who ceases to be an active Director because of age or retirement, and who at the time has been a member of the Executive Committee for twelve or more years, shall become an Honorary Member of the Executive Committee for such term or terms as the Board of Directors may determine, but subject to removal from the position of Honorary Member of the Executive Committee at any time at the pleasure of the Board. Honorary Members of the Executive Committee shall receive the customary fees for attending regular meetings, and may participate in an advisory capacity in all discussions and deliberations of the Executive Committee, but shall have no vote at the meetings which they attend in accordance with the foregoing provisions. An Honorary Member shall not be included in any calculation of the number of active Directors authorized and serving under Section 3.5. SECTION 3.6. Audit Committee. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate an Audit Committee of four (4) or more Directors. The members of the Audit Committee shall serve at the pleasure of the Board of Directors or until their successors shall be duly designated. Each Director of the Corporation who is not designated as a member of the Audit Committee hereby is designated as an alternate member of the Audit Committee, who may act in the place and stead of any absent member or members at any meeting of such Audit Committee in the event (i) a quorum of the Audit Committee is not present and (ii) the Chairman of the Board or, in his absence, the President, appoints such alternate member to act for that meeting as a member of the Audit Committee; and such alternate member shall serve only at the meeting for which such appointment is made, but shall have at that meeting all the powers of a regular member of the Audit Committee. The Audit Committee shall consider the choice of the independent public accountants for the Corporation, shall review the planned scope of the audit and the results of their examinations of the financial statements of the Corporation, their opinions thereon and their recommendations with respect to accounting, internal controls and other matters, shall convey information to and from the Board of Directors and its independent public accountants and auditors, shall be available for discussions of internal auditing problems and procedures, and shall make their report to the Board of Directors or the Executive Committee, or to corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -10- <PAGE> both. The Audit Committee shall keep full and fair accounts of its transactions. All action by the Audit Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors; provided that no rights of third persons shall be affected by any such revision or alteration. Vacancies in the Audit Committee shall be filled by the Board of Directors. SECTION 3.7. Nominating and Compensation Committee. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate a Nominating and Compensation Committee of four (4) or more Directors. The members of the Nominating and Compensation Committee shall serve at the pleasure of the Board of Directors or until their successors shall be duly designated. Each Director of the Corporation who is not designated as a member of the Nominating and Compensation Committee hereby is designated as an alternate member of the Nominating and Compensation Committee, who may act in the place and stead of any absent member or members at any meeting of such Nominating and Compensation Committee in the event (i) a quorum of the Nominating and Compensation Committee is not present and (ii) the Chairman of the Board or, in his absence, the President, appoints such alternate member to act for that meeting as a member of the Nominating and Compensation Committee; and such alternate member shall serve only at the meeting for which such appointment is made, but shall have at that meeting all the powers of a regular member of the Nominating and Compensation Committee. The Nominating and Compensation Committee shall review the performance of the senior officers of the Corporation and will recommend to the Board of Directors the appropriate compensation level for these and the other officers of the Corporation; they shall review and recommend to the Board of Directors any changes in the various benefit programs of the Corporation; and shall review the level of fees paid and the manner in which fees are paid to members of the Corporation's Board of Directors and shall make recommendations for adjustments as appropriate. The Nominating and Compensation Committee shall also identify and recommend to the Board of Directors the nominees for the Board. The Nominating and Compensation Committee shall keep full and fair accounts of its transactions. All action by the Nominating and Compensation Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors; provided that no rights of third persons shall be affected by any such revision or alteration. Vacancies in the Nominating and Compensation Committee shall be filled by the Board of Directors. SECTION 3.8. Long Range Planning Committee. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate a Long Range Planning Committee of four (4) or more Directors. The members of the Long Range Planning Committee shall serve at the pleasure of the Board of Directors or until their successors shall be duly designated. Each Director of the Corporation who is not designated as a member of the Long Range Planning Committee hereby is designated as an alternate member of the Long Range Planning Committee, who may act in the place and stead of any absent member or members at any meeting of such Long Range Planning Committee in the event (i) a quorum of the Long Range Planning Committee is not present and (ii) the Chairman of the Board or, in his absence, the President, appoints such alternate member to act for that meeting as a member of the Nominating and Compensation Committee; and such alternate member shall serve only at the meeting for which such corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -11- <PAGE> appointment is made, but shall have at that meeting all the powers of a regular member of the Long Range Planning Committee. The Long Range Planning Committee shall review plans for the growth and financial stability of the Corporation. In carrying out these duties, the Long Range Planning Committee shall make periodic reviews of the annual budget of the Corporation, all financing plans, the Corporation's Employee Pension Plan (including investments of its funds) and investments in non-utility operations. The results of said reviews shall be reported to the Board of Directors. The Long Range Planning Committee shall keep full and fair accounts of its transactions. All action by the Long Range Planning Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors; provided that no rights of third persons shall be affected by any such revision or alteration. Vacancies in the Long Range Planning Committee shall be filled by the Board of Directors. ARTICLE IV NOTICES SECTION 4.1. Notice. Whenever, under the provisions of the Articles of Incorporation or these Bylaws or by law, notice is required to be given to any Director or Shareholder, such notice may be given in writing, by mail; by telegram, telex or facsimile transmission; by other form of wire or wireless communication; or by private carrier. Unless otherwise required or permitted by law, such notice shall be deemed to be effective at the earliest of when received, or when delivered, properly addressed, to the addressee's last known principal place of business or residence; or five days after the same shall be deposited in the United States mail if mailed with first-class postage prepaid and correctly addressed; or on the date shown on the return receipt, if sent by registered or certified mail, and the receipt is signed by or on behalf of the addressee. Notice to any Director or Shareholder may also be oral if oral notice is reasonable under the circumstances. Oral notice is effective when communicated if communicated in a comprehensible manner. If these forms of personal notice are impractical, notice may be communicated by a newspaper of general circulation in the area where published, or by radio, television, or other form of public broadcast communication. SECTION 4.2. Waiver of Notice. Whenever any notice is required to be given under provisions of the Articles of Incorporation or of these Bylaws or by law, a waiver thereof, signed by the person entitled to notice and delivered to the Corporation for inclusion in the minutes or filing with the corporate records, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting and of all objections to the place or time of the meeting or the manner in which it has been called or convened, except when the person attends a meeting for the express purpose of stating, at the beginning of the meeting, any such objection and, in the case of a Director, does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Shareholders, Directors or a committee of Directors need be specified in any written waiver of notice; provided, however, that any waiver of notice of corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -12- <PAGE> a meeting of Shareholders required with respect to a plan of merger or a plan of consolidation shall be effective only upon compliance with Section 14-2-706(c) of the Code or successor provisions. ARTICLE V OFFICERS SECTION 5.1. Appointment. The Board of Directors at its first meeting following the annual meeting of Shareholders shall elect such officers as it shall deem necessary, including a Chairman of the Board, a President, a Secretary, a Treasurer, one or more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Each such officer shall hold office until the corresponding meeting of the Board of Directors in the next year and until his successor shall have been duly elected and qualified or until he shall have resigned or shall have been removed in the manner provided in Section 5.2 of this Article V. Any number of offices may be held by the same person unless the Articles of Incorporation or these Bylaws otherwise provide. The appointment of an officer does not itself create contract rights. SECTION 5.2. Resignation and Removal of Officers. An officer may resign at any time by delivering notice to the Corporation and such resignation is effective when the notice is delivered unless the notice specifies a later effective date. The Board of Directors (except in the case of an officer elected by the Board of Directors) or the Executive Committee or an officer upon whom such power of removal may have been conferred may remove any officer at any time with or without cause. SECTION 5.3. Vacancies. Any vacancy in office resulting from any cause may be filled by the Board of Directors at any regular or special meeting. SECTION 5.4. Powers and Duties. Each officer has the authority and shall perform the duties set forth below or, to the extent consistent with these Bylaws, the duties prescribed by the Board of Directors or by direction of an officer authorized by the Board of Directors to prescribe the duties of other officers. SECTION 5.4.1. Chairman of the Board of Directors. The Chairman of the Board of Directors may be chosen from among the Directors of the Corporation and need not be an Executive Officer or employee of the Corporation. The Chairman shall preside at all meetings of the Shareholders, the Board of Directors, and the Executive Committee. He shall have the usual powers and duties incident to the office of the chairman of the board of directors of a corporation and such other powers and duties as from time to time may be assigned to him by the Board of Directors. corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -13- <PAGE> SECTION 5.4.2. Chief Executive Officer. The Board of Directors may designate as the Chief Executive Officer of the Corporation the President or any other officer of the Corporation including the Chairman if the Chairman is a full-time officer and employee of the Corporation. The Chief Executive Officer of the Corporation shall have general and active management responsibility for the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Except where by law the signature of the President is required, the Chief Executive Officer shall have the same powers as the President to sign all authorized certificates, contracts, bonds, deeds, mortgages and other instruments. He shall have the usual powers and duties incident to the position of chief executive officer of a corporation and such other powers and duties as from time to time may be assigned by the Board of Directors. The Board of Directors may, or if it does not, the Chief Executive Officer may, from time to time designate an Executive Officer of the Corporation to assume and perform the duties and powers of the Chief Executive Officer during the absence or disability of the Chief Executive Officer. SECTION 5.4.3. President. The President shall be responsible for the general supervision of the affairs of the Corporation and general and active management of the financial affairs of the Corporation. He shall have the power to make and execute certificates, contracts, bonds, deeds, mortgages and other instruments on behalf of the Corporation, except in cases in which the signing thereof shall have been expressly delegated to some other officer or agent of the Corporation and to delegate such power to others. He also shall have such powers and perform such duties as are specifically imposed on him by law and as may be assigned to him by the Board of Directors. In the event there is no Chairman of the Board, the President shall also have all the powers and authority that the Chairman is given in these Bylaws or otherwise. During the absence or disability of the Chairman of the Board, the President shall preside at all meetings of the Shareholders, the Board of Directors and the Executive Committee. He shall have the usual powers and duties incident to the office of a president of a corporation and such other powers and duties as from time to time may be assigned to him by the Board of Directors. If the Board of Directors designates the President as the Chief Executive Officer of the Corporation, the President shall also have the powers and duties of the Chief Executive Officer. SECTION 5.4.4. Vice Presidents. The Executive Vice Presidents shall be senior in authority among the Vice Presidents. During the absence or disability of the President, the Board of Directors shall designate which of the Executive Vice Presidents shall exercise all the powers and discharge all of the duties of the President, provided, however, that if he is not a Director he shall not preside at any meetings of the Board of Directors or the Executive Committee. The Vice Presidents, shall perform such duties as vice presidents customarily perform and shall perform such other duties and shall exercise such other powers as the President or the Board of Directors may from time to time designate. SECTION 5.4.5. Secretary. The Secretary shall attend all meetings of the Shareholders and all meetings of the Board of Directors and shall record all votes and minutes of all proceedings in books to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall have custody of the corporate seal of the Corporation, shall have the authority to affix the same to any instrument the execution of which on behalf of the Corporation under its corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -14- <PAGE> seal is duly authorized and shall attest to the same by his signature whenever required. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the same by his signature. The Secretary shall give, or cause to be given, any notice required to be given of any meetings of the Shareholders, the Board of Directors and of the standing committees when required. The Secretary shall cause to be kept such books and records as the Board of Directors, the Chairman of the Board or the President may require and shall cause to be prepared, recorded, transferred, issued, sealed and canceled certificates of stock as required by the transactions of the Corporation and its Shareholders. The Secretary shall attend to such correspondence and shall perform such other duties as may be incident to the office of a Secretary of a Corporation or as may be assigned to him by the Board of Directors, the Chairman of the Board or the President. SECTION 5.4.6. Treasurer. The Treasurer shall be charged with the management of financial affairs of the Corporation and shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies, or other depositaries as shall from time to time be selected by the Board of Directors. He shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. In general, he shall perform such duties as treasurers usually perform and shall perform such other duties and shall exercise such other powers as the Board of Directors, the Chairman of the Board or the President may from time to time designate and shall render to the Chairman of the Board, the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. SECTION 5.4.7. Controller. The Controller shall have charge of and be responsible for preparation of financial and management reports, budgeting, rate material, property accounting, taxes and such other duties as are commonly incident to the office of Controller. The Controller shall have such power and duties as from time to time may be properly delegated by the President and such other powers and duties as may from time to time be assigned by the Board of Directors. SECTION 5.4.8. Assistant Vice President, Assistant Secretary and Assistant Treasurer. One or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, in the absence or disability of any Vice President, the Secretary or the Treasurer, respectively, shall perform the duties and exercise the powers of those offices, and, in general, they shall perform such other duties as shall be assigned to them by the Board of Directors or by the person appointing them. Specifically the Assistant Secretaries may affix the corporate seal to all necessary documents and attest the signature of any officer of the Corporation. SECTION 5.4.9. Subordinate Officers. The Board of Directors may elect such subordinate officers as it may deem desirable. Each such officer shall hold office for such period, have such authority and perform such duties as the Board of Directors may prescribe. The Board of Directors may from time to time authorize any officer to appoint and remove subordinate officers and prescribe the powers and duties thereof. The Board of Directors may from time to time authorize the Chairman of the Board of Directors or the President to appoint any employee or officer corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -15- <PAGE> of the Corporation (except the President, the Secretary or an Assistant Secretary elected by the Board of Directors) as an Assistant Secretary of the Corporation, to prescribe the powers, term, duties and salary, if any, of such Assistant Secretary, and to remove any Assistant Secretary thus appointed. SECTION 5.5. Officers Holding Two or More Offices. Any two of the above mentioned offices, except those of President and Secretary or Assistant Secretary, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument be required by statute, by the Articles of Incorporation or by these Bylaws to be executed, acknowledge or verified by any two or more officers. SECTION 5.6. Compensation. The Board of Directors shall have power to fix the compensation of all officers of the Corporation. It may authorize any officer, upon whom the power of appointing subordinate officers may have been conferred, to fix the compensation of such subordinate officers. ARTICLE VI CAPITAL STOCK SECTION 6.1. Share Certificates. Unless the Articles of Incorporation or these Bylaws provide otherwise, the Board of Directors may authorize the issue of some or all of the shares of any or all of its classes or series with or without certificates. Unless the Code provides otherwise, there shall be no differences in the rights and obligations of Shareholders based on whether or not their shares are represented by certificates. In the event that the Board of Directors authorizes shares with certificates, each certificate representing shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors and shall set forth upon the face thereof the name of the Corporation and that it is organized under the laws of the State of Georgia, the name of the person to whom the certificate is issued, and the number and class of shares and the designation of the series, if any, the certificate represents. The Board of Directors may designate any one or more officers to sign each share certificate, either manually or by facsimile. In the absence of such designation, each share certificate must be signed by the President or a Vice President and the Secretary or an Assistant Secretary. If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid. SECTION 6.2. Record of Shareholders. The Corporation or an agent designated by the Board of Directors shall maintain a record of the Corporation's Shareholders in a form that permits preparation of a list of names and addresses of all Shareholders, in alphabetical order by class or shares showing the number and class of shares held by each Shareholder. The Corporation shall be entitled to treat the person in whose name shares are registered in the records of the Corporation as the owner thereof for all purposes unless it accepts for its records a nominee certificate naming a beneficial owner of shares other than the record owner, and shall not otherwise corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -16- <PAGE> be bound to recognize any equitable or other claim to or interest in such shares except as may be provided by law. SECTION 6.3. Lost Certificates. In the event that a share certificate is lost, stolen, mutilated or destroyed, the Board of Directors may direct that a new certificate be issued in place of such certificate. When authorizing the issue of a new certificate, the Board of Directors may require such proof of loss as it may deem appropriate as a condition precedent to the issuance thereof, including a requirement that the owner of such lost, stolen or destroyed certificate, or his legal representative, advertise the same in such manner as the Board shall require and/or that he give the Corporation a bond in such sum as the Board may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6.4. Transfers of Shares. Transfers of shares of the capital stock of the Corporation shall be made only upon the books of the Corporation by the registered holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 6.5 hereof, and, in the case of a share represented by certificate, on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. SECTION 6.5. Transfer Agents and Registrars. The Board of Directors may establish such other regulations as it deems appropriate governing the issue, transfer, conversion and registration of share certificates, including appointment of transfer agents, clerks or registrars. ARTICLE VII GENERAL PROVISIONS SECTION 7.1. Indemnification of Officers, Employees and Agents. The Corporation shall indemnify any officer who was or is made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, derivative, criminal, administrative or investigative (hereinafter, a "proceeding") to the same extent as it is obligated to indemnify any Director of the Corporation, but without being subject to the same procedural conditions imposed for the indemnification of Directors. The Corporation may indemnify and advance expenses to an employee or agent who is not a Director or officer to the extent permitted by the Articles of Incorporation, the Bylaws or by law. SECTION 7.2. Seal. The Corporation may have a seal, which shall be in such form as the Board of Directors may from time to time determine. In the event that the use of the seal is corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -17- <PAGE> at any time inconvenient, the signature of an officer of the Corporation, followed by the word "Seal" enclosed in parentheses, shall be deemed the seal of the Corporation. SECTION 7.3. Voting Shares in Other Corporations. In the absence of other arrangements by the Board of Directors, shares of stock issued by another corporation and owned or controlled by the Corporation, whether in a fiduciary capacity or otherwise, may be voted by the President or any Vice President, in the absence of action by the President, in the same order as they preside in the absence of the President, or, in the absence of action by the President or any Vice President, by any other officer of the Corporation, and such person may execute the aforementioned powers by executing proxies and written waivers and consents on behalf of the Corporation. SECTION 7.4. Amendment of Bylaws. These Bylaws may be amended or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors unless the Articles of Incorporation or the Code reserve this power exclusively to the Shareholders in whole or in part or the Shareholders, in amending or repealing the particular bylaw, provide expressly that the Board of Directors may not amend or repeal that bylaw. Unless the Shareholders have fixed a greater quorum or voting requirement, these Bylaws also may be altered, amended or repealed and new bylaws may be adopted, unless such action has been recommended by the Board of Directors, by an affirmative vote of the holders of at least two-thirds of all outstanding shares entitled to vote. SECTION 7.5. Execution of Bonds, Debentures, Evidences of Indebtedness, Checks, drafts and other Obligations and Orders for Payment. The signatures of any officer or officers of the Corporation executing a corporate bond, debenture or other debt security of the Corporation or attesting the corporate seal thereon, or upon any interest coupons annexed to any such corporate bond, debenture or other debt security of the Corporation, and the corporate seal affixed to any such bond, debenture or other debt security of the Corporation, may be facsimiles, engraved or printed, provided that such bond, debenture or other debt security of the Corporation is authenticated or countersigned with the manual signature of an authorized officer of the corporate trustee designated by the indenture or other agreement under which said security is issued by a transfer agent, or registered by a registrar, other than the Corporation itself, or an employee of the Corporation. If the person who signed such, bond, debenture or other debt security of the Corporation, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid. SECTION 7.6. Business Combinations. All of the requirements of Sections 14-2- 1131 to 1133, inclusive, of the Code, as now in effect and as hereafter from time to time amended, shall be applicable to this Corporation and to any business combination approved or recommended by the Board of Directors. corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -18- <PAGE> ARTICLE VIII EMERGENCY BYLAWS SECTION 8.1. Emergency Bylaws. This Article shall be operative during any emergency resulting from some catastrophic event that prevents a quorum of the Board of Directors or any committee thereof from being readily assembled (an "emergency"), notwithstanding any different or conflicting provisions set forth elsewhere in these Bylaws or in the Articles of Incorporation. To the extent not inconsistent with the provisions of this Article, the bylaws set forth elsewhere herein and the provisions of the Articles of Incorporation shall remain in effect during such emergency, and upon termination of such emergency, the provisions of this Article shall cease to be operative. SECTION 8.2. Meetings. During any emergency, a meeting of the Board of Directors or any committee thereof may be called by any Director, or by the President, any Vice President, the Secretary or the Treasurer (the "Designated Officers") of the Corporation. Notice of the time and place of the meeting shall be given by any available means of communication by the person calling the meeting to such of the Directors and/or Designated Officers as may be feasible to reach. Such notice shall be given at such time in advance of the meeting as, in the judgement of the person calling the meeting, circumstances permit. SECTION 8.3 Quorum. At any meeting of the Board of Directors or any committee thereof called in accordance with this Article, the presence or participation of two Directors, one Director and a Designated Officer, or two Designated Officers shall constitute a quorum for the transaction of business. SECTION 8.4. Bylaws. At any meeting called in accordance with this Article, the Board of Directors or committee thereof, as the case may be, may modify, amend or add to the provisions of this Article so as to make any provision that may be practical or necessary for the circumstance of the emergency. SECTION 8.5. Liability. Corporate action taken in good faith in accordance with the emergency bylaws may not be used to impose liability on a Director, officer, employee or agent of the Corporation. SECTION 8.6. Repeal or Change. The provisions of this Article shall be subject to repeal or change by further action of the Board of Directors or by action of Shareholders, but no such repeal or change shall modify the provisions of the immediately preceding section of this Article with regard to action taken prior to the time of such repeal or change. corpsec\aglr\bylaws AGL Resources Inc. Bylaws - January 4, 1996 -19- <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> SECOND AMENDMENT TO THE ATLANTA GAS LIGHT COMPANY LONG-TERM STOCK INCENTIVE PLAN OF 1990 This Second Amendment to the Atlanta Gas Light Company Long-Term Stock Incentive Plan (the "Plan") is made and entered into this 16th day of December, 1994, by the Atlanta Gas Light Company (the "Company"). W I T N E S S E T H: WHEREAS, the Company sponsors the Plan to provide incentive and to encourage proprietary interest in the Company by its key employees, officers and inside directors; and WHEREAS, the Company believes that it is in the best interest of the Company and its employees to amend the Plan to provide for limited beneficiary designations and the extension of certain exercise periods; and WHEREAS, Section 10 of the Plan provides that the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company has adopted a resolution authorizing the amendment of the Plan; NOW, THEREFORE BE IT RESOLVED, that the Plan hereby is amended as follows: 1. Section 3 of the Plan shall be amended by deleting that section in its entirety and substituting in lieu thereof the following section: 3. Stock. The stock subject to the Stock Rights and other provisions of the Plan shall be authorized but unissued or reacquired shares of the $5.00 par value common stock of the Company (the "Common Stock"). Subject to readjustment in accordance with the provisions of Section 8, the total number of shares of the Common Stock for which Stock Rights may be granted to persons participating in the Plan shall not exceed in the aggregate 800,000 shares of Common Stock, less any shares used as payment for SAR's pursuant to Section 6(a). Notwithstanding the foregoing, shares of Common Stock allocable to the unexercised portion of any expired or terminated Option may become subject to Stock Rights under the Plan. Stock not subject to Stock Rights includes (i) shares of Restricted Stock which are forfeited for any reason and (ii) shares used in payment of the Option price for any Option under the Plan. 2. Section 5(j)(ii) of the Plan shall be amended by deleting that subsection in its entirety and substituting in lieu thereof the following subsection: (ii) Upon an Optionee's retirement with the Company's consent or the termination of an Optionee's employment due to disability, as determined by the Committee in its sole discretion, any Option or unexercised portion thereof granted to him which is otherwise exercisable shall terminate on and shall not be exercisable after 12 months from the date of the Optionee's retirement with the consent of the Company or after 3 months from the date of the Optionee's termination due to disability; provided, any ISO or unexercised portion thereof which remains unexercised on the date three months after the date on which such Optionee ceases to be an employee of the Company and any Subsidiary shall convert to a Non-ISO for the remainder of its exercise period. Notwithstanding the above, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. An Option shall be exercisable in accordance with its terms and only for the number of shares exercisable on the date such <PAGE> Optionee's employment ceases. 3. Section 5(j)(iii) of the Plan shall be amended by deleting that subsection in its entirety and substituting in lieu thereof the following subsection: (iii)In the event of the death of the Optionee while he or she is an employee of the Company or a Subsidiary or within 3 months after the date on which such Optionee's employment terminated due to retirement with the Company's consent or due to disability, as determined by the Committee in its sole discretion, any Option or unexercised portion thereof granted to him or her may be exercised by his or her beneficiary, as designated pursuant to the provisions of Section 5(p) of the Plan, at any time prior to the expiration of 1 year from the date of death of such Optionee, but in no event later than the date of expiration of the option period; provided, the Committee may provide in any Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Any exercise by a designated beneficiary of the Optionee shall be effected pursuant to the terms of this Section 5 as if such designated beneficiary were the named Optionee. 4. A new Section 5(p) shall be added to the Plan as follows: (p) Designation of Beneficiary. Each Optionee shall be permitted to name one person as -------------------------- beneficiary for each Option he or she is granted under the Plan. The designated beneficiary shall have the rights described in Section 5(j)(iii) of the Plan. Each Optionee shall be provided a beneficiary designation form by the Committee and may designate one individual as beneficiary for each Option, and that form should be completed and returned to the Committee. If no completed beneficiary designation form has been received by the Committee for an Option upon the death of the Optionee, the executor or administrator of the Optionee's estate shall be considered the Optionee's designated beneficiary for that Option. 5. The amendments contained in this Second Amendment to the Plan shall be considered effective for all Options granted after January 1, 1994. In addition, the amendments made by Items 2, 3 and 4 above shall be considered applicable to all Options (and their respective option agreements) granted under the Plan prior to that date, retroactive to the initial effective date of the Plan, November 3, 1989. 6. Except as specifically set for herein, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Second Amendment to the Plan to be executed by its duly authorized officer as of the date first above written. ATLANTA GAS LIGHT COMPANY BY: /s/ Robert L. Goocher Executive Vice President- Business Support and Chief Financial Officer A.26045 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>5 <TEXT> FOURTH AMENDMENT TO THE ATLANTA GAS LIGHT COMPANY LONG-TERM STOCK INCENTIVE PLAN OF 1990 This Fourth Amendment to the Atlanta Gas Light Company Long-Term Stock Incentive Plan (the "Plan") is made and entered into this 6th day of March, 1996, by the Atlanta Gas Light Company (the "Company"). W I T N E S S E T H: WHEREAS, the Company sponsors the Plan to provide incentive and to encourage proprietary interest in the Company by its key employees, officers and inside directors; and WHEREAS, in light of the establishment of AGL Resources Inc. and the change and conversion of all common stock of the Company into common stock of AGL Resources Inc., the Company believes that it is in the best interest of the Company and its employees to amend the Plan to provide for and clarify such change and conversion with regard to all stock issued and options granted under the Plan; and WHEREAS, Section 8 of the Plan provides for certain adjustments to be made to all outstanding Stock Rights under the Plan in the event of a change in the securities of the Company, and it is the Board's intent to make such adjustments; and WHEREAS, Section 10 of the Plan provides that the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company has adopted a resolution authorizing the amendment of the Plan; NOW, THEREFORE, BE IT RESOLVED, that the Plan hereby is amended as follows: 1. Section 3 of the Plan shall be amended, effective as of March 6, 1996, by replacing the first sentence thereof with the following sentence: "Effective as of March 6, 1996, the stock subject to the Stock Rights and other provisions of the Plan shall be authorized but unissued or reacquired shares of the $5.00 par value common stock of AGL Resources Inc. (the 'Common Stock')." <PAGE> 2. Section 8(a) of the Plan shall apply to all outstanding Stock Rights under the Plan so that appropriate adjustments shall be made under the Plan upon the conversion of all common stock of the Company into $5.00 par value common stock of AGL Resources Inc. 3. Except as specifically set forth herein, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Fourth Amendment to the Plan to be executed by its duly authorized officer as of the date first above written. ATLANTA GAS LIGHT COMPANY By: /s/ Robert L. Goocher Robert L. Goocher Executive Vice President and Chief Financial Officer S1.220264 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>6 <TEXT> FIFTH AMENDMENT TO THE AGL RESOURCES INC. LONG-TERM STOCK INCENTIVE PLAN OF 1990 (Formerly known as the ATLANTA GAS LIGHT COMPANY LONG-TERM STOCK INCENTIVE PLAN OF 1990) This Fifth Amendment to the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990 (formerly known as the Atlanta Gas Light Company Long-Term Stock Incentive Plan of 1990) (the "Plan") is made and entered into this 1st day of November, 1996, by AGL Resources Inc. (the "Company"). W I T N E S S E T H: WHEREAS, the Company has assumed the sponsorship of this Plan and has determined that it would be in the best interest of the Company, its employees and the employees of its subsidiaries to amend the Plan to change the name of the Plan, to clarify the definition of "fair market value" with regard to stock under the Plan and to clarify the methods of payment an Optionee may use to exercise an option; and WHEREAS, Section 10 of the Plan provides that the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company has adopted a resolution authorizing the amendment of the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Effective as of July 1, 1996, the name of the Plan is hereby changed to "AGL Resources Inc. Long-Term Stock Incentive Plan of 1990"; all references to the "Plan" in the Plan shall mean the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990 and all references to "Company" shall mean AGL Resources Inc. 2. Section 5(c)(ii) is hereby amended, effective as of January 1, 1996, by deleting that section in its entirety and substituting in lieu thereof the following: 1 <PAGE> "(ii) The fair market value per share of Common Stock as of a date of determination shall mean the following: (A) For purposes of transactions under the Plan that constitute a purchase or sale of Common Stock on the open market, the fair market value of the Common Stock shall be the actual market price on the date and time of the purchase or sale; and (B) For all other purposes under the Plan, the fair market value per share of the Common Stock on any particular date shall be (a) the closing sale price of the stock as reflected on the National Association of Securities Dealers, Inc. National Market System on such date, or (b) if the Common Stock is listed on an established stock exchange, the closing price of the stock on such exchange on such date. If, for any reason, the fair market value per share of the Common Stock cannot be ascertained or is unavailable for a particular date, the fair market value of such stock shall be determined as of the nearest preceding date on which such fair market value can be ascertained pursuant to the terms hereof." 3. Section 5(h)(i) of the Plan is hereby amended, effective as of January 1, 1996, by replacing the second sentence thereof with the following sentence. "The Optionee [or his or her successors as provided in Section 5(j)(iii)] may use any of the following methods of payment: (A) cash; (B) the delivery of a certificate or certificates for shares of the Common Stock duly endorsed for transfer to the Company with medallion level signature guaranteed by a member firm of a national stock exchange or by a national or state bank (or guaranteed or notarized in such other manner as the Committee may require); (C) broker-assisted cashless exercise; or (D) any combination of the above methods or any other method of exercise permitted by the Committee." 4. Section 5(h)(i) of the Plan is hereby amended, effective as of November 1, 1996, by deleting the third sentence thereof in its entirety. 5. 2 <PAGE> Except as specifically set forth herein, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to the Plan to be executed by its duly authorized officer as of the date first above written. AGL RESOURCES INC. By: /s/ Robert L. Goocher Robert L. Goocher Executive Vice President b.275900.1 3 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>7 <TEXT> FIRST AMENDMENT TO THE ATLANTA GAS LIGHT COMPANY NONQUALIFIED SAVINGS PLAN This First Amendment to the Atlanta Gas Light Company Nonqualified Savings Plan (the "Plan") is made and entered into this 6th day of March, 1996, by the Atlanta Gas Light Company (the "Company"). W I T N E S S E T H: WHEREAS, the Company sponsors the Plan to provide a select group of management or highly compensated employees an opportunity to accumulate retirement savings due to the legal limitations on their savings under the Atlanta Gas Light Company Retirement Savings Plus Plan; and WHEREAS, in light of the establishment of AGL Resources Inc. and the change and conversion of all common stock of the Company into common stock of AGL Resources Inc., the Company believes that it is in the best interest of the Company and its employees to amend the Plan to provide for and clarify such change and conversion with regard to all stock issued under the Plan; and WHEREAS, Article X of the Plan provides that the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company has adopted a resolution authorizing the amendment of the Plan; NOW, THEREFORE, BE IT RESOLVED, that the Plan hereby is amended as follows: 1. Effective as of March 6, 1996, Section 1.14 of the Plan is amended by replacing that section with the following new Section 1.14: "1.14 Company Stock shall mean the $5.00 par value common stock of AGL Resources Inc." 2. Except as specifically set forth herein, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this First Amendment to the Plan to be executed by its duly authorized officer as of the date first above written. ATLANTA GAS LIGHT COMPANY By: /s/ Robert L. Goocher Robert L. Goocher Executive Vice President and Chief Financial Officer S1.220283 <PAGE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

GIS

https://www.sec.gov/Archives/edgar/data/40704/0000040704-97-000003.txt

-----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, KPGRVKCrMBU/q9AL/RVRvtPuhwt7wTExWTjip96Q3VLvdA/OjO+gvvrYbILThC4H chtO9zDp4wlO6uxyxc/QZw== <SEC-DOCUMENT>0000040704-97-000003.txt : 19970108 <SEC-HEADER>0000040704-97-000003.hdr.sgml : 19970108 ACCESSION NUMBER: 0000040704-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961124 FILED AS OF DATE: 19970107 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MILLS INC CENTRAL INDEX KEY: 0000040704 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 410274440 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01185 FILM NUMBER: 97501791 BUSINESS ADDRESS: STREET 1: NUMBER ONE GENERAL MILLS BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55426 BUSINESS PHONE: 6125402311 MAIL ADDRESS: STREET 1: P O BOX 1113 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>SECOND QUARTER 10-Q - FISCAL 1997 <TEXT> 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 NOVEMBER 24, 1996 / / 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: 1-1185 GENERAL MILLS, INC. (Exact name of registrant as specified in its charter) Delaware 41-0274440 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Number One General Mills Boulevard Minneapolis, MN 55426 (Mail: P.O. Box 1113) (Mail: 55440) (Address of principal executive offices) (Zip Code) (612) 540-2311 (Registrant's telephone number, including area code) fs 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 ___ As of December 15, 1996, General Mills had 156,081,168 shares of its $.10 par value common stock outstanding (excluding 48,072,164 shares held in treasury). <PAGE> Part I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> GENERAL MILLS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In Millions, Except per Share Data) <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended November 24,November 26, November 24,November 26, 1996 1995 1996 1995 <S> <C> <C> <C> <C> Sales $1,560.1 $1,448.4 $2,875.7 $2,724.7 Costs and Expenses: Cost of sales 659.4 596.1 1,195.2 1,121.7 Selling, general & administrative 587.5 549.9 1,098.2 1,008.7 Depreciation and amortization 43.0 46.7 85.9 93.4 Interest, net 24.5 25.8 47.3 52.8 Unusual items - - 48.4 - Total Costs and Expenses 1,314.4 1,218.5 2,475.0 2,276.6 Earnings before Taxes and Earnings (Losses) of Joint Ventures 245.7 229.9 400.7 448.1 Income Taxes 90.5 84.0 147.0 166.4 Earnings(Losses)from Joint Ventures 1.5 (.2) .7 .9 Net Earnings $ 156.7 $ 145.7 $ 254.4 $ 282.6 Earnings per Share $ 1.00 $ .92 $ 1.62 $ 1.78 Dividends per Share $ .50 $ .47 $ 1.00 $ .94 Average Number of Common Shares 156.5 158.8 157.2 158.6 <FN> See accompanying notes to consolidated condensed financial statements. </FN> </TABLE> <PAGE> <TABLE> GENERAL MILLS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Millions) <CAPTION> (Unaudited) (Unaudited) November 24, November 26, May 26, 1996 1995 1996 <S> <C> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 28.3 $ 44.0 $ 20.6 Receivables 428.4 381.4 337.8 Inventories: Valued primarily at FIFO 154.2 230.2 186.3 Valued at LIFO (FIFO value exceeds LIFO by $58.4, $56.0 and $55.7, respectively) 242.1 215.5 209.2 Prepaid expenses and other current assets 154.3 84.3 132.6 Deferred income taxes 101.2 125.4 108.6 Total Current Assets 1,108.5 1,080.8 995.1 Land, Buildings and Equipment, at Cost 2,474.7 2,607.5 2,508.0 Less accumulated depreciation (1,218.3) (1,205.7) (1,195.6) Net Land, Buildings and Equipment 1,256.4 1,401.8 1,312.4 Other Assets 1,066.8 1,033.0 987.2 Total Assets $3,431.7 $3,515.6 $3,294.7 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 643.1 $ 538.7 $ 590.7 Current portion of long-term debt 107.5 64.9 75.4 Notes payable 421.6 299.3 141.6 Accrued taxes 141.7 130.2 124.3 Other current liabilities 232.4 338.0 259.9 Total Current Liabilities 1,546.3 1,371.1 1,191.9 Long-term Debt 1,078.8 1,246.4 1,220.9 Deferred Income Taxes 243.1 259.4 250.0 Deferred Income Taxes - Tax Leases 154.5 163.4 157.5 Other Liabilities 168.4 175.6 166.7 Total Liabilities 3,191.1 3,215.9 2,987.0 Stockholders' Equity: Cumulative preference stock, none issued - - - Common stock, 204.2 shares issued 389.6 381.6 384.3 Retained earnings 1,506.7 1,367.7 1,408.6 Less common stock in treasury, at cost, shares of 48.3, 45.2 & 45.2, respectively (1,553.6) (1,349.9) (1,367.4) Unearned compensation and other (52.8) (52.8) (61.2) Cumulative foreign currency adjustment (49.3) (46.9) (56.6) Total Stockholders' Equity 240.6 299.7 307.7 Total Liabilities and Equity $3,431.7 $3,515.6 $3,294.7 <FN> See accompanying notes to consolidated condensed financial statements. </FN> </TABLE> <PAGE> <TABLE> GENERAL MILLS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions) <CAPTION> Twenty-Six Weeks Ended November 24,November 26, 1996 1995 <S> <C> <C> Cash Flows - Operating Activities: Earnings from continuing operations $254.4 $282.6 Adjustments to reconcile earnings to cash flow: Depreciation and amortization 85.9 93.4 Deferred income taxes (3.8) 34.9 Change in current assets and liabilities (67.6) (152.7) Unusual expenses 48.4 - Other, net (5.4) (3.4) Cash provided by continuing operations 311.9 254.8 Cash used by discontinued operations (3.9) (11.2) Net Cash Provided by Operating Activities 308.0 243.6 Cash Flows - Investment Activities: Purchases of land, buildings and equipment (78.4) (57.5) Investments in businesses, intangibles and affiliates (23.6) (20.3) Purchases of marketable investments (3.9) (3.6) Proceeds from sale of marketable investments 21.3 7.0 Other, net (40.6) (6.7) Net Cash Used by Investment Activities (125.2) (81.1) Cash Flows - Financing Activities: Increase in notes payable 277.7 109.7 Issuance of long-term debt 3.9 38.6 Payment of long-term debt (109.9) (146.1) Common stock issued 23.4 22.1 Purchases of common stock for treasury (209.9) - Dividends paid (157.5) (149.1) Other, net (2.8) (6.7) Net Cash Used by Financing Activities (175.1) (131.5) Increase in Cash and Cash Equivalents $ 7.7 $31.0 <FN> See accompanying notes to consolidated condensed financial statements. </FN> </TABLE> <PAGE> GENERAL MILLS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (1) Background These financial statements do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the twenty-six weeks ended November 24, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending May 25, 1997. These statements should be read in conjunction with the financial statements and footnotes included in our annual report for the year ended May 26, 1996. The accounting policies used in preparing these financial statements are the same as those described in our annual report, except that the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of the beginning of fiscal 1997 (see note 3 below). Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. (2) Acquisition On August 13, 1996, the Company entered into an agreement to purchase the branded ready-to-eat cereal and snack mix businesses of Ralcorp Holdings, Inc., including its Chex and Cookie Crisp brands, for a total price of $570 million, payable in General Mills common stock and through the assumption of Ralcorp debt. The acquisition is expected to close on January 31, 1997 following approval by Ralcorp shareholders. The transaction includes a Cincinnati, Ohio, manufacturing facility that employs 240 people, and trademark and technology rights for the branded products in the Americas. (3) Unusual Items We adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" as of the beginning of fiscal 1997. The initial, non-cash charge recorded in the first quarter upon adoption of SFAS No. 121 was $48.4 million pre-tax, $29.2 million after-tax ($.18 per share). The charge represents a reduction in the carrying amounts of certain impaired assets to their estimated fair value, determined on the basis of estimated cash flows or net realizable value. The impaired assets include machinery and equipment related to inventory production at various plant locations. The impairments relate to assets not currently in use, assets significantly underutilized, and assets with limited planned future use. (4) Statements of Cash Flows During the first six months, we paid $47.1 million for interest (net of amount capitalized) and $125.3 million for income taxes. <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Operations generated $57.1 million more cash in the first half of fiscal 1997 than in the same prior-year period. The increase in cash provided by operations as compared to last year was caused by a $85.1 million decrease in the working capital change (principally, a reduced rate of increase in inventories) partially offset by a $28.0 million decrease in cash from operations, after adjustment for non-cash charges. Fiscal 1997 capital expenditures are estimated to be approximately $170.0 million. During the first six months, capital expenditures totaled $78.4 million. Our short-term outside financing is obtained through private placement of commercial paper and bank notes. Our level of notes payable fluctuates based on cash flow needs. Our long-term outside financing is obtained primarily through our medium-term note program. First half activity included repurchases and debt payments of $108.7 million under this program. In the first half of fiscal 1997, we acquired 3.8 million shares of common stock for our treasury for $209.9 million. RESULTS OF OPERATIONS Second quarter sales of $1,560.1 million grew 8 percent from the prior year. First half sales of $2,875.7 million grew 6 percent. Second quarter earnings from operations of $156.7 million ($1.00 per share) were up 8 percent from $145.7 million ($.92 per share) reported last year. Cumulative earnings from operations of $283.6 million ($1.80 per share), before the non-cash charge associated with the adoption of SFAS No. 121 (see Note (3)) increased slightly from $282.6 million ($1.78 per share) last year. Adoption of SFAS No. 121 resulted in a first quarter non-cash, after-tax charge of $29.2 million, or 18 cents per share. Including this non-cash charge, first half earnings were $254.4 million ($1.62 per share). This record second-quarter performance represents strong renewal of our earnings growth momentum following the first-quarter interruption caused by Big G's cereal price declines. Our earnings gain was driven by broad-based unit volume growth, with total domestic volume up 9 percent on gains by every major business unit, and international volume growth led by a 19 percent increase for our Cereal Partners Worldwide (CPW) joint venture with Nestle. In total, the company's worldwide cereal operations accounted for more than half of the second-quarter earnings increase. These first-half results include approximately 16 cents of the expected 20 cents-per-share earnings impact in 1997 from Big G's cereal price declines, with about 4 cents per share falling in the second quarter. We expect that the impact on future quarters will be less as further reductions in promotional spending behind established brands take effect. Big G cereals recorded volume gains of more than 10 percent in the second quarter and 7 percent through six months. Second-quarter volume for established cereals was up 7 percent, driven by strong performance from brands featured in the annual fall Salute to Savings corporate merchandising event and by the success of a sample-size merchandising program focused on generating consumer trial for recently improved brands. Three new Big G products-Betty Crocker Cinnamon Streusel and Dutch Apple cereals, and French Toast Crunch cereal-entered distribution during the second quarter with strong introductory marketing support and posted good initial performance. These three new cereals together with Frosted Cheerios, introduced in September 1995, accounted for nearly 2.5 points of Big G's 25 percent second-quarter pound market share. Ready-to-eat cereal category volume in all measured outlets grew nearly 1 percent during the second quarter and 1.5 percent through the first half, reflecting the category's transition to new pricing and price promotion levels. Big G's strong unit volume momentum drove its first-half pound market share up 1.5 points to 24.3 percent. Volume and market share performance also was strong across the company's other domestic businesses. Helper dinner mix volume was up 9 percent for the quarter and 12 percent through six months, reflecting continued effective merchandising and good performance from three new, lower-sodium varieties introduced in June 1996. Snacks unit volume grew 12 percent in the quarter and 3 percent through the first half, led by strong initial performance from new Golden Grahams Treats snack bars launched in October. Yoplait-Colombo yogurt volume increased 12 percent in the quarter and market share was up 2 points on strong performance from core Yoplait lines and continuing expansion of Colombo distribution in the North Central United States. Volume for Betty Crocker desserts, family flour and baking mixes grew 3 percent in the quarter. In addition, the company's foodservice operations recorded a 7 percent volume increase. Earnings from the company's expanding international operations were up 18 percent in the second quarter led by CPW. Through six months, CPW unit volume was up 17 percent with share gains recorded in most major markets. In Canada, cereal volume grew 13 percent in the second quarter and 11 percent in the first half on strong new product performance, driving cereal market share for the year-to-date up nearly 2 points to 16 percent. Volume for the Snack Ventures Europe joint venture with PepsiCo was down slightly in the first half against prior-year results that included heavy promotional activity in key markets. The International Dessert Partners (IDP) joint venture with CPC International continues to experience good consumer trial and distribution gains in its four initial Latin American markets. Through six months, international earnings were below the prior year's, primarily due to year-one development spending to launch IDP. During the first half, General Mills repurchased 3.8 million shares, including 1.6 million in the second quarter at an average price of $57.21. This activity is consistent with the previously stated long-term goal of reducing average shares outstanding by 1 to 2 percent annually. As a result, second quarter average shares outstanding totaled 156.5 million, down 2.3 million from the same period a year earlier. Interest expense was $5.5 million lower for the first half, primarily reflecting lower debt levels and rates. Our reported tax rate for the first six months was 36.7 percent. Excluding the effects of SFAS No. 121, our tax rate for the first six months was 37.0 percent, compared to 37.1 percent in last year's comparable period. <PAGE> PART II Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on September 30, 1996. (b) All directors nominated were elected at the Annual Meeting. (c) For the election of directors, the results were as follows: Richard M. Bressler For 136,058,767 Withheld 76,891 Livio D. DeSimone For 136,098,631 Withheld 37,027 William T. Esrey For 136,094,703 Withheld 40,955 Charles W. Gaillard For 136,104,184 Withheld 31,474 Judith R. Hope For 135,969,553 Withheld 166,105 Kenneth A. Macke For 136,063,487 Withheld 72,171 Michael D. Rose For 136,033,669 Withheld 101,989 Stephen W. Sanger For 136,115,174 Withheld 20,484 A. Michael Spence For 136,078,796 Withheld 56,862 Dorothy A. Terrell For 136,033,877 Withheld 101,781 Raymond G. Viault For 136,100,041 Withheld 35,617 C. Angus Wurtele For 136,107,674 Withheld 27,984 On the ratification of the appointment of KPMG Peat Marwick LLP as auditors for fiscal 1997 the results were as follows: For: 136,263,967 Against: 315,477 Abstain: 302,909 On the proposal to adopt the Stock Option and Long-Term Incentive Plan of 1993, as amended, the results were as follows: For: 130,651,004 Against: 4,744,749 Abstain: 1,486,600 On the proposal to adopt the General Mills, Inc. Executive Incentive Plan as amended, the results were as follows: For: 131,312,787 Against: 3,931,684 Abstain: 1,637,882 On the proposal to adopt the General Mills, Inc. 1996 Compensation Plan for Non-Employee Directors, the results were as follows: For: 110,650,055 Against: 24,508,804 Abstain: 1,723,494 The stockholders' proposal requesting that the directors take action to adopt cumulative voting was rejected: For: 34,507,341 Against: 78,665,757 Abstain: 10,198,121 Broker Non-Vote: 13,511,134 <PAGE> Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 11 Statement re Computation of Earnings per Share. Exhibit 12 Statement re Ratio of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the second quarter of fiscal 1997. <PAGE> 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. GENERAL MILLS, INC. (Registrant) Date January 6, 1997 /s/ S. S. Marshall S. S. Marshall Senior Vice President, General Counsel Date January 6, 1997 /s/ K. L. Thome K. L. Thome Senior Vice President, Financial Operations </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 TO 2ND QTR 10-Q - FISCAL 1997 <TEXT> Exhibit 11 <TABLE> GENERAL MILLS, INC. COMPUTATION OF EARNINGS PER SHARE (In Millions, Except per Share Data) <CAPTION> Twenty-Six Weeks Ended November 24, November 26, 1996 1995 <S> <C> <C> Net Earnings $254.4 $282.6 Computation of Shares: Weighted average number of shares outstanding, excluding shares held in treasury (a) 157.2 158.6 Net shares resulting from the assumed exercise of certain stock options (b) 3.1* 3.0* Total common shares and common share equivalents 160.3 161.6 Earnings per Share $1.62 $1.78 <FN> Notes to Exhibit 11: (a) Computed as the weighted average of net shares outstanding on stock-exchange trading days. (b) Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. * Common share equivalents are not material. As a result, earnings per share have been computed using the weighted average number of shares outstanding of 157.2 million and 158.6 million for the first six months of fiscal 1997 and 1996, respectively. </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 12 TO 2ND QTR 10-Q - FISCAL 1997 <TEXT> Exhibit 12 <TABLE> RATIO OF EARNINGS TO FIXED CHARGES <CAPTION> Twenty-Six Weeks Ended Fiscal Year Ended November 24,November 26, May 26, May 28, May 29, May 30, May 31, 1996 1995 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> <C> <C> Ratio of Earnings to Fixed Charges 7.68 7.87 6.94 4.10 6.18 8.62 9.28 </TABLE> For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations, plus pretax earnings or losses of joint ventures plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the proportion deemed representative of the interest factor) of rents of continuing operations. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 27-FINANCIAL DATA SCHEDULE-2ND QTR 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from our Form 10-Q for the twenty-six week period ended November 24, 1996, and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-25-1997 <PERIOD-START> MAY-27-1996 <PERIOD-END> NOV-24-1996 <CASH> 28,300,000 <SECURITIES> 0 <RECEIVABLES> 428,400,000 <ALLOWANCES> 0 <INVENTORY> 396,300,000 <CURRENT-ASSETS> 1,108,500,000 <PP&E> 2,474,700,000 <DEPRECIATION> (1,218,300,000) <TOTAL-ASSETS> 3,431,700,000 <CURRENT-LIABILITIES> 1,546,300,000 <BONDS> 1,078,800,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 389,600,000 <OTHER-SE> (149,000,000) <TOTAL-LIABILITY-AND-EQUITY> 3,431,700,000 <SALES> 2,875,700,000 <TOTAL-REVENUES> 2,875,700,000 <CGS> 1,195,200,000 <TOTAL-COSTS> 1,195,200,000 <OTHER-EXPENSES> 85,900,000 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 47,300,000 <INCOME-PRETAX> 400,700,000 <INCOME-TAX> 147,000,000 <INCOME-CONTINUING> 254,400,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 254,400,000 <EPS-PRIMARY> 1.62 <EPS-DILUTED> 1.62 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

HNZ

https://www.sec.gov/Archives/edgar/data/46640/0000950132-97-000159.txt

-----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, HxDKmvkJuPr7uHx/ArfwaU2l+eOSH2nprSfhIzKkWMIb/YTxeKV90ew/wNMvmi4c GwKddj5xGvw/e2FI3JML0w== <SEC-DOCUMENT>0000950132-97-000159.txt : 19970318 <SEC-HEADER>0000950132-97-000159.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950132-97-000159 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970129 FILED AS OF DATE: 19970317 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEINZ H J CO CENTRAL INDEX KEY: 0000046640 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 250542520 STATE OF INCORPORATION: PA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03385 FILM NUMBER: 97557636 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>HEINZ FORM 10-Q <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 29, 1997 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO FOR THE NINE MONTHS ENDED JANUARY 29, 1997 COMMISSION FILE NUMBER 1-3385 H. J. HEINZ COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0542520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 GRANT STREET, PITTSBURGH, 15219 PENNSYLVANIA (Zip Code) (Address of Principal Executive Offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-456-5700 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 requirements for the past 90 days. Yes X No The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of February 28, 1997, was 367,650,493 shares. <PAGE> PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Nine Months Nine Months Ended Ended January 29, 1997 January 31, 1996 ---------------- ---------------- FY 1997 FY 1996 (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales................... $6,910,356 $6,575,708 Cost of products sold... 4,418,924 4,166,161 ---------- ---------- Gross profit............ 2,491,432 2,409,547 Selling, general and administrative expenses. 1,445,107 1,427,731 ---------- ---------- Operating income........ 1,046,325 981,816 Interest income......... 28,701 30,392 Interest expense........ 204,481 208,849 Other expense, net...... 27,117 23,243 ---------- ---------- Income before income taxes................... 843,428 780,116 Provision for income taxes................... 311,991 290,996 ---------- ---------- Net income.............. $ 531,437 $ 489,120 ========== ========== Net income per share.... $ 1.42 $ 1.30 ========== ========== Cash dividends per share................... $ .84 1/2 $ .77 ========== ========== Average shares for earnings per share...... 373,934 376,929 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------ 2 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Three Months Ended Ended January 29, 1997 January 31, 1996 ---------------- ----------------- FY 1997 FY 1996 (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales....................................... $2,307,538 $2,193,138 Cost of products sold....................... 1,459,249 1,380,830 ---------- ---------- Gross profit................................ 848,289 812,308 Selling, general and administrative expenses.................................... 502,998 497,873 ---------- ---------- Operating income............................ 345,291 314,435 Interest income............................. 8,324 10,869 Interest expense............................ 70,496 70,858 Other expense, net.......................... 6,436 9,114 ---------- ---------- Income before income taxes.................. 276,683 245,332 Provision for income taxes.................. 102,296 88,848 ---------- ---------- Net income.................................. $ 174,387 $ 156,484 ========== ========== Net income per share........................ $ .47 $ .42 ========== ========== Cash dividends per share.................... $ .29 $ .26 1/2 ========== ========== Average shares for earnings per share....... 373,934 376,929 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------ 3 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 29, 1997 May 1, 1996* ---------------- ------------ FY 1997 FY 1996 (Unaudited) (Thousands of Dollars) <S> <C> <C> Assets Current Assets: Cash and cash equivalents........................ $ 124,883 $ 90,064 Short-term investments, at cost which approximates market.............................. 23,379 18,316 Receivables, net................................. 1,215,057 1,207,874 Inventories...................................... 1,675,529 1,493,963 Prepaid expenses and other current assets........ 324,824 236,475 ---------- ---------- Total current assets........................... 3,363,672 3,046,692 ---------- ---------- Property, plant and equipment.................... 4,433,415 4,220,044 Less accumulated depreciation.................... 1,727,281 1,603,216 ---------- ---------- Total property, plant and equipment, net....... 2,706,134 2,616,828 ---------- ---------- Investments, advances and other assets........... 560,089 573,645 Goodwill, net.................................... 1,817,336 1,737,478 Other intangibles, net........................... 644,317 649,048 ---------- ---------- Total other noncurrent assets.................. 3,021,742 2,960,171 ---------- ---------- Total assets................................... $9,091,548 $8,623,691 ========== ========== </TABLE> *Summarized from audited fiscal year 1996 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------ 4 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 29, 1997 May 1, 1996* ---------------- ------------ FY 1997 FY 1996 (Unaudited) (Thousands of Dollars) <S> <C> <C> Liabilities and Shareholders' Equity Current Liabilities: Short-term debt.................................. $ 446,814 $ 994,586 Portion of long-term debt due within one year.... 566,763 87,583 Accounts payable................................. 817,566 870,337 Salaries and wages............................... 64,211 72,678 Accrued marketing................................ 136,344 146,055 Other accrued liabilities........................ 285,567 368,182 Income taxes..................................... 218,281 175,701 ---------- ---------- Total current liabilities...................... 2,535,546 2,715,122 ---------- ---------- Long-term debt................................... 2,758,463 2,281,659 Deferred income taxes............................ 386,505 319,936 Non-pension postretirement benefits.............. 206,106 209,994 Other liabilities................................ 360,694 390,223 ---------- ---------- Total long-term debt and other liabilities..... 3,711,768 3,201,812 ---------- ---------- Shareholders' Equity: Capital stock.................................... 108,019 108,045 Additional capital............................... 158,856 154,602 Retained earnings................................ 4,377,578 4,156,380 Cumulative translation adjustments............... (157,485) (155,753) ---------- ---------- 4,486,968 4,263,274 Less: Treasury stock at cost (63,530,274 shares at January 29, 1997 and 62,498,417 shares at May 1, 1996)........................................... 1,590,943 1,500,866 Unfunded pension obligation..................... 32,355 32,550 Unearned compensation relating to the ESOP...... 19,436 23,101 ---------- ---------- Total shareholders' equity..................... 2,844,234 2,706,757 ---------- ---------- Total liabilities and shareholders' equity..... $9,091,548 $8,623,691 ========== ========== </TABLE> *Summarized from audited fiscal year 1996 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------ 5 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Nine Months Ended Ended January 29, 1997 January 31, 1996 ---------------- ----------------- FY 1997 FY 1996 (Unaudited) (Thousands of Dollars) <S> <C> <C> Cash Provided by Operating Activities....... $ 434,858 $ 274,191 --------- --------- Cash Flows from Investing Activities: Capital expenditures...................... (277,681) (246,069) Acquisitions, net of cash acquired........ (179,627) (96,532) Purchases of short-term investments....... (3,337) (864,989) Sales and maturities of short-term investments.............................. 13,651 890,427 Investment in tax benefits................ (3,016) 61,952 Other items, net.......................... 28,757 58,524 --------- --------- Cash (used for) investing activities.... (421,253) (196,687) --------- --------- Cash Flows from Financing Activities: Proceeds from long-term debt.............. 45,185 5,606 Payments on long-term debt................ (100,049) (51,141) Proceeds from commercial paper and short- term borrowings, net..................... 468,693 237,431 Dividends................................. (310,239) (283,917) Purchases of treasury stock............... (208,281) (65,118) Exercise of stock options................. 105,589 70,716 Other items, net.......................... 27,384 46,271 --------- --------- Cash provided by (used for) financing activities............................. 28,282 (40,152) --------- --------- Effect of exchange rate changes on cash and cash equivalents........................... (7,068) (7,653) --------- --------- Net increase in cash and cash equivalents... 34,819 29,699 Cash and cash equivalents at beginning of year....................................... 90,064 124,338 --------- --------- Cash and cash equivalents at end of period.. $ 124,883 $ 154,037 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------ 6 <PAGE> H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's annual report on Form 10-K for the fiscal year ended May 1, 1996 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the company's business. Certain prior year amounts have been reclassified in order to conform with the fiscal 1997 presentation. (3) In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. (4) The composition of inventories at the balance sheet dates was as follows: <TABLE> <CAPTION> January 29, 1997 May 1, 1996 ---------------- ----------- (Thousands of Dollars) <S> <C> <C> Finished goods and work-in-process............. $1,241,995 $1,115,367 Packaging material and ingredients............. 433,534 378,596 ---------- ---------- $1,675,529 $1,493,963 ========== ========== </TABLE> (5) The provision for income taxes consists of provisions for federal, state, U.S. possessions and foreign income taxes. The company operates in an international environment with significant operations in various locations outside the United States. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. (6) On July 10, 1996, the company acquired Southern Country Foods Limited in Australia, one of the world's largest producers of canned corn beef and meals. Southern Country Foods, with annual sales of approximately $55 million, sells two-thirds of its products in the Pacific Rim, the Middle East and Canada. On September 23, 1996, the company acquired substantially all of the pet food businesses of Martin Feed Mills Limited of Elmira, Ontario. Martin produces and markets cat and dog food throughout Canada and also exports to Japan and Europe. Martin sells pet food under the Techni-Cal brand and markets products under the Medi-Cal label through veterinary offices and clinics. On November 4, 1996, the company acquired the assets of the canned beans and pasta business of Nestle Canada Inc., together with a two-year license to use the Libby's brand. Under the agreement, the company also acquired the trademarks Deep-Browned Beans, Alpha-Getti and Zoodles, among others. On December 5, 1996, the company acquired the assets of Shortland Cannery Limited, an Auckland, New Zealand meat processor. Shortland markets New Zealand's number-one canned corn beef line and produces other meat products. More than half of Shortland's revenues are from exports to United States markets and parts of Asia and the Pacific Rim. Shortland sells its products under the Hellaby, Crown and Pacific labels. During fiscal 1997, the company also made other smaller acquisitions. All of the above acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated on a preliminary basis to the respective assets and liabilities 7 <PAGE> based on their estimated fair values as of the dates of the acquisitions. Operating results of these acquisitions have been included in the Consolidated Statement of Income from the dates of the acquisition. Pro forma results of the company, assuming all of the above fiscal 1997 acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (7) On August 29, 1996, the company amended the line of credit agreements that support its domestic commercial paper programs, increasing availability and extending maturity dates. The amended terms provide for one agreement totaling $2.3 billion that expires in September 2001. The previous agreements provided for lines of credit totaling $2.0 billion, of which $1.2 billion was scheduled to expire in September 1996 and $800.0 million was scheduled to expire in September 2000. At January 29, 1997, the company had $1.8 billion of domestic commercial paper outstanding. Due to the long-term nature of the amended credit agreement, all of the outstanding domestic commercial paper has been classified as long-term debt as of January 29, 1997. As of May 1, 1996, $1.5 billion of domestic commercial paper was outstanding, of which $800.0 million was classified as long-term debt. (8) On September 10, 1996, the company's board of directors raised the quarterly dividend on the company's common stock to $0.29 per share from $0.26 1/2 per share, for an indicated annual rate of $1.16 per share. (9) On May 2, 1996, the company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The implementation of this standard did not have a material effect on the company's financial position or results of operations. (10) On March 14, 1997, the company announced its intentions to implement a plan to reorganize and restructure the company which is expected to reduce fiscal 1997 full-year pre-tax earnings. See Item 2 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") of this report for additional information. 8 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS NINE MONTHS ENDED JANUARY 29, 1997 AND JANUARY 31, 1996 For the nine months ended January 29, 1997, sales increased $334.6 million, or 5.1%, to $6,910.4 million from $6,575.7 million recorded in the same period a year ago. The sales increase came primarily from acquisitions (net of divestitures) of 2.8%, price increases of 1.3%, and volume gains of 0.9%. The effect of foreign exchange rates was negligible. Domestic operations provided 55.4% of the current period's net sales compared to 57.0% in the same period last year. Fiscal 1996 acquisitions impacting the year-to-year sales dollar comparison include: Nature's Recipe Pet Food in the U.S.; Alimentos Pilar S.A. of Argentina; Fattoria Scaldasole S.p.A. in Italy; Earth's Best, Inc. in the U.S.; Britwest Ltd. in the United Kingdom; the Craig's foodservice business in New Zealand; Indian Ocean Tuna Ltd. in the Seychelles; and the Mareblu brand of canned tuna in Italy. Also contributing to the sales dollar increase were the following fiscal 1997 acquisitions: Southern Country Foods Limited in Australia; substantially all of the pet food businesses of Martin Feed Mills Limited of Elmira, Ontario; the canned beans and pasta business of Nestle Canada Inc.; Shortland Cannery Limited in New Zealand; and other smaller acquisitions. Price increases recorded in single-serve condiments, retail frozen potatoes, infant food, and tuna were partially offset by price decreases in Weight Watchers classroom activities. Volume increases recorded in pet food, foodservice frozen potatoes, bakery products, tuna, pizza components and Weight Watchers classroom activities overseas were partially offset by volume declines in weight loss products, infant food, frozen entrees, and retail frozen potatoes. Gross profit increased $81.9 million to $2,491.4 million from $2,409.5 million a year ago. The gross profit increase is mainly attributable to increased sales. The ratio of gross profit to sales, however, decreased to 36.1% from 36.6%. The current year's gross profit ratio was impacted by higher commodity prices, an unfavorable profit mix and charges for restructuring and related costs; offset somewhat by a gain on the sale of real estate and favorable pricing. Operating income, excluding non-recurring items, increased $73.0 million, or 7.4%, to $1,054.8 million from $981.8 million for the same period last year. Non-recurring items include a charge for restructuring and related costs, and a gain from the sale of real estate. Including these non-recurring items, operating income increased $64.5 million, or 6.6%, to $1,046.3 million. The increase in operating income was primarily due to the sales-driven increase in gross profit and decreased marketing expenses; partially offset by higher general and administrative expenses associated with restructuring and related costs and acquisitions, and higher selling and distribution expenses directly attributable to higher sales levels. For the nine months ended January 29, 1997, domestic operations provided 54.9% of operating income compared to 56.2% for the same period a year ago. Net interest expense decreased $2.7 million to $175.8 million from $178.5 million in the comparable period a year ago as the impact of higher average borrowings was more than offset by lower average interest rates. The effective tax rate for the first nine months of fiscal 1997 was 37.0% compared to 37.3% for the same period a year ago. Net income for the first nine months was $531.4 million compared to $489.1 million for the same period last year, and earnings per share was $1.42 compared to $1.30. Excluding the non-recurring items noted above, earnings per share was $1.43 which represents an increase of 10.0% over the prior period. 9 <PAGE> RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 29, 1997 AND JANUARY 31, 1996 For the three months ended January 29, 1997, sales increased $114.4 million, or 5.2%, to $2,307.5 million from $2,193.1 million recorded in the same period a year ago. The sales increase came from acquisitions (net of divestitures) of 3.1%, price increases of 1.6%, and the effect of favorable foreign exchange rates of 1.2%; partially offset by slightly lower sales volumes of 0.7%. Domestic operations provided 53.6% of the current period's net sales compared to 56.6% in the same period last year. Fiscal 1996 and fiscal 1997 acquisitions impacting the quarter-to-quarter sales dollar comparison include: Nature's Recipe Pet Food in the U.S.; Alimentos Pilar S.A. of Argentina; substantially all of the pet food businesses of Martin Feed Mills Limited of Elmira, Ontario; Earth's Best, Inc. in the U.S.; Britwest Ltd. in the United Kingdom; the Craig's foodservice business in New Zealand; Indian Ocean Tuna Ltd. in the Seychelles; the Mareblu brand of canned tuna in Italy; Southern Country Foods Limited in Australia; the canned beans and pasta business of Nestle Canada Inc.; Shortland Cannery Limited in New Zealand; and other smaller acquisitions. Price increases in foodservice single-serve condiments, pet food, tuna, and retail frozen potatoes were partially offset by decreases in retail ketchup. The strengthening of overseas currencies, particularly in the United Kingdom and New Zealand, against the U. S. Dollar increased sales $27.2 million, or 1.2%. Volume decreases in tuna, weight loss products, and frozen entrees were partially offset by volume increases in soup, Weight Watchers classroom activities overseas, and foodservice ketchup. Gross profit increased $36.0 million to $848.3 million from $812.3 million a year ago. The ratio of gross profit to sales decreased slightly to 36.8% from 37.0%. The current quarter's gross profit ratio was impacted by an unfavorable profit mix and restructuring and related costs; offset somewhat by a gain on the sale of real estate and favorable pricing. Operating income, excluding non-recurring items, increased $35.8 million, or 11.4%, to $350.2 million from $314.4 million in the third quarter of last year. During the current quarter, $18.1 million in charges were recorded for costs related to the worldwide restructuring program, including headcount reductions at the company's overseas affiliates in New Zealand, Italy and Australia. These charges were partially offset by a gain on the sale of real estate of $13.2 million. Including these non-recurring items, operating income increased $30.9 million, or 9.8%, to $345.3 million. The increase in operating income was primarily due to the sales-driven increase in gross profit and decreased marketing expenses; partially offset by higher general and administrative expenses associated with restructuring related charges and acquisitions, and higher selling and distribution expenses directly attributable to higher sales levels. For the third quarter ended January 29, 1997, domestic operations provided 55.5% of operating income compared to 58.1% in the same period last year. Net interest expense increased $2.2 million to $62.2 million from $60.0 million in the third quarter a year ago due mainly to lower interest income on marketable securities. Interest expense remained comparable period to period. The effective tax rate for the third quarter was 37.0% compared to 36.2% for the same period a year ago. Net income for the current quarter was $174.4 million compared to $156.5 million for the same quarter last year, and earnings per share was $0.47 compared to $0.42, an increase of 11.9%. Excluding the non-recurring items noted above, earnings per share was $0.48 which represents an increase of 14.3% over the prior year's comparable quarter. 10 <PAGE> LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities totaled $434.9 million for the nine month period ended January 29, 1997 compared to $274.2 million last year. Cash used for investing activities required $421.3 million compared to $196.7 million last year. Cash used for acquisitions in the current period totaled $179.6 million, due mainly to the purchases of Martin Feed Mills Limited in Canada; the assets of the canned beans and pasta business of Nestle Canada Inc., together with a two-year license to use the Libby's brand; Shortland Cannery Limited in New Zealand; and Southern Country Foods Limited in Australia. Acquisitions in the prior year's comparable period totaled $96.5 million and included PMV/Zabreh in the Czech Republic; the additional investment in Kecskemeti Konzervgyar R.T. in Hungary; the purchase of Britwest Ltd. in the United Kingdom; the purchase of Fattoria Scaldasole S.p.A. in Italy; the purchase of the Craig's brand of jams and dressings from Kraft General Foods New Zealand Ltd.; and the purchase of a majority interest in Indian Ocean Tuna Limited, located in the Seychelles. Purchases of property, plant and equipment totaled $277.7 million in the current period compared to $246.1 million a year ago. Investments in tax benefits required $3.0 million compared to providing $62.0 million in the prior period, due mainly to the company's sale of certain domestic investments in the prior period. Financing activities provided $28.3 million for the nine months ended January 29, 1997 compared to requiring $40.2 million a year ago. Stock options exercised provided $105.6 million in the current period versus $70.7 million in the prior year's comparable period. Proceeds from commercial paper and short-term borrowings, net provided $468.7 million compared to $237.4 million in the prior period. Proceeds from long-term debt provided $45.2 million compared to $5.6 million in the prior period. During the nine months ended January 29, 1997, treasury stock purchases totaled $208.3 million (6.2 million shares) versus $65.1 million (2.1 million shares) in the prior year's first nine months. Payments on long-term debt totaled $100.0 million for the current period compared to $51.1 million last year. Dividend payments totaled $310.2 million compared to $283.9 million a year ago. On August 29, 1996, the company amended the line of credit agreements that support its domestic commercial paper programs, increasing availability and extending maturity dates. The amended terms provide for one agreement totaling $2.3 billion that expires in September 2001. The previous agreements provided for lines of credit totaling $2.0 billion, of which $1.2 billion would have expired in September 1996 and $800.0 million was scheduled to expire in September 2000. On January 29, 1997, the company had $1.8 billion of domestic commercial paper outstanding. Due to the long-term nature of the amended credit agreement, all of the outstanding domestic commercial paper has been classified as long-term debt as of January 29, 1997. As of May 1, 1996, $1.5 billion of domestic commercial paper was outstanding, of which $800.0 million was classified as long-term debt. On September 10, 1996, the company's board of directors raised the quarterly dividend on the company's common stock to $0.29 per share from $0.26 1/2 per share, for an indicated annual rate of $1.16 per share. On March 12, 1997, the company's board of directors declared the quarterly dividend on the company's common stock of $0.29 per share payable April 10, 1997 to shareholders of record at the close of business on March 24, 1997. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. 11 <PAGE> OTHER MATTERS On March 14, 1997, the company announced its intention to implement a plan to reorganize and restructure the company which will reduce fiscal 1997 full- year pre-tax earnings by approximately $650 million, net of anticipated capital gains of approximately $100 million from the sale of non-strategic assets in New Zealand and real estate in the U.K. The plan will include the following initiatives: 1. The company has entered into a letter of agreement with McCain Foods Limited to sell, for approximately $500 million, Ore-Ida's foodservice business, including six facilities, subject to customary due diligence, the formal approval of the Board of Directors of McCain Foods and regulatory approvals. The aggregate cash proceeds from this transaction, the transactions in the above paragraph and the sale of other businesses the company intends to sell during the next 12 months is expected to total $750 million to $850 million. 2. The company will close or sell at least 25 plants throughout the world while investing heavily to upgrade and build plants to add capacity in fast-growing markets. Excluding the sale of plants and businesses, the global workforce will be reduced by approximately 2,500. Specific plants and businesses to be closed will not be publicly identified until after affected employees have been notified. This process will take place over the next few months. 3. The company intends to eliminate certain end of quarter trade promotion practices to improve inventory turns, cash flow and working capital for the benefit of both the company and its customers. As a result of this initiative, sales in the fourth quarter are expected to be flat compared to last year. This action is designed to fundamentally change the way the company goes to market in key U.S. businesses. An impact of approximately $90 million to $95 million for this initiative is included in the $650 million cost of the reorganization noted above. 4. The company plans to exit at least four non-strategic businesses that do not fit its core categories or are underperforming. 5. The company will dramatically reduce the cost of its entire U.S. Weight Watchers meeting system to replicate its very successful Weight Watchers system in the U.K., the European continent, Australia and South America. The plan is expected to generate $120 million in savings, $300 million of working capital improvements and $1 billion in free cash flow through fiscal 1998 that will ensure 10% to 12% earnings growth from a fiscal 1997 operating base of $1.93 per share into the future. When fully implemented, the plan should provide approximately $200 million in annual savings. The plan will be finalized and acted upon by the company's Board of Directors prior to the end of the fiscal year. More specific announcements regarding the details of the company's worldwide reorganization and restructuring plan will be made over the next few months. 12 <PAGE> PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION See "Other Matters" in Part I--Item 2 of this Quarterly Report on Form 10-Q. This report contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. Reference should be made to the section "Forward-Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K for the fiscal year ended May 1, 1996 for a description of the important factors that could cause actual results to differ materially from those discussed herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are listed below and are filed as part hereof. The Registrant has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S- K. The Registrant agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 11.Computation of net income per share. 27.Financial Data Schedule. 99.Additional Exhibits--H.J. Heinz Company Press Release dated March 14, 1997. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended January 29, 1997. 13 <PAGE> 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. H. J. HEINZ COMPANY (Registrant) Date: March 17, 1997 /s/ Paul F. Renne By................................... Paul F. Renne Senior Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Date: March 17, 1997 /s/ Edward J. McMenamin By................................... Edward J. McMenamin Corporate Controller (Principal Accounting Officer) 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF NET INCOME PER SHARE <TEXT> <PAGE> EXHIBIT 11 H. J. Heinz Company and Subsidiaries COMPUTATION OF NET INCOME PER SHARE (Unaudited) <TABLE> <CAPTION> Nine Months Ended ----------------------- January 29, January 31, 1997 1996 ----------- ----------- FY 1997 FY 1996 <S> <C> <C> Primary income per share: Net income........................................... $531,437 $489,120 Preferred dividends.................................. 32 44 -------- -------- Net income applicable to common stock................ $531,405 $489,076 ======== ======== Average common shares outstanding and common stock equivalents............................ 373,934 376,929 ======== ======== Net income per share--primary........................ $ 1.42 $ 1.30 ======== ======== Fully diluted income per share: Net income........................................... $531,437 $489,120 ======== ======== Average common shares outstanding and common stock equivalents............................ 373,934 376,929 Additional common shares assuming: Conversion of $1.70 third cumulative preferred stock.............................................. 345 469 Additional common shares assuming options were exercised at the period-end market price..................... 853 1,372 -------- -------- Average common shares outstanding and common stock equivalents............................ 375,132 378,770 ======== ======== Net income per share--fully diluted................. $ 1.42 $ 1.29 ======== ======== </TABLE> All amounts in thousands except per share amounts. ------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE PERIOD ENDED JANUARY 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> APR-30-1997 <PERIOD-START> MAY-02-1996 <PERIOD-END> JAN-29-1997 <EXCHANGE-RATE> 1 <CASH> 124,883 <SECURITIES> 23,379 <RECEIVABLES> 1,215,057 <ALLOWANCES> 0 <INVENTORY> 1,675,529 <CURRENT-ASSETS> 3,363,672 <PP&E> 4,433,415 <DEPRECIATION> 1,727,281 <TOTAL-ASSETS> 9,091,548 <CURRENT-LIABILITIES> 2,535,546 <BONDS> 2,758,463 <PREFERRED-MANDATORY> 0 <PREFERRED> 245 <COMMON> 107,774 <OTHER-SE> 2,736,215 <TOTAL-LIABILITY-AND-EQUITY> 9,091,548 <SALES> 6,910,356 <TOTAL-REVENUES> 6,910,356 <CGS> 4,418,924 <TOTAL-COSTS> 4,418,924 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 204,481 <INCOME-PRETAX> 843,428 <INCOME-TAX> 311,991 <INCOME-CONTINUING> 531,437 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 531,437 <EPS-PRIMARY> 1.42 <EPS-DILUTED> 1.42 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>4 <DESCRIPTION>PRESS RELEASE <TEXT> <PAGE> Exhibit 99 FOR RELEASE UPON RECEIPT CONTACT: Ted Smyth Debora S. Foster VP - Corp. Affairs Gen. Mgr. - Corp. Communications (412)456-5780 (412)456-5778 Michael Mullen Ketchum Public Relations (412)456-5778 Heinz Reorganizes for Sales and Earnings Growth and Shareholder Value San Francisco, CA, March 14, 1997 -- H. J. Heinz Company (NYSE; HNZ) today announced its largest ever reorganization plan designed to strengthen the company's six core businesses and improve Heinz's profitability and global growth. Heinz, the global food company, has number-one brands such as Heinz ketchup and infant foods, Ore-Ida, Weight Watchers, StarKist, Farley's and 9- Lives. Brand-building, increasing media spend by 30% over two years, overseas expansion, Efficient Consumer Response (ECR), value-added manufacturing, price- based costing and working capital savings are important elements of the plan to make Heinz one of the three preeminent branded food companies in the world. "Heinz has launched this bold initiative, which we call Project Millennia, to deliver the 21st Century early and produce unprecedented competitive strength to ride the global growth wave in terms of brand growth, financial performance and enhanced shareholder value," said Heinz Chairman and Chief Executive Officer Anthony J. F. O'Reilly to The Security Analysts of San Francisco. "This plan will make Heinz one of the three preeminent branded food companies in the world," O'Reilly said. - - more - <PAGE> 2 "Heinz is one of the most global of American food companies," O'Reilly said. "With GDP growth in Asia predicted at 7% this year and 6% in Eastern Europe, this is the right time for Heinz to accelerate the sales of its big brands to the millions of new consumers who are enjoying economic liberalization." Reorganization Initiatives: -------------------------- Heinz announced its intention to implement a plan to reorganize the company for the new millennium which will reduce Fiscal 1997 (ends April 30) full-year pre-tax earnings by approximately $650 million, net of anticipated capital gains of approximately $100 million from the sale of non-strategic assets in New Zealand and real estate in the U.K. The plan will include the following initiatives: 1. Heinz has entered into a letter of agreement with McCain Foods Limited to sell, for approximately $500 million, Ore-Ida's foodservice business, including two potato factories at Burley and Plover and four appetizer plants for a total of six factories, subject to customary due diligence, the formal approval of the Board of Directors of McCain Foods and regulatory approvals. Heinz is pleased that McCain plans to offer employment to substantially all of the Ore-Ida employees currently working full-time at its production facilities, and to headquarters and sales personnel as deemed necessary to support the business. Heinz will now focus on expanding its foodservice global leadership in high-margin ketchup and condiments, tuna and portion control, not only in the U.S., but also in Europe and Asia. The aggregate cash proceeds from all these transactions, and from the sale of other plants and businesses Heinz intends to sell during the next 12 months, should be approximately $750 million to $850 million. (See separate release issued March 14, 1997.) 2. The company will close or sell at least 25 plants throughout the world while investing heavily to upgrade and build plants to add capacity in fast-growing markets. Excluding the sale of plants and businesses, the global workforce will be reduced by approximately 2,500. "We regret the loss of jobs but this plan is necessary to make us more competitive in the tough global marketplace," said Dr. O'Reilly. "We will be sensitive and responsive to our people who are affected." Specific plants and businesses for closure will not be publicly identified until after affected employees have been notified in the next few months. - more - <PAGE> 3 3. These plant closures or sales will be facilitated by the elimination of end-of-quarter trade promotion practices to improve inventory turns, cash flow and working capital for both Heinz and its customers. These practices have built up in all companies, "and I stress in all companies," Dr. O'Reilly noted, over the past 10 years and are no longer efficient because of new technology such as scanning, EDI, cross-dock software and computer-assisted ordering which enable the retailer and manufacturer to work in tandem to achieve more efficient ECR and Continuous Replenishment Program objectives. As a result of this initiative, sales in the fourth quarter are expected to be flat compared to last year. This action is designed to fundamentally change the way Heinz goes to market in key U.S. businesses. If the company had continued to do business as usual, it would have expected to achieve an additional $90 to $95 million in operating income for the fourth quarter, "yielding EPS of $1.93 for the full year, the impact of which is included in the $650 million cost of the reorganization," Dr. O'Reilly added. 4. The company plans to exit at least four non-strategic businesses that do not fit its core categories or are underperforming. 5. The company will dramatically reduce the costs of its entire U.S. Weight Watchers meeting system, at a cost of $55 million within the reorganization charge, to replicate its very successful Weight Watchers system in the U.K., the European continent, Australia and South America. Dr. O'Reilly added, "This growth plan is designed to: . Ensure 10 to 12% earnings growth into the next century. . Target sales to grow to $14 to $15 billion by 2003, compared to approximately $9.5 billion this year. . Grow Fiscal `98 earnings 10 to 12% from this year's anticipated operating base of $1.93. . Generate working capital reductions of $300 million within the next 12 months. . Yield pre-tax savings of approximately $120 million in Fiscal `98 and approximately $200 million in Fiscal `99 and beyond. . Achieve over $2 billion in free cash flow over the next five years, with $1 billion in the next 12 months." - more - <PAGE> 4 Third Quarter Results: --------------------- Earlier in the morning, Heinz announced record third-quarter results. Earnings per share, excluding non-recurring items, were $0.48. This represented an increase of 14.3 % over the same period last year. Sales growth for the third quarter was strong at over 5%. (See separate release issued March 14, 1997.) Growth Initiatives: ------------------ Future growth initiatives focus on investing in Heinz's big global brands, maximizing market share and extending successful products to new markets. Heinz has number-one brands in ketchup, weight control, tuna, frozen potatoes, soups, beans, infant foods and pet food around the world. The company has an enviable array of 25 power brands that have at least $100 million in sales. Funding for these growth initiatives will come from improved asset utilization, ECR programs, the closure of 25 plants and the exit from lower- margin businesses. "As a result of the reorganization," Dr. O'Reilly said, "the company expects overseas sales to increase from its current level of 43% of annual revenues. The overseas growth will stem from rapid expansion into the fast- growing markets of Eastern Europe, Asia, the Indian sub-continent and South America." Heinz President and Chief Operating Officer William R. Johnson said: "By moving into higher profit businesses, we expect to increase our gross margin from 36% today to 40% by Fiscal 2001. Our asset turnover should increase from 1.0 to 1.3 times, a 30% improvement. And, we expect to generate free cash flow of more than $2 billion over five years." International Growth and Brand Building Under "Project Millennia": ----------------------------------------------------------------- . Tuna sales in Europe will grow in double digits, supplied by the low- cost canneries in the Seychelles and Ghana. . International expansion of pet treats and specialty pet products. Both are high-margin and rapidly growing segments. Heinz is seeking acquisitions -- similar to the company's Alimentos Pilar, S.A. acquisition in Argentina last year -- in South America, Japan and Southern Africa. It already plans to sell pet treats in Australia and, additionally, to sell into European markets from a production base in Ireland. - more - <PAGE> 5 . Develop a pan-European category-based strategy in Europe -- building on Heinz's exceptional strengths in the U.K., Italy, Spain and Portugal, -- to expand sales in the rest of the continent, particularly for tuna, pet treats, ketchup, infant foods, foodservice and Weight Watchers. . Expand sales of Heinz ketchup in Germany, which consumes 30% of all ketchup sold in Europe. Plans call for increasing Heinz's share of that market from 17% to 35% in the next five years. . Double the Heinz European foodservice business over the next five years, a category which is growing rapidly. . Increase production capacity for single-serve products in Australia. This production capacity, along with last year's acquisition of the Craig's line of single-serve items by Wattie's in New Zealand, will enable Heinz to supply the Asian market with a growing range of these items --from ketchup to jellies. . Introduce the Earth's Best line of organic baby food (bought by Heinz U.S.A. last year) into Canada and Australia. . Deliver 35% annual sales growth in Eastern Europe to reach $400 million by 2003. . Increase Heinz's business in India, where baby foods -- combined with nutritional drinks and Heinz branded products for children and adults -- will deliver annual sales growth of 20% to top $300 million by 2005. . Expand marketing for baby food in China, where the Heinz brand remains number-one in infant dry cereal. . Double the company's Japanese business over the next three to five years, focusing on low-cost, high-quality products made in New Zealand. Marketing Innovations: --------------------- . Return to television advertising in the United States for the company's flagship product line, Heinz ketchup, which has a leading 50% market share. . Introduce an innovative "stand-up" resealable pouch for pet treats. - more - <PAGE> 6 . Aggressively market Ore-Ida's frozen stuffed pasta line, whose Rosetto brand is already number-one in the U.S. The company expects to expand the entire category by 12% a year to $350 million over the next five years. . Increase marketing for Ore-Ida retail potato products in the U.S.A. which are number-one with a 55% dollar market share. . Introduce into the U.S. the Weight Watchers "1,2,3 Success" Program, which has been very popular in the U.K., where registrations have increased by 50%. Weight Watchers in the U.K., Continental Europe, Australia, and South America have combined OI of $40 million, including $10 million from Weight Watchers foods in the U.K. . Begin "price-based costing" for The Budget Gourmet brand of frozen products, using low manufacturing costs to generate an everyday retail price of 99 cents each. . Complete an agreement with Hain Food Group Inc. to manufacture and market Weight Watchers brand dry and refrigerated products, including salad dressings, canned soup, sauces and cookies. This allows Weight Watchers Gourmet Food Company to concentrate on its core frozen entrees, desserts and side dishes. . Refocus on "Smart Ones from Weight Watchers" line of frozen entrees. This will involve improving the overall quality of the line, along with pricing and product varieties. . Continue to build market share for tuna in the U.K., Italy and parts of Eastern Europe. The company already owns one of the brand leaders (Petit Navire) in France. Heinz's operating profits from tuna sold in Europe increased 200% this fiscal year and substantial improvement is expected again next year. . Entered a joint venture in Australia to market tuna oil, which is rich in Omega 3 fatty acids (linked to reducing the risk of heart disease) and long-chain polyunsaturated fats (critical to intellectual development in children). A by-product of tuna processing, tuna oil offers margins of over 50%. . Partner with Dunkin' Donuts to sell bagels produced by Heinz Bakery Products. The venture is expected to deliver $50 million in sales next year, with good margins based on our state-of-the-art, low-cost dedicated production systems. - more - <PAGE> 7 Reorganization Plan For Manufacturing and Distribution Facilities: ----------------------------------------------------------------- . Signed a letter of agreement to sell Ore-Ida's foodservice business (including six factories) to McCain Foods Limited of New Brunswick, Canada. . Close one of five major ketchup and condiment-making factories in North America. . Accelerating ECR initiatives at Heinz North America. This action should deliver annualized operating savings of $20 to $30 million by Fiscal 1999 and decrease working capital by about $40 to $50 million. . Realign production and distribution centers for pet foods to place factories and warehouses closer to Heinz customers. As a result, the company will reduce its distribution costs. This will generate $10 to $15 million in annual operating savings. . Develop alliances with other dry pet food manufacturers. Such co-packing arrangements will allow Heinz to substantially reduce its delivered cost for dry pet food. . Consolidate pet treat production to reduce overhead costs. . Dramatic reduction of Weight Watchers costs by exiting the Personal Cuisine business in 238 of our centers which sold food. We will close 55 centers and will retain 183 of the high-attendance centers as classrooms only. These actions should reduce cost for Weight Watchers in the U.S. by $10 to $15 million annually. . Consolidate the manufacture of Weight Watchers brand foods for Europe in a single, expanded factory in Dundalk, Ireland. Currently, the products -- which are highly successful and sold in the U.K., France and the Nordic countries -- are co-packed for Heinz in five different locations. With 57% market share in the U.K., Weight Watchers entrees exceed the combined share of Nestle and Unilever. . Automate the labor-intensive cleaning of tuna at StarKist plants in Puerto Rico and American Samoa. This effort will generate an annual savings of $12 to $15 million and enhance product quality. - more - <PAGE> 8 . Optimize production between Puerto Rico and Samoa to reflect the lowest delivered cost on each variety of tuna fish (albacore, chunk light and special recipe) taking account of labor rates, cost of fish and tax benefits. . Downsize or close as many as three seafood production facilities that no longer fit within Heinz's global low-cost manufacturing strategy. In Europe, StarKist is leveraging the substantial benefits of its low-cost, duty-free plants in Ghana and the Seychelles. . Revise the manufacturing configuration for Heinz Bakery Products by closing, selling or downsizing up to five of its ten plants. . Reorganizing the Wattie's business in New Zealand by combining the three remaining companies into one unit, eliminating substantial overhead and centralizing all ECR and category management initiatives. . Closed several production facilities in Australia and New Zealand. Wattie's will now focus on developing its Tomoana plant site as a supply source for Japan. Worldwide Expansion and Development of Production Centers: --------------------------------------------------------- Heinz is planning to expand and develop its international production centers in these locations: . The Seychelles for tuna sold in Europe . Ghana for tuna sold in Europe . Puerto Rico and Samoa for Star-Kist tuna . Ireland for frozen food sold into the U.K. and Europe . Ozzaro Taro for infant foods in Northern Italy . Aligarh, India for nutritional drinks and infant foods . Jacksonville, Florida for portion control products . Hastings and Tomoana, in New Zealand, particularly for exports to Asia and the Pacific. # # <PAGE> 9 ABOUT HEINZ: With sales approaching $10 billion, H. J. Heinz Company is one of the world's leading food processors and purveyors of nutritional services. Its 50 affiliates operate in some 200 countries, offering more than 4,000 products. Among the company's famous brands are Heinz, StarKist, Ore-Ida, 9-Lives, Weight Watchers, Wattie's, Plasmon, Farley's, The Budget Gourmet, Earth's Best, Ken-L Ration, Kibbles `n Bits, Orlando, Olivine, and Guloso. * * * The above contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. Reference should be made to the section "Forward-Looking Statements" in Item 1 of H. J. Heinz Company's Annual Report on Form 10-K for the fiscal year ended May 1, 1996 for a description of the important factors that could cause actual results to differ materially from those discussed above. * * * Note to assignment editors: A Heinz video news release/B-roll which includes - -------------------------- interviews with A. J. F. O'Reilly and William R. Johnson and company production footage is available as follows: SATELLITE INFORMATION --------------------- FEED #1 FEED #2 ------- ------- DATE: March 14, 1997 March 14, 1997 TIME: 1:30 pm-2:00 pm (Eastern) 4:00 pm-4:15 pm (Eastern) (10:30 am -11:00 am (Pacific) (1:00 pm-1:15pm Pacific) COORDS: GALAXY C4 TRANS 9 GALAXY 9 TRANS 22 AUDIO: 6.2, 6.8 MHz 6.2, 6.8 MHz </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/46765/0000950134-97-001114.txt

-----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, T3tEbFPRUEofXUXujxYtXL5mjj9sgjSdcVInhNWJEqFksLtnN9KKx/cRBgzs/Lc0 DVVp5Anr6ShlNkvt6OxBvA== <SEC-DOCUMENT>0000950134-97-001114.txt : 19970222 <SEC-HEADER>0000950134-97-001114.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950134-97-001114 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELMERICH & PAYNE INC CENTRAL INDEX KEY: 0000046765 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 730679879 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04221 FILM NUMBER: 97535378 BUSINESS ADDRESS: STREET 1: UTICA AT 21ST ST CITY: TULSA STATE: OK ZIP: 74114 BUSINESS PHONE: 9187425531 MAIL ADDRESS: STREET 1: UTICA AT 21ST ST CITY: TULSA STATE: OK ZIP: 74114 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR QUARTER ENDING DECEMBER 31, 1996 <TEXT> <PAGE> 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 30549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended: DECEMBER 31, 1996 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: 1-4221 HELMERICH & PAYNE, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 73-0679879 (I.R.S. Employer I.D. Number) UTICA AT TWENTY-FIRST STREET, TULSA, OKLAHOMA 74114 (Address of principal executive office) (zip code) Registrant's telephone number, including area code: (918) 742-5531 Former name, former address and former fiscal year, if changed since last report: NONE 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 ----- ------ CLASS OUTSTANDING AT DECEMBER 31, 1996 Common Stock, .10 par value 24,918,500 AUTHORIZED AT DECEMBER 31, 1996 26,764,476 Total Number of Pages 13 ---- <PAGE> 2 HELMERICH & PAYNE, INC. INDEX <TABLE> <CAPTION> PART I FINANCIAL INFORMATION <S> <C> <C> Consolidated Condensed Balance Sheets - December 31, 1996 and September 30, 1996 3 Consolidated Condensed Statements of Income - Three Months Ended December 31, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended December 31, 1996 and 1995 5 Consolidated Condensed Statement of Shareholders' Equity - Three Months Ended December 31, 1996 6 Notes to Consolidated Condensed Financial Statements 7&8 Revenues and Income by Business Segments 9 Management's Discussion and Analysis of Financial 10,11 Condition and Results of Operations & 12 PART II. OTHER INFORMATION 12 Signature Page 13 </TABLE> <PAGE> 3 PART I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> (Unaudited) December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 27,494 $ 16,892 Short-term investments 1,005 1,005 Accounts receivable, net 85,533 75,374 Inventories 16,839 16,915 Prepaid expenses and other 8,781 4,182 -------- -------- Total Current Assets 139,652 114,368 -------- -------- Investments 252,197 229,809 Property, Plant and Equipment, Net 480,766 463,496 Other Assets 13,026 14,241 -------- -------- Total Assets $885,641 $821,914 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 29,544 $ 25,622 Accrued liabilities 39,296 31,943 Notes payable 15,000 5,000 -------- -------- Total Current Liabilities 83,840 62,565 -------- -------- Noncurrent Liabilities Deferred income taxes 106,679 98,335 Other 17,881 15,044 -------- -------- Total Noncurrent Liabilities 124,560 113,379 -------- -------- Shareholders' Equity Common stock, par value $.10 per share 2,677 2,677 Preferred stock, no shares issued -- -- Additional paid-in capital 50,955 50,410 Net unrealized holding gains 69,775 56,550 Retained earnings 574,793 557,543 -------- -------- 698,200 667,180 Less treasury stock, at cost 20,959 21,210 -------- -------- Total Shareholders' Equity 677,241 645,970 -------- -------- $885,641 $821,914 ======== ======== </TABLE> See accompanying notes to financial statements. -3- <PAGE> 4 PART I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (in thousands except per share data) <TABLE> <CAPTION> Three Months Ended December 31 1996 1995 ------------------------- <S> <C> <C> REVENUES: Sales and other operating revenues $116,726 $ 87,260 Income from investments 1,536 1,167 -------- -------- 118,262 88,427 -------- -------- COST AND EXPENSES: Operating costs 63,900 53,263 Depreciation, depletion and amortization 15,472 13,573 Dry holes and abandonments 560 928 Taxes, other than income taxes 4,687 3,692 General and administrative 2,259 2,348 Interest 3 79 -------- -------- 86,881 73,883 -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN INCOME OF AFFILIATE 31,381 14,544 INCOME TAX EXPENSE 11,756 5,270 EQUITY IN INCOME OF AFFILIATE, net of income taxes 500 194 -------- -------- INCOME FROM CONTINUING OPERATIONS 20,125 9,468 INCOME FROM DISCONTINUED OPERATIONS -- 1,625 -------- -------- NET INCOME $ 20,125 $ 11,093 ======== ======== PER COMMON SHARE: Income from continuing operations $ .81 $ .38 Income from discontinued operations -- .07 -------- -------- NET INCOME $ .81 $ .45 ======== ======== CASH DIVIDENDS (Note 2) $ .13 $ .125 AVERAGE COMMON SHARES OUTSTANDING 24,826 24,603 </TABLE> See accompanying notes to financial statements. -4- <PAGE> 5 PART I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended December 31 1996 1995 ------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 20,125 $ 11,093 Adjustments to reconcile net income to net cash provided by operating activities-- Discontinued operations - (1,625) Depreciation, depletion, and amortization 15,472 13,573 Dry holes and abandonments 560 928 Equity in income of affiliate before income taxes (806) (313) Amortization of deferred compensation 368 425 Loss (Gain) on sale of fixed assets, other (438) 427 Change in assets and liabilities-- Accounts receivable (10,159) (5,937) Inventories 76 (148) Prepaid expenses and other (3,384) (641) Accounts payable 6,119 (668) Accrued liabilities 7,353 5,670 Deferred income taxes 238 213 Other noncurrent liabilities 2,837 1,447 -------- -------- Total adjustments 18,236 13,351 -------- -------- Net cash provided by continuing operations 38,361 24,444 Net cash provided by discontinued operations - 1,453 -------- -------- Net cash provided by operating activities 38,361 25,897 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, including dry hole costs, from continuing operations (36,319) (35,616) Proceeds from sales of property, plant, and equipment 1,283 72 Discontinued operations - (458) Purchase of investments (276) - -------- -------- Net cash used in investing activities (35,312) (36,002) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 15,000 22,000 Payments made on notes payable (5,000) (20,000) Dividends paid (3,243) (3,095) Proceeds from exercise of stock options 796 - -------- -------- Net cash provided by(used in) financing activities 7,553 (1,095) -------- -------- NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 10,602 (11,200) CASH AND CASH EQUIVALENTS, beginning of period 16,892 19,543 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 27,494 $ 8,343 ======== ======== </TABLE> -5- <PAGE> 6 PART I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands) <TABLE> <CAPTION> Net Unrlzed Treasury Stock Common Stock Paid-In Holding Retained ------------------ Shares Amount Capital Gains Earnings Shares Amount --------------- ------- ------- -------- ------------------ <S> <C> <C> <C> <C> <C> <C> Balance, September 30, 1996 26,764 $2,677 $50,410 $56,550 $557,543 1,879 $(21,210) Change in net unrealized holding gains, net of income taxes of $8,106 - - - 13,225 - - - Cash dividends ($0.13 per share) - - - - (3,243) - - Exercise of stock options - - 545 - - (33) 251 Amortization of deferred compensation - - - - 368 - - Net income - - - - 20,125 - - ------------------------------------------------------------------------ Balance, December 31, 1996 26,764 $2,677 $50,955 $69,775 $574,793 1,846 $(20,959) ========================================================================= </TABLE> See accompanying notes to financial statements. - 6 - <PAGE> 7 I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the results of the periods presented. The results of operations for the three months ended December 31, 1996, and December 31, 1995, are not necessarily indicative of the results to be expected for the full year. 2. The $.13 cash dividend declared in September was paid December 2, 1996. On December 4, 1996, a cash dividend of $.13 per share was declared for shareholders of record on February 14, 1997, payable March 3, 1997. 3. Inventories consist of materials and supplies. 4. Income from investments does not include any gains or losses on sales of available-for-sale securities during the first quarter of 1997 or 1996. 5. The following is a summary of available-for-sale securities, which excludes those accounted for under the equity method of accounting. The recorded investment in securities accounted for under the equity method is $26,021,000. <TABLE> <CAPTION> Gross Gross Est. Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) ----------------------------------------- <S> <C> <C> <C> <C> Equity Securities 12/31/96 $113,635 $113,358 $817 $226,176 Equity Securities 09/30/96 $113,384 $ 92,081 $871 $204,594 </TABLE> 6. In May 1996 the Company renewed its line of credit agreement with certain banks. The new agreement provides for maximum borrowing of $50,000,000 at adjustable interest rates based on London Interbank Offered Rates (LIBOR). The borrowings will mature either in May of 1997 or May of 1998. A $40,000,000 portion of the line is for a 364 day term and a $10,000,000 portion is for a two year term. As of December 31, 1996, the Company had borrowed $15,000,000 against the line of credit, at a weighted average interest rate of 5.93%, and had letters of credit outstanding in the amount of $7,671,000, leaving an unused portion of $27,329,000. Under the line of credit agreement, the Company must meet certain requirements regarding levels of debt, net worth and earnings. The Company has an additional $14.0 million line of credit with a bank to be used primarily for letters of credit. As of December 31, 1996, the Company had letters of credit outstanding in the amount of $2,547,222 leaving an unused portion of $11,452,778. -7- <PAGE> 8 PART I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 7. Discontinued Operations Effective August 30, 1996, the Company exchanged all of the common stock of its wholly-owned subsidiary, Natural Gas Odorizing, Inc. (NGO), to Occidental Petroleum Corporation (OPC) for 2,018,928 shares of OPC common stock with a fair market value at closing of approximately $48 million. NGO comprised all of the Company's chemical operations. Prior period operating results for such operations are reported as discontinued operations. Summary operating results of discontinued operations for the quarter ending December 31, 1995 are as follows (in thousands): <TABLE> <S> <C> Revenues $6,158 Operating Profit $2,739 Income Taxes $1,114 Net Income $1,625 </TABLE> -8- <PAGE> 9 I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. REVENUES AND INCOME BY BUSINESS SEGMENTS (in thousands) <TABLE> <CAPTION> FY 1997 FY 1996 1ST QUARTER 1ST QUARTER ----------- ----------- <S> <C> <C> SALES AND OTHER REVENUES: Contract Drilling-Domestic $ 29,596 $23,020 Contract Drilling-International 35,630 33,935 -------- ------- Total Contract Drilling Division 65,226 56,955 -------- ------- Exploration and Production 30,014 15,460 Natural Gas Marketing 18,991 12,786 -------- ------- Total Oil & Gas Division 49,005 28,246 -------- ------- Real Estate Division 2,412 2,008 Investment and Other 1,619 1,218 -------- ------- Total Revenues $118,262 $88,427 ======== ======= OPERATING PROFIT(LOSS): Contract Drilling-Domestic $ 4,210 $ 1,915 Contract Drilling-International 6,907 8,309 -------- ------- Total Contract Drilling Division 11,117 10,224 -------- ------- Exploration and Production 18,274 4,075 Natural Gas Marketing 1,381 757 -------- ------- Total Oil & Gas Division 19,655 4,832 -------- ------- Real Estate Division 1,779 1,221 -------- ------- Total Operating Profit 32,551 16,277 -------- ------- OTHER (1,170) (1,733) -------- ------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN INCOME OF AFFILIATE $ 31,381 $14,544 ======== ======= </TABLE> See accompanying notes to financial statements. -9- <PAGE> 10 I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DECEMBER 31, 1996 Business Environment and Risk Factor The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. The Company's future operating results may be affected by various trends and factors which are beyond the Company's control. These include, among other factors, fluctuations in natural gas prices, expiration or termination of drilling contracts, changes in general economic conditions, rapid or unexpected changes in technologies and uncertain business conditions that affect the Company's businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. With the exception of historical information, the matters discussed below under the headings "Results of Operations" and "Liquidity and Capital Resources" may include forward-looking statements that involve risks and uncertainties. The Company wishes to caution readers that a number of important factors discussed in this report and in the Company's other reports filed with the Securities and Exchange Commission, could affect the Company's actual results and cause actual results to differ materially from those in the forward- looking statements. Results of Operations The Company reported net income of $20,125,000 ($0.81 per share) from revenues of $118,262,000 for the first quarter of fiscal 1997, compared with $11,093,000 ($0.45 per share) net income from revenues of $88,427,000 during the first quarter of 1996. The Company's Exploration and Production Division reported an operating profit of $18,274,000 for the first quarter of fiscal 1997, compared with an operating profit of $4,075,000 for the same period last year. Oil and gas revenues for the first quarter of 1997 were $30,014,000, a 94% increase from last year's revenues of $15,460,000. Natural gas revenues increased to $24,147,000 in the first quarter of fiscal 1997 from $12,254,000 in the first quarter of fiscal 1996. Oil revenues increased to $5,661,000 in the first quarter of fiscal 1997 from $3,229,000 in the first quarter of fiscal 1996. Increased prices and volumes for both oil and gas contributed to the increased revenues and operating profit. Natural gas prices for the first quarter of fiscal 1997 averaged $2.46 per mcf, a 64% increase over the $1.50 per mcf received in the first quarter of fiscal 1996. Gas volumes increased nearly 20% to 106.8 mmcf/d for the quarter from 89.3 mmcf/d for the first quarter of fiscal 1996. A substantial -10- <PAGE> 11 I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DECEMBER 31, 1996 (Continued) portion of the increased natural gas volumes was produced from the Company's Rocky East Prospect which went on production in the third and fourth quarters of fiscal 1996. Although natural gas prices remain relatively strong into the second quarter of fiscal 1997, the Company expects that in the coming months natural gas prices and sales volumes will decrease in response to reduced seasonal demands. Oil prices for the first quarter of fiscal 1997 averaged $23.98 compared with $16.42 for the same period in 1996. Oil volumes were 2,566 bbls/d and 2,171 bbls/d for the first quarter of 1997 and 1996, respectively. The increased volumes were the result of new wells in the Austin Chalk area in Louisiana going on production in the first quarter of fiscal 1997. Additional Austin Chalk wells are planned for the remainder of the year, but the timing and impact on production are not predictable. The Contract Drilling Division reported an operating profit of $11,117,000 in the first quarter of fiscal year 1997, compared with $10,224,000 in the same period of 1996. Operating profit from the domestic drilling operations increased to $4,210,000 for the quarter compared with $1,915,000 for the first quarter of fiscal 1996. Increased utilization of land rigs (revenue days increased 20% from first quarter of 1996) and increased day rates for land rigs contributed to the increased operating profit. Also contributing substantially to earnings was the new Mars offshore platform rig which began drilling in the third quarter of fiscal 1996. The Mars rig more than offset the negative impact of two offshore rigs that were released from contract in the fourth quarter of 1996. Two additional rigs will commence operations for Shell Offshore Inc. by the third quarter of fiscal year 1997. The Company expects this will have a positive impact on domestic operating profit for the last six months of fiscal 1997. Operating profit from international drilling operations decreased to $6,907,000 in the first quarter of fiscal 1997 from $8,309,000 in the same quarter last year. The first quarter of fiscal 1996 included foreign currency transaction gains in Venezuela of $1 million. No such gains were realized in the first quarter of fiscal 1997 because of a more stable currency situation. Additional decreases were due to slightly higher operating expenses in Colombia for the first quarter of 1997, compared with the first quarter of fiscal 1996. The Company's Real Estate Division increased operating profit to $1,779,000 in the first quarter of fiscal 1997 from $1,221,000 in the same quarter of fiscal 1996. The increase was primarily due to a gain on the sale of a small parcel of land during the quarter. -11- <PAGE> 12 I. FINANCIAL INFORMATION HELMERICH & PAYNE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DECEMBER 31, 1996 (Continued) Liquidity and Capital Resources Net cash provided by continuing operations was $38,361,000 for the first quarter of fiscal 1997, compared with $24,444,000 for the same period in 1996. Capital expenditures were $36,319,000 and $35,616,000 for the first quarter of fiscal 1997 and 1996, respectively. It is anticipated for fiscal 1997 that capital expenditures could possibly exceed internally generated cash flows and that the Company will borrow under its line of credit agreement or sell a portion of its investment portfolio to fund capital expenditures. It was recently announced that Atwood Oceanics, Inc. (Atwood) had filed a Registration Statement for the offer and sale of 1.5 million shares of common stock of the company. In order to maintain its existing ownership interest in Atwood of 23.8%, Helmerich & Payne, Inc. (H&P) plans to purchase 25% of the shares to be offered. H&P's new investment would total between $20-$25 million. There were no significant changes in the Company's financial position since September 30, 1996. PART II. OTHER INFORMATION HELMERICH & PAYNE, INC. Item 1. Legal Proceedings A lawsuit was filed in an Oklahoma state court in November of 1995 against Helmerich & Payne, Inc., in which five named plaintiffs, on behalf of themselves and other unnamed plaintiffs, are demanding their royalty share of a gas contract settlement. The plaintiffs are attempting to certify a class which would contain certain of the Company's lessors and certain other mineral owners who own an interest in wells covered by such gas contract settlement. If a certified class is awarded a royalty share of the gas contract settlement, then any such award could have a material impact on income from continuing operations for the applicable quarter. Management believes that any such award should not exceed approximately $2.7 million. Item 6(b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended December 31, 1996. -12- <PAGE> 13 PART II. OTHER INFORMATION HELMERICH & PAYNE, INC. 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. Date: FEBRUARY 14 1997 /S/ DOUGLAS E. FEARS --------------------------- ----------------------------------------- Douglas E. Fears, Chief Financial Officer Date: FEBRUARY 14 1997 /S/ HANS C. HELMERICH --------------------------- ----------------------------------------- Hans C. Helmerich, President -13- <PAGE> 14 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 27 - Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-START> OCT-01-1996 <PERIOD-END> SEP-30-1997 <CASH> 27,494 <SECURITIES> 252,197 <RECEIVABLES> 86,214 <ALLOWANCES> 681 <INVENTORY> 16,839 <CURRENT-ASSETS> 139,652 <PP&E> 1,093,421 <DEPRECIATION> 612,655 <TOTAL-ASSETS> 885,641 <CURRENT-LIABILITIES> 83,840 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2,677 <OTHER-SE> 674,564 <TOTAL-LIABILITY-AND-EQUITY> 885,641 <SALES> 116,726 <TOTAL-REVENUES> 118,262 <CGS> 84,619 <TOTAL-COSTS> 84,619 <OTHER-EXPENSES> 2,259 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 3 <INCOME-PRETAX> 31,381 <INCOME-TAX> 11,756 <INCOME-CONTINUING> 20,125 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 20,125 <EPS-PRIMARY> .81 <EPS-DILUTED> .81 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

HPQ

https://www.sec.gov/Archives/edgar/data/47217/0000047217-97-000018.txt

-----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, AMl8kd1s0UYygB2vsJVmIR18MQUTZtRTx5YIxzTgBqnvInvCc/agP1aK9MHX3FFQ bvAzOByh3TOno6n7j0ffEA== <SEC-DOCUMENT>0000047217-97-000018.txt : 19970318 <SEC-HEADER>0000047217-97-000018.hdr.sgml : 19970318 ACCESSION NUMBER: 0000047217-97-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEWLETT PACKARD CO CENTRAL INDEX KEY: 0000047217 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 941081436 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04423 FILM NUMBER: 97557314 BUSINESS ADDRESS: STREET 1: 3000 HANOVER ST CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4158571501 MAIL ADDRESS: STREET 1: 3000 HANOVER ST STREET 2: MS 20BQ CITY: PALO ALTO STATE: CA ZIP: 94304 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q FILING FOR QUARTER ENDED JANUARY 31, 1997 <TEXT> 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 January 31, 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: 1-4423 HEWLETT-PACKARD COMPANY ---------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-1081436 - ------------------------------- ------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3000 Hanover Street, Palo Alto, California 94304 - ------------------------------------------ -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 857-1501 -------------- __________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1997 - -------------------------- ------------------------------- Common Stock, $1 par value 1.02 billion shares <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX ----- Page No. ________ Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Balance Sheet January 31, 1997 (Unaudited) and October 31, 1996 2 Consolidated Condensed Statement of Earnings (Unaudited) Three months ended January 31, 1997 and 1996 3 Consolidated Condensed Statement of Cash Flows (Unaudited) Three months ended January 31, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). 6-10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K. 11 Signature 12 Exhibit Index 13 1<PAGE> <TABLE> Item 1. Financial Statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET ------------------------------------ (Millions except par value and number of shares) <CAPTION> January 31 October 31 1997 1996 ---------- ---------- Assets (Unaudited) ------ <S> <C> <C> Current assets: Cash and cash equivalents $ 2,789 $ 2,885 Short-term investments 70 442 Accounts and notes receivable 6,841 7,126 Inventories: Finished goods 3,958 3,956 Purchased parts and fabricated assemblies 2,274 2,445 Other current assets 1,254 1,137 ------- ------- Total current assets 17,186 17,991 ------- ------- Property, plant and equipment (less accumulated depreciation: January 31, 1997 - $4,831; October 31, 1996 - $4,662) 5,634 5,536 Long-term investments and other assets 4,336 4,172 ------- ------- $27,156 $27,699 ======= ======= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Notes payable and short-term borrowings $ 380 $ 2,125 Accounts payable 2,223 2,375 Employee compensation and benefits 1,563 1,675 Taxes on earnings 2,050 1,514 Deferred revenues 1,100 951 Other accrued liabilities 2,082 1,983 ------- ------- Total current liabilities 9,398 10,623 ------- ------- Long-term debt 2,584 2,579 Other liabilities 1,062 1,059 Shareholders' equity: Preferred stock, $1 par value; 300,000,000 shares authorized; none issued Common stock and capital in excess of $1 par value; 2,400,000,000 shares authorized; 1,016,182,000 and 1,014,123,000 shares issued and outstanding at January 31, 1997 and October 31, 1996, respectively 1,020 1,014 Retained earnings 13,092 12,424 ------- ------- Total shareholders' equity 14,112 13,438 ------- ------- $27,156 $27,699 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. </TABLE> 2<PAGE> <TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS -------------------------------------------- (Unaudited) (Millions except per share amounts) Three months ended January 31 ------------------ <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Net revenue: Products $ 8,825 $ 8,040 Services 1,470 1,248 ------- ------- 10,295 9,288 ------- ------- Costs and expenses: Cost of products sold and services 6,694 5,988 Research and development 699 612 Selling, general and administrative 1,621 1,493 ------- ------- 9,014 8,093 ------- ------- Earnings from operations 1,281 1,195 Interest income and other, net 76 37 Interest expense 54 70 ------- ------- Earnings before taxes 1,303 1,162 Provision for taxes 391 372 ------- ------- Net earnings $ 912 $ 790 ======= ======= Net earnings per share* $ .87 $ .75 ======= ======= Cash dividends declared per share* $ .24 $ .20 ======= ======= Average shares and equivalents used in computing net earnings per share* 1,047 1,052 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. * 1996 amounts have been restated to reflect the retroactive effect of the July 1996 2-for-1 stock split. See Note 5 for a discussion of the stock split. </TABLE> 3 <TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------- (Unaudited) (Millions) <CAPTION> Three months ended January 31 ------------------ 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 912 $ 790 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 335 289 Deferred taxes on earnings (195) (55) Change in assets and liabilities: Accounts and notes receivable 314 263 Inventories 169 (743) Accounts payable (152) (270) Taxes on earnings 509 198 Other current assets and liabilities (102) 73 Other, net 20 73 ------ ------ Net cash provided by operating activities 1,810 618 ------ ------ Cash flows from investing activities: Investment in property, plant and equipment (513) (429) Disposition of property, plant and equipment 146 138 Purchases of short-term investments (412) (1,959) Maturities of short-term investments 784 1,824 Other, net 18 (6) ------ ------ Net cash provided by (used in) investing 23 (432) activities ------ ------ Cash flows from financing activities: Change in notes payable and short-term borrowings (1,760) 186 Issuance of long-term debt 34 441 Payment of current maturities of long-term debt (14) (2) Issuance of common stock under employee stock plans 106 86 Repurchase of common stock (172) (309) Dividends (122) (103) Other, net (1) - ------ ------ Net cash (used in) provided by financing (1,929) 299 activities ------ ------ (Decrease) Increase in cash and cash equivalents (96) 485 Cash and cash equivalents at beginning of period 2,885 1,973 ------ ------ Cash and cash equivalents at end of period $2,789 $2,458 ====== ====== The accompanying notes are an integral part of these consolidated condensed financial statements. </TABLE> 4 <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. In the opinion of the Company's management, the accompanying consolidated condensed financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position as of January 31, 1997 and October 31, 1996, the results of operations for the three months ended January 31, 1997 and 1996, and the cash flows for the three months ended January 31, 1997 and 1996. The results of operations for the three months ended January 31, 1997 are not necessarily indicative of the results to be expected for the full year. 2. Net earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effect of outstanding stock options. 3. Income tax provisions for interim periods are based on estimated effective annual income tax rates. The effective income tax rate varies from the U.S. federal statutory income tax rate primarily because of variations in the tax rates on foreign income. 4. The Company paid interest of $107 million and $58 million during the three months ended January 31, 1997 and 1996, respectively. During the same periods, the Company paid income taxes of $47 million and $208 million, respectively. The effect of foreign currency exchange rate fluctuations on cash balances held in foreign currencies was not material. 5. On May 17, 1996, the Company's Board of Directors approved a 2-for-1 stock split of the Company's $1 par value common stock in the form of a 100 percent distribution to shareholders of record as of June 21, 1996. As a result of the stock split, which took effect in July 1996, authorized, outstanding, and reserved common shares doubled and retained earnings was reduced by the par value of the additional common shares issued. The rights of the holders of these securities were not otherwise modified. All references in the consolidated statement of earnings for the period ended January 31, 1996 to number of shares and per share amounts of the Company's common stock have been restated. 6. The Company accounts for its employee stock compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which is effective for fiscal year 1997. Under SFAS 123 companies may elect, but are not required, to use a fair value methodology to recognize compensation expense for all stock-based awards. The Company will implement the disclosure-only provisions of SFAS 123 effective with its annual financial statements for fiscal year 1997. 5 Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). HEWLETT-PACKARD COMPANY AND SUBSIDIARIES RESULTS OF OPERATIONS - --------------------- Net Revenue - Net revenue for the first three months of fiscal 1997 was $10.3 billion, an increase of 11 percent from the same period of fiscal 1996. Product sales increased 10 percent and service revenue grew 18 percent over the corresponding period of fiscal 1996. Net revenue grew 9 percent to $6.0 billion internationally and 14 percent to $4.3 billion in the U.S. The first quarter growth in net revenue was due principally to strong growth in home and desktop PCs, PC servers, UNIX(R) systems, and service and support. The Company's printer products groups grew moderately, with supplies leading growth. The Company's slower revenue growth, as compared to the same period in the prior year, is attributable to slower market growth in some geographies, intensified competitive pricing pressures, and declines in average selling prices for some of the Company's products. Fluctuations in foreign currency exchange rates also unfavorably impacted the Company's net revenue growth. Costs and Expenses - Cost of products sold and services as a percentage of net revenue was 65.0 percent for the first quarter of fiscal 1997, compared to 64.5 percent for the first quarter of fiscal 1996, a .5 percentage point increase. This compares to a 2.2 percentage point year-over-year increase experienced in the first quarter of fiscal 1996. The decline in the rate of increase is due to a lessening in competitive pricing pressures in the PC businesses, favorable component pricing in the PC and printer businesses, and a favorable shift in the Company's product sales mix to higher-gross-margin products. Improved supply-chain management was also a key factor. Cost of sales is expected, however, to continue to trend upward in the future as the benefit of some of the factors above is considered temporary. Operating expenses as a percentage of net revenue were 22.6 percent for the first quarter of fiscal 1997 and 1996. This reflects ongoing efforts to achieve expense structures appropriate for the Company's changing business and expansion of the net revenue base in fiscal 1997. Operating expenses increased 10 percent for the first quarter of fiscal 1997 over the corresponding year-ago period. Within this category, the largest expense growth occurred in research and development expenses, reflecting the Company's commitment to ensuring a continuing flow of high quality products. 6 Provision for Taxes - The provision for taxes as a percentage of earnings before taxes was 30.0 percent for the first quarter of fiscal 1997, compared to 32.0 percent for the first quarter of fiscal 1996. The lower tax rate in fiscal 1997 resulted from changes in the geographic mix of the Company's earnings and resolution of certain issues related to tax returns filed in previous years. Net Earnings - Net earnings for the first quarter of fiscal 1997 were $912 million, or 87 cents per share on an average of 1.05 billion shares, compared to net earnings of $790 million, or 75 cents per share on an average of 1.05 billion shares for the first quarter of fiscal 1996, as restated to reflect the retroactive effect of the July 1996 2-for-1 stock split. FINANCIAL CONDITION - ------------------- Liquidity and Capital Resources - The Company's financial position remains strong, with cash and cash equivalents and short-term investments of $2.9 billion at January 31, 1997, compared to $3.3 billion at October 31, 1996. In addition, other long-term investments, relatively low levels of debt compared to assets, and a large equity base continue to demonstrate the Company's financial flexibility. Cash flows from operating activities were $1.8 billion during the first three months of fiscal 1997, compared to $618 million for the corresponding period of fiscal 1996. The increase in cash flows from operating activities in fiscal 1997 was attributable primarily to changes in inventory levels during fiscal 1997 and 1996. Inventory declined 8 percent on 11 percent revenue growth during the first quarter of fiscal 1997, as compared to an increase of 54 percent on revenue growth of 27 percent in the same period of fiscal 1996. The decline during fiscal 1997, as well as the resulting improvement in inventory as a percentage of net revenue, from 20.3 percent in fiscal 1996 to 15.8 percent in fiscal 1997, is attributable primarily to improved supply-chain management, particularly of order inflows and shipments to third-party distribution channels. 7 Capital expenditures for the first three months of fiscal 1997 were $513 million, compared to $429 million for the corresponding period in fiscal 1996. The increase in capital expenditures was due to expansion of capacity for increased levels of business and increased expenditures to support growth in the Company's leasing business. The changes in short-term investment and borrowing activities during the first quarter continue a program of repatriation of short-term investments from Puerto Rico that the Company began in the fourth quarter of fiscal 1996 due to changes in tax laws in that country. Cash from the liquidation of those investments was used to pay down notes payable and short-term borrowings. Under the Company's ongoing stock repurchase program, shares have been purchased to meet employee stock plan requirements. During the three months ended January 31, 1997, the Company purchased and retired approximately 3.3 million shares for an aggregate price of $172 million. During the three months ended January 31, 1996, the Company purchased and retired approximately 7.4 million shares (on a restated basis) for an aggregate price of $309 million. FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------- HP's future operating results may be adversely affected if the Company is unable to continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements. The process of developing new high technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers' changing needs and emerging technological trends. The Company then must make long-term investments and commit significant resources before knowing whether its predictions will eventually result in products that achieve market acceptance. After a product is developed, the Company must quickly ramp manufacturing in sufficient volumes at acceptable costs. This is a process that requires accurate forecasting of volumes, mix of products and configurations. Moreover, the supply and timing of a new product or service must match the customers' demand and timing for those particular products or services. Given the wide variety of systems, products and services which the Company offers, the process of planning production and managing inventory levels becomes increasingly difficult. Inventory management has also become increasingly complex as the Company continues to sell a greater mix of products, especially printers and personal computers, through third party distribution channels. Resellers constantly adjust their ordering patterns in response to the Company's, and its competitors', supply into the channel and the timing of their new product introductions and relative feature sets, as well as seasonal fluctuations in end-user demand such as the back-to-school and holiday selling periods. Resellers may increase orders during times of shortages, cancel orders if the channel is filled with currently available products, or delay orders in anticipation of the new products. Any excess supply could result in price reductions and inventory writedowns, which in turn could adversely affect the Company's gross margins. The short life cycles of many of the Company's products pose a challenge for the effective management of the transition from existing products to new products and could adversely affect the Company's future operating results. Product development or manufacturing delays, variations in product costs, and delays in customer purchases of existing products in anticipation of new product introductions are among the factors that make a smooth transition from current products to new products difficult. In addition, the timing of competitors' introductions of new products and services may negatively affect the future operating results of the Company, especially when these introductions coincide with periods leading up to the Company's own introduction of new or enhanced products. Furthermore, some of the Company's own new products replace or compete with others of the Company's current products. 8 Portions of the Company's manufacturing operations are dependent on the ability of suppliers to deliver components, subassemblies and completed products in time to meet critical manufacturing and distribution schedules. The Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts. Such constraints, if persistent, may adversely affect the Company's operating results until alternate sourcing could be developed. In order to secure components for production and introduction of new products, the Company frequently makes advanced payments to certain suppliers, and often enters into noncancelable purchase commitments with vendors for such components. Volatility in the prices of these component parts, the possible inability of the Company to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect the Company's future operating results. The Company continues to expand into third-party distribution channels to accomodate changing customer preferences. As a result, the financial health of these resellers, and the Company's continuing relationships with them, become more important to the Company's success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. The Company's financial results could be adversely affected if the financial condition of these resellers substantially weakens or the Company's relationship with such resellers deteriorates. Sales outside the United States make up more than half of the Company's revenues. In addition, a portion of the Company's product and component manufacturing, along with key suppliers, are located outside the United States. Accordingly, the Company's future results could be adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, the overlap of different tax structures, unexpected changes in regulatory requirements and natural disasters. As a matter of course, the Company frequently engages in discussions with a variety of parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Although the consummation of any transaction is unlikely to have a material effect on the Company's results as a whole, the implementation or integration of the transaction may contribute to the Company's results differing from the investment community's expectation in a given quarter. Divestitures may result in the cancellation of orders and charges to earnings. Acquisitions and strategic alliances may require, among other things, integration or coordination with a different company culture, management team organization, and business infrastructure. They may also require the development, manufacture and marketing of product offerings with the Company's products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of the transaction, successful integration or implementation depends on a variety of factors, including the hiring and retention or coordination of key employees, management of geographically separate facilities, and the integration or coordination of different research and development and product manufacturing facilities. All of these efforts require varying levels of management resources, which may temporarily adversely impact other business operations. 9 A portion of the Company's research and development activities, its corporate headquarters, other critical business operations and certain of its suppliers are located near major earthquake faults. The ultimate impact on the Company, its significant suppliers and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. The Company is predominately self-insured for losses and interruptions caused by earthquakes. Operations of the Company involve the use of substances regulated under various federal, state and international laws governing the environment. It is the Company's policy to apply strict standards for environmental protection to sites inside and outside the U.S., even if not subject to regulations imposed by local governments. The liability for environmental remediation and related costs is accrued when it is considered probable and the costs can be reasonably estimated. Environmental costs are presently not material to the Company's operations or financial position. Although the Company believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. The Company's stock price, like that of other technology companies, is subject to significant volatility. The announcement of new products, services or technological innovations by the Company or its competitors, quarterly variations in the Company's results of operations, changes in revenue or earnings estimates by the investment community and speculation in the press or investment community are among the factors affecting the Company's stock price. In addition, the stock price may be affected by general market conditions and domestic and international macroeconomic factors unrelated to the Company's performance. Because of the foregoing reasons, recent trends should not be considered reliable indicators of future stock prices or financial results. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open(R) Company Limited. X/Open is a registered trademark, and the X device is a trademark of X/Open Company Ltd. in the U.K. and other countries. 10 PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on February 25, 1997. (b) At the Annual Meeting, shareholders voted on three matters: the election of directors, the adoption of the Company's 1997 Director Stock Plan and the appointment of Price Waterhouse LLP as the Company's independent accountants. The shareholders elected all members of the management slate in an uncontested election and approved the adoption of the 1997 Director Stock Plan and the appointment of independent accountants, by the following votes, respectively. Directors --------- Votes Withheld/ Director Votes For Abstentions -------- --------- --------------- Thomas E. Everhart 839,973,588 6,957,640 John B. Fery 840,037,495 6,893,733 Jean-Paul G. Gimon 840,129,551 6,801,677 Sam Ginn 840,150,525 6,780,703 Richard A. Hackborn 840,189,980 6,741,248 Walter B. Hewlett 840,143,171 6,788,057 George A. Keyworth II 840,183,091 6,748,137 David M. Lawrence, M.D. 840,058,118 6,873,110 Paul F. Miller, Jr. 840,137,583 6,793,645 Susan P. Orr 840,158,608 6,772,620 David W. Packard 840,060,904 6,870,324 Lewis E. Platt 840,185,891 6,745,337 Robert P. Wayman 840,167,232 6,763,996 Adoption of 1997 Director Stock Plan ------------------------------------ Votes Withheld/ Votes For Votes Against Abstentions --------- ------------- --------------- 827,400,859 12,464,458 7,065,911 Accountants ----------- Votes Withheld/ Votes For Votes Against Abstentions --------- ------------- --------------- 843,735,489 1,302,557 1,893,182 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: A list of exhibits is set forth in the Exhibit Index found on page 13 of this report. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended January 31, 1997. 11 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES SIGNATURE --------- 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. HEWLETT-PACKARD COMPANY (Registrant) Dated: March 14, 1997 By: ROBERT P. WAYMAN -------------------- Robert P. Wayman Executive Vice President, Finance and Administration (Chief Financial Officer) 12 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX ------------- Exhibits: 1. Not applicable. 2. None. 3. Amended By-Laws 4. None. 5-9. Not applicable. 10-11. None. 12-14. Not applicable. 15. None. 16-17. Not applicable. 18-19. None. 20-21. Not applicable. 22-24. None. 25-26. Not applicable. 27. Financial Data Schedule. 28. Not applicable. 99. Hewlett-Packard Company 1997 Director Stock Plan, which exhibit is incorporated herein by reference to Form S-8 filing made on March 7, 1997. 13 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>ARTICLE 5 FDS FOR 1ST QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1996 <PERIOD-END> JAN-31-1997 <CASH> 2,789 <SECURITIES> 70 <RECEIVABLES> 6,841 <ALLOWANCES> 0 <INVENTORY> 6,232 <CURRENT-ASSETS> 17,186 <PP&E> 10,465 <DEPRECIATION> 4,831 <TOTAL-ASSETS> 27,156 <CURRENT-LIABILITIES> 9,398 <BONDS> 2,584 <COMMON> 1,020 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 13,092 <TOTAL-LIABILITY-AND-EQUITY> 27,156 <SALES> 8,825 <TOTAL-REVENUES> 10,295 <CGS> 0 <TOTAL-COSTS> 6,694 <OTHER-EXPENSES> 699 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 54 <INCOME-PRETAX> 1,303 <INCOME-TAX> 391 <INCOME-CONTINUING> 912 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 912 <EPS-PRIMARY> .87 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

HRB

https://www.sec.gov/Archives/edgar/data/12659/0000950137-97-001044.txt

-----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, RuYBkWWRpseIDKPx3+vEFXZxTYtENDgu3GVE0S00I8xP7iByVJCCZkm1Mikf1rNK pWCq0zBzqR8gGQlqV5E2SQ== <SEC-DOCUMENT>0000950137-97-001044.txt : 19970318 <SEC-HEADER>0000950137-97-001044.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950137-97-001044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970317 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: H&R BLOCK INC CENTRAL INDEX KEY: 0000012659 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 440607856 STATE OF INCORPORATION: MO FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06089 FILM NUMBER: 97557980 BUSINESS ADDRESS: STREET 1: 4410 MAIN ST CITY: KANSAS CITY STATE: MO ZIP: 64111 BUSINESS PHONE: 8167536900 MAIL ADDRESS: STREET 1: 4410 MAIN STREET CITY: KANSAS CITY STATE: MO ZIP: 64111 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> 1 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 JANUARY 31, 1997 [ ] 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 1-6089 H&R BLOCK, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 44-0607856 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4400 MAIN STREET KANSAS CITY, MISSOURI 64111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (816) 753-6900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 ----- ---- The number of shares outstanding of the registrant's Common Stock, without par value, at March 7, 1997 was 104,042,145 shares. <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> PART I Financial Information Consolidated Balance Sheets January 31, 1997 (Unaudited) and April 30, 1996 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Operations Three Months Ended January 31, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . 2 Nine Months Ended January 31, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows Nine Months Ended January 31, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . 5 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 8 PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 </TABLE> <PAGE> 3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS <TABLE> <CAPTION> JANUARY 31, APRIL 30, 1997 1996 ---- ---- ASSETS (UNAUDITED) (AUDITED) <S> <C> <C> CURRENT ASSETS Cash (including certificates of deposit of $444 and $22,093) $ 199,539 $ 339,055 Marketable securities 70,382 389,557 Receivables, less allowance for doubtful accounts of $15,058 and $7,848 680,087 333,734 Prepaids and other current assets 97,733 59,912 ------------- ------------ TOTAL CURRENT ASSETS 1,047,741 1,122,258 INVESTMENTS AND OTHER ASSETS Investments in marketable securities 31,759 17,081 Excess of cost over fair value of net tangible assets acquired, net of amortization 89,960 61,141 Deferred subscriber acquisition costs, net of amortization 46,127 96,636 Other 70,209 59,201 ------------- ------------ 238,055 234,059 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 433,016 399,574 ------------- ------------ $ 1,718,812 $ 1,755,891 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 461,020 $ 72,651 Accounts payable, accrued expenses and deposits 175,107 201,320 Accrued salaries, wages and payroll taxes 51,976 109,870 Accrued taxes on earnings - 94,406 ------------- ------------ TOTAL CURRENT LIABILITIES 688,103 478,247 DEFERRED INCOME TAXES 31,924 46,700 OTHER NONCURRENT LIABILITIES 42,302 38,222 MINORITY INTEREST 132,884 153,129 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Convertible preferred stock, no par, stated value $.01 per share 4 4 Additional paid-in capital 502,436 504,694 Retained earnings 509,191 747,212 ------------- ------------ 1,012,720 1,252,999 Less cost of 4,924,855 and 5,556,097 shares of common stock in treasury 189,121 213,406 ------------- ------------ 823,599 1,039,593 ------------- ------------ $ 1,718,812 $ 1,755,891 ============= ============ </TABLE> See Notes to Consolidated Financial Statements -1- <PAGE> 4 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS <TABLE> <CAPTION> THREE MONTHS ENDED ------------------ JANUARY 31, ----------- 1997 1996 ---- ---- <S> <C> <C> REVENUES Service revenues $ 346,233 $ 296,060 Franchise royalties 10,279 9,068 Other income 6,552 6,717 ------------- ------------- 363,064 311,845 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 120,245 105,124 Occupancy and equipment 145,408 98,738 Marketing and advertising 36,485 21,151 Supplies, freight and postage 21,458 29,812 Other 86,561 66,129 ------------- ------------- 410,157 320,954 ------------- ------------- Operating loss (47,093) (9,109) OTHER INCOME Investment income, net 3,008 227 ------------- ------------- Loss before income taxes and minority interest (44,085) (8,882) Income tax benefit (15,930) (3,411) ------------- ------------- Net loss before minority interest (28,155) (5,471) Minority interest in consolidated subsidiary (2,829) - ------------- ------------- Net loss $ (25,326) $ (5,471) ============= ============= Weighted average number of common shares outstanding 104,041 103,361 ============= ============= Net loss per share $ (.24) $ (.05) ============= ============= Dividends per share $ .20 $ .32 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -2- <PAGE> 5 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS <TABLE> <CAPTION> NINE MONTHS ENDED ----------------- JANUARY 31, ----------- 1997 1996 ---- ---- <S> <C> <C> REVENUES Service revenues $ 817,763 $ 711,871 Franchise royalties 16,486 14,045 Other income 9,523 8,337 ------------- ------------- 843,772 734,253 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 260,973 221,551 Occupancy and equipment 403,691 269,976 Marketing and advertising 156,704 41,300 Supplies, freight and postage 43,017 62,954 Other 268,774 172,187 ------------- ------------- 1,133,159 767,968 ------------- ------------- Operating loss (289,387) (33,715) OTHER INCOME Investment income, net 14,746 7,401 Other, net - 12,445 ------------- ------------- 14,746 19,846 ------------- ------------- Loss before income taxes and minority interest (274,641) (13,869) Income tax benefit (102,716) (5,326) ------------- ------------- Net loss before minority interest (171,925) (8,543) Minority interest in consolidated subsidiary (20,245) - ------------- ------------- Net loss $ (151,680) $ (8,543) ============= ============= Weighted average number of common shares outstanding 103,960 104,069 ============= ============= Net loss per share $ (1.46) $ (.08) ============= ============= Dividends per share $ .84 $ .9525 ============= ============= </TABLE> See Notes to Consolidated Financial Statements. -3- <PAGE> 6 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED, AMOUNTS IN THOUSANDS <TABLE> <CAPTION> NINE MONTHS ENDED ----------------- JANUARY 31, ----------- 1997 1996 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (151,680) $ (8,543) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 110,628 74,528 Amortization of deferred subscriber acquisition costs 104,276 9,267 Gain on sale of subsidiary - (12,445) Deferred subscriber acquisition costs (53,767) (74,876) Provision for deferred taxes on earnings (11,152) 34,258 Other noncurrent liabilities 4,080 4,318 Minority interest (20,245) - Changes in: Receivables (346,353) (90,460) Prepaid expenses (41,445) (30,384) Accounts payable, accrued expenses and deposits (27,257) 14,597 Accrued salaries, wages and payroll taxes (57,894) (27,229) Accrued taxes on earnings (94,622) (97,867) ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (585,431) (204,836) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (171,763) (356,855) Maturities of marketable securities 476,711 676,895 Purchases of property and equipment (129,884) (180,829) Excess of cost over fair value of net tangible assets acquired, net of cash acquired (19,524) (11,264) Proceeds from sale of subsidiary - 35,000 Other, net (13,635) (22,158) ------------- ------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 141,905 140,789 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of notes payable (3,147,413) (1,452,392) Proceeds from issuance of notes payable 3,535,782 1,647,510 Dividends paid (87,180) (99,813) Payments to acquire treasury shares - (71,897) Proceeds from stock options exercised 2,821 11,072 ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 304,010 34,480 ------------- ------------- NET DECREASE IN CASH (139,516) (29,567) CASH AT BEGINNING OF PERIOD 339,055 90,248 ------------- ------------- CASH AT END OF PERIOD $ 199,539 $ 60,681 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income taxes paid $ 18,695 $ 58,281 Interest paid 6,989 2,898 </TABLE> See Notes to Consolidated Financial Statements. -4- <PAGE> 7 H&R BLOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited, dollars in thousands, except share data 1. The Consolidated Balance Sheet as of January 31, 1997, the Consolidated Statements of Operations for the three and nine months ended January 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for the nine months ended January 31, 1997 and 1996 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 1997 and for all periods presented have been made. Prior year amounts have been reclassified to conform to current year presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A, Amendment Number 1, for the fiscal year ended April 30, 1996. Operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Thus, the nine month results are not indicative of results to be expected for the year. 2. Other expenses for the nine months ended January 31, 1997 include charges totaling $25,563 recorded by the Computer Services segment. The second quarter includes a charge of $7,850 due to the withdrawal of the WOW! online service from the marketplace as of January 31, 1997. The first quarter includes a charge of $17,713 due to the potential sale or other disposition of certain assets and business operations of a corporate computer software group; the consolidation of certain U.S.-based staff functions and office facilities; the renegotiation of certain third-party customer service agreements; and the write-off of certain obsolete software costs for billing and customer service systems. 3. In October 1996, the Computer Services segment changed its rate of amortization of deferred subscriber acquisition costs to more closely correlate with recent trends in subscriber retention rates and member net revenues. The new rate of amortization is 50% in the first three months, 30% in the next nine months, and 20% in the subsequent year, compared to the previous policy of 60% in the first 12 months and 40% in the subsequent year. In conjunction with this change in amortization rates, the Computer Services segment accelerated amortization of previously deferred CompuServe Interactive Service subscriber acquisition costs of $34,500 in the second quarter. Additionally, all previously deferred subscriber acquisition costs for WOW! and SPRYNET, totaling $8,321 and $2,560, respectively, were written off in the second quarter due to the costs to service these high usage, flat-priced services. All future subscriber acquisition costs for SPRYNET will be -5- <PAGE> 8 expensed as incurred. The total $45,381 adjustment of deferred subscriber acquisition costs is included in marketing expenses for the nine months ended January 31, 1997. 4. On July 16, 1996, the Company's Board of Directors approved a plan to spin off the Company's remaining ownership interest of approximately 80.1% in CompuServe Corporation (CompuServe) on or about November 1, 1996. The spin-off was subject to, among other things, shareholder approval at the Company's annual meeting on September 11, 1996 and a favorable ruling from the Internal Revenue Service as to the tax-free nature of the distribution. On August 28, 1996, the Company's Board of Directors decided not to present the proposed spin-off to shareholders at the September 1996 annual meeting. This decision was based, in part, on CompuServe's reported first quarter and projected second quarter losses, market uncertainties related to the online industry and the planned September introduction of new interfaces for CompuServe Interactive Service and WOW! 5. During the nine months ended January 31, 1997, the net unrealized holding gain on available-for-sale securities increased $235 to $1,404. 6. The Company files its Federal and state income tax returns on a calendar year basis. The Consolidated Statements of Operations reflect the effective tax rates expected to be applicable for the respective full fiscal years. 7. Net loss per common share is based on the weighted average number of shares outstanding during each period. The weighted average shares outstanding for the nine months ended January 31, 1997 declined to 103,960,000 from 104,069,000 last year, due to repurchase of outstanding shares, principally in the second quarter of the prior fiscal year, partially offset by the issuance of treasury shares for stock option exercises and a franchise acquisition this fiscal year. 8. During the nine months ended January 31, 1997 and 1996, the Company issued 69,511 and 318,108 shares, respectively, pursuant to provisions for exercise of stock options under its stock option plans. During the nine months ended January 31, 1996, the Company reacquired 1,833,200 shares of its common stock at an aggregate cost of $71,897. 9. In June 1996, a purported shareholder class action complaint was filed against CompuServe and the Company in the Court of Common Pleas, Franklin County, Ohio, entitled Greenfield v. CompuServe Corporation et al. A second purported shareholder class action suit was filed in July 1996 against CompuServe and the Company in the United States District Court for the Southern District of Ohio, entitled Romine v. CompuServe Corporation, et al. A third purported shareholder class action suit was filed in August 1996 against CompuServe, the Company and the lead underwriters in CompuServe's initial public offering of its common stock in April 1996 (the IPO) in United States District Court for the District of Minnesota, entitled Acker v. CompuServe Corporation, et al, but the plaintiffs later voluntarily dismissed this suit and joined the plaintiffs in the Romine suit. The complaints in the Greenfield and Romine cases also name certain officers and directors of CompuServe at the time of the IPO -6- <PAGE> 9 as additional defendants. Each suit alleges similar violations of the Securities Act of 1933 based on assertions of omissions and misstatements of fact in connection with CompuServe's public filings related to the IPO. The Greenfield suit also alleges similar violations of the Ohio Securities Code and common law of negligent misrepresentation. Relief sought is unspecified but includes pleas for rescission and damages. In August 1996, an action for discovery was filed solely against CompuServe on behalf of a shareholder in the Court of Common Pleas, Franklin County, Ohio, in a matter entitled Schnipper v. CompuServe Corporation, seeking factual support for a possible additional claim relating to disclosures in connection with the IPO. The defendants are vigorously defending these suits. -7- <PAGE> 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION These comments should be read in conjunction with the Consolidated Balance Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4, respectively. Working capital decreased from $644.0 million at April 30, 1996 to $359.6 million at January 31, 1997. The working capital ratio at January 31, 1997 is 1.52 to 1, compared to 2.3 to 1 at April 30, 1996. The decrease in working capital and working capital ratio must be viewed in the context of the Company's business which is seasonal, with peak activity in the fourth quarter, due to the nature of the Company's Tax Services segment. Tax return preparation occurs almost entirely in the fourth quarter and has the effect of increasing certain assets and liabilities during this time. The Company has no long-term debt. However, the Company maintains seasonal lines of credit to support short-term borrowing facilities in the United States and Canada. During the months of January through April, the Company's Canadian Tax Services regularly incurs short-term borrowings to purchase refunds due its clients. Block Financial Corporation (BFC), a wholly-owned subsidiary of the Company, incurs short-term borrowings throughout the year to fund receivables associated with its credit card, home equity loan and other financial service programs. During January through April this year, BFC will use short-term borrowings to purchase a participating interest of 40 percent in certain Refund Anticipation Loans (RALs) through a ten-year agreement with Beneficial National Bank. RALs are loans that are expected to be retired by income tax refunds. In December 1996, BFC obtained a $1.25 billion back-up credit facility to support their various financial activities over the next twelve months; however, this facility will reduce to a $400 million year-round credit facility on April 30, 1997. CompuServe Corporation (CompuServe), a majority-owned subsidiary of the Company, maintains a $25 million line of credit to fulfill short-term cash requirements. This facility expires in June 1997, subject to renewal. The Company's capital expenditures and dividend payments during the first nine months were funded through internally-generated funds, the proceeds from CompuServe's initial public offering of its common stock in April 1996 and, to a lesser extent, short-term borrowing. The Company obtained a $50 million credit facility to support seasonal working capital needs from December 1996 through February 1997. At January 31, 1997, short-term borrowings used to fund credit card loans, home equity loans, other programs and operations totaled $461.0 million, compared to $72.7 million at April 30, 1996. -8- <PAGE> 11 On July 16, 1996, the Company's Board of Directors approved a plan to spin off the Company's remaining ownership interest of approximately 80.1% in CompuServe on or about November 1, 1996. The spin-off was subject to, among other things, shareholder approval at the Company's annual meeting on September 11, 1996 and a favorable ruling from the Internal Revenue Service as to the tax-free nature of the distribution. In the first quarter, CompuServe incurred a nonrecurring pretax charge of $17.7 million relating to the potential sale or other disposition of certain assets and business operations of a corporate computer software group; the consolidation of U.S.-based staff functions and office facilities; the renegotiation of certain third-party customer service agreements; and the write-off of certain obsolete software costs for billing and customer service systems. On August 28, 1996, the Company's Board of Directors announced its decision not to present the proposed spin-off to shareholders at the September 1996 annual meeting. This decision was based, in part, on CompuServe's reported first quarter and projected second quarter losses, market uncertainties related to the online industry and the planned September introduction of new interfaces for CompuServe Interactive Service and WOW! On November 21, 1996, CompuServe announced a shift in its marketing emphasis to build on its leadership in the small-business professional and technical market sectors, and focus on profitable segments in the consumer markets. As a part of this shift, CompuServe withdrew its family-oriented WOW! online service effective January 31, 1997, which resulted in an additional nonrecurring pretax charge of $7.9 million in the second quarter of fiscal 1997. The Company announced in December 1993 its intention to repurchase from time to time up to 10 million of its shares on the open market. In July 1996, the Company announced its intention to repurchase up to 10 million additional shares in the open market over a two-year period following the spin-off of CompuServe. Such authorization is in addition to the 1993 authorization. -9- <PAGE> 12 RESULTS OF OPERATIONS The analysis that follows should be read in conjunction with the table below and the Consolidated Statements of Operations found on pages 2 and 3. Prior year amounts have been reclassified to conform to current year presentation. THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1996 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Computer services $ 210,975 $ 203,032 $ (21,667) $ 22,121 Tax services 123,863 97,581 (27,192) (29,393) Financial services 32,590 12,750 7,795 2,112 Unallocated corporate 183 483 (3,678) (3,949) Corporate investment income - - 657 227 Intersegment sales (4,547) (2,001) - - ------------- ------------- ------------- ------------- $ 363,064 $ 311,845 (44,085) (8,882) ============= ============= Income tax benefit (15,930) (3,411) ------------- ------------- Net loss before minority interest (28,155) (5,471) Minority interest (2,829) - ------------- ------------- Net loss $ (25,326) $ (5,471) ============= ============= </TABLE> Consolidated revenues for the three months ended January 31, 1997 increased 16.4% to $363.064 million from $311.845 million reported last year. The increase is primarily due to greater revenues reported by the Tax Services and Financial Services segments. The consolidated pretax loss before minority interest for the third quarter of fiscal 1997 increased to $44.085 million from $8.882 million in the third quarter of last year. The increase in the third quarter loss is attributable to the Computer Services segment, which incurred a pretax loss of $21.667 million compared to pretax earnings of $22.121 million in the third quarter of last year. The net loss was $25.326 million, or $.24 per share, compared to $5.471 million, or $.05 per share, for the same period last year. An analysis of operations by segment follows. -10- <PAGE> 13 COMPUTER SERVICES Revenues increased 3.9% to $210.975 million from $203.032 million in the comparable period last year, due to increases in Network Services revenues. Network Services revenues of $65.239 million were 27.4% better than last year due to an increase in the number of network customers and increased usage by existing customers. The number of network customers increased 24% over last year to 1,151. Commercial customer hours increased to 14.160 million hours this quarter from 10.873 million in last year's comparable quarter. Interactive Services revenues of $138.506 million declined 2.1% compared to last year as a result of a relatively flat membership base coupled with a decline in usage. The number of CompuServe Interactive Service (CSi) subscribers at January 31, 1997, exclusive of the Japanese licensee, decreased 3.2% to 2.892 million from 2.989 million last year. Average monthly CSi total revenue per subscriber decreased 9.8% to $15.22 for the quarter ended January 31, 1997, compared to $16.88 for last year's third quarter. This decrease is primarily due to decreased usage by the membership base. Average monthly CSi total revenue per subscriber includes revenues from fees, usage, product sales, online advertising, mall, magazine and CD-ROM subscriptions. Operating expenses increased 26.5% to $234.987 million from $185.785 million last year. Over half of the increase is attributable to a $30.419 million increase in costs directly associated with service revenues this quarter compared to last year. The increase is primarily a result of increased network hours, higher outsourced customer service costs and the write-off of obsolete equipment. Online subscriber hours, including CSi and SPRYNET, increased 11.6% to 37.808 million hours for the third quarter of fiscal 1997 from 33.874 million hours in the comparable period last year. Depreciation and amortization increased 52.7% to $29.363 million as a result of increased capital expenditures to double network capacity to support the rapid growth during the past year. The pretax loss was $21.667 million, compared to pretax earnings of $22.121 million in the third quarter of fiscal 1997. TAX SERVICES Revenues increased 26.9% to $123.863 million from $97.581 million last year, due to an increase in the number of tax returns prepared and an increase in the average charge which is a continuation of a pricing strategy adopted last fiscal year. During the first month of the U.S. tax season, returns prepared by company-owned offices increased 21.7% to 1.2 million compared with the previous January. The number of electronically filed returns prepared by company-owned offices increased 29.2% to 946 thousand in January. However, the number of returns filed electronically in company-owned offices for taxpayers who prepare their own returns remained consistent with the prior year. The significant increase in revenues and number of returns prepared and electronically filed is partially due to favorable weather conditions this year. Last year, severe weather in January led to the late distribution of W-2s throughout much of the eastern part of the country, shifting some amount of tax preparation into early February. The pretax loss decreased 7.5% to $27.192 million from $29.393 million in the third quarter of last year, benefiting from the investments that began last May of adding approximately 250 new -11- <PAGE> 14 offices, significantly improving technology, enhancing the Premium business and favorable weather conditions this year. FINANCIAL SERVICES Revenues increased 155.6% to $32.590 million from $12.750 million in the same period last year. This increase is mainly attributed to participation in the RAL program and mortgage loan operations, including a gain recognized on the securitization of home equity loans. In the third quarter of fiscal 1997, the Financial Services segment began participating in the RALs offered through Beneficial National Bank by purchasing a 40% interest in such RALs, generating revenues of $10.719 million. The Financial Services segment also completed its first securitization of home equity loans, recording a $3 million gain on a $102 million asset backed security issue that closed on January 30, 1997. Additionally, revenues from credit cards and software sales increased 28.1% and 40.6%, respectively, compared to last year. The pretax earnings increased to $7.795 million from $2.112 million in the third quarter of fiscal 1996, primarily due to participation in the RAL program and the $3 million gain on the securitization. INVESTMENT INCOME Net corporate investment income increased 189.4% to $657 thousand from $227 thousand last year. The increase resulted from more funds available for investment, partially offset by lower short-term interest rates in fiscal 1997. CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss for the third quarter decreased 6.9% to $3.678 million from $3.949 million in the comparable period last year. The decrease resulted from lower professional fees partially offset by increased charitable contributions. -12- <PAGE> 15 THREE MONTHS ENDED JANUARY 31, 1997 (THIRD QUARTER) COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1996 (SECOND QUARTER) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) ------------------------ ------------------------ 3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- <S> <C> <C> <C> <C> Computer services $ 210,975 $ 214,343 $ (21,667) $ (92,115) Tax services 123,863 30,805 (27,192) (41,576) Financial services 32,590 9,984 7,795 (2,090) Unallocated corporate 183 318 (3,678) (3,081) Corporate investment income - - 657 2,263 Intersegment sales (4,547) (2,000) - - ------------- ------------- ------------- ----------- $ 363,064 $ 253,450 (44,085) (136,599) ============= ============= Income tax benefit (15,930) (50,940) ------------- ----------- Net loss before minority interest (28,155) (85,659) Minority interest (2,829) (11,531) ------------- ----------- Net loss $ (25,326) $ (74,128) ============= =========== </TABLE> Consolidated revenues increased 43.2% to $363.064 million from $253.450 million in the second quarter of fiscal 1997. The increase is primarily due to higher revenues generated by the Tax Services segment related to the beginning of the U.S. and Canadian tax filing seasons and higher revenues from the Financial Services segment. The consolidated pretax loss before minority interest decreased 67.7% to $44.085 million from $136.599 million for the three months ended October 31, 1996. The decrease is largely due to the Computer Services segment, which incurred a pretax loss of $21.667 million compared to $92.115 million in the second quarter. The net loss was $25.326 million, or $.24 per share, compared to $74.128 million, or $.71 per share, for the second quarter of fiscal 1997. An analysis of operations by segment follows. -13- <PAGE> 16 COMPUTER SERVICES Revenues decreased 1.6% to $210.975 million from $214.343 million reported in the second quarter of fiscal 1997. The decrease is due to less revenues generated by the Interactive Services division offset by increases in the Network Services division and other revenues. Interactive Services revenues for the three months ended January 31, 1997 decreased 3.9% to $138.506 million, as compared to the second quarter. Network Services revenues grew 2.6% to $65.239 million due to an increase in number of customers. New commercial customers increased 8.5% to 1,151, adding a record 90 corporate customers in the third quarter. The pretax loss decreased 76.5% to $21.667 million from $92.115 million reported in the second quarter of fiscal 1997. The decrease is largely due to the $7.850 million nonrecurring pretax charge related to the withdrawal of the WOW! online service, the accelerated amortization of previously deferred CompuServe Interactive Service subscriber acquisition costs of $34.500 million and the write-off of previously deferred WOW! and SPRYNET deferred subscriber acquisition costs of $8.321 million and $2.560 million, respectively, in the second quarter. Additionally, cost savings were obtained in the third quarter related to costs directly associated with service revenues and marketing expenses. TAX SERVICES Revenues increased to $123.863 million from $30.805 million in the second quarter of fiscal 1997. The pretax loss decreased 34.6% to $27.192 million from $41.576 million reported for the three months ended October 31, 1996. The improved results are due to the onset of the tax filing season in the United States and Canada. FINANCIAL SERVICES Revenues increased 226.4% to $32.590 million from $9.984 million for the three months ended October 31, 1996. The increase in revenues is associated with participation in the RAL program, mortgage loan operations and growth in software sales. In the third quarter of fiscal 1997, the Financial Services segment began participating in the RALs offered through Beneficial National Bank by purchasing a 40% interest in such RALs, generating revenues of $10.719 million. Mortgage operations revenues increased 261.1% to $4.832 million from $1.338 million for the three months ended October 31, 1996, including a gain of $3 million on the first securitization of home equity loans. The increase in software sales is from sales of TaxCut(R) software. Tax preparation software sales are highly seasonal, and normally peak in the third and fourth quarters of the fiscal year concurrent with the tax filing season. The pretax earnings of $7.795 million increased from the pretax loss of $2.090 million for the second quarter of fiscal 1997, due to greater revenues related to the beginning of the tax season and the $3 million gain on the securitization. INVESTMENT INCOME Net corporate investment income decreased 71.0% to $657 thousand from $2.263 million earned for the three months ended October 31, 1996, due to lower funds available for investment because of the additional resources required to fund operations during the Tax Services segment's off-season. -14- <PAGE> 17 CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss increased 19.4% to $3.678 million from $3.081 million in the second quarter of fiscal 1997, resulting from increased employee costs and charitable contributions, partially offset by decreased shareholder-related expenses. NINE MONTHS ENDED JANUARY 31, 1997 (FYTD) COMPARED TO NINE MONTHS ENDED JANUARY 31, 1996 (FYTD) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Computer services $ 633,960 $ 577,955 $ (161,852) $ 88,323 Tax services 166,950 135,139 (113,997) (104,963) Financial services 50,798 25,857 4,683 4,092 Unallocated corporate 610 1,313 (10,338) (8,722) Corporate investment income - - 6,863 7,401 Intersegment sales (8,546) (6,011) - - ------------- ------------- ------------ ------------ $ 843,772 $ 734,253 (274,641) (13,869) ============= ============= Income tax benefit (102,716) (5,326) ------------ ------------ Net loss before minority interest (171,925) (8,543) Minority interest (20,245) - ------------ ------------ Net loss $ (151,680) $ (8,543) ============ ============ </TABLE> Consolidated revenues for the nine months ended January 31, 1997 increased 14.9% to $843.772 million from $734.253 million reported last year. The increase is principally due to greater revenues reported by all operating segments. The consolidated pretax loss before minority interest increased to $274.641 million from $13.869 million in the comparable period last year. The increased loss is largely due to the Computer Services segment which incurred a pretax loss of $161.852 million compared to pretax earnings of $88.323 million in the prior year. The net loss was $151.680 million, or $1.46 per share, compared to $8.543 million, or $.08 per share, for the comparable period last year. An analysis of operations by segment follows. -15- <PAGE> 18 COMPUTER SERVICES Revenues increased 9.7% to $633.960 million from $577.955 million last year due to increases in both Interactive Services and Network Services revenues. Network Services revenues of $188.124 million were 30.7% better than last year, due to increasing usage and new customers. The number of network customers increased 24.0% over last year to 1,151. Commercial customer hours increased to 41.617 million from 30.620 million at January 31, 1996. Interactive Services revenues of $424.013 million were 3.8% better than last year. The growth is due to an increase in customers, offset by a pricing structure change introduced in September 1995. The number of CSi and SPRYNET subscribers at January 31, 1997, exclusive of the Japanese licensee, increased 2.4% to 3.162 million from 3.088 million last year. Operating expenses increased 63.6% to $803.668 million from $491.368 million last year. Costs directly associated with service revenues increased $143.035 million, or 51.3%, as a result of increased network hours and higher outsourced customer service costs. Online subscriber hours, including CSi and SPRYNET, increased 42.6% to 113.049 million hours for the nine months ended January 31, 1997, from 79.267 million hours last year. Marketing expenses for the nine months increased $106.298 million over last year primarily due to accelerated amortization of previously deferred CSi subscriber acquisition costs of $34.500 million, the write-off of previously deferred WOW! and SPRYNET subscriber acquisition costs of $8.321 million and $2.560 million, respectively, and the scheduled amortization of deferred subscriber acquisition costs. The first nine months of the year also include nonrecurring charges totaling $25.563 million before taxes. A nonrecurring pretax charge of $17.713 million was recorded in the first quarter related to the potential sale or other disposition of certain assets and business operations of a corporate computer software group; the consolidation of certain U.S.-based staff functions and office facilities; the renegotiation of certain third-party customer service agreements; and the write-off of certain obsolete software costs for billing and customer service systems. The second quarter of fiscal 1997 includes a nonrecurring pretax charge of $7.850 million related to the withdrawal of the WOW! online service from the marketplace as of January 31, 1997. The pretax loss was $161.852 million, compared to pretax earnings of $88.323 million last year. TAX SERVICES Revenues increased 23.5% to $166.950 million from $135.139 million last year, due to an increase in the number of tax returns prepared and an increase in the average charge which is a continuation of a pricing strategy adopted last fiscal year. The significant increase in revenues and number of returns prepared and electronically filed is partially due to favorable weather conditions this year. Last year, severe weather in January led to the late distribution of W-2s throughout much of the eastern part of the country, shifting some amount of tax preparation to early February. The pretax loss increased 8.6% to $113.997 million from $104.963 million last year, due to first-time expenses in operating acquired franchises and competitors, investment in field management and existing offices, and normal inflationary and volume-related increases in expenses. The -16- <PAGE> 19 expense increases were partially offset by improved revenues due in part to favorable weather conditions this year. FINANCIAL SERVICES Revenues increased 96.5% to $50.798 million from $25.857 million last year due to participation in the RAL program and mortgage loan operations, including a gain recognized on the securitization of home equity loans. In the third quarter of fiscal 1997, the Financial Services segment began participating in the RALs offered through Beneficial National Bank by purchasing a 40% interest in such RALs, generating revenues of $10.719 million. The Financial Services segment also completed its first securitization of home equity loans, recording a $3 million gain on a $102 million asset backed security issue that closed on January 30, 1997. Additionally, revenues from credit cards increased 24.1% to $22.624 million compared to last year. Pretax earnings increased 14.4% to $4.683 from $4.092 million for the comparable prior year period. Last year's results included a gain on the sale of MECA Software, Inc. of $12.445 million, partially offset by a write-down of impaired assets associated with the tax preparation software business of $8.389 million, resulting in pretax earnings of $36 thousand exclusive of these items. Pretax results increased by $4.647 million, exclusive of these items, due to participation in the RAL program and the $3 million gain on the securitization. INVESTMENT INCOME Net corporate investment income decreased 7.3% to $6.863 million from $7.401 million last year. The decrease resulted from lower short-term interest rates in fiscal 1997. CORPORATE AND ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss increased 18.5% to $10.338 million from $8.722 million last year, due to increased charitable contributions and expenses of $795 thousand associated with the planned spin-off of the Company's remaining investment in CompuServe (see discussion under the Financial Condition section of the Management's Discussion and Analysis). Increases in expenses were partially offset by lower professional fees. -17- <PAGE> 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The lawsuits discussed herein were reported in the Forms 10-Q for the first and second quarters of fiscal year 1997. In June 1996, a purported shareholder class action complaint was filed against CompuServe Corporation (CompuServe) and the registrant in the Court of Common Pleas, Franklin County, Ohio, in a case entitled Greenfield v. CompuServe Corporation, et al. A second purported shareholder class action suit was filed in July 1996 against CompuServe and the registrant in the United States District Court for the Southern District of Ohio in a case entitled Romine v. CompuServe Corporation, et al. A third purported shareholder class action suit was filed in August 1996 against CompuServe, the registrant and the lead underwriters in CompuServe's initial public offering of its common stock in April 1996 (the IPO) in the United States District Court for the District of Minnesota in a case entitled Acker v. CompuServe Corporation, et al., but the plaintiffs in such case later voluntarily dismissed the suit and joined the plaintiffs in the Romine suit. The complaints in the Greenfield and Romine cases also name certain officers and directors of CompuServe at the time of the IPO as additional defendants. Each suit alleges similar violations of the Securities Act of 1933 based on assertions of omissions and misstatements of fact in connection with CompuServe's public filings related to the IPO. The Greenfield suit also alleges similar violations of the Ohio Securities Code and common law of negligent misrepresentation. Relief sought is unspecified but includes pleas for rescission and damages. In August 1996, an action for discovery was filed solely against CompuServe on behalf of a shareholder in the Court of Common Pleas, Franklin County, Ohio, in a matter entitled Schnipper v. CompuServe Corporation, seeking factual support for a possible additional claim relating to IPO disclosures. The defendants are vigorously defending these suits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (10)(a) Amendment No. 7 to the H&R Block Deferred Compensation Plan for Executives. (10)(b) Amendment No. 3 to the H&R Block Supplemental Deferred Compensation Plan for Executives. (10)(c) Amendment No. 2 to the H&R Block Deferred Compensation Plan for Directors. (27) Financial Data Schedule. (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the third quarter of fiscal year 1997. -18- <PAGE> 21 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. H&R BLOCK, INC. ------------------------------ (Registrant) DATE 3/13/97 BY /s/ George T. Robson ---------------- ------------------------------ George T. Robson Senior Vice President, Chief Financial Officer and Treasurer DATE 3/13/97 BY /s/ Patrick D. Petrie ---------------- ------------------------------ Patrick D. Petrie Vice President and Corporate Controller -19- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(A) <SEQUENCE>2 <DESCRIPTION>AMEND NO. 7 TO DEFERRED COMPENSATION PLANS <TEXT> <PAGE> 1 EXHIBIT (10)(a) AMENDMENT NO. 7 TO THE H&R BLOCK DEFERRED COMPENSATION PLAN FOR EXECUTIVES H&R BLOCK, INC. (the "Company") adopted the H&R Block Deferred Compensation Plan for Executives (the "Plan") effective as of August 1, 1987. The Company amended said Plan by Amendment No. 1 effective December 15, 1990; by Amendment No. 2 effective January 1, 1990; by Amendment No. 3 effective September 1, 1991; by Amendment No. 4 effective January 1, 1994; by Amendment No. 5 effective May 1, 1994; and by Amendment No. 6 effective August 1, 1995. The Company continues to retain the right to amend the Plan, pursuant to action by the Company's Board of Directors. The Company hereby exercises that right. This Amendment No. 7 is effective as of December 11, 1996. AMENDMENT 1. Section 2.1.22 of the Plan, as previously amended, is further amended (a) by deleting the following phrase "and MECA Software, Inc.,"; (b) by replacing the period at the end of this Section with a semi-colon; and (c) by adding after the semi-colon the following: "provided, however, that as of the close of business on December 31, 1996, CompuServe Incorporated and all of its subsidiaries shall be deemed to be Participating Affiliates only to the extent of existing Accounts established with respect to eligible Executives." 2. Section 3.2 of the Plan, as previously amended, is further amended by replacing the period at the end of the second sentence with a comma, and by adding after the comma the following: "and subject to the provisions of Sections 3.6 and 3.7." 3. Section 3.3 of the Plan, as previously amended, is further amended (a) by deleting the word "or" in between subsections (b) and (c) thereof; (b) by replacing the period at the end of the first sentence with a comma; and (c) by adding after the comma the following: "or (d) the transfer of all benefits to which the Participant is entitled under the Plan to a deferred compensation plan established by or for the benefit of CompuServe Corporation, CompuServe Incorporated and/or any direct or indirect subsidiary of CompuServe Corporation (hereinafter collectively referred to as 'CompuServe')." <PAGE> 2 4. The following Section 3.6 is added to the Plan: "Section 3.6 Participants Employed by CompuServe. As of the close of business on December 31, 1996, those Participants employed by CompuServe ('CompuServe Participants') shall no longer (a) make Permissible Deferral elections for the Plan Years commencing on or after January 1, 1997, or (b) make deferrals from Base Salary or Bonuses pursuant to any outstanding Permissible Deferral elections. During their continuous employment by CompuServe after December 31, 1996, and prior to any transfer of benefits pursuant to Section 3.7, (i) gains and losses shall be posted to the Accounts of CompuServe Participants in accordance with the provisions of Section 4.2, and (ii) vesting for Company Contributions shall continue as set forth in Article 5." 5. The following Section 3.7 is added to the Plan: "Section 3.7 Election by CompuServe Participants Upon a Spin-Off or Other Disposition Not Involving a Change in Control. In the event that the Company transfers, sells, distributes, exchanges or otherwise disposes of the CompuServe Corporation common stock directly or indirectly held by the Company by means of a pro-rata distribution by the Company to its shareholders (the 'Spin-Off') or by any other means, as a result of which the Company thereafter directly or indirectly owns less than fifty percent (50%) of the issued and outstanding common stock of CompuServe Corporation, but a Change in Control of a Participating Subsidiary under Section 1.01-2 of the Trust has not occurred, then each Participant employed by CompuServe on the effective date of such Spin-Off or other disposition shall within thirty (30) days after such effective date elect to either: (a) maintain his or her Account(s) and continue to participate in the Plan as set forth in Section 3.6; or (b) have the Company transfer all of the benefits to which the Participant is entitled under the Plan to a deferred compensation plan established by or for the benefit of CompuServe (the 'CompuServe Plan'), and upon such transfer, release the Company from all liability under the Plan. If the Participant makes no election within said 30-day period, the Participant will be deemed to have elected to maintain his or her Account(s) and to continue to participate in the Plan as set forth in Section 3.6. If a Participant elects to have the Company transfer benefits to the CompuServe Plan, said transfer to the CompuServe Plan shall be 2 <PAGE> 3 completed within 120 days after the effective date of the Spin-Off or other distribution. Upon such transfer, the Participant shall no longer participate in the Plan, and the Company shall have no further liability to the Participant under the Plan. If a Participant elects to have the Company transfer benefits and then terminates employment with CompuServe prior to said transfer, or if the Participant terminates his or her employment with CompuServe during said 30-day period prior to making an election, the benefits to which the Participant is entitled shall be paid pursuant to the provisions of Article 6 of the Plan." 6. Section 11.5 of the Plan shall be amended by adding the following sentence to the end of such Section: "This Section 11.5 shall not be deemed to prohibit a transfer of benefits pursuant to Section 3.7." 7. Except as modified in this Amendment No. 7, the Plan, as previously amended, shall remain in full force and effect, including the Company's right to amend or terminate the Plan as set forth in Article 9 of the Plan. H&R BLOCK, INC. By: /s/ Frank L. Salizzoni -------------------------------------- Its: President and Chief Executive Officer ------------------------------------- 3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(B) <SEQUENCE>3 <DESCRIPTION>AMEND NO. 3 TO DEFERRED COMPENSATION PLAN <TEXT> <PAGE> 1 EXHIBIT (10)(b) AMENDMENT NO. 3 TO THE H&R BLOCK SUPPLEMENTAL DEFERRED COMPENSATION PLAN FOR EXECUTIVES H&R BLOCK, INC. (the "Company") adopted the H&R Block Supplemental Deferred Compensation Plan for Executives (the "Plan") effective as of May 1, 1994. The Company amended said Plan by Amendment No. 1 effective September 7, 1994; and by Amendment No. 2 effective August 1, 1995. The Company continues to retain the right to amend the Plan, pursuant to action by the Company's Board of Directors. The Company hereby exercises that right. This Amendment No. 3 is effective as of December 11, 1996. AMENDMENT 1. Section 2.1.24 of the Plan is amended (a) by deleting the following phrase "MECA Software, Inc.,"; (b) by replacing the period at the end of this Section with a semi-colon; and (c) by adding after the semi-colon the following: "provided, however, that as of the close of business on December 31, 1996, CompuServe Incorporated and all of its subsidiaries shall be deemed to be Participating Affiliates only to the extent of existing Accounts established with respect to eligible Executives." 2. Section 3.2 of the Plan, as previously amended, is further amended by replacing the period at the end of the second sentence with a comma, and by adding after the comma the following: "and subject to the provisions of Sections 3.6 and 3.7." 3. Section 3.3 of the Plan is amended (a) by deleting the word "or" in between subsections (a) and (b) thereof; (b) by replacing the period at the end of the first sentence with a comma; and (c) by adding after the comma the following: "or (c) the transfer of all benefits to which the Participant is entitled under the Plan to a deferred compensation plan established by or for the benefit of CompuServe Corporation, CompuServe Incorporated and/or any direct or indirect subsidiary of CompuServe Corporation (hereinafter collectively referred to as 'CompuServe')." 4. The following Section 3.6 is added to the Plan: "Section 3.6 Participants Employed by CompuServe. As of the close of business on December 31, 1996, those Participants employed by <PAGE> 2 CompuServe ('CompuServe Participants') shall no longer (a) make Permissible Deferral elections for the Plan Years commencing on or after January 1, 1997, or (b) make deferrals from Base Salary or Bonuses pursuant to any outstanding Permissible Deferral elections. During their continuous employment by CompuServe after December 31, 1996, and prior to any transfer of benefits pursuant to Section 3.7, (i) the Accounts of CompuServe Participants shall continued to be valued in accordance with the provisions of Section 4.2, and (ii) vesting for Company Contributions shall continue as set forth in Section 5.2." 5. The following Section 3.7 is added to the Plan: "Section 3.7 Election by CompuServe Participants Upon a Spin-Off or Other Disposition Not Involving a Change in Control. In the event that the Company transfers, sells, distributes, exchanges or otherwise disposes of the CompuServe Corporation common stock directly or indirectly held by the Company by means of a pro-rata distribution by the Company to its shareholders (the 'Spin-Off') or by any other means, as a result of which the Company thereafter directly or indirectly owns less than fifty percent (50%) of the issued and outstanding common stock of CompuServe Corporation, but a Change in Control of a Participating Subsidiary under Section 1.01-2 of the Trust has not occurred, then each Participant employed by CompuServe on the effective date of such Spin-Off or other disposition shall within thirty (30) days after such effective date elect to either: (a) maintain his or her Account(s) and continue to participate in the Plan as set forth in Section 3.6; or (b) have the Company transfer all of the benefits to which the Participant is entitled under the Plan to a deferred compensation plan established by or for the benefit of CompuServe (the 'CompuServe Plan'), and upon such transfer, release the Company from all liability under the Plan. If the Participant makes no election within said 30-day period, the Participant will be deemed to have elected to maintain his or her Account(s) and to continue to participate in the Plan as set forth in Section 3.6. If a Participant elects to have the Company transfer benefits to the CompuServe Plan, said transfer to the CompuServe Plan shall be completed within 120 days after the effective date of the Spin-Off or other distribution. Upon such transfer, the Participant shall no longer participate in the Plan, and the Company shall have no further liability to the Participant under the Plan. If a Participant elects to have the Company 2 <PAGE> 3 transfer benefits and then terminates employment with CompuServe prior to said transfer, or if the Participant terminates his or her employment with CompuServe during said 30-day period prior to making an election, the benefits to which the Participant is entitled shall be paid pursuant to the provisions of Article 6 of the Plan." 6. Section 6.6.2 of the Plan, as previously amended, is further amended by replacing the second paragraph of said Section with the following new paragraph: "The pre-retirement death benefit shall be paid semimonthly for a ten-year period. The Beneficiary may petition the Committee for an alternative method of payment. Earnings on the Account shall continue to be credited during the payment period at an interest rate equal to the rate of one-year United States Treasury notes, said rate to be determined once each Plan Year and to be the rate in effect as of September 30 of the Plan Year immediately prior to the Plan Year to which it applies, as published by Salomon Brothers, Inc., or any successor thereto, or as determined by the Chief Financial Officer of the Company. Commencement of the benefits under this Section 6.6.2 shall begin no later than six (6) months following the death of the Participant notwithstanding any election which the Participant may have made to defer benefits pursuant to Section 6.5." 7. Section 10.5 of the Plan shall be amended by adding the following sentence to the end of such Section: "This Section 10.5 shall not be deemed to prohibit a transfer of benefits pursuant to Section 3.7." 8. Except as modified in this Amendment No. 3, the Plan, as previously amended, shall remain in full force and effect, including the Company's right to amend or terminate the Plan as set forth in Article 9 of the Plan. H&R BLOCK, INC. By: /s/ Frank L. Salizzoni -------------------------------------- Its: President and Chief Executive Officer ------------------------------------- 3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(C) <SEQUENCE>4 <DESCRIPTION>AMEND NO. 2 TO DEFERRED COMPENSATION PLAN <TEXT> <PAGE> 1 EXHIBIT (10)(c) AMENDMENT NO. 2 TO THE H&R BLOCK DEFERRED COMPENSATION PLAN FOR DIRECTORS H&R BLOCK, INC. (the "Company"), adopted the H&R Block Deferred Compensation Plan for Directors (the "Plan") effective as of September 1, 1987. The Company amended said Plan by Amendment No. 1 effective May 1, 1995. The Company continues to retain the right to amend the Plan pursuant to action by the Company's Board of Directors. The Company hereby exercises that right. This Amendment No. 2 is effective as of December 11, 1996. AMENDMENT 1. Section 2.1.15 of the Plan, as previously amended, is further amended by deleting the following phrases: "CompuServe Incorporated," and "and MECA Software, Inc.,". 2. Section 2.1.20 of the Plan is amended by replacing the word "monthly" with "semimonthly". 3. Section 4.2.1 of the Plan, as previously amended, is further amended by replacing the phrase "April 30" in the second sentence of said Section with "September 30". 4. Section 6.1 of the Plan is amended by replacing the phrase "Participant as a Director" in subsection (a) thereof with "Participant's membership on all Boards of Directors of all Participating Affiliates". 5. Section 6.2 of the Plan is replaced with the following new Section 6.2: "Section 6.2. Form of Benefits for Distributions Made for Reasons Other Than Death. 6.2.1. For distributions made for reasons other than the death of the Participant, payments from the Account shall be made in accordance with the Standard Form of Benefit. However, the Participant in the Plan Year prior to payment of benefits may petition the Committee for, and the Committee may approve at such time, one of the following forms of benefit: (a) semimonthly payments over a five (5) year period; or (b) a single distribution. 6.2.2. Except for a single distribution, benefit payments shall be in the <PAGE> 2 form of semimonthly cash installments paid during the applicable payment period (the 'Overall Payment Period'). The amount of each installment payment shall be level during the portion of the Overall Payment Period ending on December 31 of the Plan Year in which benefit payments commence (the 'Initial Payment Period'), during each complete calendar year of the Overall Payment Period thereafter (a 'Calendar Year Payment Period'), and during any remaining period of the Overall Payment Period following the last Calendar Year Payment Period (the 'Remainder Payment Period'), but will vary from one such portion of the Overall Payment Period to the next. 6.2.3. If the Participant elected the fixed rate investment option or the Common Stock crediting rate option, the amount of each level benefit payment for the Initial Payment Period, if any, each Calendar Year Payment Period, and the Remainder Payment Period, if any, shall be calculated using the balance in the Account as of the beginning of the applicable payment period and amortizing such balance over the remaining Overall Payment Period using the applicable interest rate, such that the Account balance at the end of the Overall Payment Period is zero. The applicable interest rate to be used for amortization and reamortization purposes shall be (i) the crediting rate determined in accordance with Section 4.2 if the Participant elected the fixed rate investment option, and (ii) an assumed interest rate of zero percent (0%) per annum if the Participant elected the Common Stock crediting rate option. If the Participant elected the Common Stock crediting rate option, the balance in the Account as of the beginning of each Calendar Year Payment Period and the Remainder Payment Period, if any, shall be the value of such Account as of the first business day of such Calendar Year Payment Period or the Remainder Payment Period, as the case may be. 6.2.4. If the Participant elected the variable rate investment option, (a) the amount of each level payment for the Initial Payment Period, if any, shall be calculated using the balance in the Account as of the beginning of the Initial Payment Period and amortizing such balance over the remaining Overall Payment Period using an assumed interest rate of five percent (5%) per annum; (b) the amount of each level payment for each Calendar Year Payment Period shall be calculated taking the balance in the Account as of November 30 of the calendar year immediately prior to such Calendar Year Payment Period, subtracting the benefit payments made during the portion of such calendar year following November 30, and amortizing the difference over the remaining Overall Payment Period using an assumed interest rate of five percent (5%) per annum; and (c) the amount of each level payment for the Remainder Payment Period, if any, shall be calculated by taking the balance in the Account as of November 30 of the 2 <PAGE> 3 calendar year immediately prior to the Remainder Payment Period, subtracting the benefit payments made during the portion of such calendar year following November 30, and amortizing the difference over the Remainder Payment Period using an assumed interest rate of zero percent (0%) per annum. If the actual crediting rate for the Remainder Payment Period is more than zero percent, the additional gain resulting from the difference shall be paid to the Participant in a single payment within six months after the last day of the Remainder Payment Period. 6.2.5. The Account shall continue to be credited during the Overall Payment Period with gains and losses as provided in Section 4.2. 6.2.6. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, (i) increase or reduce any assumed interest rate set forth in this Section 6.2 and any such assumed interest rate, as so adjusted, shall be effective for calculating level semimonthly installments for Participants whose benefit payments commence after the date of such adjustment, and (ii) change the date set forth in Section 6.2.4 on which the balance in the Participant's Account is to be determined for purposes of calculating the amount of each level payment for each Calendar Year Payment Period and each Remainder Payment Period, and any such revised date shall be effective for calculating level semimonthly installments for the Calendar Year Payment Period or the Remainder Payment Period beginning on or after the effective date of such revision." 6. Section 6.4.1 of the Plan is amended by replacing the third sentence thereof with the following new sentence: "The Account shall be credited from the date of the Participant's death at an interest rate equal to the rate of one-year United States Treasury notes, said rate to be determined once each Plan Year and to be the rate in effect as of September 30 of the Plan Year to which it applies, as published by Salomon Brothers, Inc., or any successor thereto, or as determined by the Chief Financial Officer of the Company." 7. Section 6.4.2 of the Plan is amended by replacing the first two sentences thereof with the following new sentences: "In the event a Participant dies prior to the time benefits commence, the Company shall pay a pre-retirement death benefit to the Participant's Beneficiary equal to the Participant's Account as of the date of the Participant's death, annuitized over a ten-year period at an interest rate equal to the rate of one-year United States Treasury notes in effect as of September 30 of the Plan Year immediately prior to the Plan Year in 3 <PAGE> 4 which payment of the pre-retirement death benefit commences, as published by Salomon Brothers, Inc., or any successor thereto, or as determined by the Chief Financial Officer of the Company. The pre-retirement death benefit shall be paid semimonthly for a ten-year period." 8. Section 9.1 of the Plan is amended by adding the following sentence to the end of said Section: "Notwithstanding anything in this Section 9.1 to the contrary, the Committee may, in its discretion, (i) amend the Plan to increase or reduce any assumed interest rate set forth in Section 6.2, in accordance with the provisions of Section 6.2.6, or (ii) amend the Plan to change the date set forth in Section 6.2.4 on which the balance in the Participant's Account is to be determined for purposes of calculating the amount of each level payment for each Calendar Year Payment Period and each Remainder Payment Period, in accordance with the provisions of Section 6.2.6." 9. Except as modified in this Amendment No. 2, the Plan, as previously amended, shall remain in full force and effect, including the Company's right to amend or terminate the Plan as set forth in Article 9 of the Plan. H&R BLOCK, INC. By: /s/ Frank L. Salizzoni -------------------------------------- Its: President and Chief Executive Officer ------------------------------------- 4 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FDS <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> APR-30-1997 <PERIOD-END> JAN-31-1997 <CASH> 199,539 <SECURITIES> 70,382 <RECEIVABLES> 695,145 <ALLOWANCES> 15,058 <INVENTORY> 0 <CURRENT-ASSETS> 1,047,741 <PP&E> 433,016<F1> <DEPRECIATION> 0 <TOTAL-ASSETS> 1,718,812 <CURRENT-LIABILITIES> 688,103 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 4 <COMMON> 1,089 <OTHER-SE> 822,506 <TOTAL-LIABILITY-AND-EQUITY> 1,718,812 <SALES> 0 <TOTAL-REVENUES> 843,772 <CGS> 0 <TOTAL-COSTS> 1,133,159 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> (289,387) <INCOME-TAX> (102,716) <INCOME-CONTINUING> (151,680) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (151,680) <EPS-PRIMARY> (1.46) <EPS-DILUTED> 0 <FN> <F1>PP&E Balance is net of accumulated depreciation and amortization. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

IKN

https://www.sec.gov/Archives/edgar/data/3370/0000950109-97-001236.txt

-----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, FjuvKKVkse2MDqFrJj7qfOvz2FpalXUSkZsQnGXj0SX9VBLVI1tlM4kfC1A9Oyai 72/bRbcwCyVhP1CwLct5yA== <SEC-DOCUMENT>0000950109-97-001236.txt : 19970222 <SEC-HEADER>0000950109-97-001236.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950109-97-001236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALCO STANDARD CORP CENTRAL INDEX KEY: 0000003370 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 230334400 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05964 FILM NUMBER: 97532640 BUSINESS ADDRESS: STREET 1: P O BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2152968000 MAIL ADDRESS: STREET 1: BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: ALCO CHEMICAL CORP DATE OF NAME CHANGE: 19680218 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One)* [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 1996 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 1-5964 --------------------------- IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 23-0334400 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Box 834, Valley Forge, Pennsylvania 19482 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 296-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) ALCO STANDARD CORPORATION - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- * Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ----- ----- * Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 31, 1997. Common Stock, no par value 134,656,622 shares <PAGE> INDEX IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets--December 31, 1996 and September 30, 1996 Consolidated Statements of Income--Three months ended December 31, 1996 and December 31, 1995 Consolidated Statements of Cash Flows--Three months ended December 31, 1996 and December 31, 1995 Notes to Consolidated Financial Statements-- December 31, 1996 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K SIGNATURES - ---------- <PAGE> PART I. FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> December 31 September 30 ASSETS 1996 1996 - ------ ------------- -------------- <S> <C> <C> Current Assets Cash and cash equivalents $ 61,423 $ 46,056 Accounts receivable, net 587,096 513,378 Finance receivables, net 507,439 435,434 Inventories 433,533 350,774 Prepaid expenses 124,984 80,352 Deferred taxes 90,955 83,161 ------------ ------------- Total current assets 1,805,430 1,509,155 ------------ ------------- Investments and Long-Term Receivables 16,244 48,165 Long-Term Finance Receivables, net 959,014 878,324 Equipment on Operating Leases, net 95,826 95,043 Property and Equipment, at cost 375,737 358,234 Less accumulated depreciation 177,360 169,416 ------------ ------------- 198,377 188,818 ------------ ------------- Other Assets Goodwill 1,169,257 1,087,210 Miscellaneous 133,150 88,679 ------------ ------------- 1,302,407 1,175,889 ------------ ------------- Net Assets of Discontinued Operations 1,489,201 ------------ ------------- $ 4,377,298 $ 5,384,595 ============ ============= </TABLE> See notes to consolidated financial statements. <PAGE> IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> December 31 September 30 LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996 - ------------------------------------ ----------- ----------- <S> <C> <C> Current Liabilities Current portion of long-term debt $ 48,038 $ 62,697 Current portion of long-term debt, finance subsidiaries 373,000 314,000 Notes payable 11,400 186,462 Trade accounts payable 188,213 123,571 Accrued salaries, wages and commissions 67,682 101,632 Deferred revenues 203,389 200,225 Other accrued expenses 252,935 269,400 ----------- ----------- Total current liabilities 1,144,657 1,257,987 ----------- ----------- Long-Term Debt 536,525 721,923 Long-Term Debt, Finance Subsidiaries 928,034 813,026 Deferred Taxes 222,773 191,272 Other Long-Term Liabilities 140,852 144,883 Shareholders' Equity Series BB conversion preferred stock, no par value: 3,877 depositary shares issued and outstanding 290,170 290,170 Common stock, no par value: Authorized 300,000 shares Issued 12/96 - 133,800 shares; 9/96 - 131,930 shares 597,118 1,305,413 Retained earnings 530,076 701,771 Foreign currency translation adjustment (3,380) (25,187) Cost of common shares in treasury: 12/96 - 216 shares; 9/96 - 374 shares (9,527) (16,663) ----------- ----------- 1,404,457 2,255,504 ----------- ----------- $ 4,377,298 $ 5,384,595 =========== =========== </TABLE> See notes to consolidated financial statements. <PAGE> IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) CONSOLIDATED STATEMENTS OF INCOME (in thousands, except earnings per share) <TABLE> <CAPTION> Three Months Ended December 31 ------------------------- 1996 1995 ----------- ----------- <S> <C> <C> Revenues Net Sales $ 638,828 $ 515,012 Service and rental revenue 453,860 353,772 Financial subsidiaries 47,746 31,795 ----------- ----------- 1,140,434 900,579 ----------- ----------- Costs and Expenses Cost of goods sold 404,934 333,226 Service and rental costs 216,107 169,335 Finance subsidiaries interest 20,011 14,809 Selling and administrative 417,970 314,534 ----------- ----------- 1,059,022 831,904 ----------- ----------- Operating Income 81,412 68,675 Interest expense 8,201 7,340 ----------- ----------- Income from continuing operations before taxes and extraordinary loss 73,211 61,335 Taxes on Income 28,552 24,398 ----------- ----------- Income from continuing operations before extraordinary loss 44,659 36,937 Discontinued operations 20,151 26,229 ----------- ----------- Income before extraordinary loss 64,810 63,166 Extraordinary loss from extinguishment of debt, net of tax benefit (12,156) ----------- ----------- Net Income 52,654 63,166 Less: Preferred Dividends 4,885 7,664 ----------- ----------- Net Income Available to Common Shareholders $ 47,769 $ 55,502 =========== =========== Earnings (Loss) Per Share (1) Continuing Operations $0.30 $0.25 Discontinued Operations $0.15 $0.22 Extraordinary loss ($0.09) ----------- ----------- $0.36 $0.47 =========== =========== </TABLE> (1) See Exhibit 11 for computation of earnings per share. See notes to consolidated financial statements. <PAGE> IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Three Months Ended December 31, ----------------------------- 1996 1995 ----------------------------- <S> <C> <C> Operating Activities Income from continuing operations before extraordinary loss $ 44,659 $ 36,937 Additions (deductions) to reconcile income from continuing operations before extraordinary loss to net cash (used in) provided by operating activities of continuing operations Depreciation 28,616 16,329 Amortization 11,211 7,319 Provisions for losses on accounts receivables 7,430 3,625 Provisions for deferred taxes 18,800 Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Increase in accounts receivables (63,384) (25,425) Increase in inventories (79,134) (47,256) Increase in prepaid expenses (54,245) (39,194) Increase in accounts payable, deferred revenues and accrued expenses 17,446 64,150 Miscellaneous 4,129 (11,923) ------------ ------------ Net cash (used in) provided by operating activities of continuing operations (64,472) 4,562 Net cash provided by (used in) operating activities of discontinued operations 24,176 (63,764) ------------ ------------ Net cash used in operating activities (40,296) (59,202) Investing activities Proceeds from the sale of property and equipment 10,679 8,407 Payments received on long term receivables 3,057 962 Cost of companies acquired, net of cash acquired (41,224) (25,662) Expenditures for property and equipment (38,912) (26,692) Purchase of miscellaneous assets (9,249) (9,474) Finance subsidiaries receivables - additions (317,869) (191,094) Finance subsidiaries receivables - collections 142,615 73,443 ------------ ------------ Net cash used in investing activities of continuing operations (250,903) (170,110) Net cash used in investing activities of discontinued operations (38,058) (74,544) ------------ ------------ Net cash used in investing activities (288,961) (244,654) Financing activities Payments of short-term borrowings, net (180,351) (93,733) Proceeds from issuance of long-term debt 14,591 369,194 Proceeds from option exercises and sale of treasury shares 27,874 13,281 Proceeds from sale of finance subsidiaries lease receivables 25,433 15,808 Proceeds from (payments to) Unisource 553,479 (146,387) Long-term debt repayments (258,969) (14,655) Finance subsidiaries debt - additions 200,008 134,985 Finance subsidiaries debt - repayments (26,000) (44,402) Dividends paid (23,537) (22,917) Purchase of treasury shares (1,786) (52,676) ------------ ------------ Net cash provided by financing activities of continuing operations 330,742 158,498 Net cash provided by financing activities of discontinued operations 13,882 138,308 ------------ ------------ Net cash provided by financing activities 344,624 296,806 ------------ ------------ Net increase (decrease) in cash and cash equivalents 15,367 (7,050) Cash and cash equivalents at beginning of year 46,056 66,519 ------------ ------------ Cash and cash equivalents at end of period $ 61,423 $ 59,469 ============ ============ </TABLE> See notes to consolidated financial statements. <PAGE> IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 1: Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10- 01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1996. Certain prior year amounts have been reclassified to conform with the current year presentation. As a result of the spin-off of Unisource as discussed in Note 3 and the second quarter fiscal 1996 merger of two companies that were accounted for as poolings-of-interests, prior period amounts have been restated. Note 2: Debt ---- On December 16, 1996, the Company entered into a credit agreement with several banks under which it may borrow up to $400 million. This multicurrency facility replaces a $500 million credit facility which was due to expire December 1, 1999 and a $100 million credit facility which was canceled on December 2, 1996. The reduced credit commitment reflects the spin-off of the Unisource business which was effective December 31, 1996 (see note 3). The new agreement, which expires December 15, 2001, includes a facility fee of 8 basis points per annum on the commitment, based upon the Company's current long-term debt rating. The agreement provides that loans may be made under either domestic or Eurocurrency notes at rates computed under a selection of rate formulas including prime or Eurocurrency rates. The agreement was filed as Exhibit 4.1 to the Company's Form 10-K for the year ended September 30, 1996. Note 3: Discontinued Operations and Spin-off ------------------------------------ On June 19, 1996, the Company announced that it would separate Unisource Worldwide, Inc. ("Unisource"), its printing and imaging and supply systems distribution business from IKON Office Solutions, Inc. ("IKON"), its office solutions business, with each business operating as a stand-alone, publicly traded company. In order to effect the separation of these businesses, Alco declared a dividend payable to holders of record of Alco common stock at the close of business on December 13, 1996 of one share of common stock, $.001 par value, of Unisource for every two shares of Alco stock owned on December 13, 1996. The distribution resulted in 100% of the outstanding shares of Unisource common stock being distributed to Alco shareholders by December 31, 1996. The Company has accounted for Unisource as a discontinued operation for all periods presented in these financial statements. Prior year amounts have also been restated to reflect the allocation of corporate interest and other corporate expenses to the discontinued operations of the Company. The results of discontinued operations are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended December 31 ---------------------- 1996 1995 ---------- ---------- <S> <C> <C> Revenues $1,728,533 $1,716,165 ========== ========== Income before taxes $ 34,743 $ 43,282 Tax expense 14,592 17,053 ---------- ---------- Net income $ 20,151 $ 26,229 ========== ========== </TABLE> <PAGE> IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1996 Note 3: Discontinued Operations and Spin-off (Continued) ------------------------------------ The net carrying value at September 30, 1996 of the assets to be distributed to shareholders consisted of (in thousands): <TABLE> <S> <C> Working capital $ 750,792 Net property and equipment 224,168 Other assets 637,062 Long-term debt and other liabilities (122,821) ---------- Unisource equity and intercompany debt $1,489,201 ========== </TABLE> In December 1996, Unisource repaid $553.5 million of intercompany debt outstanding with the Company. The December 31, 1996 Balance Sheet reflects the distribution of the Unisource stock to Alco shareholders. Equity of the Company was reduced by $952.3 million, which was the equity of Unisource at December 31, 1996. Note 4: Extraordinary Loss on Early Extinguishment of Debt -------------------------------------------------- On December 2, 1996, Unisource borrowed under its new credit facility to repay $553.5 million of intercompany debt with the Company. The Company prepaid debt in the amount of $514 million from these funds. Early repayment of this debt resulted in certain prepayment penalties. Total prepayment penalties of $18.7 million and related tax benefits of $6.5 million are reflected as an extraordinary loss on early extinguishment of debt on the December 31, 1996 financial statements. Note 5: Name Change ----------- At their annual meeting on January 23, 1997, the shareholders voted to change the name of the Company from Alco Standard Corporation to IKON Office Solutions, Inc., the name previously used by Alco's remaining operating unit. The name change was effective immediately and the Company's ticker symbol was changed from ASN to IKN effective January 27, 1997. <PAGE> Item 2: Management's Discussion and Analysis of Results of Operations and - -------------------------------------------------------------------------- Financial Condition and Liquidity - --------------------------------- On June 19, 1996, the Company announced that it would split its two operating units into independent companies by spinning off Unisource, its paper and supply systems distribution group, as a separate publicly owned company. The Company accomplished the transaction through a U.S. tax-free distribution of Unisource stock to Company shareholders on December 31, 1996. As a result of the spin off of Unisource, the Company has accounted for Unisource as a discontinued operation. Continuing operations of the Company consist of IKON, which sells, rents and leases photocopiers, digital printers and other automated office equipment for use in both traditional and integrated office environments. IKON also provides outsourcing and imaging services and offers consulting, design, computer networking and technology training for the networked office environment. On January 23, 1997, shareholders of the Company voted to change the name of the Company from Alco Standard Corporation to IKON Office Solutions, Inc. Results of Operations --------------------- The discussion of the results of operations reviews the continuing operations of the Company as contained in the Consolidated Statements of Income, as well as the discontinued operations of Unisource. Three Months Ended December 31, 1996 Compared with the Three Months Ended December 31, 1995 ------------------------------------------------------ Continuing Operations Revenues and income before taxes for the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996 were as follows: <TABLE> <CAPTION> Three Months Ended --------------------- December 31 % ------------ 1996 1995 Change ---- ---- ------ <S> <C> <C> <C> (in millions) REVENUES $1,140 $901 26.5% ------ ---- INCOME BEFORE TAXES: Operating income $81.4 $68.6 18.7% Interest expense (8.2) (7.3) ---- ---- $73.2 $61.3 19.4% ----- ----- </TABLE> The Company's first quarter revenues increased $239 million, or 26.5% over the first quarter of fiscal 1996, of which $107 million relates to current and prior year acquisitions and $132 million to base companies' internal growth. The Company's internal revenue growth was 15% in the first quarter of fiscal 1997. The results reflect a very strong performance from the Company's traditional copier business with substantial growth in both equipment placements and copy volume. Revenues from the Company's operations outside the U.S. were $147 million for the first quarter of fiscal 1997 compared to $124 million for the same period of the prior fiscal year. The Company's European operations accounted for $2 million of the increase, while Canadian revenues increased $18 million as a result of acquisitions and internal growth in base companies. A fiscal 1996 Mexican acquisition added $3 million of revenue to the first quarter of fiscal 1997. The Company's operating income increased by $12.8 million, or 18.7% over the prior year's quarter. Current and prior year acquisitions accounted for $5.8 million, while $7.0 million was the result of base companies' internal growth net of increased transformation related costs. IKON Capital, Inc. contributed 17.7% of the Company's operating income in the first quarter of fiscal 1997 compared to 12.4% in the first quarter of fiscal 1996. The Company's operating margins were 7.1% in the first <PAGE> quarter of fiscal 1997, compared to 7.6% in fiscal 1996. The reduction was primarily the result of the short-term dilutive impact of the Company's rapid acquisition of technology services companies and transformation expenses in Europe. The Company recognized a $6.5 million pretax gain in the first quarter of fiscal 1997 on the sale of its corporate headquarters building. The Company plans to move into a new headquarters facility later in fiscal 1997. The Company also recognized several first time costs in the first quarter of fiscal 1997, including costs associated with a national advertising program, enhanced training programs throughout the Company and enhanced sales incentive programs. Operating income from foreign operations was $10.0 million for the three months ended December 31, 1996, down $1.6 million from the prior year's quarter, of which $2.7 million is attributable to European operations and relates to the European transformation initiative in the first quarter of fiscal 1997, net of $1.0 million increase in Canadian operations and $.1 million of additional operating income related to the Mexican acquisition. There was no material effect of foreign currency exchange rate fluctuations on the results of operations in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. The Company continues to proceed as planned with the transformation program announced in 1995 to change its organization into a more cohesive and efficient network by building a uniform information technology system and implementing best practices for critically important management functions throughout the Company. Acquisitions In the first quarter of fiscal 1997, the Company completed 23 acquisitions with annualized revenues of nearly $170 million. Of the 23 companies acquired, 10 were systems integration companies, seven were outsourcing and imaging companies and six were traditional copier companies. The increasing number of systems integration and outsourcing companies in the acquisition mix reflects the Company's intention to strengthen its ability to offer customers complete office technology solutions, from traditional copier systems to computer networking and outsourced imaging and duplicating services. Other Interest expense, net of corporate interest expense allocated to discontinued operations, increased $.9 million in the first quarter of fiscal 1997, primarily the result of slightly higher borrowing levels and increased interest rates during the first quarter of fiscal 1997 compared to fiscal 1996. Income before taxes increased by $11.9 million, or 19.4% for the first quarter, primarily reflecting the combined result of internal growth from base companies, along with earnings contributed by acquisitions, net of increased interest costs. The effective income tax rate for the quarter is 39.0% compared with 39.8% for the comparative period in fiscal 1996. The Company recorded an extraordinary charge of $12.2 million after tax in the first quarter of fiscal 1997 relating to its early extinguishment of certain corporate debt. The Company used the proceeds of a December 2, 1996 $553.5 million intercompany debt repayment from its discontinued operation, Unisource, to prepay $514 million of corporate debt. The pretax charge of $18.7 million primarily included prepayment penalties and has a related tax benefit of $6.5 million. Earnings per share from continuing operations, excluding the extraordinary charge, increased 20% from $.25 per share for the first quarter of fiscal 1996 to $.30 per share for the first quarter of fiscal 1997. Including the loss per share of $.09 on the extraordinary charge and the earnings per share of $.15 on discontinued operations, earnings per share of the Company were $.36 for the first quarter ended December 31, 1996 compared to $.47 (which includes $.22 for discontinued operations) for the first quarter ended December 31, 1995. Weighted average shares of 134.3 million for the quarter ended December 31, 1996 were 15.8 million shares greater than the 118.5 million for the quarter ended December 31, 1995, primarily the result of acquisitions for stock (6.8 million weighted shares) and the conversion of the Company's Series AA Preferred Stock effective February 9, 1996 (8.7 million weighted shares). <PAGE> Discontinued Operations Revenues of Unisource, the Company's discontinued operation, increased $13 million, or 0.7%, to $1.73 billion in the first quarter of fiscal 1997 compared to the first quarter of the prior year. This change is due to increases associated with current and prior year acquisitions of $152 million, which were offset by revenue declines of $139 million in base operations. The decline in base operations is principally due to an estimated decrease in average paper prices of 17% compared to the same period last year. The price deflation was partially offset by volume gains in the base operations. Income before income taxes decreased $8.5 million to $34.7 million for the first quarter of fiscal 1997 compared to $43.3 million in the first quarter of fiscal 1996. This decrease is primarily related to price decreases, net of volume increases in base operations and operating income contributed by acquisitions, plus additional interest expense of $3.5 million in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. Financial Condition and Liquidity --------------------------------- Net cash used in operating activities of continuing operations for the first quarter of fiscal 1997 was $64 million and primarily related to increases in working capital. During the same period, the Company also used $251 million in cash for investing activities, which included finance subsidiary activity of $175 million, acquisition activity at a cash cost of $41 million and capital expenditures of $39 million. Operating and investing activities were funded through cash flow from financing activities. Cash provided by financing activities included $553 million of intercompany debt repaid by Unisource which was used primarily to prepay corporate debt of the Company. Debt, excluding finance subsidiaries, was $596 million at December 31, 1996, a decrease of $375 million from the continuing operations debt balance at September 30, 1996 of $971 million. The debt to capital ratio was 29.8% at December 31, 1996 compared to 31.4% at September 30, 1996. On December 16, 1996, the Company entered into a credit agreement with several banks under which it may borrow up to $400 million. This credit facility replaces a $500 million credit facility which was due to expire December 1999 and a $100 million credit facility which was canceled on December 2, 1996. The reduced credit commitment reflects the spin-off of the Unisource business which was effective December 31, 1996. As of December 31, 1996, there were no borrowings under this agreement. The Company also has $450 million available for either stock or debt offerings under its shelf registration statement filed November 1995. Finance subsidiaries debt grew by $174 million from September 30, 1996, a result of increased leasing activity. During the three months ended December 31, 1996, IKON Capital issued an additional $177 million under its $1.5 billion medium term notes program which began in July 1994. At December 31, 1996, $1.1 billion of medium term notes were outstanding with a weighted interest rate of 6.7%, leaving $323 million available under this program. Under its $275 million asset securitization program, IKON Capital sold $25.4 million in direct financing leases during the first quarter of fiscal 1997, replacing those leases liquidated and leaving the amount of contracts sold unchanged. Of the total $275 million asset securitization program, $125 million expires in March 1997, but is expected to be renewed. The Company filed shelf registrations for 10 million shares of common stock in January 1996 and 5 million shares of common stock in March 1996. Shares issued under these registration statements are being used for acquisitions. Approximately 11 million shares have been issued under these shelf registrations through December 31, 1996. The Company believes that its operating cash flow together with unused bank credit facilities and other financing arrangements will be sufficient to finance current operating requirements including capital expenditures, acquisitions, dividends and transformation costs. <PAGE> PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The following Exhibits are furnished pursuant to Item 601 of Regulation S-K: Exhibit No. (3.1) Amendment dated January 23, 1997 to Amended and Restated Articles of Incorporation Exhibit No. (3.2) Code of Regulations of IKON Office Solutions, Inc. Exhibit No. (11) Computation of Earnings per Share Exhibit No. (27) Financial Data Schedule. (b) Reports on Form 8-K On November 13, 1996, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, the Amended and Restated 1996 Support Agreement with its leasing subsidiary, IKON Capital, Inc. as Exhibit 10 under Item 7 of the Form 8-K and to announce that on November 8, 1996, the Board of Directors declared a special dividend of 100% of the common stock of Unisource Worldwide, Inc., the registrant's wholly-owned subsidiary, payable December 31, 1996 to shareholders of record of Alco common stock on December 13, 1996. On January 30, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, the earnings for the fiscal quarter ended December 31, 1996 and the announcement of the name change from Alco Standard Corporation to IKON Office Solutions, Inc. which was approved by shareholder vote at the annual shareholders meeting held January 23, 1997. <PAGE> 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. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant. IKON OFFICE SOLUTIONS, INC. Date February 14, 1997 /s/ Michael J. Dillon ------------------- ------------------------------ Michael J. Dillon Vice President and Controller (Chief Accounting Officer) <PAGE> INDEX TO EXHIBITS ----------------- Exhibit Number - -------------- (3.1) Amendment dated January 23, 1997 to amended and restated Article of Incorporation (3.2) Code of Regulations of IKON Office Solutions, Inc. (11) Computation of Earnings per Share (27) Financial Data Schedule. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1 <SEQUENCE>2 <DESCRIPTION>ARTICLES OF INCORPORATION <TEXT> <PAGE> [SEAL OF THE SECRETARY Prescribed by OF STATE OF OHIO BOB TAFT, Secretary of State APPEARS HERE] 30 East Broad Street, 14th Floor Columbus, Ohio 43266-0418 Form SH-AMD (January 1991) Exhibit 3.1 CERTIFICATE OF AMENDMENT by Shareholders to the Articles of Incorporation of Alco Standard Corporation - -------------------------------------------------------------------------------- (Name of Corporation) O. Gordon Brewer , who is: - ------------------------------ [_] Chairman of the Board [_] President [X] Vice President (check one) and Karin M. Kinney , who is [X] Secretary [_] Assistant Secretary - ------------------------------ (Check one) of the above named Ohio corporation for profit do hereby certify that: (check the appropriate box and complete the appropriate statements) [X] a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on January 23, 1997 at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 69% of the voting power of the corporation. [_] in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: See attached Exhibit A IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 23rd day of January, 1997. By /s/ O. Gordon Brewer ------------------------------------ O. Gordon Brewer Vice President By /s/ Karin M. Kinney ------------------------------------ Karin M. Kinney Secretary NOTE: Ohio law does not permit one officer to sign in two capacities, Two separate signatures are required, even if this necessitates the election of a second officer before the filing can be made. (OHIO - 613 - 3/4/91) <PAGE> Exhibit A RESOLVED, that the Amended and Restated Articles of Incorporation of Alco Standard Corporation be amended by changing FIRST thereof so that, as amended, FIRST shall be and read as follows: "FIRST: The name of the Corporation shall be IKON Office Solutions, Inc." FURTHER RESOLVED, that all other provisions of the Amended and Restated Articles of Incorporation not specifically modified by these resolutions, shall remain in full force and effect unchanged. FURTHER RESOLVED, that the officers of the corporation are hereby authorized to take all necessary or appropriate action to carry out the purpose of the foregoing resolutions. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>3 <DESCRIPTION>CODE OF REGULATIONS <TEXT> <PAGE> Exhibit 3.2 IKON OFFICE SOLUTIONS, INC. (Formerly Known as Alco Standard Corporation) CERTIFICATION OF CODE OF REGULATIONS The undersigned hereby certifies that she is the duly elected, acting and qualified Secretary of IKON Office Solutions, Inc., an Ohio corporation ("the Corporation"), and that the attached "IKON Office Solutions, Inc. Code of Regulations" is a true and complete copy of the Code of Regulations of the Corporation as in effect as of the date hereof. In witness whereof the undersigned has hereunto set her hand and affixed the seal of the Corporation this day of ___________________________________ Secretary <PAGE> IKON OFFICE SOLUTIONS, INC. (Formerly Known as Alco Standard Corporation) CODE OF REGULATIONS Adopted: January 19, 1970 Amended: February 9, 1982 Amended: January 25, 1996 Name Change: January 23, 1997 ARTICLE I SHAREHOLDERS SECTION 1. Annual Meeting. The annual meeting of shareholders of the corporation for the election of directors, the consideration of reports to be laid before such meeting, and the transaction of such other business as may properly be brought before such meeting shall be held on such day in January, February or March in each year at such time and place, either within or without the State of Ohio, as may be fixed by the board of directors and specified in the notice of the meeting. If, prior to December 31 of the year next preceding the annual meeting, the board of directors does not so fix the time, place and date of the meeting, the annual meeting of the shareholders shall be held on the last Tuesday in February, if not a legal holiday (and if a legal holiday, then on the next succeeding business day) at such time and place, either within or without the State of Ohio, as may be fixed by the chairman of the board or by the president and specified in the notice of such meeting. SECTION 2. Special Meetings. Special meetings of the shareholders of the corporation may be held on any business day, when called by the chairman of the board, or by the president, or by the vice president, or by the board of directors acting at a meeting, or by a majority of the directors acting without a meeting, or by the person who hold twenty-five per cent of all the shares outstanding and entitled to vote thereat. Upon request in writing delivered either in person or by registered mail to the president or the secretary by any persons entitled to call a meeting of shareholders, such officer shall forthwith cause to be given to the shareholders entitled thereto notice of a meeting to be held on a date not less than ten or more than sixty days after the receipt of such request, as such officer may fix. If such notice is not given within thirty days after the delivery or mailing of such request, the persons calling the meeting may fix the time of the meeting and give notice thereof in the manner provided by law or as provided in these regulations, or cause such notice to be given by any designated representative. Each special meeting shall be called to convene between nine o'clock a.m., and four o'clock p.m., and shall be held at the principal office of the corporation, unless the same is called by the directors, acting with or without a meeting, in which case such meeting may be held at any place either within or without the State of Ohio designated by the board of directors and specified in the notice of such meeting. SECTION 3. Notice of Meetings. Not less than ten or more than sixty days before the date fixed for a meeting of shareholders, written notice stating the time, place, and purposes of 1 <PAGE> such meeting shall be given by or at the direction of the secretary, or assistant secretary, or any other person or persons required or permitted by these regulations to give such notice. The notice shall be given by personal delivery or by mail to each shareholder entitled to notice of the meeting who is of record as the day next preceding the day on which notice is given or, if a record date therefor is duly fixed, of record as of said date; if mailed, the notice shall be addressed to the shareholders at their respective addresses as they appear on the records of the corporation. Notice of the time, place, and purposes of any meeting of shareholders may be waived in writing, either before or after the holding of such meeting, by any shareholders, which writing shall be filed with or entered upon the record of the meeting. The attendance of any shareholder at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting. SECTION 4. Quorum; Adjournment. Except as may be otherwise provided by law or by the Articles of Incorporation, at any meeting of the shareholders the holders of shares entitling them to exercise a majority of the voting power of the corporation present in person or by proxy shall constitute a quorum for such meeting; provided, however, that no action required by law, by the Articles, or by these regulations to be authorized or taken by a designated proportion of the share of any particular class or of each class of the corporation may be authorized or taken by a lesser proportion; and provided, further, that the holders of a majority of the voting shares represented thereat, whether or not a quorum is present, may adjourn such meeting from time to time; if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. SECTION 5. Proxies. Persons entitled to vote shares or to act with respect to shares may vote or act in person or by proxy. The person appointed as proxy need not be a shareholder. Unless the writing appointing a proxy otherwise provides, the presence at a meeting of the person having appointed a proxy shall not operate to revoke the appointment. Notice to the corporation, in writing or in open meeting, of the revocation of the appointment of a proxy shall not affect any vote or act previously taken or authorized. SECTION 6. Approval and Ratification of Acts of Offices and Board of Directors. Except as otherwise provided by the Articles of Incorporation or by law, any contract, act, or transaction, prospective or past, of the corporation, or of the board of directors, or of the officers may be approved or ratified by the affirmative vote at a meeting of the shareholders, or by the written consent, with or without a meeting, of the holders of record of shares entitling them or exercise a majority of the voting power of the corporation, and such approval or ratification shall be as valid and binding as though affirmatively voted for or consented to by every shareholder of the corporation. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number. The number of directors shall be such number as is fixed by the shareholders, at any annual or special meeting called for the purpose of electing directors at which a quorum is present, by the affirmative vote of the holders of a majority of the shares which are represented at the meeting and entitled to vote, but shall not be less than seven or more than 2 <PAGE> sixteen. If the shareholders at any meeting for the election of directors shall fail to fix the number of directors to be elected, the number elected shall be deemed to be the number of directors so fixed. Notwithstanding the foregoing, the board of directors may change the number of directors fixed by the shareholders, from time to time by resolution adopted by a majority of the board of directors, provided, however, that in no event shall the number of directors be less than seven or more than sixteen. SECTION 2. Election of Directors; Vacancies. The directors shall be elected at each annual meeting of shareholders or at a special meeting called for the purpose of electing directors. At a meeting of shareholders at which directors are to be elected, only persons nominated as candidates shall be eligible for election as directors and the candidates receiving the greatest number of votes shall be elected. In the event of the occurrence of any vacancy or vacancies in the board of directors, however caused, the remaining directors, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any such vacancy for the unexpired term. SECTION 3. Term of Office; Resignations. Each director shall hold office until the next annual meeting of the shareholders and until his successor is elected, or until his earlier resignation, removal from office, or death. Any director may resign at any time by oral statement to that effect made at a meeting of the board of directors or in a writing to that effect delivered to the secretary, such resignation to take effect immediately or at such other time as the director may specify. SECTION 4. Organization Meeting. Immediately after each annual meeting of the shareholders, the newly elected directors shall hold an organization meeting for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. SECTION 5. Regular Meetings. Regular meetings of the board of directors may be held at such times and places within or without the State of Ohio as may be provided for in bylaws or resolutions adopted by the board of directors and upon such notice, if any, as shall be so provided. SECTION 6. Special Meetings. Special meetings of the board of directors may be held at any time within or without the State of Ohio upon call by the chairman of the board or the president or a vice president or by not less than one-third of the directors. Notice of the time and place of each such meeting shall be served upon or telephoned to each director at least twenty-four hours, or mailed or telegraphed to each director at his address as shown by the books of the corporation at least forty-eight hours prior to the time of the meeting, which notice need not specify the purposes of the meeting; provided, however, that attendance of any director at any such meeting without protesting, prior to or at the commencement of the meeting. the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting and such notice may be waived in writing, either before or after hold of such meeting, by any director, which writing shall be filed with or entered upon the records of the meeting. Unless otherwise indicated in the notice thereof, any business may be transacted at any organization, regular or special meeting. SECTION 7. Quorum; Adjournment. A quorum of the board of directors shall consist of a majority of the directors then in office (but in no event more than five); provided, that a majority of the directors present at a meeting duly held, whether or not a quorum is present, may 3 <PAGE> adjourn such meeting from time to time; if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. At each meeting of the board of directors at which a quorum is present, all questions and business shall be determined by a majority vote of those present except as in these regulations otherwise expressly provided. SECTION 8. Action Without a Meeting. Any action which may be authorized or taken at a meeting of the board of directors may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all of the directors, which writing or writings shall be filed with or entered upon the records of the corporation. SECTION 9. Committees. The board of directors may at any time appoint from its members an executive, finance, or other committee or committees, consisting of such number of members, not less than three, as the board of directors may deem advisable, together with such alternates as the board of directors may deem advisable, to take the place of any absent member or members at any meeting of such committee. Each such member and each such alternate shall hold office during the pleasure of the board of directors. Any such committee shall act only in the intervals between meetings of the board of directors and shall have such authority of the board of directors as may, from time to time, be delegated by the board of directors, except the authority to fill vacancies in the board of directors or in any committee of the board of directors. Subject to the aforesaid exceptions, any person dealing with the corporation shall be entitled to rely upon any act or authorization of an act by any such committee, to the same extent as an act or authorization of the board of directors. Each committee shall keep full and complete records of all meetings and actions, which shall be open to inspection by the directors. Unless otherwise ordered by the board of directors, any such committee may prescribe its own rules for calling and holding meetings, and for its own method of procedure, and may act at a meeting by a majority of its members or without a meeting by a writing or writings signed by all of its members. ARTICLE III OFFICERS SECTION 1. Election and Designation of Officers. The board of directors shall elect a president, a secretary, a treasurer, and, in its discretion, may elect a chairman of the board, one or more administrative or managing directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as the board of directors may deem necessary. The chairman of the board and the president shall be directors, but no one of the other officers need be a director. Any two or more of such offices may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument is required to be executed, acknowledged, or verified by two or more officers. SECTION 2. Term of Office; Vacancies. The officers of the corporation shall hold office until the next organization meeting of the board of directors and until their successors are elected, except in case of resignation, removal from office, or death. The board of directors may remove any officer at any time with or without cause by a majority vote of the directors then in office. Any vacancy in any office may be filled by the board of directors. 4 <PAGE> SECTION 3. Authority and Duties of Officers. The officers of the corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices or as may be specified from time to time by the board of directors, regardless of whether such authority and duties are customarily incident to such office. SECTION 4. Delegation of Authority and Duties. The board of directors is authorized to delegate the authority and duties of any officer to any other officer and generally to control the action of the officers and to require the performance of duties to those mentioned herein. ARTICLE IV COMPENSATION SECTION 1. Directors and Members of Committees. Members of the board of directors and members of any committee of the board of directors shall, as such, receive such compensation, which may be either a fixed sum for attendance at each meeting of the board of directors, or at each meeting of the committee, or stated compensation payable at intervals, or shall otherwise be compensated as may be determined by or pursuant to authority conferred by the board of directors or any committee of the board of directors, which compensation may be in different amounts for various members of the board of directors or any committee. No member of the board of directors and no member of any committee of the board of directors shall be disqualified from being counted in the determination of a quorum from acting at any meeting of the board of directors or of a committee of the board of directors by reason of the fact that matters affecting his own compensation as a director, member of a committee of the board of directors, officer , or employee are to be determined. SECTION 2. Officers and Employees. The compensation of officers and employees of the corporation, or the method of fixing such compensation, shall be determined by or pursuant to authority conferred by the board of directors or any committee of the board of directors. Such compensation may include pension, disability, an death benefits, and may be by way of fixed salary, or on the basis of earnings of the corporation, or any combination thereof, or otherwise, as my be determined or authorized from time to time by the board of directors or any committee of the board of directors. ARTICLE V INDEMNIFICATION SECTION 1. Third Party Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including all appeals (other than an action, suit, or proceeding by or in the right of the corporation) by reason of the fact that he is or was a director, officer or employee of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, or employee of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, decrees, fines, penalties, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and 5 <PAGE> in a manner reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION 2. Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit, including all appeals, by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, or employee of the corporation, or is or was serving at the requires of the corporation as a director, trustee, officer, or employee of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been finally adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the Court of Common Pleas or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Please or such other court shall deem proper. SECTION 3. Rights after Successful Defense. To the extent that a director, trustee, officer, or employee has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or 2, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 4. Other Determinations of Rights. Except in a situation governed by Section 3, any indemnification under Section 1 or 2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or 2. Such determination shall be made (a) by a majority vote of directors acting at a meeting at which a quorum consisting of directors who were not parties to such action, suit, or proceeding is present, or (b) if such a quorum is not obtainable (or even if obtainable), and a majority of disinterested directors so directs, by independent legal counsel (compensated by the corporation) in a written opinion, or (c) by the affirmative vote in person or by proxy of the holders of a majority of the shares entitled to vote in the election of directors, without regard to voting power which may thereafter exist upon default, failure, or other contingency. SECTION 5. Advances of Expenses. Expenses of each person indemnified hereunder incurred in defending a civil, criminal, administrative, or investigative action, suit, or proceeding (including all appeals), or threat thereof, may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding as authorized by the board of directors, whether a 6 <PAGE> disinterested quorum exists or not, upon receipt of an undertaking by or on behalf of the director, trustee, office, or employee, to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation. SECTION 6. Non-Exclusivity; Heirs. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled as a matter of law or under the Articles, these regulations, any agreement, vote of shareholders, any insurance purchased by the corporation, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 7. Purchase of Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, or employee of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, or employee of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article or of the Ohio General Corporation Law. ARTICLE VI RECORD DATES For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders, the board of directors may fix a record date in accordance with the provisions of the Ohio General Corporation Law. The record date for the purpose of the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall continue to be the record date for all adjournments of such meetings, unless the board of directors or the persons who shall have fixed the original record date shall, subject to the limitations set forth in the Ohio General Corporation Law, fix another date, and, in case a new record date is so fixed, notice thereof and of the ate to which the meeting shall have been adjourned shall be given to shareholders of record as of such date in accordance with the same requirements as those applying to a meeting newly called. The board of directors may close the share transfer books against transfers of shares during the whole or any part of the period provided for in this Article, including the date of the meeting of shareholders and the period ending with the date, if any, to which adjourned. If no record date is fixed therefor, the record date for determining the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall be the date next preceding the day on which notice is given, or the date next preceding the day on which the meeting is held, as the case may be. 7 <PAGE> ARTICLE VII CERTIFICATES FOR SHARES SECTION 1. Form of Certificates and Signatures. Each holder of shares shall be entitled to one or more certificates, signed by the chairman of the board or the president or a vice president and by the secretary, an assistant secretary, the treasurer, or an assistant treasurer of the corporation, which shall certify the number and class of shares held by him in the corporation, but no certificate for shares shall be executed or delivered until such shares are fully paid. When such a certificate is countersigned by an incorporated transfer agent or registrar, the signature of any of said officers of the corporation may be facsimile, engraved, stamped, or printed. Although any officer of the corporation whose manual or facsimile signature is affixed to such a certificate ceases to be such officer before the certificate is delivered, such certificate nevertheless shall be effective in all respects when delivered. SECTION 2. Transfer of Shares. Shares of the corporation shall be transferable upon the books of the corporation by the holders thereof, in person, or by a duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares of the same class or series, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signatures to such assignment and power of transfer as the corporation or its agents may reasonably require. SECTION 3. Lost, Stolen, or Destroyed Certificates. The corporation may issue a new certificate for shares in place of any certificate theretofore issued by it and alleged to have been lost, stolen, or destroyed, and the board of directors may, in its discretion, require the owner, or his legal representatives, to give the corporation a bond containing such terms as the board of directors or the president or a vice president and the secretary or the treasurer may require to protect the corporation or any person injured by the execution and delivery of a new certificate. SECTION 4. Transfer Agent and Registrar. The board of directors may appoint, or revoke the appointment of transfer agents and registrars and may require all certificates for shares to bear the signatures of such transfer agents and registrars, or any of them. ARTICLE VIII CORPORATE SEAL The Ohio General Corporation Law provides in effect that the absence of a corporate seal from any instrument executed on behalf of the corporation does not affect the validity of the instrument; if in spite of that provision a seal is imprinted on or attached, applied, or affixed to an instrument by embossment, engraving, stamping, printing, typing, adhesion, or other means, the impression of the seal on the instrument shall be circular in form and shall contain the name of the corporation and the words "corporate seal". 8 <PAGE> ARTICLE IX AMENDMENTS The regulations of the corporation may be amended, or new regulations may be adopted, by the shareholders at a meeting held for such purpose, by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power on such proposal or without a meeting by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on such proposal. If the regulations are amended or new regulations are adopted without a meeting of the shareholders, the secretary of the corporation shall mail a copy of the amendment or the new regulations to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. 9 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>4 <DESCRIPTION>COMPUTATIONS OF EARNINGS PER SHARE <TEXT> <PAGE> EXHIBIT 11 - ---------- IKON OFFICE SOLUTIONS, INC. (formerly Alco Standard Corporation) COMPUTATION OF EARNINGS PER SHARE (in thousands, except earnings (loss) per share) <TABLE> <CAPTION> 1996 1995 -------------------------- -------------------------- Fully Fully Primary Diluted(1) Primary Diluted(1) ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Three Months Ended December 31 Average Shares Outstanding Common shares 132,801 132,801 116,315 116,315 Preferred stock 8,694 Convertible loan notes 230 241 Dilutive effect of stock options 1,545 1,669 2,229 2,300 ----------- ----------- ----------- ----------- Total shares 134,346 134,700 118,544 127,550 =========== =========== =========== =========== Income - ------ Continuing operations $ 44,659 $ 44,744 $ 36,937 $ 36,937 Discontinued operations 20,151 20,151 26,229 26,229 ----------- ----------- ----------- ----------- Income before extraordinary item 64,810 64,895 63,166 63,166 Extraordinary loss on extinguishment of debt (12,156) (12,156) ----------- ----------- ----------- ----------- Net Income 52,654 52,739 63,166 63,166 Less: Preferred dividends 4,885 4,885 7,664 4,885 ----------- ----------- ----------- ----------- Net income available to common shareholders $ 47,769 $ 47,854 $ 55,502 $ 58,281 =========== =========== =========== =========== Earnings (Loss) Per Share Continuing operations $0.30 $0.30 $0.25 $0.25 Discontinued operations 0.15 0.15 0.22 0.21 Extraordinary loss (0.09) (0.09) ----------- ----------- ----------- ----------- $0.36 $0.36 $0.47 $0.46 =========== =========== =========== =========== </TABLE> (1) This calculation is submitted in accordance with Regulation S-K item 601 (b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF IKON OFFICE SOLUTIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 61,423,000 <SECURITIES> 0 <RECEIVABLES> 628,139,000 <ALLOWANCES> 41,043,000 <INVENTORY> 433,533,000 <CURRENT-ASSETS> 1,805,430,000 <PP&E> 638,090,000<F1> <DEPRECIATION> 343,887,000<F2> <TOTAL-ASSETS> 4,377,298,000 <CURRENT-LIABILITIES> 1,144,657,000 <BONDS> 1,464,559,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 290,170,000 <COMMON> 597,118,000 <OTHER-SE> 517,169,000 <TOTAL-LIABILITY-AND-EQUITY> 4,377,298,000 <SALES> 638,828,000 <TOTAL-REVENUES> 1,140,434,000 <CGS> 404,934,000 <TOTAL-COSTS> 641,052,000<F3> <OTHER-EXPENSES> 417,970,000<F4> <LOSS-PROVISION> 7,430,000<F5> <INTEREST-EXPENSE> 8,201,000 <INCOME-PRETAX> 73,211,000 <INCOME-TAX> 28,552,000 <INCOME-CONTINUING> 44,659,000 <DISCONTINUED> 20,151,000 <EXTRAORDINARY> (12,156,000) <CHANGES> 0 <NET-INCOME> 52,654,000 <EPS-PRIMARY> 0.36 <EPS-DILUTED> 0.36 <FN> <F1>INCLUDES EQUIPMENT ON OPERATING LEASES, AT COST, OF $262,353,000 <F2>INCLUDES ACCUMULATED DEPRECIATION FOR EQUIPMENT ON OPERATING LEASES OF $166,527,000 <F3>INCLUDES FINANCE SUBSIDIARIES INTEREST OF $20,011,000 <F4>REPRESENTS SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. <F5>CONTINUING OPERATIONS ONLY. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/709519/0000950005-97-000134.txt

-----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, E2pEOZI0JwIMhYgqE0c0XxQvuiMOl1h30NingxUJticyhSNnxawIzASnyAshq4bd nTkwNvXka3G0Rdw0jd7jeA== <SEC-DOCUMENT>0000950005-97-000134.txt : 19970222 <SEC-HEADER>0000950005-97-000134.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950005-97-000134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC CENTRAL INDEX KEY: 0000709519 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942805249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15086 FILM NUMBER: 97525221 BUSINESS ADDRESS: STREET 1: 2550 GARCIA AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 BUSINESS PHONE: 4159601300 MAIL ADDRESS: STREET 1: 2550 GARCIA AVENUE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) __X__Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 29, 1996 or _____Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission file number:0-15086 SUN MICROSYSTEMS, INC. (Exact Name of registrant as specified in its charter) Delaware 94-2805249 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2550 Garcia Avenue, Mountain View, CA 94043-1100 (Address of principal executive offices with zip code) Registrant's telephone number, including area code: (415) 960-1300 N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES___X__ NO______ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES______ NO______ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at December 29, 1996 Common stock - $0.00067 par value 368,084,106 <PAGE> INDEX PAGE ---- COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II - OTHER INFORMATION Item 5 - Other Information 12 Item 6 - Exhibits and Reports on Form 8 - K 14 SIGNATURES 15 2 <PAGE> PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) December 29, June 30, 1996 1996 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 438,083 $ 528,854 Short-term investments 312,657 460,743 Accounts receivable, net 1,392,873 1,206,612 Inventories 394,919 460,914 Deferred tax asset 201,134 177,554 Other current assets 229,224 199,059 ----------- ----------- Total current assets 2,968,890 3,033,736 Property, plant and equipment, at cost 1,549,677 1,282,384 Accumulated depreciation and amortization (848,739) (748,535) ----------- ----------- 700,938 533,849 Other assets, net 196,792 233,324 ----------- ----------- $ 3,866,620 $ 3,800,909 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 26,901 $ 49,161 Accounts payable 383,981 325,067 Accrued liabilities 804,805 801,550 Other current liabilities 265,764 313,491 ----------- ----------- Total current liabilities 1,481,451 1,489,269 Long-term debt and other obligations 81,002 60,154 Stockholders' equity 2,304,167 2,251,486 ----------- ----------- $ 3,866,620 $ 3,800,909 =========== =========== See accompanying notes. 3 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) <CAPTION> Three Months Ended Six Months Ended ---------------------------- ---------------------------- December 29, December 31, December 29, December 31, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net revenues $2,081,588 $1,751,383 $3,940,607 $3,236,661 Cost and expenses: Cost of sales 1,033,402 972,665 2,005,503 1,789,498 Research and development 201,010 166,295 387,278 310,380 Selling, general and administrative 591,331 434,452 1,115,997 845,868 ---------- ---------- ---------- ---------- Total costs and expenses 1,825,743 1,573,412 3,508,778 2,945,746 Operating income 255,845 177,971 431,829 290,915 Interest income, net 6,421 7,395 11,893 19,004 ---------- ---------- ---------- ---------- Income before income taxes 262,266 185,366 443,722 309,919 Provision for income taxes 83,925 59,317 141,991 99,174 ---------- ---------- ---------- ---------- Net income $ 178,341 $ 126,049 $ 301,731 $ 210,745 ========== ========== ========== ========== Net income per common and and common-equivalent share $ 0.46 $ 0.32 $ 0.77 $ 0.54 ========== ========== ========== ========== Common and common-equivalent shares used in the calculation of net income per share 388,738 388,600 389,428 393,598 ========== ========== ========== ========== <FN> See accompanying notes. </FN> </TABLE> 4 <PAGE> <TABLE> SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) <CAPTION> Six Months Ended ------------------------------------ December 29, December 31, 1996 1995 ----------- ----------- <S> <C> <C> Cash flow from operating activities: Net income $ 301,731 $ 210,745 Adjustments to reconcile net income to operating cash flows: Depreciation, amortization and other non-cash items 198,788 172,120 Increase in accounts receivable (186,261) (30,688) Decrease (increase) in inventories 65,995 (60,264) Increase in accounts payable 58,914 40,498 Net increase in other current and non-current assets (37,045) (35,566) Net increase (decrease) in other current and non-current liabilities 12,517 (62,899) ----------- ----------- Net cash provided from operating activities 414,639 233,946 ----------- ----------- Cash flow from investing activities: Acquisition of property, plant and equipment (301,582) (137,380) Acquisition of other assets (22,241) (47,892) Acquisition of short-term investments (221,081) (1,027,664) Maturities of short-term investments 371,676 1,538,666 ----------- ----------- Net cash (used by) provided from investing activities (173,228) 325,730 ----------- ----------- Cash flow from financing activities: Issuance of common stock 18,101 29,814 Acquisition of treasury stock (329,531) (484,047) Proceeds from employee stock purchase plans 37,303 27,770 Reduction of short - term borrowings, net (22,260) (36,909) Reduction of long - term borrowings (35,795) (39,582) ----------- ----------- Net cash used by financing activities (332,182) (502,954) ----------- ----------- Net increase (decrease) in cash and cash equivalents $ (90,771) $ 56,722 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 8,198 $ 9,669 Income taxes $ 122,888 $ 131,396 <FN> See accompanying notes </FN> </TABLE> 5 <PAGE> SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sun Microsystems, Inc. ("Sun" or "the Company") and its wholly - owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to current year presentation. While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The information included in this report should be read in conjunction with the 1996 Annual Report to Stockholders which is incorporated by reference in the Company's 1996 Form 10-K. INVENTORIES (in thousands) December 29, 1996 June 30, 1996 ----------------------- ----------------- Raw materials $231,730 $267,811 Work in process 31,081 58,337 Finished goods 132,108 134,766 -------- -------- $394,919 $460,914 ======== ======== INCOME TAXES The Company accounts for income taxes under the liability method of Statement of Financial Accounting Standards No. 109. The provision for income taxes during the interim periods considers anticipated annual income before taxes, earnings of foreign subsidiaries permanently invested in foreign operations, and other differences. STOCK DIVIDEND The Company declared two-for-one stock split (effected in the form of a stock dividend) to stockholders of record as of the close of business on November 18, 1996. Share and per share amounts presented have been adjusted to reflect the stock dividend. 6 <PAGE> ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION <TABLE> The following table sets forth items from the Condensed Consolidated Statements of Income as a percentage of net revenues: <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ December 29, December 31, December 29, December 31, 1996 1995 1996 1995 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 49.6 55.5 50.9 55.3 ------ ------ ------ ------ Gross margin 50.4 44.5 49.1 44.7 Research and development 9.7 9.5 9.8 9.6 Selling, general and administrative 28.4 24.8 28.3 26.0 ------ ------ ------ ------ Operating income 12.3 10.2 11.0 9.1 Interest income, net 0.3 0.4 0.3 0.6 ------ ------ ------ ------ Income before income taxes 12.6 10.6 11.3 9.7 Provision for income taxes 4.0 3.4 3.6 3.1 ------ ------ ------ ------ Net income 8.6% 7.2% 7.7% 6.6% ====== ====== ====== ====== RESULTS OF OPERATIONS </TABLE> Net revenues Net revenues were $2.082 billion for the second quarter and $3.941 billion for the first six months of fiscal 1997, representing increases of 18.9 % and 21.7%, respectively, over the comparable periods of fiscal 1996. Approximately eighty percent of the growth in revenues resulted from increased demand for servers, high-end desktop systems, and from memory, storage options, and accessories shipped as part of system sales. The remaining increase reflects growth in revenues from other Sun businesses, including service, aftermarketing, and microprocessors, as compared with the corresponding periods of fiscal 1996. Domestic net revenues increased by 22.6% and 24.1% while international net revenues (including United States exports) grew 15.4% and 19.5% in the second quarter and first six months of fiscal 1997, respectively, compared with the corresponding periods of fiscal 1996. European net revenues increased 13.9% and 19.3% while net revenues in Rest of World increased 17.3% and 19.6% in the second quarter and first six months of fiscal 1997, respectively, when compared with the same periods of fiscal 1996. These increases are due primarily to continued strengthening of most of the markets in Europe and the expanding markets in Asia. Compared with the second quarter of fiscal 1996, the dollar has weakened against the British pound sterling and strengthened against the Japanese yen, German mark, and French franc. For the six month period ended December 29, 1996, the dollar has strengthened significantly against the Japanese yen and remained relatively 7 <PAGE> consistent against most major European currencies, compared with the corresponding period of fiscal 1996. Management has estimated that the net impact of currency fluctuations on operating results, while slightly favorable, was not significant in the second quarter or the first six months of fiscal 1997. Gross margin Gross margin was 50.4% for the second quarter and 49.1% for the first six months of fiscal 1997, compared with 44.5% and 44.7%, respectively, for the corresponding periods in fiscal 1996. The increase in the gross margin for the periods compared reflects principally the effects of increased revenue generated from higher margin servers and memory storage options and accessories, as well as continued Company cost decreases. The factors described above resulted in a favorable impact on gross margin for the second quarter and first six months of fiscal 1997. Systems repricing actions may be initiated in the future, which could result in downward pressure on gross margins. Sun's future operating results would be adversely affected if such repricing actions were to occur and the Company were unable to mitigate the margin pressure by maintaining a favorable mix of systems, software, service, and other revenues and by achieving component cost reductions and operating efficiencies. Research and development Research and development (R&D) expenses were $201.0 million in the second quarter and $387.3 million for the first six months of fiscal 1997, compared with $166.3 and $310.4 million for the same periods of fiscal 1996. As a percentage of net revenues, R&D expenses increased to 9.7% for the second quarter and 9.8% for the first six months of fiscal 1997, from 9.5% and 9.6% respectively in the comparable periods of fiscal 1996. Slightly less than one-fourth of the dollar increase in the second quarter and the first six months of fiscal 1997 over the comparable periods in fiscal 1996 reflects development of hardware and software products which utilize the Java architecture. The remaining increase for the second quarter and first six months of fiscal 1997 is attributable to continued development of UltraSPARC systems and further development of products acquired through acquisitions of Integrated Micro Products, plc and Cray Business Systems, a division of Cray Research, Inc. and increased compensation as a result of higher levels of staffing. Selling, general and administrative Selling, general and administrative (SG&A) expenses were $591.3 million in the second quarter and $1,116.0 million in the first six months of fiscal 1997, compared with $434.5 and $845.9 million for the same periods of fiscal 1996. As a percentage of net revenues, SG&A expenses were 28.4% and 28.3% in the second quarter and first six months of fiscal 1997, respectively, and 24.8% and 26.0%, respectively in the comparable periods of fiscal 1996. Approximately half of the dollar increases are attributable to increased marketing costs related to new product introductions and other promotional programs, and increases related to compensation resulting from higher levels of headcount. The remaining increases reflect costs incurred in connection with the Company's ongoing efforts to improve business processes and cycle times. The Company expects to continue to invest in efforts to achieve additional operating efficiencies through continual review and improvement of business processes. In addition, the Company expects to continue to hire personnel to further expand its demand creation programs and service support organizations. Interest income, net Net interest income was $6.4 million for the second quarter and $11.9 million for the first six months of fiscal 1997, compared with $7.4 million and $19.0 million, respectively, for the corresponding periods in fiscal 1996. The decrease from the second quarter of fiscal 1997 is primarily the result of lower interest earnings due to a 8 <PAGE> smaller average portfolio of cash and investments offset by interest savings from reduced debt levels, as compared to the corresponding period in fiscal 1996. The decrease for the first six months of fiscal 1997 is primarily the result of lower interest earnings due to a smaller average portfolio of cash and investments as compared to the corresponding period in fiscal 1996. Income taxes The Company's effective income tax rate for the second quarter and the first six months of both fiscal 1997 and 1996 was 32%. FUTURE OPERATING RESULTS This following section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties so that actual results may vary materially. The future operating results discussed below represent specific risks which could impact the financial condition and results over the next few quarters. This information below should be read in conjunction with the 1996 Annual Report to Stockholders which is incorporated by reference in the Company's 1996 Form 10-K. The market for Sun's products and services is intensely competitive and subject to continuous, rapid technological change, short product life cycles and frequent product performance improvements and price reductions. Due to the breadth of the Company's product lines and the scalability of its products and network computing model, Sun competes in many segments of the network computing market across a broad spectrum of customers. The Company expects the markets for its products and technologies, as well as its competitors within such markets, will continue to change as the rightsizing trend shifts customer buying patterns to network based systems which often employ solutions from multiple vendors. Competition in these markets will also continue to intensify as Sun and its competitors, principally Hewlett-Packard, International Business Machines, Digital Equipment Corporation, and Silicon Graphics, aggressively position themselves to benefit from this shifting of customer buying patterns and demand. The Company is also facing competition from these competitors, as well as other systems manufacturers, such as Compaq Computer Corporation and Dell Computer Corporation, with respect to such competitors products based on microprocessors from Intel Corporation coupled with Windows NT operating system software from Microsoft Corporation. These products demonstrate the viability of certain networked personal computer solutions and have increased the competitive pressure, particularly in the Company's workstation and lower-end server product lines. Finally, the timing of introductions of new products and services by Sun's competitors may negatively impact the future operating results of the Company, particularly when such introductions occur in periods leading up to the Company's introduction of its own new enhanced products. The Company expects this pressure to continue and to intensify throughout the remainder of fiscal 1997. While many other technical, service and support capabilities affect a customer's buying decision, the Company's future operating results will depend, in part, on its ability to compete with these technologies. The Company's future operating results will depend to a considerable extent on its ability to rapidly and continuously develop, introduce, and deliver in quantity new systems, software, and service products, as well as new microprocessor technologies, that offer its customers enhanced performance at competitive prices. The development of new high - performance computer products, such as the Company's recent development of the UltraSPARC is a complex and uncertain process requiring high levels of innovation from the Company's designers and suppliers, as well as accurate anticipation of customer requirements and technological trends. Once a hardware product is developed, the Company must rapidly bring such products to volume manufacturing, a process that requires accurate forecasting of volumes, mix of products and configurations, among other things, in order to achieve acceptable yields and costs. 9 <PAGE> Accordingly, with the introduction of the Company's enhanced server systems during fiscal 1996, future operating results will depend to a considerable extent on the Company's ability to closely manage these product introductions, as well as future product introductions , in order to minimize unfavorable patterns of customer orders, to reduce levels of older inventory and to ensure that adequate supplies of new products can be delivered to meet customer demand. The ability of the Company to match supply and demand is further complicated by the Company's need to adjust prices to reflect changing competitive market conditions as well as the variability and timing of customer orders with respect to the Company's older products. As a result, the Company's operating results could be adversely affected if the Company is not able to correctly anticipate the level of demand for the mix of products. Because the Company is continuously engaged in this product development, introduction, and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The Company is increasingly dependent on the ability of its suppliers to design, manufacture, and deliver advanced components required for the timely introduction of new products. The failure of any of these suppliers to deliver components on time or in sufficient quantities, or the failure of any of the Company's own designers to develop advanced innovative products on a timely basis, could result in a significant adverse impact on the Company's operating results. The inability to secure enough components to build products, including new products, in the quantities and configurations required, or to produce, test and deliver sufficient products to meet demand in a timely manner, would adversely affect the Company's net revenues and operating results. To secure components for development, production, and introduction of new products, the Company frequently makes advanced payments to certain suppliers and often enters into noncancelable purchase commitments with vendors early in the design process. Due to the variability of material requirement specifications during the design process, the Company must closely manage material purchase commitments and respective delivery schedules. In the event of a delay or flaw in the design process, the Company's operating results could be adversely affected due to the Company's obligations to fulfill such noncancelable purchase commitments. Generally, the computer systems sold by Sun, such as the UltraSPARC based products, are the result of hardware and software development, such that delays in the software development can delay the ability of the Company to ship new hardware products. In addition, adoption of a new release of an operating system may require effort on the part of the customer and porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays by customers in adopting a new release of an operating system can limit the acceptability of hardware products tied to that release. Such delays could adversely affect the future operating results of the Company. Seasonality also affects the Company's operating results, particularly in the first quarter of each fiscal year. In addition, the Company's operating expenses are increasing as the Company continues to expand its operations, and future operating results will be adversely affected if revenues do not increase accordingly. Additionally, the Company plans to continue to evaluate and, when appropriate, make acquisitions of complementary technologies, products or businesses. As part of this process, the Company will continue to evaluate the changing value of its assets, and when necessary, make adjustments thereto. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. 10 <PAGE> LIQUIDITY AND CAPITAL RESOURCES Total assets at December 29, 1996 increased by approximately $66 million from June 30, 1996, due principally to increases in accounts receivable of $186 million, property, plant and equipment-net of $167 million, and other current assets of $30 million, offset by decreases in cash, cash equivalents and short-term investments of $239 million and inventories of $66 million. The increase in accounts receivable reflects a larger percentage of sales occurring near the end of the quarter and the timing of cash receipts. Increase in property, plant and equipment reflects the purchase of Phase II of the campus located in Menlo Park for approximately $100 million and capital additions to support increased headcount, primarily in engineering, service and marketing. Other current assets increased due to the timing of payments for insurance and other taxes. Cash was principally used for the systematic and opportunistic repurchases of 12.1 million shares of common stock for $329 million, capital expenditures of approximately $200 million, purchase of Phase II of the campus located in Menlo Park, and scheduled debt repayments of $40 million, offset by net maturities of short-term investments for $150 million and cash provided from operations. The reduction in inventories reflects improved inventory management. Total current liabilities decreased $8 million from June 30, 1996, due principally to a decrease in other current liabilities of $48 million and short-term borrowings of $22 million, offset by an increase in accounts payable of $59 million. The decrease in other current liabilities and short-term borrowings reflects the final payment related to the Company's senior notes and scheduled debt repayments. The increase in accounts payable reflects increased inventory receipts during the last three weeks of the quarter as compared to the fourth quarter of fiscal 1996. At December 29, 1996, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $750 million and a revolving credit facility with banks aggregating $300 million, which was available subject to compliance with certain covenants. The Company believes that the liquidity provided by existing cash and short-term investment balances and the borrowing arrangement described above will be sufficient to meet the Company's capital requirements through fiscal 1997. However, the Company believes the level of financial resources is a significant competitive factor in its industry and may choose at any time to raise additional capital through debt or equity financing to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. The sufficiency of the Company's capital resources are forward looking statements which involve risks and uncertainties and actual results may vary materially. 11 <PAGE> PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 13, 1996, the Annual Meeting of Stockholders of the Company was held in Menlo Park, California. An election of directors was held with the following individuals being elected to the Board of Directors of the Company: Share Voted For Votes Withheld --------------- -------------- Scott G. McNealy 314,141,304 1,592,750 L. John Doerr 314,200,826 1,533,228 Judith L. Estrin 314,176,294 1,557,760 Robert J. Fisher 314,181,142 1,552,912 Robert L. Long 314,171,094 1,562,960 M. Kenneth Oshman 314,195,994 1,538,060 A. Michael Spence 314,172,572 1,561,482 The seven nominees who received the highest number of votes (all of the above individuals) were elected to the Board of Directors. Votes withheld from any nominee were counted for purposes of determining the presence or absence of a quorum. The stockholders also approved an amendment to the Company's Restated Certificate of Incorporation increasing the number of shares of common stock, par value $0.00067, authorized for issuance thereunder from 300,000,000 to 940,000,000 shares. There were 305,052,626 shares voted for the amendment, 6,386,726 shares voted against the amendment, 918,234 abstentions and 3,376,468 broker non-votes. The affirmative vote of the holders of a majority of the outstanding shares of common stock outstanding on the record date of the Annual Meeting was needed in order to approve the foregoing proposal. Votes cast against the proposal , abstentions and broker non-votes, were counted only for purposes of determining a quorum and were counted as votes against the proposal. 12 <PAGE> ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of the Company's Common Stock by the Company's executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended December 29, 1996: OFFICER/ DATE PRICE NUMBER OF DIRECTOR SHARES SOLD ========================================================================== William Joy 11/1/96 $30.8906 40,000 11/8/96 $31.937 20,000 11/22/96 $28.75 20,000 11/22/96 $28.7187 20,000 11/25/96 $28.687 20,000 11/25/96 $28.4062 20,000 11/25/96 $28.6562 20,000 11/26/96 $28.2812 40,000 Michael Lehman 11/7/96 $37.7812 8,000 11/7/96 $37.7812 8,000 11/7/96 $37.7812 8,000 Eric Schmidt 11/21/96 $29.687 10,000 11/22/96 $28.937 10,000 John Shoemaker 11/6/96 $31.72 20,000 10/31/96 $30.392 2,000 Chet Silvestri 11/8/96 $32.312 20,000 11/27/96 $28.625 20,000 Michael Spence 11/7/96 $31.9687 20,000 Dorothy Terrell 11/7/96 $32.0312 6,000 11/8/96 $32.5312 6,000 11/7/96 $31.7844 20,000 11/8/96 $32.7085 6,000 Edward Zander 11/27/96 $57.0625 5,000 13 <PAGE> ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 10.89 Form of Change of Control Agreement executed by each corporate executive officer of Registrant. 10.90 Form of Change of Control Agreement executed by Chief Executive Officer of Registrant. 10.91 Form of Vice President Change of Control Severance Plan 10.92 Form of Director-Level Change of Control Severance Plan 11.0 Statement re: Computation of Earnings Per Share 27.0 Financial data for the period ended December 29, 1996 14 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman ------------------------ Michael E. Lehman Vice President and Chief Financial Officer /s/ George Reyes -------------------- George Reyes Vice President and Corporate Controller, Chief Accounting Officer Dated: February 11, 1997 15 <PAGE> EXHIBITS TO REPORT ------------------ ON FORM 10-Q ------------ FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 1996 ------------------------------------------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.89 <SEQUENCE>2 <DESCRIPTION>FORM OF CHANGE OF CONTROL AGREEMENT <TEXT> November 13, 1996 Dear [Name]: Sun Microsystems, Inc. (the "Company") considers it essential to the best interests of its stockholders to attract top executives and to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to ensure the continuity of management and to foster objectivity in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company and in consideration of your further services to the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company terminates subsequent to a "Change of Control" of the Company (as defined in subparagraph 2(c) hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until your employment with the Company is terminated other than after a Change of Control unless sooner terminated by written agreement of the Company and you. 2. Definitions. As used in this Agreement: (a) "Annual Compensation" means the total of (i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your termination of employment (the "Look-Back Period"), (ii) 100% of the greatest "On Target" annual bonus for which you were eligible within the Look-Back Period, and (iii) 100% of the greatest "On Target" Commission for which you were eligible within the Look-Back Period. (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). <PAGE> (c) "Change of Control" of the Company means and includes each and all of the following occurrences: (i) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities except pursuant to a negotiated agreement with the Company and pursuant to which such securities are purchased for the Company. (iii) A majority of the Board of Directors of the Company in office at the beginning of any thirty-six (36) month period is replaced during the course of such thirty-six (36) month period (other than by voluntary resignation of individual directors in the ordinary course of business) and such placement was not initiated by the Board of Directors of the Company as constituted at the beginning of such thirty-six (36) month period. Any other provision of this Section notwithstanding, the term "Change in Control" shall not include either of the following events undertaken at the election of the Company: (x) Any transaction, the sole purpose of which is to change the state of the Company's incorporation; (y) A transaction, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company's Common Stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. -2- <PAGE> (d) "COBRA" means Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Company" means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Article VII hereof. (g) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Sections 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee). (h) "Severance Payment" means the payment of severance compensation as provided in Section 3 of this Agreement. 3. Compensation Upon Termination of Employment Following a Change of Control. Subject to Sections 7 and 8 below, if your employment with the Company is terminated within twelve (12) months after a Change in Control, (a) you will be entitled to a Severance Payment in an amount computed as follows: (i) an amount equal to two and one-half (2 1/2) times Annual Compensation ("Termination Payment"); plus (ii) the same percentage of Company-paid health and group-term life insurance benefits as were provided to you and your family under plans of the Company as of the Change of Control for a total of twenty-four (24) months. (b) the Company agrees that in addition to the Termination Payment, all outstanding stock options previously granted to you under the Company's Stock Option Plan (including any options issued in substitution or assumption of such options as a result of a Change in Control), whether vested or unvested, shall immediately have their vesting accelerated upon such termination, and all such outstanding non-statutory stock options shall be exercisable for a period of three (3) months after such termination. -3- <PAGE> (c) Any cash payment to you under subparagraph 3(a) shall be made within 30 calendar days of your termination of employment. (d) Notwithstanding anything contained in subsections (a) and (b) above, the Company shall have no obligation to make any payment or offer any benefits to you under this Section 3 if your employment is terminated prior to a Change in Control or if your employment is terminated after a Change in Control for Cause (as defined in Section 4), death, Disability (as defined in Section 5), retirement or resignation other than for Good Reason (as defined in Section 6). (e) For purposes of COBRA, the date of a "qualifying event" for you and your covered dependents shall be the date upon which the coverage provided under Section 3(a)(ii) above terminates. Furthermore, for purposes of this Agreement, if it is determined by the Company's independent public accountants (the "Accountants") that acceleration of vesting of shares would preclude accounting for the acquisition of the Company as a pooling of interests, and it is a condition to the closing of the Change of Control transaction that the transaction be accounted for as a pooling of interests, then the Company shall not accelerate the vesting of your options under this Section 3. 4. Cause. For purposes of this Agreement, "Cause" means (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs, (iii) being under the influence of alcohol or drugs (except to the extent medically prescribed) while on duty or on Company premises, (iv) involvement in activities representing conflicts of interest, (v) improper disclosure of confidential information, (vi) conduct endangering, or likely to endanger, the health or safety of another employee; (vii) conviction of a felony, or (viii) falsifying or misrepresenting information on Company records. 5. Disability. For purposes of this Agreement, "Disability" means that, at the time your employment is terminated, you have been unable to perform the duties of your position for a period of six (6) consecutive months as the result of your incapability due to physical or mental illness. 6. Good Reason. The Company will be obligated to make payments and provide benefits under Section 3 if you terminate your employment for Good Reason within twelve months after a Change in Control. For purposes of this Agreement, "Good Reason" means (i) a material reduction in salary or benefits, (ii) a material change in job responsibilities, (iii) a request to relocate, except for office relocations that would not increase your one-way commute by more than 50 miles, or (iv) the failure of the Company to obtain the assumption of the Agreement as stipulated in Section 11. 7. Parachute Payments. In the event that any payment or benefit received or to be received by you in connection with a termination of your employment with the Company (collectively, the "Severance Payments") would (i) constitute a "parachute payment" within the meaning of section 280G of the Code or any similar or successor provision to 280G and (ii) but for this Section 7, be subject to the excise tax imposed by section 4999 of the Code or any similar or successor provision to section 4999 (the "Excise Tax"), then such Severance Payments (which Severance Payments shall collectively -4- <PAGE> be referred to herein as the "Severance Parachute Payments") shall be reduced to the largest amount which would result in no portion of the Severance Parachute Payments being subject to the Excise Tax. In the event any reduction of benefits is required pursuant to this Agreement, you shall be allowed to choose which benefits hereunder are reduced (e.g., reduction first from the Severance Payment, then from the vesting acceleration). Any determination as to whether a reduction is required under this Agreement and as to the amount of such reduction shall be made in writing by the Accountants prior to the Change of Control, whose determinations shall be conclusive and binding upon the Participant and the Company for all purposes. If the Internal Revenue Service (the "IRS") determines that a Severance Parachute Payment is subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of Section 8 hereof. Such enforcement of Section 8 hereof shall be the only remedy, under any and all applicable state and federal laws or otherwise, for your failure to reduce the Severance Parachute Payments so that no portion thereof is subject to the Excise Tax. The Company or related corporation shall reduce a Severance Parachute Payment in accordance with Section 7 only upon written notice by the Accountants indicating the amount of such reduction, if any. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Agreement. 8. Remedy. If, notwithstanding the reduction described in Section 7 hereof, the IRS determines that you are liable for the Excise Tax as a result of the receipt of a Severance Parachute Payment, then you shall, subject to the provisions of this Agreement, be obligated to pay to the Company (the "Repayment Obligation") an amount of money equal to the "Repayment Amount". The Repayment Amount with respect to a Severance Parachute Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that your net proceeds with respect to any Severance Parachute Payment (after taking into account the payment of the Excise Tax imposed on such Severance Parachute Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to a Severance Parachute Payment shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, you shall pay the Excise Tax. The Repayment Obligation shall be performed within 30 days of either (i) your entering into a binding agreement with the IRS as to the amount of your Excise Tax liability or (ii) a final determination by the IRS or a court decision requiring you to pay the Excise Tax with respect to such a Severance Parachute Payment from which no appeal is available or is timely taken. 9. Disputes. If you disagree with your allotment of benefits under this Agreement, you may file a written appeal with the designated Human Resources representative. Any claim relating to this Agreement shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of your termination date. The appeal must state the reasons that you believe you are entitled to different benefits under the Agreement. A designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide you with a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving your written appeal. If your appeal is denied, you shall have the right and option to elect review of such denial by either a court of competent jurisdiction or by arbitration. -5- <PAGE> 10. No Mitigation. (a) You shall not be required to mitigate the amount of any payment provided for in Section 3 hereof by seeking other employment or otherwise, nor shall the amount of such payment be reduced by reason of compensation or other income you receive for services rendered after your termination of employment with the Company. (b) In addition to the Termination Payment payable pursuant to Section 3 hereof, you shall be entitled to receive all benefits payable to you under any benefit plan of the Company in which you participate. 11. Company's Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform the obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Section 11, "Company" includes any successor to its business or assets as aforesaid which executes and delivers this Agreement or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or five (5) days after deposit with postal authorities transmitted by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first or last 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 notices of change address shall be effective only upon receipt. 13. Amendment or Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by you and the Company. No waiver of either party at any time of the breach of, or lack of compliance with, any conditions or provisions of this Agreement shall be deemed a waiver of the provisions or conditions hereof. 14. Sole Agreement. This Agreement represents the entire agreement between you and the Company with respect to the matters set forth herein and supersedes and replaces any prior agreements in their entirety. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement will be made by either party which are not set forth expressly herein. 15. Employee's Successors. 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 amounts are still payable to you hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to your devisee, legatee, or other designee or, if there be no such designees, to your estate. 16. Funding. This Agreement shall be funded from the Company's general assets. -6- <PAGE> 17. Validity. The invalidity or unenforceabihty of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 18. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. If the foregoing conforms with your understanding, please indicate your agreement to the terms hereof by signing where indicated below and returning one copy of this Agreement to the undersigned. IN WITNESS WHEREOF, this Agreement is executed effective as of the date set forth above. Very truly yours, SUN MICROSYSTEMS, INC. ------------------------------------- Michael H. Morris Vice President, General Counsel and Secretary ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE: - --------------------------------- [Name] - --------------------------------- - --------------------------------- (Address) -7- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.90 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 10.90 <TEXT> EXHIBIT 10.90 November 13, 1996 Dear Mr. McNealy: Sun Microsystems, Inc. (the "Company") considers it essential to the best interests of its stockholders to attract top executives and to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to ensure the continuity of management and to foster objectivity in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company and in consideration of your further services to the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company terminates subsequent to a "Change of Control" of the Company (as defined in subparagraph 2(c) hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until your employment with the Company is terminated other than after a Change of Control unless sooner terminated by written agreement of the Company and you. 2. Definitions. As used in this Agreement: (a) "Annual Compensation" means the total of (i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your termination of employment (the "Look-Back Period"), (ii) 100% of the greatest "On Target" annual bonus for which you were eligible within the Look-Back Period, and (iii) 100% of the greatest "On Target" Commission for which you were eligible within the Look-Back Period. (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). <PAGE> (c) "Change of Control" of the Company means and includes each and all of the following occurrences: (i) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities except pursuant to a negotiated agreement with the Company and pursuant to which such securities are purchased for the Company. (iii) A majority of the Board of Directors of the Company in office at the beginning of any thirty-six (36) month period is replaced during the course of such thirty-six (36) month period (other than by voluntary resignation of individual directors in the ordinary course of business) and such placement was not initiated by the Board of Directors of the Company as constituted at the beginning of such thirty-six (36) month period. Any other provision of this Section notwithstanding, the term "Change in Control" shall not include either of the following events undertaken at the election of the Company: (x) Any transaction, the sole purpose of which is to change the state of the Company's incorporation; (y) A transaction, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company's Common Stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. -2- <PAGE> (d) "COBRA" means Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Company" means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Article VII hereof. (g) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Sections 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee). (h) "Severance Payment" means the payment of severance compensation as provided in Section 3 of this Agreement. 3. Compensation Upon Termination of Employment Following a Change of Control. Subject to Sections 7 and 8 below, if your employment with the Company is terminated within twelve (12) months after a Change in Control, (a) you will be entitled to a Severance Payment in an amount computed as follows: (i) an amount equal to three (3) times annual Compensation ("Termination Payment"); plus (ii) the same percentage of Company-paid health and group-term life insurance benefits as were provided to you and your family under plans of the Company as of the Change of Control for a total of twenty-four (24) months. (b) the Company agrees that in addition to the Termination Payment, all outstanding stock options previously granted to you under the Company's Stock Option Plan (including any options issued in substitution or assumption of such options as a result of a Change in Control), whether vested or unvested, shall immediately have their vesting accelerated upon such termination, and all such outstanding non-statutory stock options shall be exercisable for a period of three (3) months after such termination. -3- <PAGE> (c) Any cash payment to you under subparagraph 3(a) shall be made within 30 calendar days of your termination of employment. (d) Notwithstanding anything contained in subsections (a) and (b) above, the Company shall have no obligation to make any payment or offer any benefits to you under this Section 3 if your employment is terminated prior to a Change in Control or if your employment is terminated after a Change in Control for Cause (as defined in Section 4), death, Disability (as defined in Section 5), retirement or resignation other than for Good Reason (as defined in Section 6). (e) For purposes of COBRA, the date of a "qualifying event" for you and your covered dependents shall be the date upon which the coverage provided under Section 3(a)(ii) above terminates. Furthermore, for purposes of this Agreement, if it is determined by the Company's independent public accountants (the "Accountants") that acceleration of vesting of shares would preclude accounting for the acquisition of the Company as a pooling of interests, and it is a condition to the closing of the Change of Control transaction that the transaction be accounted for as a pooling of interests, then the Company shall not accelerate the vesting of your options under this Section 3. 4. Cause. For purposes of this Agreement, "Cause" means (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs, (iii) being under the influence of alcohol or drugs (except to the extent medically prescribed) while on duty or on Company premises, (iv) involvement in activities representing conflicts of interest, (v) improper disclosure of confidential information, (vi) conduct endangering, or likely to endanger, the health or safety of another employee; (vii) conviction of a felony, or (viii) falsifying or misrepresenting information on Company records. 5. Disability. For purposes of this Agreement, "Disability" means that, at the time your employment is terminated, you have been unable to perform the duties of your position for a period of six (6) consecutive months as the result of your incapability due to physical or mental illness. 6. Good Reason. The Company will be obligated to make payments and provide benefits under Section 3 if you terminate your employment for Good Reason within twelve months after a Change in Control. For purposes of this Agreement, "Good Reason" means (i) a material reduction in salary or benefits, (ii) a material change in job responsibilities, (iii) a request to relocate, except for office relocations that would not increase your one-way commute by more than 50 miles, or (iv) the failure of the Company to obtain the assumption of the Agreement as stipulated in Section 11. 7. Parachute Payments. In the event that any payment or benefit received or to be received by you in connection with a termination of your employment with the Company (collectively, the "Severance Payments") would (i) constitute a "parachute payment" within the meaning of section 280G of the Code or any similar or successor provision to 280G and (ii) but for this Section 7, be subject to the excise tax imposed by section 4999 of the Code or any similar or successor provision to section 4999 (the "Excise Tax"), then such Severance Payments (which Severance Payments shall collectively -4- <PAGE> be referred to herein as the "Severance Parachute Payments") shall be reduced to the largest amount which would result in no portion of the Severance Parachute Payments being subject to the Excise Tax. In the event any reduction of benefits is required pursuant to this Agreement, you shall be allowed to choose which benefits hereunder are reduced (e.g., reduction first from the Severance Payment, then from the vesting acceleration). Any determination as to whether a reduction is required under this Agreement and as to the amount of such reduction shall be made in writing by the Accountants prior to the Change of Control, whose determinations shall be conclusive and binding upon the Participant and the Company for all purposes. If the Internal Revenue Service (the "IRS") determines that a Severance Parachute Payment is subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of Section 8 hereof. Such enforcement of Section 8 hereof shall be the only remedy, under any and all applicable state and federal laws or otherwise, for your failure to reduce the Severance Parachute Payments so that no portion thereof is subject to the Excise Tax. The Company or related corporation shall reduce a Severance Parachute Payment in accordance with Section 7 only upon written notice by the Accountants indicating the amount of such reduction, if any. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Agreement. 8. Remedy. If, notwithstanding the reduction described in Section 7 hereof, the IRS determines that you are liable for the Excise Tax as a result of the receipt of a Severance Parachute Payment, then you shall, subject to the provisions of this Agreement, be obligated to pay to the Company (the "Repayment Obligation") an amount of money equal to the "Repayment Amount". The Repayment Amount with respect to a Severance Parachute Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that your net proceeds with respect to any Severance Parachute Payment (after taking into account the payment of the Excise Tax imposed on such Severance Parachute Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to a Severance Parachute Payment shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, you shall pay the Excise Tax. The Repayment Obligation shall be performed within 30 days of either (i) your entering into a binding agreement with the IRS as to the amount of your Excise Tax liability or (ii) a final determination by the IRS or a court decision requiring you to pay the Excise Tax with respect to such a Severance Parachute Payment from which no appeal is available or is timely taken. 9. Disputes. If you disagree with your allotment of benefits under this Agreement, you may file a written appeal with the designated Human Resources representative. Any claim relating to this Agreement shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of your termination date. The appeal must state the reasons that you believe you are entitled to different benefits under the Agreement. A designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide you with a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving your written appeal. If your appeal is denied, you shall have the right and option to elect review of such denial by either a court of competent jurisdiction or by arbitration. -5- <PAGE> 10. No Mitigation. (a) You shall not be required to mitigate the amount of any payment provided for in Section 3 hereof by seeking other employment or otherwise, nor shall the amount of such payment be reduced by reason of compensation or other income you receive for services rendered after your termination of employment with the Company. (b) In addition to the Termination Payment payable pursuant to Section 3 hereof, you shall be entitled to receive all benefits payable to you under any benefit plan of the Company in which you participate. 11. Company's Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform the obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Section 11, "Company" includes any successor to its business or assets as aforesaid which executes and delivers this Agreement or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or five (5) days after deposit with postal authorities transmitted by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first or last 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 notices of change address shall be effective only upon receipt. 13. Amendment or Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by you and the Company. No waiver of either party at any time of the breach of, or lack of compliance with, any conditions or provisions of this Agreement shall be deemed a waiver of the provisions or conditions hereof. 14. Sole Agreement. This Agreement represents the entire agreement between you and the Company with respect to the matters set forth herein and supersedes and replaces any prior agreements in their entirety. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement will be made by either party which are not set forth expressly herein. 15. Employee's Successors. 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 amounts are still payable to you hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to your devisee, legatee, or other designee or, if there be no such designees, to your estate. 16. Funding. This Agreement shall be funded from the Company's general assets. -6- <PAGE> 17. Validity. The invalidity or unenforceabihty of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 18. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. If the foregoing conforms with your understanding, please indicate your agreement to the terms hereof by signing where indicated below and returning one copy of this Agreement to the undersigned. IN WITNESS WHEREOF, this Agreement is executed effective as of the date set forth above. Very truly yours, SUN MICROSYSTEMS, INC. ----------------------------------------- Michael H. Morris Vice President, General Counsel and Secretary ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE: - ----------------------------------- Scott G. McNealy - ----------------------------------- - ----------------------------------- (Address) -7- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.91 <SEQUENCE>4 <DESCRIPTION>VICE PRESIDENT CHANGE OF CONTROL SEVERANCE PLAN <TEXT> EXHIBIT 10.91 SUN MICROSYSTEMS, INC. VICE PRESIDENT CHANGE OF CONTROL SEVERANCE PLAN Introduction The Board of Directors of Sun Microsystems, Inc., a Delaware corporation ("Company"), has evaluated the economic and social impact of certain acquisitions or change of control events on its employees. The Board recognized that it will no longer have the power to protect interests of the employees after an acquisition or other change of control. As a result, the Board believes that it is in the Company's interest to provide its employees with the right to compensation and assurance of economic security in certain circumstances following an acquisition or other change of control. Furthermore, the Board believes a severance compensation plan of this kind will aid the Company in attracting and retaining the highly qualified, high performing individuals who are essential to its success. The plan's assurance of fair treatment will ensure organizational stability during any period of significant uncertainty that is inherent to an acquisition or other change of control. Accordingly, the following plan has been developed and is hereby adopted. SECTION I. ESTABLISHMENT OF PLAN 1.1 Establishment of Plan As of the Effective Date, the Company hereby establishes a severance plan to be known as the "Vice President Change of Control Severance Plan" (the "Plan"), as set forth in this document. The purposes of the Plan are set forth in the Introduction. 1.2 Applicability of Plan The benefits provided by this Plan shall be available to all Employees of the Company who, at or after the Effective Date, meet the eligibility requirements of Section III. 1.3 Contractual Right to Benefits This Plan establishes and vests in each Participant a contractual right to the benefits to which he or she is entitled hereunder, enforceable by the Participant against his or her Employer or the Company, or both. <PAGE> SECTION II. DEFINITIONS AND CONSTRUCTION 2.1 Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the term is capitalized. (a) "Annual Compensation" means the total of (i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your termination of employment (the "Look-Back Period"), (ii) 100% of the greatest "On Target" annual bonus for which you were eligible within the Look-Back Period, and (iii) 100% of the greatest "On Target" Commission for which you were eligible within the Look-Back Period. (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) "Change of Control" of the Company means and includes each and all of the following occurrences: (i) The stockholders of the Company approve a merger or consolidation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, or securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities except pursuant to a negotiated agreement with the Company and pursuant to which such securities are purchased for the Company. (iii) A majority of the Board of Directors of the Company in office at the beginning of any thirty-six (36) month period is replaced during the course of such thirty-six (36) month period (other than by voluntary resignation of individual directors in the ordinary course of business) and such replacement was not initiated by the Board of Directors of the Company as constituted at the beginning of such thirty-six (36) month period. -2- <PAGE> Any other provision of this Section notwithstanding, the term "Change of Control" shall not include either of the following events undertaken at the election of the Company: (i) Any transaction, the sole purpose of which is to change the state of the Company's incorporation. (ii) A transaction, the result of which is to sell all or substantially all the assets of the Company to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company's common stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. (d) "Change of Control Date" means, for purposes of this Plan, the date as of which a Change of Control shall have occurred. (e) "COBRA" means Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Company" means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Section VII hereof. (h) "Effective Date" means November 13, 1996. (i) "Eligible Employee" means a common law employee of an Employer whose official Company title is Vice President (other than an employee who is a party to an individual agreement with the Company which provides severance or severance-type benefits), and whose customary employment as of a Change of Control is 20 hours or more per week. For purposes of this plan, an Employee shall be considered to continue to be employed in the case of sick leave, military leave, or any other leave of absence approved pursuant to the regular leave policy of the Company. (j) "Employer" means the Company or a subsidiary of the Company which has adopted the Plan pursuant to Section VI hereof. (k) "Hours of Work" means the Employee's customary hours of employment per week. For purposes of this Plan, customary Hours of Work shall not include overtime or other extraordinary hours. (l) "Just Cause" means the termination of employment of an Employee shall have taken place as a result of (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs, (iii) being under the influence of alcohol or drugs (except to the extent -3- <PAGE> medically prescribed) while on duty or on Company premises, (iv) involvement in activities representing conflicts of interest, (v) improper disclosure of confidential information, (vi) conduct endangering, or likely to endanger, the health or safety of another employee; (vii) conviction of a felony, or (viii) falsifying or misrepresenting information on Company records. (m) "Participant" means an Employee who meets the eligibility requirements of Section III. (n) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee). (o) "Plan" means the Sun Microsystems, Inc. Vice President Change of Control Severance Plan. (p) "Severance Payment" means the payment of severance compensation as provided in Section IV hereof. 2.2 Applicable Law To the extent not preempted by the laws of the United States, the laws of the State of California shall be the controlling law in all matters relating to the Plan. 2.3 Severability If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. SECTION III. ELIGIBILITY 3.1 Participation in Plan Any Eligible Employee shall become a Participant in the Plan. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee of an Employer, unless such Participant is then entitled to payment of a Severance Payment as provided in the Plan. A Participant entitled to payment of a Severance Payment shall remain a Participant in the Plan until the full amount of the Severance Payment has been paid to the Participant. -4- <PAGE> 3.2 Re-entry into Plan For purposes of Section 4.3, an individual who ceases to be an Eligible Employee due to a reduction in Hours of Work below 20 hours and who again becomes an Eligible Employee prior to an Change of Control shall be deemed to have been "continuously employed" for his or her entire period of employment as an Eligible Employee. SECTION IV. SEVERANCE BENEFITS 4.1 Right to Severance Benefits A Participant shall be entitled to receive from the Company a Severance Payment and certain benefits in the amount and to the extent provided in this Section IV if there has been a Change of Control of the Company and if, within twelve (12) months thereafter, the Participant's employment by an Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Severance Payment or benefits if termination occurs for reasons not specified in Section 4.2, including death, voluntary retirement at or after age 65, total and permanent disability, or for Just Cause. 4.2 Good Reasons for Termination Following a Change of Control, a Participant shall be entitled to a Severance Payment and to the benefits described in Section 4.5 following termination of employment, whether voluntary or involuntary, for one or more of the following reasons: (a) The Employer reduces by 15% or more the Participant's Annual Compensation. (b) The Employer reduces by 20% or more the Participant's Hours of Work as in effect immediately prior to the Change of Control. (c) Without the Participant's express written consent, the Employer requires the Participant to change the location of his or her job or office, so that he or she will be based at a location more than fifty (50) miles from the location of his job or office immediately prior to the Change of Control. (d) The cost of Employer-provided benefits, under plans, arrangements, policies and procedures, taken as a whole, decreases by 25% or more of the Employer-provided cost immediately prior to the Change of Control or the cost of such benefits to the Participant increases by 25% or more of the Participant's cost immediately prior to the Change of Control; provided, -5- <PAGE> however, that if such increase results from the Employer's good faith exercise of better judgment in response to changes in federal or state law, such decrease increase shall not be a Good Reason for Termination. (e) The Participant incurs a Significant Reduction in Duties and Responsibilities as determined by the "Review Committee". Such review Committee shall be composed of seven (7) Employees, appointed by the Board of Directors for this purpose, of which no less than four (4) are Participants. The Review Committee may establish such procedures as it deems appropriate to facilitate a fair and objective review process to determine whether a Participant has incurred a Significant Reduction in Duties and Responsibilities. (f) A successor company fails or refuses to assume the Company's obligations under this Plan, as required by Section VII. (g) The Company or any successor company breaches any of the provisions of this Plan. (h) The Employer terminates the employment of a Participant at or after a Change of Control other than for Just Cause. 4.3 Amount of Severance Payment (a) Subject to Section 4.3(b), each Participant entitled to a Severance Payment under this Plan who is employed by the Company as of the Change of Control Date shall receive from the Company a lump sum cash payment in an amount equal to two (2) times Annual Compensation. (b) In the case of a Participant who is not a citizen of the United States, the Company may, in its discretion, reduce the Severance Payment otherwise calculated under Section 4.3(a) by the amount of severance-type benefits to which such Participant is then entitled under the laws of the country in which the Participant resides. (c) A Participant shall not be required to mitigate damages or the amount of his or her Severance payment by seeking other employment or otherwise, nor shall the amount of such payment be reduced by any compensation earned by the Participant as a result of employment after his or her termination of employment by an Employer. 4.4 Time of Severance Payment The Severance Payment to which a Participant is entitled shall be paid by the Company to the Participant, in cash and in full, no later than ten (10) calendar days after the termination of the Participant's employment. If such a Participant should die before all amounts payable to him or her have been paid, such unpaid amounts shall be paid to the Participant's spouse, if living, otherwise to the personal representative of the Participant's estate. -6- <PAGE> 4.5 Other Severance Provisions (a) Subject to the requirements of the Code, Participants will receive, in addition to the Severance Payment, the same percentage of Company-Paid health and group-term life insurance in the same plans as were provided to such Participant immediately prior to the Participant's termination (the "Company-Paid Coverage"). If a Participant's Company-Paid Coverage also included the Participant's dependents immediately prior to the Participant's termination, such dependents shall continue to be covered at the same percentage rate after such termination. (b) Company-Paid Coverage shall continue for twenty-four (24) months beginning at the Participant's termination date. (c) For purposes of COBRA, the date of the "qualifying event" for Participants and their covered dependents shall be the date upon which the Company-Paid Coverage terminates. (d) In addition to the Severance Payment and the Company-Paid Coverage, all outstanding options previously granted to Participants under the Employer's stock option plans (including any options issued in substitution or assumption of such options as a result of a Change in Control), whether vested or unvested, shall have their vesting immediately accelerated upon such termination; provided, however, that if it is determined by the Company's independent public accountants (the "Accountants") that acceleration of vesting of option shares would preclude accounting for the acquisition of the Company as a pooling of interests, and it is a condition to the closing of the Change of Control transaction that the transaction be accounted for as a pooling of interests, then the Company shall not accelerate the vesting of options hereunder. 4.6 Parachute Payments (a) In the event that any payment or benefit received or to be received by a Participant in connection with a termination of the Participant's employment with an Employer (collectively, the "Termination Payments") would (i) constitute an "excess parachute payment" within the meaning of Section 280G of the Code or any similar or successor provision to Section 280G and (ii) but for this Section 4.6(a), be subject to the excise tax imposed by section 4999 of the Code or any similar or successor provision to section 4999 (the "Excise Tax"), then, subject to the provisions of (c) below, such Termination Payments (which Termination Payments shall collectively be referred to herein as the "Termination Parachute Payments") shall be reduced to the largest amount which would result in no portion of the Termination Parachute Payments being subject to the Excise Tax. In the event any reduction of benefits is required pursuant to this subsection 4.6(a), each Participant shall be allowed to choose which benefits hereunder are reduced (e.g., reduction first from the Severance Payment, then from the vesting acceleration). Any determination as to whether a reduction is required under this Section 4.6. and as to the amount of such reduction shall be made in writing by the Company's independent public accountants prior to the Change of Control (the "Accountants"), whose determinations shall be conclusive and binding upon the Participant and the Company for all purposes. For purposes of making the calculations required by this Section 4.6., the -7- <PAGE> Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.6. (b) If the Internal Revenue Service (the "IRS") determines that a Termination Parachute Payment is subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of (c) below. Such enforcement of Section 4.6(c) hereof shall be the only remedy, under any and all applicable state and federal laws or otherwise, for the failure to reduce the Termination Parachute Payments so that no portion thereof is subject to the Excise Tax. (c) If, notwithstanding the reduction described in (a) above, the IRS determines that a Participant is liable for the Excise Tax as a result of the receipt of a Termination Parachute Payment, then such Participant shall, subject to the provisions of this Plan, be obligated to pay to the Company (the "Repayment Obligation") an amount of money equal to the "Repayment Amount". The Repayment Amount with respect to a Termination Parachute Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that such Participant's net proceeds with respect to any Termination Parachute Payment (after taking into account the payment of the Excise Tax imposed on such Termination Parachute Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to a Termination Parachute Payment shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Termination Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the participant shall pay the Excise Tax. The Repayment Obligation shall be performed within 30 days of either (i) the Participant entering into a binding agreement with the IRS as to the amount of his or her Excise Tax liability or (ii) a final determination by the IRS or a court decision requiring the Participant to pay the Excise Tax with respect to such a Termination Parachute Payment from which no appeal is available or is timely taken. SECTION V. OTHER RIGHTS AND BENEFITS NOT AFFECTED 5.1 Other Benefits Neither the provisions of this Plan nor the Severance Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant's rights as an Employee of an Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock purchase plan, or any employment agreement or other plan or arrangement. -8- <PAGE> 5.2 Employment Status THIS PLAN DOES NOT CONSTITUTE A CONTRACT OF EMPLOYMENT OR IMPOSE ON THE PARTICIPANT OR THE PARTICIPANT'S EMPLOYER ANY OBLIGATION TO RETAIN THE PARTICIPANT AS AN EMPLOYEE, TO CHANGE THE STATUS OF THE PARTICIPANT AS AN AT-WILL EMPLOYEE, OR TO CHANGE THE COMPANY'S POLICIES REGARDING TERMINATION OF EMPLOYMENT. SECTION VI. PARTICIPATING EMPLOYERS 6.1 Upon approval by the Board of Directors of the Company, this Plan may be adopted by any Subsidiary of the Company. Upon such adoption, the Subsidiary shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary. The term "Subsidiary" means any corporation in which the Company, directly or indirectly holds a majority of the voting power of its outstanding shares of capital stock. SECTION VII. SUCCESSOR TO COMPANY 7.1 The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. SECTION VIII. DURATION, AMENDMENT AND TERMINATION 8.1 Duration If a Change of Control has not occurred, this Plan shall expire on November 13, 2001, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of Directors of the Company. -9- <PAGE> If a Change of Control occurs, this Plan shall continue in full force and effect, and shall not terminate or expire until after all Participants who become entitled to Severance Payments hereunder shall have received such payments in full. 8.2 Amendment and Termination The Plan may be terminated or amended in any respect by resolution adopted by two-thirds of the Board of Directors of the Company, unless a Change of Control has previously occurred. If a Change of Control occurs, the Plan no longer shall be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. 8.3 Form of Amendment The form of any proper amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board of Directors. A proper amendment of the Plan automatically shall effect a corresponding amendment to all Participants' rights hereunder. A proper termination of the Plan automatically shall effect a termination of all Participants' rights and benefits hereunder. SECTION IX. PLAN ADMINISTRATION 9.1 Discretionary Authority. Prior to a Change of Control, the Employer shall have discretionary authority to construe and interpret the terms of the Plan, to determine eligibility and to make all other determinations under the Plan. On or after the date a Change of Control, the Employer shall not have discretionary authority to construe and interpret the Plan, and any decisions of the Employer with respect to the Plan during such period shall be subject to de novo review if and when the such decisions are reviewed by a court or in arbitration. 9.2 Initial Appeal Procedure An employee or former employee of an Employer who disagrees with their allotment of benefits under this Plan may file a written appeal with the designated Human Resources representative. Any claim relating to this Plan shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of the employee's termination date. The appeal must state the reasons the employee or former employee believes he or she is entitled to different benefits under the Plan. The designated Human Resources representative shall -10- <PAGE> review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide the employee a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving the written appeal. 9.3 Review of Appeal Procedure If the appeal of an employee or former employee of an Employer appeal is denied, such employee or former employee shall have the right and option to elect review of such denial by either a court of competent jurisdiction or by arbitration as set forth in Section 11 hereof. SECTION X. LEGAL FEES AND EXPENSES 10.1 The Company shall pay all legal fees, costs of litigation and/or arbitration, and other expenses incurred in good faith by each Participant as a result of the Company's refusal to make the Severance payment to which the Participant becomes entitled under this Plan, or as a result of the Company's contesting the validity, enforceability or interpretation of the Plan. SECTION XI. ARBITRATION 11.1 Each Participant shall have the right and option to elect (in lieu of litigation) to have any dispute or controversy arising under or in connection with the Plan settled by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of his or her job with an Employer, in accordance with rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Participant, shall be borne by the Company. SECTION XII. FUNDING 12.1 The Plan shall be funded from the Company's general assets. -i- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.92 <SEQUENCE>5 <DESCRIPTION>DIRECTOR LEVEL CHANGE OF CONTROL SEVERANCE PLAN <TEXT> SUN MICROSYSTEMS, INC. DIRECTOR LEVEL CHANGE OF CONTROL SEVERANCE PLAN Amended and Restated Effective as of November 13, 1996 Introduction The Board of Directors of Sun Microsystems, Inc., a Delaware corporation ("Company"), has evaluated the economic and social impact of certain acquisitions or change of control events on its employees. The Board recognized that it will no longer have the power to protect interests of the employees after an acquisition or other change of control. As a result, the Board believes that it is in the Company's interest to provide its employees with the right to compensation and assurance of economic security in certain circumstances following an acquisition or other change of control. Furthermore, the Board believes a severance compensation plan of this kind will aid the Company in attracting and retaining the highly qualified, high performing individuals who are essential to its success. The plan's assurance of fair treatment will ensure organizational stability during any period of significant uncertainty that is inherent to an acquisition or other change of control. Accordingly, the following plan has been developed and is hereby adopted. SECTION I. ESTABLISHMENT OF PLAN 1.1 Establishment of Plan As of the Effective Date, the Company hereby establishes a severance plan to be known as the "Director Level Change of Control Severance Plan" (the "Plan"), as set forth in this document. The purposes of the Plan are set forth in the Introduction. 1.2 Applicability of Plan The benefits provided by this Plan shall be available to all Employees of the Company who, at or after the Effective Date, meet the eligibility requirements of Section III. 1.3 Contractual Right to Benefits This Plan establishes and vests in each Participant a contractual right to the benefits to which he or she is entitled hereunder, enforceable by the Participant against his or her Employer or the Company, or both. <PAGE> SECTION II. DEFINITIONS AND CONSTRUCTION 2.1 Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the term is capitalized. (a) "Annual Compensation" means the total of (i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your termination of employment (the "Look-Back Period"), (ii) 100% of the greatest "On Target" annual bonus for which you were eligible within the Look-Back Period, and (iii) 100% of the greatest "On Target" Commission for which you were eligible within the Look-Back Period. (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) "Change of Control" of the Company means and includes each and all of the following occurrences: (i) The stockholders of the Company approve a merger or consolidation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, or securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities except pursuant to a negotiated agreement with the Company and pursuant to which such securities are purchased for the Company. (iii) A majority of the Board of Directors of the Company in office at the beginning of any thirty-six (36) month period is replaced during the course of such thirty-six (36) month period (other than by voluntary resignation of individual directors in the ordinary course of business) and such replacement was not initiated by the Board of Directors of the Company as constituted at the beginning of such thirty-six (36) month period. -2- <PAGE> Any other provision of this Section notwithstanding, the term "Change of Control" shall not include either of the following events undertaken at the election of the Company: (i) Any transaction, the sole purpose of which is to change the state of the Company's incorporation. (ii) A transaction, the result of which is to sell all or substantially all the assets of the Company to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company's common stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. (d) "Change of Control Date" means, for purposes of this Plan, the date as of which a Change of Control shall have occurred. (e) "COBRA" means Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Company" means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Section VII hereof. (h) "Effective Date" as to Employees of an Employer means the date the Plan is approved by the Board of Directors of that Employer, or such other date as the Board shall designate in its resolution approving the Plan. (i) "Eligible Employee" means a common law employee of an Employer whose official Company title is Director (other than an employee who is a party to an individual agreement with the Company which provides severance or severance-type benefits), and whose customary employment as of a Change of Control is 20 hours or more per week. For purposes of this plan, an Employee shall be considered to continue to be employed in the case of sick leave, military leave, or any other leave of absence approved pursuant to the regular leave policy of the Company. (j) "Employer" means the Company or a subsidiary of the Company which has adopted the Plan pursuant to Section VI hereof. (k) "Hours of Work" means the Employee's customary hours of employment per week. For purposes of this Plan, customary Hours of Work shall not include overtime or other extraordinary hours. (l) "Just Cause" means the termination of employment of an Employee shall have -3- <PAGE> taken place as a result of (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs, (iii) being under the influence of alcohol or drugs (except to the extent medically prescribed) while on duty or on Company premises, (iv) involvement in activities representing conflicts of interest, (v) improper disclosure of confidential information, (vi) conduct endangering, or likely to endanger, the health or safety of another employee; (vii) conviction of a felony, or (viii) falsifying or misrepresenting information on Company records. (m) "Participant" means an Employee who meets the eligibility requirements of Section III. (n) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee). (o) "Plan" means the Sun Microsystems, Inc. Director Level Change of Control Severance Plan. (p) "Severance Payment" means the payment of severance compensation as provided in Section IV hereof. 2.2 Applicable Law To the extent not preempted by the laws of the United States, the laws of the State of California shall be the controlling law in all matters relating to the Plan. 2.3 Severability If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. SECTION III. ELIGIBILITY 3.1 Participation in Plan Any Eligible Employee shall become a Participant in the Plan. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee of an Employer, unless such Participant is then entitled to payment of a Severance Payment as provided in the Plan. A Participant entitled to payment of a Severance Payment shall remain a Participant in the Plan until -4- <PAGE> the full amount of the Severance Payment has been paid to the Participant. 3.2 Re-entry into Plan For purposes of Section 4.3, an individual who ceases to be an Eligible Employee due to a reduction in Hours of Work below 20 hours and who again becomes an Eligible Employee prior to an Change of Control shall be deemed to have been "continuously employed" for his or her entire period of employee as an Eligible Employee. SECTION IV. SEVERANCE PAYMENTS 4.1 Right to Severance Payment A Participant shall be entitled to receive from the Company a Severance Payment and certain benefits in the amount provided in this Section IV if there has been a Change of Control of the Company and if, within twelve (12) months thereafter, the Participant's employment by an Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Severance Payment or benefits if termination occurs for reasons not specified in Section 4.2, including death, voluntary retirement at or after age 65, total and permanent disability, or for Just Cause. 4.2 Good Reasons for Termination Following a Change of Control, a Participant shall be entitled to a Severance Payment and to the benefits described in Section 4.5 following termination of employment, whether voluntary or involuntary, for one or more of the following reasons: (a) The Employer reduces by 15% or more the Participant's Annual Compensation. (b) The Employer reduces by 20% or more the Participant's Hours of Work as in effect immediately prior to the Change of Control. (c) Without the Participant's express written consent, the Employer requires the Participant to change the location of his or her job or office, so that he or she will be based at a location more than fifty (50) miles from the location of his job or office immediately prior to the Change of Control. (d) The cost of Employer-provided benefits, under plans, arrangements, policies and procedures, taken as a whole, decreases by 25% or more of the Employer-provided cost immediately prior to the Change of Control or the cost of such benefits to the Participant increases -5- <PAGE> by 25% or more of the Participant's cost immediately prior to the Change of Control; provided, however, that if such increase results from the Employer's good faith exercise of better judgment in response to changes in federal or state law, such decrease increase shall not be a Good Reason for Termination. (e) The Participant incurs a Significant Reduction in Duties and Responsibilities as determined by the "Review Committee". Such review Committee shall be composed of seven (7) Employees, appointed by the Board of Directors for this purpose, of which no less than four (4) are Participants. The Review Committee may establish such procedures as it deems appropriate to facilitate a fair and objective review process to determine whether a Participant has incurred a Significant Reduction in Duties and Responsibilities. (f) A successor company fails or refuses to assume the Company's obligations under this Plan, as required by Section VII. (g) The Company or any successor company breaches any of the provisions of this Plan. (h) The Employer terminates the employment of a Participant at or after a Change of Control other than for Just Cause. 4.3 Amount of Severance Payment (a) Subject to Section 4.3(b), each Participant entitled to a Severance Payment under this Plan who is employed by the Company as of the Change of Control Date shall receive from the Company a lump sum cash payment in an amount equal to one and one-half (1 1/2) times Annual Compensation. (b) In the case of a Participant who is not a citizen of the United States, the Company may, in its discretion, reduce the Severance Payment otherwise calculated under Section 4.3(a) by the amount of severance-type benefits to which such Participant is then entitled under the laws of the country in which the Participant resides. (c) A Participant shall not be required to mitigate damages or the amount of his or her Severance payment by seeking other employment or otherwise, nor shall the amount of such payment be reduced by any compensation earned by the Participant as a result of employment after his or her termination of employment by an Employer. 4.4 Time of Severance Payment The Severance Payment to which a Participant is entitled shall be paid by the Company to the Participant, in cash and in full, no later than ten (10) calendar days after the termination of the Participant's employment. If such a Participant should die before all amounts payable to him or her have been paid, such unpaid amounts shall be paid to the Participant's spouse, if living, otherwise to -6- <PAGE> the personal representative of the Participant's estate. 4.5 Other Severance Provisions (a) Subject to the requirements of the Code, Participants will receive, in addition to the Severance Payment, the same percentage of Company-Paid health and group-term life insurance in the same plans as were provided to such Participant immediately prior to the Participant's termination (the "Company-Paid Coverage"). If a Participant's Company-Paid Coverage also included the Participant's dependents immediately prior to the Participant's termination, such dependents shall continue to be covered at the same percentage rate after such termination. (b) Company-Paid Coverage shall continue for eighteen (18) months beginning at the Participant's termination date. (c) For purposes of COBRA, the date of the "qualifying event" for Participants and their covered dependents shall be the date upon which the Company-Paid Coverage terminates. 4.6 Parachute Payments (a) In the event that any payment or benefit received or to be received by a Participant in connection with a termination of the Participant's employment with an Employer (collectively, the "Termination Payments") would (i) constitute an "excess parachute payment" within the meaning of Section 280G of the Code or any similar or successor provision to Section 280G and (ii) but for this Section 4.6(a), be subject to the excise tax imposed by section 4999 of the Code or any similar or successor provision to section 4999 (the "Excise Tax"), then, subject to the provisions of (c) below, such Termination Payments (which Termination Payments shall collectively be referred to herein as the "Termination Parachute Payments") shall be reduced to the largest amount which would result in no portion of the Termination Parachute Payments being subject to the Excise Tax. Any determination as to whether a reduction is required under this Section 4.6. and as to the amount of such reduction shall be made in writing by the Company's independent public accountants prior to the Change of Control (the "Accountants"), whose determinations shall be conclusive and binding upon the Participant and the Company for all purposes. For purposes of making the calculations required by this Section 4.6, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.6. (b) If the Internal Revenue Service (the "IRS") determines that a Termination Parachute Payment is subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of (c) below. Such enforcement of -7- <PAGE> Section 4.6(c) hereof shall be the only remedy, under any and all applicable state and federal laws or otherwise, for the failure to reduce the Termination Parachute Payments so that no portion thereof is subject to the Excise Tax. (c) If, notwithstanding the reduction described in (a) above, the IRS determines that a Participant is liable for the Excise Tax as a result of the receipt of a Termination Parachute Payment, then such Participant shall, subject to the provisions of this Plan, be obligated to pay to the Company (the "Repayment Obligation") an amount of money equal to the "Repayment Amount". The Repayment Amount with respect to a Termination Parachute Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that such Participant's net proceeds with respect to any Termination Parachute Payment (after taking into account the payment of the Excise Tax imposed on such Termination Parachute Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to a Termination Parachute Payment shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Termination Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the participant shall pay the Excise Tax. The Repayment Obligation shall be performed within 30 days of either (i) the Participant entering into a binding agreement with the IRS as to the amount of his or her Excise Tax liability or (ii) a final determination by the IRS or a court decision requiring the Participant to pay the Excise Tax with respect to such a Termination Parachute Payment from which no appeal is available or is timely taken. SECTION V. OTHER RIGHTS AND BENEFITS NOT AFFECTED 5.1 Other Benefits Neither the provisions of this Plan nor the Severance Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant's rights as an Employee of an Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock purchase plan, or any employment agreement or other plan or arrangement. 5.2 Employment Status THIS PLAN DOES NOT CONSTITUTE A CONTRACT OF EMPLOYMENT OR IMPOSE ON THE PARTICIPANT OR THE PARTICIPANT'S EMPLOYER ANY OBLIGATION TO RETAIN THE PARTICIPANT AS AN EMPLOYEE, TO CHANGE THE STATUS OF THE PARTICIPANT AS AN AT-WILL EMPLOYEE, OR TO CHANGE THE COMPANY'S POLICIES REGARDING TERMINATION OF EMPLOYMENT. -8- <PAGE> SECTION VI. PARTICIPATING EMPLOYERS 6.1 Upon approval by the Board of Directors of the Company, this Plan may be adopted by any Subsidiary of the Company. Upon such adoption, the Subsidiary shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary. The term "Subsidiary" means any corporation in which the Company, directly or indirectly holds a majority of the voting power of its outstanding shares of capital stock. SECTION VII. SUCCESSOR TO COMPANY 7.1 The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. SECTION VIII. DURATION, AMENDMENT AND TERMINATION 8.1 Duration If a Change of Control has not occurred, this Plan shall expire on November 13, 2001, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of Directors of the Company. If a Change of Control occurs, this Plan shall continue in full force and effect, and shall not terminate or expire until after all Participants who become entitled to Severance Payments hereunder shall have received such payments in full. 8.2 Amendment and Termination The Plan may be terminated or amended in any respect by resolution adopted by two-thirds of the Board of Directors of the Company, unless a Change of Control has previously occurred. If a Change of Control occurs, the Plan no longer shall be subject to amendment, change, -9- <PAGE> substitution, deletion, revocation or termination in any respect whatsoever. 8.3 Form of Amendment The form of any proper amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board of Directors. A proper amendment of the Plan automatically shall effect a corresponding amendment to all Participants' rights hereunder. A proper termination of the Plan automatically shall effect a termination of all Participants' rights and benefits hereunder. SECTION IX. PLAN ADMINISTRATION 9.1 Discretionary Authority. Prior to a Change of Control, the Employer shall have discretionary authority to construe and interpret the terms of the Plan, to determine eligibility and to make all other determinations under the Plan. On or after the date a Change of Control, the Employer shall not have discretionary authority to construe and interpret the Plan, and any decisions of the Employer with respect to the Plan during such period shall be subject to de novo review if and when the such decisions are reviewed by a court or in arbitration. 9.2 Initial Appeal Procedure An employee or former employee of an Employer who disagrees with their allotment of benefits under this Plan may file a written appeal with the designated Human Resources representative. Any claim relating to this Plan shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of the employee's termination date. The appeal must state the reasons the employee or former employee believes he or she is entitled to different benefits under the Plan. The designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide the employee a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving the written appeal. 9.3 Review of Appeal Procedure If the appeal of an employee or former employee of an Employer appeal is denied, such employee or former employee shall have the right and option to elect review of such denial by either a court of competent jurisdiction or by arbitration as set forth in Section 11 hereof. -10- <PAGE> SECTION X. LEGAL FEES AND EXPENSES 10.1 The Company shall pay all legal fees, costs of litigation and/or arbitration, and other expenses incurred in good faith by each Participant as a result of the Company's refusal to make the Severance payment to which the Participant becomes entitled under this Plan, or as a result of the Company's contesting the validity, enforceability or interpretation of the Plan. SECTION XI. ARBITRATION 11.1 Each Participant shall have the right and option to elect (in lieu of litigation) to have any dispute or controversy arising under or in connection with the Plan settled by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of his or her job with an Employer, in accordance with rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Participant, shall be borne by the Company. SECTION XII. FUNDING 12.1 The Plan shall be funded from the Company's general assets. -11- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>6 <DESCRIPTION>EXHIBIT 11 <TEXT> <TABLE> EXHIBIT 11 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) PRIMARY ------- <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- December 29, December 31, December 29, December 31, 1996 1995 1996 1995 --------- --------- ---------- -------- <S> <C> <C> <C> <C> Net income $178,341 $126,049 $301,731 $210,745 ======== ======== ======== ======== Weighted average common shares outstanding 368,381 366,782 367,748 373,286 Common - equivalent shares attributable to stock options and warrants 20,357 21,818 21,680 20,312 -------- -------- -------- -------- Total common and common - equivalent shares outstanding 388,738 388,600 389,428 393,598 ======== ======== ======== ======== Net income per common and common - equivalent share $0.46 $ 0.32 $ 0.77 $ 0.54 ======== ======== ======== ======== </TABLE> -1- <PAGE> <TABLE> EXHIBIT 11 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) FULLY DILUTED ------------- Three Months Ended Six Months Ended ------------------ ---------------- December 29, December 31, December 29, December 31, 1996 1995 1996 1995 --------- --------- ---------- -------- <S> <C> <C> <C> <C> Net income $178,341 $126,049 $301,731 $210,745 ======== ======== ======== ======== Weighted average common shares outstanding 368,381 366,782 367,748 373,286 Common - equivalent shares attributable to stock options and warrants 20,357 22,934 22,285 21,250 -------- -------- -------- -------- Total common and common - equivalent shares outstanding 388,738 389,716 390,033 394,536 ======== ======== ======== ======== Net income per common and common - equivalent share $ 0.46 $ 0.32 $ 0.77 $ 0.54 ======== ======== ======== ======== </TABLE> -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>7 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-START> JUL-01-1996 <PERIOD-END> DEC-29-1996 <CASH> 438,083 <SECURITIES> 312,657 <RECEIVABLES> 1,392,873 <ALLOWANCES> 154,086 <INVENTORY> 394,919 <CURRENT-ASSETS> 2,968,890 <PP&E> 1,549,677 <DEPRECIATION> 848,739 <TOTAL-ASSETS> 3,866,620 <CURRENT-LIABILITIES> 1,481,451 <BONDS> 40,000 <COMMON> 73 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 2,304,094 <TOTAL-LIABILITY-AND-EQUITY> 3,866,620 <SALES> 2,081,588 <TOTAL-REVENUES> 2,081,588 <CGS> 1,033,402 <TOTAL-COSTS> 1,825,743 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 9,160 <INTEREST-EXPENSE> 2,132 <INCOME-PRETAX> 262,266 <INCOME-TAX> 83,925 <INCOME-CONTINUING> 178,341 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 178,341 <EPS-PRIMARY> 0.46 <EPS-DILUTED> 0.46 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

LU

https://www.sec.gov/Archives/edgar/data/1006240/0000950146-97-000189.txt

-----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, RmmbF2gUWAPeJgo3p62V72igymJCduBt/JNDjuUJsusiWXOjoya5MVWIL7YBSin3 yIoCo6snuE7X5JCf/OFaLg== <SEC-DOCUMENT>0000950146-97-000189.txt : 19970222 <SEC-HEADER>0000950146-97-000189.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950146-97-000189 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUCENT TECHNOLOGIES INC CENTRAL INDEX KEY: 0001006240 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 223408857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11639 FILM NUMBER: 97533890 BUSINESS ADDRESS: STREET 1: 600 MOUNTAIN AVE CITY: MURRAY HILL STATE: NJ ZIP: 07974 BUSINESS PHONE: 9085828500 MAIL ADDRESS: STREET 1: 600 MOUNTAIN AVE CITY: MURRAY HILL STATE: NJ ZIP: 07974 FORMER COMPANY: FORMER CONFORMED NAME: NS MPG INC DATE OF NAME CHANGE: 19960124 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q EDGAR FILING <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 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 001-11639 LUCENT TECHNOLOGIES INC. A Delaware I.R.S. Employer Corporation No. 22-3408857 600 Mountain Avenue, Murray Hill, New Jersey 07974 Telephone - Area Code 908-582-8500 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 .... At January 31, 1997 638,169,488 common shares were outstanding. <PAGE> 2 Form 10-Q - Part I PART I - FINANCIAL INFORMATION Item 1. Financial Statements LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Three Months Ended December 31, 1996 1995 Revenues............................. $ 7,938 $ 7,427 Costs................................ 4,296 5,102 Gross margin......................... 3,642 2,325 Operating Expenses Selling, general and administrative expenses ........... 1,459 3,046 Research and development expenses ... 713 713 Total operating expenses............. 2,172 3,759 Operating income(loss)............... 1,470 (1,434) Other income - net .................. 9 122 Interest expense..................... 79 77 Income (loss) before income taxes.... 1,400 (1,389) Provision (benefit)for income taxes.. 541 (372) Net income(loss)..................... $ 859 $(1,017) Weighted average common shares outstanding (millions)............. 638.2 524.7 Net income(loss) per common share................... $ 1.35 (1.94) Dividends declared per common share................... $ 0.075 - See Notes to Consolidated Financial Statements. <PAGE> 3 Form 10-Q - Part I LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Per Share Amounts) (Unaudited) December 31, September 30, 1996 1996 ASSETS Cash and cash equivalents.............. $ 3,177 $ 2,241 Accounts receivable less allowances of $286 at December 31, 1996 and $273 at September 30, 1996 ................... 5,885 4,914 Inventories............................ 2,459 3,288 Contracts in process (net of contract billings of $1,186 at December 31, 1996 and $708 at September 30, 1996.................... 493 505 Deferred income taxes - net............ 1,690 1,617 Other current assets................... 266 216 Total current assets................... 13,970 12,781 Property, plant and equipment, net of accumulated depreciation of $6,327 at December 31, 1996 and $6,333 at September 30, 1996......... 4,687 4,687 Prepaid pension costs.................. 2,922 2,828 Deferred income taxes - net............ 973 979 Capitalized software development costs. 344 362 Other assets........................... 1,153 989 TOTAL ASSETS........................... $ 24,049 $ 22,626 See Notes to Consolidated Financial Statements. (CONT'D) <PAGE> 4 Form 10-Q - Part I LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Per Share Amounts) (Unaudited) December 31, September 30, 1996 1996 LIABILITIES Accounts payable....................... $ 1,577 $ 1,900 Payroll and benefit-related liabilities.......................... 2,590 2,492 Postretirement and postemployment benefit liabilities.................. 241 220 Debt maturing within one year.......... 2,336 2,363 Other current liabilities.............. 4,356 3,738 Total current liabilities.............. 11,100 10,713 Postretirement and postemployment benefit liabilities.................. 5,820 5,642 Long-term debt ........................ 1,651 1,634 Other liabilities...................... 1,960 1,951 Total liabilities ..................... 20,531 19,940 SHAREOWNERS' EQUITY Preferred stock-par value $1.00 per share Authorized shares: 250,000,000 Issued and outstanding shares: None - - Common stock-par value $.01 per share Authorized shares: 3,000,000,000 Issued and outstanding shares: 637,424,491 at December 31, 1996 636,662,634 at September 30, 1996..... 6 6 Additional paid-in capital............. 2,622 2,595 Guaranteed ESOP obligation............. (106) (106) Foreign currency translation........... (22) (16) Retained earnings...................... 1,018 207 Total shareowners' equity.............. 3,518 2,686 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $24,049 $22,626 See Notes to Consolidated Financial Statements. <PAGE> 5 Form 10-Q - Part I LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Three Months Ended December 31, 1996 1995 Operating Activities Net income(loss)......................... $ 859 $ (1,017) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Business restructuring charge......... (54) 2,613 Asset impairment and other charges.... (46) 188 Depreciation and amortization......... 387 389 Provision for uncollectibles.......... 42 19 Deferred income taxes................. (67) (745) (Increase) in accounts receivable .... (1,025) (1,608) Decrease in inventories and contracts in process............ 813 215 Increase (decrease) in accounts payable................. (319) 392 Changes in other operating assets and liabilities..................... 645 503 Other adjustments for noncash items - net......................... 6 34 Net cash provided by operating activities.................. 1,241 983 Investing Activities Capital expenditures .................... (344) (493) Proceeds from the sale or disposal of property, plant and equipment.......... 3 104 Purchases of equity investments.......... (16) (50) Acquisitions, net of cash acquired....... (124) - Dispositions............................. 179 - Other investing activities - net......... 33 (133) Net cash used in investing activities.... (269) (572) Financing Activities Repayments of long-term debt ............ (6) (14) Repayments of debt sharing agreement - net........................ - (67) Proceeds of issuance of common stock..... 27 - Dividends paid........................... (48) - Transfers to AT&T........................ - (203) Decrease in short-term borrowings - net.. (14) (89) Net cash used in financing activities.... (41) (373) See Notes to Consolidated Financial Statements. (CONT'D) <PAGE> 6 Form 10-Q - Part I LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited) For the Three Months Ended December 31, 1996 1995 Effect of exchange rate changes on cash........................ 5 (3) Net increase in cash and cash equivalents....................... 936 35 Cash and cash equivalents at beginning of year................... 2,241 413 Cash and cash equivalents at end of period....................... $3,177 $448 See Notes to Consolidated Financial Statements. <PAGE> 7 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) 1. BACKGROUND AND BASIS OF PRESENTATION BACKGROUND On September 20, 1995, AT&T Corp. ("AT&T") announced its intention to create a separate company comprised of the AT&T businesses and operations that now comprise Lucent Technologies Inc. ("Lucent" or the "Company") and the associated assets and liabilities of those businesses and operations, including Bell Laboratories (the "Separation"). Lucent was incorporated on November 29, 1995 with 1,000 shares of Lucent common stock ("Common Stock"), authorized and outstanding, all of which were owned by AT&T. On April 2, 1996, AT&T obtained an additional 524,623,894 shares of Common Stock, and on April 10, 1996, Lucent issued 112,037,037 shares in the Initial Public Offering ("IPO") for $27 per share less underwriting discounts and commissions of $1.05 per share. On September 30, 1996, AT&T distributed to its shareowners all its remaining interests in Lucent ("Distribution"). The consolidated financial statements for 1996 reflect the assets and liabilities related to Lucent's operations, including the IPO proceeds and the impact of AT&T's retention of approximately $2,000 in customer accounts receivable. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Lucent pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown. The consolidated financial statements presented for the three month period ended December 31, 1995 reflects the results of operations and changes in cash flows of the businesses transferred to Lucent in 1996 from AT&T as if Lucent were a separate entity. The consolidated financial statements for 1995 have been prepared using the historical results of operations and historical basis of the assets and liabilities of these businesses. Additionally, the consolidated financial statements of Lucent include the allocation of certain AT&T corporate headquarters assets, liabilities and expenses relating to the Lucent businesses that were transferred to Lucent from AT&T. Management believes these allocations are reasonable. All intercompany transactions and balances between the Lucent businesses have been eliminated. The financial statement results for interim periods are not necessarily indicative of financial results for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the period ended September 30, 1996. EARNINGS(LOSS) PER COMMON SHARE For the three month periods ended December 31, 1996 and 1995, net earnings(loss) per common share was calculated by dividing the three month net income of $859 and the three month net loss of $1,017 by the weighted average shares that were outstanding during the respective periods. The 1995 loss per common share assumes that all shares issued to AT&T prior to the IPO were considered outstanding since January 1, 1995. Determination of the weighted average shares includes the impact of common stock equivalents. <PAGE> 8 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) 2. SUPPLEMENTARY BALANCE SHEET Inventories at December 31, 1996 and September 30, 1996 were as follows: December 31, September 30, 1996 1996 Completed goods ............... $ 1,065 $ 1,837 Work in process and raw materials................ 1,394 1,451 Total inventories ............. $ 2,459 $ 3,288 3. SIGNIFICANT CUSTOMERS For the quarters ended December 31, 1996 and 1995, Lucent recorded $1,204 and $881, respectively, of revenues from AT&T. At December 31, 1996, other current liabilities included a prepayment by AT&T of $500 to be applied to AT&T's purchases that are due and payable on or after January 1, 1997 for products, licensed materials and services from Lucent. 4. BUSINESS RESTRUCTURING AND OTHER CHARGES The pre-tax charge in the quarter ended December 31, 1995 for restructuring, impairments and other charges of $2,801 was recorded as $892 of costs, $1,645 of selling, general and administrative expenses, and $264 of research and development expenses. The charges included $1,509 for employee separations; $627 for asset write-downs; $202 for closing, selling and consolidating facilities; and $463 for other items. The total charges reduced net income by $1,847. For the quarter ended December 31, 1996, Lucent reversed $54 of business restructuring and other charges primarily related to employee separations. The reversal was offset by a one-time write-off of $79 of in-process research and development acquired in the acquisition of Agile Networks, Inc.("Agile"). Cash payments of $115 were made for the quarter ended December 31, 1996 for the 1995 business restructuring charge. The reserve for business restructuring as of December 31, 1996 was $1,087. <PAGE> 9 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) 5. COMMITMENTS AND CONTINGENCIES Lucent's current and historical manufacturing and research operations are subject to a wide range of environmental protection laws in the United States and other countries. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities underway at 46 current and former facilities. In addition, Lucent was named a successor to AT&T as a PRP at numerous "Superfund" sites pursuant to CERCLA or comparable state statutes. Under the Separation and Distribution Agreement, among AT&T, Lucent and NCR Corporation ("NCR"), dated as of February 1, 1996, and amended and restated as of March 29, 1996 ("Separation and Distribution Agreement"), Lucent is responsible for all liabilities primarily resulting from or related to the operation of the Company's Business as conducted at any time prior to, on or after the Separation including related businesses discontinued or disposed of prior to the Separation, and Lucent's assets including, without limitation, those associated with these sites. In addition, under the Separation and Distribution Agreement, Lucent is required to pay a portion of contingent liabilities paid out in excess of certain amounts by AT&T and NCR, including environmental liabilities. Lucent records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable, whether the claims are asserted or unasserted. The amounts provided for in Lucent's consolidated financial statements in respect of environmental reserves are the gross undiscounted amount of such reserves, without deductions for insurance or third party indemnity claims. In those cases where insurance carriers or third party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the financial statements. Although Lucent believes that its reserves are adequate, there can be no assurance that the amount of capital expenditures and other expenses which will be required relating to remedial actions and compliance with applicable environmental laws, will not exceed the amounts reflected in Lucent's reserves or will not have a material adverse effect on Lucent's financial condition, results of operations or cash flows. Lucent has several significant contracts for the sale of infrastructure systems to network operators which extend over a multi-year period, and expects to enter into similar contracts in the future, with the uncertainties that involve new technologies which may not have been previously deployed on a large-scale commercial basis. Lucent may incur significant initial cost overruns and losses on such contracts which would be recognized in the quarter in which they became ascertainable. One of Lucent's multi-year contracts is with Pacific Bell for the provision of a broadband network based on hybrid fiber-coaxial cable technology. In July 1996, Lucent and Pacific Bell agreed to modify the terms of the contract so as to resolve issues and potential claims which may have arisen due to implementation difficulties and cost overruns under the contract. Lucent's financial statements include reserves to reflect these contract modifications. Lucent will continue to assess the adequacy of these reserves. <PAGE> 10 Form 10-Q - Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Lucent Technologies Inc. ("Lucent" or the "Company") reported net income of $859 million, or $1.35 per share for the quarter ended December 31, 1996. The year-ago quarterly net loss was $1,017 million, or $1.94 per share. On a pro forma basis, net income and earnings per share for the quarter ended December 31, 1995 was $830 million and $1.30, respectively. The pro forma presentation of net income and earnings per share excludes $1,847 million of after-tax restructuring charges in the quarter ended December 31, 1995, assumes that all 636.7 million common shares outstanding on April 10, 1996 were outstanding since January 1, 1995 and gives no effect to the use of proceeds from the IPO. Operating income increased $2,904 million in the quarter compared with the same quarter in 1995 and is 18.5% as a percent of revenues. The increase was largely due to the restructuring charges in the fourth quarter of calendar year 1995. Excluding the impact of restructuring charges, operating income increased $103 million reflecting the 6.9% revenue growth, partially offset by increases in research and development expenses. Prior to February 1, 1996, AT&T conducted the Company's businesses through various divisions and subsidiaries. On February 1, 1996, AT&T began effectuating the Separation by transferring to the Company the assets and liabilities related to such businesses, except that AT&T retained accounts receivable having a face amount of approximately $2,000 million. The effective date of the transfer of employee benefit assets and liabilities to Lucent, or trusts established by Lucent, was October 1, 1996. The Lucent consolidated financial statements at and for the period ended December 31, 1995 reflect the financial position, results of operations and cash flows of the business transferred to Lucent from AT&T in the Separation. As a result, these consolidated financial statements of Lucent have been carved out from the financial statements of AT&T using the historical results of operations and historical basis of the assets and liabilities of the business. Additionally, the consolidated financial statements of Lucent include certain assets, liabilities, revenues and expenses which were not historically recorded at the level of, but are primarily associated with, the business. Management believes the assumptions underlying Lucent's financial statements are reasonable. VARIABILITY IN THE BUSINESS Lucent's sales continue to be highly seasonal. Many of Lucent's large customers have historically delayed a disproportionate percentage of their capital expenditures until the fourth quarter of the calendar year. Consequently, Lucent's results of operations for the first three quarters of each calendar year historically have, in the aggregate, been significantly less profitable than the fourth quarter. In the past, Lucent has reported net losses in the first quarter of each calendar year. To manage this fluctuation caused by the buying behaviors of large customers, Lucent continues to seek out new types of customers both in the United States and internationally, such as competitive access providers, cable television network operators and computer manufacturers. <PAGE> 11 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Lucent is one of the world's leading designers, developers and manufacturers of telecommunications systems, software and products. Lucent is a global market leader in the sale of public telecommunications systems, and is a supplier of systems and software to most of the world's largest network operators. Lucent is also a global leader in the sale of business communications systems and microelectronic components for communications systems and computer manufacturers. In addition, Lucent is the largest supplier in the United States of consumer telecommunications products. Lucent is comprised of the systems and technology units that were formerly part of AT&T, including the research and development capabilities of Bell Laboratories. Lucent is engaged in the design, development, manufacturing and servicing of systems and software for telecommunications applications within the global telecommunications networking industry. These integrated systems enable network operators and business enterprises to connect, route, manage and store information between and within locations. REVENUES - THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 Total revenues increased to $7,938 million, or 6.9% in the quarter ended December 31, 1996 compared with the same quarter of 1995, primarily due to gains in sales from Systems for Network Operators, Microelectronic Products and Business Communications Systems. The overall revenue growth was partially offset by the continued decline in revenue from Consumer Products and Other Systems and Products. Revenue growth was driven by domestic sales as well as increases in international sales. The following table presents Lucent's revenues by product line, and the approximate percentage of total revenues for the three months ended December 31, 1996 and 1995: Three Months Ended December 31, Dollars in Millions -------------------------------- 1996 1995 ------- ------- Systems for Network Operators........ $5,026 63% $4,555 61% Business Communications Systems...... 1,733 22 1,526 21 Microelectronic Products............. 671 9 559 8 Consumer Products.................... 330 4 551 7 Other Systems and Products........... 178 2 236 3 Total................................ $7,938 100% $7,427 100% Revenues from SYSTEMS FOR NETWORK OPERATORS increased $471 million, or 10.3% in 1996 compared with the same quarter in 1995. The increase was driven by higher sales of wireless systems, fiber optic systems and professional services. Demand for those products was driven by second line subscriber growth in businesses and residences for internet services and data traffic. During the current quarter, Lucent began recognizing revenue related to its personal comunications services ("PCS") contracts as systems went on-line. <PAGE> 12 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales from Systems for Network Operators in the United States increased by 16% over the yearago quarter. The revenue increase in the United States was led by sales to United States service providers, including non-traditional customers such as competitive access providers and cable television providers. International revenues for the quarter ended December 31, 1996 remained relatively flat compared with the same quarter in 1995. International revenue for 1996 includes approximately $151 million in revenue resulting from the operations of certain subsidiaries of Philips Electronics NV ("Philips") acquired by Lucent. International revenues represented 30.4% of revenues from Systems for Network Operators for the quarter ended December 31, 1996 compared with 33.9% in same quarter in 1995. Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $207 million, or 13.6% compared with the same quarter in 1995. This increase was led by sales of DEFINITY(R), integrated offers such as call centers, as well as higher revenue from small business systems and advanced multimedia communications systems. This increase is partially offset by the continued erosion of the rental base. International revenues increased by 9.6%, largely due to growth in the Asia/Pacific and Caribbean/Latin America regions. International revenue represented approximately 15% of the revenue for the quarter. For the quarter ended December 31, 1996, domestic revenues increased 14.3% as compared to the same quarter of 1995. Sales of MICROELECTRONIC PRODUCTS increased $112 million, or 20.0% compared with the same quarter in 1995 due to higher sales of customized chips for computing and communications, including components for local area networks and data networking, high-end computer workstations, wireless telephones and computer modems. Domestic revenues increased 7.4% compared to the same quarter in 1995, led by sales to original equipment manufacturers ("OEMs"). International revenues increased 34.2%. The growth in international revenues was driven by sales in the Asia/Pacific and European regions. International revenues represented 52.6% of the Microelectronic Products sales in the quarter ended December 31, 1996 compared with 47.0% for the same period of 1995. Revenues from CONSUMER PRODUCTS sales decreased $221 million, or 40.1% compared with the same quarter in 1995. The decline in revenues was primarily due to the decrease in product sales related to the closing of the Phone Center Stores, the discontinuance of unprofitable product lines and the continued decrease in phone rentals. Consumer Products will continue to distribute its products through retailers. Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $58 million, or 24.6% compared with the same quarter in 1995. The reduction in revenues was largely due to the sale of Lucent's data communications and custom manufacturing systems businesses. Total costs decreased $806 million, or 15.8% in 1996 compared with the same quarter in 1995 due to the restructuring charges in 1995. Without restructuring, costs increased $86 million primarily due to increases in sales volume. As a percentage of revenue, gross margin increased to 45.9% from 31.3% in the year-ago quarter. Excluding restructuring, gross margin as a percentage of revenue for the quarter ended December 31, 1995 was 43.3%. The increase in gross margin percentage was due to overall favorable changes in the mix of hardware revenues offset in part by the erosion of high margin rental revenues. - -------------------------------------- (R) Registered trademark of Lucent <PAGE> 13 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 Selling, general and administrative expenses decreased $1,587 million, or 52.1% compared with the same quarter in 1995. This decrease is attributed to the restructuring charge of $1,645 million in the quarter ended December 31, 1995. Without restructuring, selling, general and administrative expenses increased by $58 million, or 4.1%. This increase was due in part from the start-up costs of $39 million associated with the launch of a new company, such as advertising and creating a new information systems infrastructure, as well as expenses associated with the operations of Philips and additional expenses incurred as a result of higher sales volume. These increases were offset in part by the reversal of calendar year 1995 business restructuring reserves of $54 million. Selling, general and administrative expenses as a percentage of revenues were 18.4% for the quarter ended December 31, 1996 as compared to 41.0% for the same quarter in 1995. Excluding the impact of restructuring, selling, general and administrative expenses as a percentage of revenues for the quarter ended December 31, 1995 were 18.9%. Research and development expenses were comparable for the quarters ended December 31, 1996 and 1995. Excluding the impact of restructuring charges for the quarter ended December 31, 1995, research and development expenses increased by $264 million, primarily due to expenditures in support of the wireless infrastructure, microelectronic products and the one-time write-off of $79 million of in-process research and development acquired in the acquisition of Agile. Research and development expenses represented 9.0% of revenues for the quarter ended December 31, 1996 as compared with 9.6% of revenues in the same quarter of 1995. Excluding 1995 restructuring charges, research and development expenses as a percentage of revenues increased 3.0 percentage points from 6.0% for the quarter ended December 31, 1995. OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 Other income -- net decreased $113 million for the quarter ended December 31, 1996 compared with the same quarter in 1995. This decrease was largely due to a gain recognized in the December 31, 1995 quarter resulting from an adjustment of market value for securities held for trade. Interest expense for the quarter ended December 31, 1996 was relatively flat compared with the same quarter in 1995. The effective income tax rate of 38.6% for the quarter ended December 31, 1996 increased from the effective income tax benefit rate of 26.8% in the same quarter of 1995 which resulted from the 1995 business restructuring charges. Excluding 1995 restructuring charges, the effective income tax rate decreased from 41.2% for the quarter ended December 31, 1995 primarily due to the tax impact resulting from foreign earnings and increased research credits, offset in part by the tax impact associated with the write-off of in-process research and development acquired in the acquisition of Agile. <PAGE> 14 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY Total assets increased $1,423 million, or 6.3%, from fiscal year-end 1996. This overall increase was due to an increase in cash and cash equivalents of $936 million and an increase of receivables of $971 million, offset by a decrease in inventories of $829 million. The increase in cash was generated by cash flow from operations. The increase in receivables and decrease in inventories is consistent with the cyclical nature of business, when receivables are at their highest levels and inventories at their lowest levels at the close of the calendar year. Working capital, defined as current assets less current liabilities, increased $802 million from fiscal year-end 1996 primarily resulting from asset increases discussed above and decreases in accounts payable offset by an increase in other current liabilities for accrued income taxes. Lucent expects that, over time, it may replace all or part of the outstanding commercial paper with short- or long-term borrowings as market conditions permit. At December 31, 1996, Lucent also maintained approximately $6,400 million in credit facilities of which a portion is used to support Lucent's commercial paper program. At December 31, 1996, approximately $6,200 million was unused. Future financings will be arranged to meet Lucent's requirements with the timing, amount and form of issue depending on the prevailing market and general economic conditions. Lucent anticipates that borrowings under its bank credit facilities, the issuance of additional commercial paper, cash generated from operations and short- and long-term debt financings will be adequate to satisfy its future cash requirements, although there can be no assurance that this will be the case. In recent years, the purchasing behavior of Lucent's large customers has increasingly been characterized by the use of fewer, larger contracts. This trend is expected to intensify, and contributes to the variability of Lucent's results. Such larger purchase contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require investments which may substantially precede recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, customers often demand more stringent performance and acceptance criteria which can also cause revenue recognition delays and contract termination, as well as financing from Lucent. Network operators, domestically and internationally, increasingly have required their suppliers to arrange or provide long-term financing for them as a condition to obtaining or bidding on infrastructure projects. These projects may require financing in amounts ranging from modest sums to over a billion dollars. In this regard, Lucent entered into a credit agreement in October 1996 to provide Sprint Spectrum LP long-term financing of $1,800 million for purchasing equipment and services for its PCS network. Payment of quarterly interest on each borrowing may be deferred at the borrower's option for up to two years. Lucent is currently discussing with financial institutions potential alternatives to sell loans it may make under the credit agreement, which will depend, among other things, on the market conditions and requirements at the time. Lucent has also entered into a credit agreement to provide, or committed to providing subject to completion of final contracts and certain conditions, up to approximately $850 million in total to three other PCS operators. Lucent is continuing to propose, and commit to provide, financing where appropriate for its business, in addition to the above arrangements. The ability of Lucent to arrange or provide financing for network operators will depend on a number of factors, including Lucent's capital structure and level of available credit. In the normal course of business, Lucent uses various financial instruments, including derivative financial instruments, for purposes other than trading. Derivative financial instruments are not entered into for speculative purposes. Lucent's derivative financial instruments include foreign currency exchange contracts. Lucent's nonderivative financial instruments include letters of credit, commitments to extend credit and guarantees of debt. <PAGE> 15 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION By their nature, all such instruments involve risk, including market risk and the credit risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized in the balance sheet. All of Lucent's foreign currency exchange contracts are hedges against specific exposures. In foreign exchange contracts, Lucent assumed the risk from the possible inability of counterparties to meet the terms of their contracts; however, management believes this risk to be remote since the counterparties to these contracts are major international institutions. Lucent controls its exposure to credit risk associated with its financial instruments through credit approvals, credit limits and monitoring procedures. At December 31, 1996, in management's opinion, Lucent did not have any significant exposure to any individual customer or counterparty, nor did Lucent have any major concentration of credit risk related to any financial instrument. CASH FLOWS Cash provided by operating activities increased compared with the same period in 1995 due to a larger decrease in inventory levels, a slower increase in accounts receivable and higher accrued income taxes. Cash payments of $115 million were made for the quarter ended December 31, 1996 for the 1995 business restructuring charge. Of such total charges, approximately $1.0 billion will result in future cash payments. Of the 23,000 employees that Lucent announced it would downsize and that are included in the aforementioned restructuring charges, approximately 15,600 people have left the payroll as of December 31, 1996. Comparing the quarters ended December 31, 1996 and 1995, the reduction in cash used in investing was due to a decrease in capital expenditures. Capital expenditures, the largest component, were $344 million and $493 million for the three month periods ended December 31, 1996 and December 31, 1995, respectively. Capital expenditures generally relate to expenditures for equipment and facilities used in manufacturing and research and development, including expansion of manufacturing capacity, and expenditures for cost reduction efforts and international growth. For the quarter ended December 31, 1996, cash used in financing activities decreased primarily due to the transfers to AT&T during 1995. As of October 1, 1996, all transfers to and from AT&T were completed. In 1995, Lucent relied on AT&T to provide financing for its operations. The cash flows from financing activities in 1995 principally reflect changes in the Company's assumed capital structure. These cash flows are not necessarily indicative of the cash flows that would have resulted if the Company were a stand-alone entity. The ratio of total debt to total capital (debt plus equity) was 53.1% at December 31, 1996 compared to 59.8% on at September 30, 1996. OTHER Lucent's current and historical manufacturing and research operations are subject to a wide range of environmental protection laws in the United States and other countries. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities underway at 46 current and former facilities. In addition, Lucent was named a successor to AT&T as a PRP at numerous "Superfund" sites pursuant to CERCLA or comparable state statutes. Under the Separation and Distribution Agreement, Lucent is responsible for all liabilities primarily resulting from or related to the operation of the Company's business as conducted at any time prior to, on or after the Separation including related businesses discontinued or disposed of prior to the Separation, and Lucent's assets including, without limitation, those associated with these <PAGE> 16 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION sites. In addition, under the Separation and Distribution Agreement, Lucent is required to pay a portion of contingent liabilities paid out in excess of certain amounts by AT&T and NCR, including environmental liabilities. Lucent records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable, whether the claims are asserted or unasserted. The amounts provided for in Lucent's consolidated financial statements in respect of environmental reserves are the gross undiscounted amount of such reserves, without deductions for insurance or third party indemnity claims. In those cases where insurance carriers or third party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the financial statements. Although Lucent believes that its reserves are adequate, there can be no assurance that the amount of capital expenditures and other expenses which will be required relating to remedial actions and compliance with applicable environmental laws, will not exceed the amounts reflected in Lucent's reserves or will not have a material adverse effect on Lucent's financial condition, results of operations or cash flows. Lucent has several significant contracts for the sale of infrastructure systems to network operators which extend over a multi-year period, and expects to enter into similar contracts in the future, with the uncertainties discussed above. One of Lucent's multi-year contracts is with Pacific Bell for the provision of a broadband network based on hybrid fiber-coaxial cable technology. In July 1996, Lucent and Pacific Bell agreed to modify the terms of the contract so as to resolve issues and potential claims which may have arisen due to implementation difficulties and cost overruns under the contract. Lucent's financial statements include reserves to reflect these contract modifications. Lucent will continue to assess the adequacy of these reserves. In connection with the December sale of Lucent's interconnect products business, Lucent entered into a contract to purchase products from Hicks, Muse, Tate and Furst Incorporated of Dallas for approximately $1.8 billion over a five year period. Lucent anticipates using these products in the normal course of business. FORWARD-LOOKING STATEMENTS This Form 10-Q report contains forward-looking statements that are based on current expectations, estimates and projections about the industries in which the Company operates, management's beliefs and assumptions made by management. Any Form 10-K, Annual Report to Shareowners, Form 10-Q or Form 8-K of the Company may include forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. For a description of the Future Factors that could cause actual results to differ materially from such forward-looking statements, see the discussion thereof contained in the Company's Form 10-K for the Transition Period from January 1, 1996 to September 30, 1996 in Item 1 under the section entitled "OUTLOOK-Forward Looking Statements" and the remainder of the OUTLOOK section. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions including interest rate and currency exchange rate fluctuations and other Future Factors. <PAGE> 17 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RECENT PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (the "Standard"). This Standard provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. For Lucent, this Standard will be effective in the second quarter of the new fiscal year 1997. The adoption of this Standard is not expected to impact Lucent's consolidated results of operations, financial position or cash flows. <PAGE> 18 Form 10-Q - Part II Part II - Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K: Not applicable <PAGE> 19 Form 10-Q 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. Lucent Technologies Inc. Date February 10, 1997 James S. Lusk Vice President and Controller (Principal Accounting Officer) <PAGE> 20 Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>STATEMENT RE: COMPUTATION OF RATIOS <TEXT> Exhibit 12 Form 10-Q For the Three Months Ended December 31, 1996 Lucent Technologies Inc. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the Three Months Ended December 31, 1996 Earnings Before Income Taxes........................... $ 1,400 Less Interest Capitalized during the Period........................................... 4 Less Undistributed Earnings of Less than 50% Owned Affiliates..................................... - Add Fixed Charges...................................... 116 Total Earnings ........................................ $ 1,512 Fixed Charges Total Interest Expense Including Capitalized Interest.. $ 90 Interest Portion of Rental Expense..................... 26 Total Fixed Charges................................ $ 116 Ratio of Earnings to Fixed Charges..................... 13.0 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FDS -- <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the unaudited balance sheet of Lucent at December 31, and the unaudited consolidated statement of income for the three-month period ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-START> OCT-31-1996 <PERIOD-END> DEC-31-1996 <CASH> 3,177 <SECURITIES> 0 <RECEIVABLES> 6,171 <ALLOWANCES> 286 <INVENTORY> 2,459 <CURRENT-ASSETS> 13,970 <PP&E> 11,014 <DEPRECIATION> 6,327 <TOTAL-ASSETS> 24,049 <CURRENT-LIABILITIES> 11,100 <BONDS> 1,651 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 6 <OTHER-SE> 3,512 <TOTAL-LIABILITY-AND-EQUITY> 24,049 <SALES> 7,938 <TOTAL-REVENUES> 7,938 <CGS> 4,296 <TOTAL-COSTS> 4,296 <OTHER-EXPENSES> 2,172 <LOSS-PROVISION> 42 <INTEREST-EXPENSE> 79 <INCOME-PRETAX> 1,400 <INCOME-TAX> 541 <INCOME-CONTINUING> 859 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 859 <EPS-PRIMARY> 1.35 <EPS-DILUTED> 0 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

MDP

https://www.sec.gov/Archives/edgar/data/65011/0000065011-97-000004.txt

-----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, IbsarTrmK7Fxixohln/cIaFLo92d4y+wNKZ2LA4UoG6G64Ln7VeKZayrHkIrb1tq K5j7onHulrSn+/rH54dFIg== <SEC-DOCUMENT>0000065011-97-000004.txt : 19970221 <SEC-HEADER>0000065011-97-000004.hdr.sgml : 19970221 ACCESSION NUMBER: 0000065011-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEREDITH CORP CENTRAL INDEX KEY: 0000065011 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 420410230 STATE OF INCORPORATION: IA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05128 FILM NUMBER: 97523684 BUSINESS ADDRESS: STREET 1: 1716 LOCUST ST CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152843000 FORMER COMPANY: FORMER CONFORMED NAME: MEREDITH PUBLISHING CO DATE OF NAME CHANGE: 19710317 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>12-31-96 10-Q FILING <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 Commission file number 1-5128 Meredith Corporation (Exact name of registrant as specified in its charter) Iowa 42-0410230 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1716 Locust Street, Des Moines, Iowa 50309-3023 (Address of principal executive offices) (ZIP Code) 515 - 284-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1997 Common Stock, $1 par value 20,379,669 Class B Stock, $1 par value 6,383,437 - 1 - <PAGE> Part I - FINANCIAL INFORMATION Item 1. Financial Statements Meredith Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) December 31 June 30 Assets 1996 1996 - ------------------------------------------------------------------------------ (in thousands, except share data) Current assets: Cash and cash equivalents $ 76,135 $ 13,801 Marketable securities 20,060 -- Receivables, net 97,530 89,448 Inventories 24,400 31,185 Supplies and prepayments 9,311 8,104 Film rental costs 13,130 10,321 Deferred income taxes 12,413 8,930 Subscription acquisition costs 51,056 48,887 ---------- ---------- Total current assets 304,035 210,676 ---------- ---------- Property, plant and equipment 189,564 182,855 Less accumulated depreciation (107,970) (102,856) ---------- ---------- Net property, plant and equipment 81,594 79,999 ---------- ---------- Net assets of discontinued operation -- 88,051 Subscription acquisition costs 40,551 46,745 Film rental costs 8,453 6,816 Other assets 19,350 19,043 Goodwill and other intangibles (at original cost less accumulated amortization) 277,277 282,443 ---------- ---------- Total assets $731,260 $733,773 ========== ========== See accompanying Notes to Interim Consolidated Financial Statements. - 2 - <PAGE> (Unaudited) December 31 June 30 Liabilities and Stockholders' Equity 1996 1996 - ------------------------------------------------------------------------------ Current liabilities: Current portion of long-term debt $ -- $ 15,000 Current portion of long-term film rental contracts 15,716 13,063 Accounts payable 33,445 42,085 Accrued taxes and expenses 74,391 68,958 Unearned subscription revenues 144,423 140,401 ---------- ---------- Total current liabilities 267,975 279,507 ---------- ---------- Long-term debt -- 35,000 Long-term film rental contracts 9,443 8,419 Unearned subscription revenues 92,715 97,811 Deferred income taxes 27,206 25,510 Other deferred items 28,897 25,962 ---------- ---------- Total liabilities 426,236 472,209 ---------- ---------- Stockholders' equity: Series preferred stock, par value $1 per share Authorized 5,000,000 shares; none issued -- -- Common stock, par value $1 per share Authorized 80,000,000 shares; issued and outstanding 20,343,140 at December 31 and 20,380,437 at June 30 (net of treasury shares, 12,439,898 at December 31 and 12,207,776 at June 30.) 20,343 20,380 Class B stock, par value $1 per share, convertible to common stock Authorized 15,000,000 shares; issued and outstanding 6,410,704 at December 31 and 6,568,583 at June 30. 6,411 6,569 Additional paid-in capital -- -- Retained earnings 281,420 236,903 Unearned compensation (3,150) (2,288) ---------- ---------- Total stockholders' equity 305,024 261,564 ---------- ---------- Total liabilities and stockholders' equity $ 731,260 $ 733,773 ========== ========== See accompanying Notes to Interim Consolidated Financial Statements. - 3 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Earnings (Unaudited) Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 - ------------------------------------------------------------------------------ (in thousands, except per share) Revenues (less returns and allowances): Advertising $111,766 $104,802 $216,100 $205,373 Circulation 64,161 69,557 126,803 136,258 Consumer books 10,988 23,262 20,786 41,253 All other 22,857 18,487 45,263 39,797 -------- -------- -------- -------- Total revenues 209,772 216,108 408,952 422,681 -------- -------- -------- -------- Operating costs and expenses: Production, distribution and edit 83,567 92,776 168,898 181,470 Selling, general and administrative 91,338 93,525 177,217 187,560 Depreciation and amortization 5,587 5,620 11,227 11,246 -------- -------- -------- -------- Total operating costs and expenses 180,492 191,921 357,342 380,276 -------- -------- -------- -------- Income from operations 29,280 24,187 51,610 42,405 Gain on dispositions -- 5,898 -- 5,898 Interest income 1,175 459 1,554 1,121 Interest expense (335) (1,711) (1,071) (3,470) -------- -------- -------- -------- Earnings from continuing operations before income taxes 30,120 28,833 52,093 45,954 Income taxes 13,044 12,755 22,556 20,367 -------- -------- -------- -------- Earnings from continuing operations 17,076 16,078 29,537 25,587 Discontinued operation: Net loss from operations -- -- -- (717) Net gain on disposition 27,693 -- 27,693 -- -------- -------- -------- -------- Net earnings $ 44,769 $ 16,078 $ 57,230 $ 24,870 ======== ======== ======== ======== - 4 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Earnings (Unaudited) (continued) Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 - ------------------------------------------------------------------------------ (in thousands, except per share) Net earnings per share: Earnings from continuing operations $ 0.61 $ 0.57 $ 1.06 $ 0.91 Discontinued operation 1.00 -- 1.00 (0.03) -------- -------- -------- -------- Net earnings per share $ 1.61 $ 0.57 $ 2.06 $ 0.88 ======== ======== ======== ======== Average shares outstanding 27,875 28,291 27,817 28,189 ======== ======== ======== ======== See accompanying Notes to Interim Consolidated Financial Statements. Meredith Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended December 31 1996 1995 - -------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net earnings $ 57,230 $ 24,870 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,227 11,246 Amortization of film contract rights 8,924 8,457 Gain on dispositions, net of taxes (27,693) (3,379) Loss from discontinued operation -- 717 Changes in assets and liabilities: Accounts receivable (4,653) (10,833) Inventories 6,785 7,687 Supplies and prepayments (1,179) 5,076 Subscription acquisition costs 4,025 4,214 Accounts payable (8,640) (17,162) Accruals (5,230) 11,303 Unearned subscription revenues (1,074) (12,044) Deferred income taxes (1,787) 2,412 Other deferred items 2,935 (181) --------- --------- Net cash provided by operating activities 40,870 32,383 --------- --------- - 5 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (continued) Six Months Ended December 31 1996 1995 - -------------------------------------------------------------------------- (in thousands) Cash flows from investing activities: Proceeds from dispositions 123,275 27,894 Additions to property, plant, and equipment (7,693) (19,237) Purchases of marketable securities (20,060) -- Change in other assets (496) (212) --------- --------- Net cash provided by investing activities 95,026 8,445 --------- --------- Cash flows from financing activities: Long-term debt retired (50,000) (10,000) Payments for film rental contracts (9,792) (7,906) Proceeds from common stock issued 3,992 2,969 Purchase of Company stock (11,864) -- Dividends paid (5,898) (5,511) --------- --------- Net cash (used) by financing activities (73,562) (20,448) --------- --------- Net increase in cash and cash equivalents 62,334 20,380 Cash and cash equivalents at beginning of year 13,801 11,825 --------- --------- Cash and cash equivalents at end of period $ 76,135 $ 32,205 ========= ========= See accompanying Notes to Interim Consolidated Financial Statements. - 6 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies The information included in the foregoing interim financial statements is unaudited. In the opinion of management, all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. 2. Discontinued Operation On October 25, 1996, Meredith Corporation, through its cable venture, Meredith/New Heritage Partnership (MNH Partnership), completed the sale of its ownership interest in Meredith/New Heritage Strategic Partners, L.P. (Strategic Partners). Strategic Partners owned and operated cable television systems with approximately 127,000 subscribers in the Minneapolis/St. Paul area. The MNH Partnership, of which the Company indirectly owned 96 percent, sold its 73 percent ownership interest in Strategic Partners to Continental Cablevision of Minnesota Subsidiary Corporation (Continental), an affiliate of MNH Partnership's minority partner, Continental Cablevision of Minnesota, Inc. The total value of the cable television systems was $262.5 million based on estimated discounted future cash flows. Meredith Corporation's share of the proceeds was $116.0 million in cash (net of taxes). Continental also paid $84.3 million in Strategic Partners' debt. Meredith Corporation recorded a gain in the quarter ended December 31, 1996 of $27.7 million, or $1.00 per share, (net of $8.9 million in taxes) from the sale. The cable segment was classified as a discontinued operation effective September 30, 1995. Cable net losses subsequent to September 30, 1995 were deferred since the Company expected to realize a net gain from the sale. Cable operations reported revenues of $52.9 million, income from operations of $6.0 million and a net loss of $189,000 (including income tax expense of $89,000) for the period October 1, 1995, through the effective date of the sale. - 7 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 3. Marketable Securities Currently-owned marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. At December 31, 1996, marketable securities consisted of one U. S. Treasury Note with a fair value equal to its amortized cost. This security matures in less than one year. No other marketable securities were purchased or sold during the six months ended December 31, 1996. 4. Inventories Major components of inventories are summarized below. Of total inventory values shown, approximately 85 and 67 percent respectively, are under the LIFO method at December 31, 1996, and June 30, 1996. (unaudited) December 31 June 30 1996 1996 -------- -------- (in thousands) Raw materials $19,186 $28,354 Work in process 11,276 11,907 Finished goods 5,990 4,276 -------- -------- 36,452 44,537 Reserve for LIFO cost valuation (12,052) (13,352) -------- -------- Total $24,400 $31,185 ======== ======== - 8 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 5. Revenues, operating profit and depreciation and amortization by industry segment are shown below: (unaudited) (unaudited) Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands) Revenues Publishing $160,698 $171,436 $317,784 $337,999 Broadcasting 43,400 38,306 78,879 72,440 Real Estate 5,693 6,382 12,321 12,588 Less: Inter-segment revenues (19) (16) (32) (346) -------- -------- -------- -------- Total revenues $209,772 $216,108 $408,952 $422,681 ======== ======== ======== ======== Operating profit Publishing $ 17,648 $ 13,533 $ 31,300 $ 22,603 Broadcasting 17,735 15,526 30,201 28,287 Real Estate 469 1,096 2,012 2,116 Unallocated corporate expense (6,572) (5,968) (11,903) (10,601) -------- -------- -------- -------- Income from operations 29,280 24,187 51,610 42,405 Gain on disposition -- 5,898 -- 5,898 Interest income 1,175 459 1,554 1,121 Interest expense (335) (1,711) (1,071) (3,470) -------- -------- -------- -------- Earnings from continuing operations before income taxes 30,120 28,833 52,093 45,954 Income taxes 13,044 12,755 22,556 20,367 -------- -------- -------- -------- Earnings from continuing operations* $ 17,076 $ 16,078 $ 29,537 $ 25,587 ======== ======== ======== ======== - 9- <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) (unaudited) (unaudited) Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Depreciation and amortization Publishing $ 2,172 $ 2,476 $ 4,379 $ 4,996 Broadcasting 2,924 2,645 5,842 5,268 Real Estate 129 119 267 234 Unallocated corporate expense 362 380 739 748 -------- -------- -------- -------- Total depreciation and amortization $ 5,587 $ 5,620 $ 11,227 $ 11,246 ======== ======== ======== ======== *Note: Earnings for the quarter and six months ended December 31, 1995, include $3,379,000 (12 cents per share) in post-tax income from a gain on the disposition of book clubs. - 10 - <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (Note: All per-share amounts are computed on a post-tax basis.) Consolidated - ------------ Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands, except per share) Total revenues $209,772 $216,108 $408,952 $422,681 ======== ======== ======== ======== EBITDA $ 34,867 $ 29,807 $ 62,837 $ 53,651 ======== ======== ======== ======== Income from operations $ 29,280 $ 24,187 $ 51,610 $ 42,405 ======== ======== ======== ======== Operating profit margin 14.0% 11.2% 12.6% 10.0% ======== ======== ======== ======== Earnings from continuing operations $ 17,076 $ 16,078 $ 29,537 $ 25,587 ======== ======== ======== ======== Discontinued operations $ 27,693 $ -- $ 27,693 $ (717) ======== ======== ======== ======== Net earnings $ 44,769 $ 16,078 $ 57,230 $ 24,870 ======== ======== ======== ======== Per Share: Earnings from continuing operations $ 0.61 $ 0.57 $ 1.06 $ 0.91 Discontinued operations $ 1.00 $ -- $ 1.00 $ (.03) -------- -------- -------- -------- Net earnings $ 1.61 $ 0.57 $ 2.06 $ 0.88 ======== ======== ======== ======== - 11 - <PAGE> EBITDA is earnings from continuing operations before interest, taxes, depreciation and amortization. Net earnings of $44.8 million, or $1.61 per share, were recorded in the quarter ended December 31, 1996, compared to net earnings of $16.1 million, or 57 cents per share, in the prior-year second quarter. For the six months ended December 31, 1996, net earnings were $57.2 million, or $2.06 per share, compared to net earnings of $24.9 million, or 88 cents per share, in the prior-year period. Net earnings for both the quarter and six months ended December 31, 1996, included a post-tax gain of $27.7 million, or $1.00 per share, from the sale of the discontinued cable operations. Net earnings in the first half of the prior fiscal year included a net loss from discontinued cable operations of $.7 million, or 3 cents per share. Earnings from continuing operations were $17.1 million, or 61 cents per share, and $16.1 million, or 57 cents per share for the second quarters ended December 31, 1996 and 1995, respectively. Earnings from continuing operations for the comparative six-month periods were $29.5 million, or $1.06 per share, in fiscal 1997 and $25.6 million, or 91 cents per share, in fiscal 1996. Earnings from continuing operations in the prior-year periods included a post-tax gain of $3.4 million, or 12 cents per share, from the December 1995 sale of three book clubs. Excluding this non-recurring item from the prior-year periods, fiscal 1997 earnings per share from continuing operations increased 36 percent for the second quarter and 34 percent for the six month period. The Company's revenues declined 3 percent in both the quarter and six-month periods due to lower publishing revenues. The decline in publishing revenues reflected the elimination of most direct-response book sales due to the prior- year sale of the Company's book clubs and the agreement granting The Reader's Digest Association, Inc. rights for direct-response marketing of certain Meredith-trademarked products. Also contributing to the revenue decline were changes in magazine operations, including a rate base reduction at Ladies' Home Journal magazine and discontinuing the publication of home garden magazine. EBITDA increased 17 percent in both the quarter and six-month periods. Operating costs and expenses declined 6 percent in both periods leading to increased operating profit margins in the current-year periods. Lower production, distribution and editorial expenses, both in total and as a percentage of revenues, were the primary factor in the second quarter margin improvement. Downsizing in the book operations and lower paper and manufacturing costs in magazine operations, resulting from lower prices and volumes, led to the decline. These same factors contributed to lower production, distribution and editorial expenses, both in total and as a percentage of revenues, in the current six-month period. Selling, general and administrative costs also declined, in total and as a percentage of revenues, for the six months. The downsizing of book operations and lower magazine - 12 - <PAGE> subscription acquisition costs, due to the previously mentioned magazine changes, were the primary factors in the decline. In October 1996, the Company repaid its entire bank debt using a portion of the proceeds from the sale of cable operations. This resulted in net interest income in the current quarter and six-month periods versus net interest expense in the comparable prior-year periods. The Company's effective tax rate was 43.3 percent in the current quarter and six month periods compared with approximately 44.3 percent in the prior-year periods. The lower rate reflects an increase in currently estimated fiscal year earnings, which lessens the effect of non-deductible items on the overall tax rate. Publishing - ---------- Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands) Revenues --------- Magazine advertising $ 70,501 $ 68,246 $141,061 $136,733 Magazine circulation 64,161 69,557 126,803 136,258 Consumer book 10,988 23,262 20,786 41,253 Other 15,048 10,371 29,134 23,755 -------- -------- -------- -------- Total revenues $160,698 $171,436 $317,784 $337,999 ======== ======== ======== ======== Operating profit $ 17,648 $ 13,533 $ 31,300 $ 22,603 ======== ======== ======== ======== Publishing revenues decreased 6 percent compared to both the prior-year quarter and six month periods primarily due to lower consumer book revenues. The approximate 50 percent decline in consumer book revenues reflected the elimination of most direct-response book sales due to the prior-year sale of the Company's book clubs and formation of a strategic alliance with The Reader's Digest Association, Inc. Revenues from ongoing retail book sales were down for the quarter largely due to the timing of sales of the 11th edition of the Better Homes and Gardens New Cook Book, introduced in August 1996. Retail book revenues were down slightly for the six months ended December 31, 1996, even with increased first quarter sales from the New Cook Book, due to the introduction of fewer new titles in the current period. - 13 - <PAGE> Magazine circulation revenues declined 7 percent in the quarter and 8 percent in the fiscal year-to-date primarily due to the effect of a 10 percent advertising rate base reduction (effective with the February 1996 issue) at Ladies' Home Journal magazine, the Company's second largest circulation title. Closing home garden and Weekend Woodworking magazines also contributed to the decline in circulation revenues, as did a reduction in the publication frequency of Country America magazine from 10 to 6 times annually. Magazine advertising revenues grew 3 percent in both the quarter and six-month periods largely due to increased ad revenues at Better Homes and Gardens, the Company's largest circulation title. Better Homes and Gardens magazine's ad revenue growth primarily reflected an increased number of ad pages. Midwest Living, Country Home and the Better Homes and Gardens' Special Interest Publications also reported strong ad revenue growth in both periods due to a combination of increased ad pages and higher average revenue per page. Advertising revenues at Ladies' Home Journal declined in both the quarter and six-month period primarily due to lower average revenue per page. The decline in average revenue per page reflected the advertising rate base reduction. The increases in other publishing revenues in the quarter and year-to-date periods reflected higher sales volumes in the custom publishing operations and the addition of a crafts licensing agreement with Wal-Mart Stores, Inc. Publishing operating profit was up 30 percent in the fiscal 1997 second quarter and 39 percent for the fiscal year-to-date. The improvements were largely a result of increased operating profit from magazine publishing due to higher ad revenues and lower paper prices. Increased revenues and operating profit from licensing operations also contributed. Better Homes and Gardens, Country Home and Midwest Living magazines, along with the Company's lineup of Special Interest Publications, reported strong advertising revenues leading to operating profit increases for the quarter and year-to-date periods. In spite of lower revenues, Ladies' Home Journal also reported higher operating profit in both periods due primarily to lower paper and printing costs (a result of favorable pricing and reduced volumes). In addition, lower circulation expenses, due to fewer new prospect subscription mailings resulting in part from the rate base reduction, also contributed to Ladies' Home Journal's improvement in the six month period. The elimination of an operating loss from home garden magazine, which ceased publication in the spring of 1996, also was a factor in Publishing's improved operating results. Book publishing reported lower operating profit in the second quarter and for the fiscal year-to-date, primarily due to the retail book revenue declines mentioned previously. Paper is a significant expense of the Publishing segment. Paper prices, which had been escalating in fiscal 1995 and early fiscal 1996, began to moderate in the second half of fiscal 1996 and has continued to-date. As of December 31, 1996, the Company's average price paid for paper was approximately 14 percent lower than the price paid at June 30, 1996. Declining prices to-date have - 14 - <PAGE> resulted in favorable LIFO inventory reserve adjustments in the current period. The price of paper is driven by overall market conditions and, therefore, is difficult to predict. However, at this time, management does not anticipate any increases in paper prices until possibly late this fiscal year or in early fiscal 1998. Broadcasting - ------------ Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands) Revenues --------- Advertising $ 41,265 $ 36,556 $ 75,039 $ 68,640 Other 2,135 1,750 3,840 3,800 -------- -------- -------- -------- Total revenues $ 43,400 $ 38,306 $ 78,879 $ 72,440 ======== ======== ======== ======== Operating profit $ 17,735 $ 15,526 $ 30,201 $ 28,287 ======== ======== ======== ======== Revenues increased 13 percent in the fiscal 1997 second quarter and 9 percent in the six months ended December 31, 1996, from the comparable prior-year periods. Excluding revenues from WOGX-Ocala/Gainesville, acquired in January 1996, comparable revenues increased 10 percent for the quarter and 6 percent for the six months. All stations reported higher advertising revenues in the second quarter, in part due to fall 1996 political campaign advertising. For the six-month period, ad revenues increased at all stations except WOFL-Orlando and KPHO-Phoenix, where ad revenues were flat due to weak national ad sales, particularly in the first quarter. Operating profit increased 14 percent in the second quarter and 7 percent in the six-month period due primarily to the advertising revenue increases. - 15 - <PAGE> Real Estate - ----------- Three Months Six Months Ended December 31 Ended December 31 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands) Total revenues $ 5,693 $ 6,382 $ 12,321 $ 12,588 ======== ======== ======== ======== Operating profit $ 469 $ 1,096 $ 2,012 $ 2,116 ======== ======== ======== ======== Revenues and operating profit declined in both the quarter and six months ended December 31, 1996, largely due to the prior-year signing of a master franchise agreement. Excluding the effects of this agreement, second quarter revenues and operating profit were comparable to those in the prior-year quarter. On the same basis, year-to-date revenues and operating profit increased largely due to higher transaction fee revenues, resulting from an increase in the number of member firms and continued strength in existing home sales. Discontinued Operation - ---------------------- The sale of the Company's ownership interest in cable television operations was completed on October 25, 1996. The Meredith/New Heritage Partnership (MNH Partnership), of which the Company indirectly owned 96 percent, sold its 73 percent ownership interest in Meredith/New Heritage Strategic Partners, L.P. to Continental Cablevision of Minnesota Subsidiary Corporation, an affiliate of MNH Partnership's minority partner, Continental Cablevision of Minnesota, Inc. The total value of the systems was $262.5 million. Meredith Corporation received $116.0 million in cash (net of taxes) and recorded a gain in the fiscal second quarter of $27.7 million, or $1.00 per share, from the sale. The gain is net of taxes and deferred cable losses from September 30, 1995, until the effective date of the sale. The cable segment was classified as a discontinued operation on September 30, 1995. - 16 - <PAGE> Liquidity and Capital Resources Cash and cash equivalents increased by $62.3 million in the first six months of fiscal 1997 compared to an increase of $20.4 million in the prior-year period. The larger increase in cash in the current period resulted from the sale of the discontinued cable operation. Proceeds from the sale funded increased use of cash in the current period for retirement of long-term debt, purchases of marketable securities and purchases of Company stock. Cash provided by operating activities increased 26 percent in the current period due to higher operating income. Company debt, which totaled $50 million at June 30, 1996, was repaid in its entirety in October 1996, using a portion of the proceeds from the cable sale. Interest expense associated with this debt totaled $909,000 (excluding $92,000 in capitalized interest) in the six months ended December 31, 1996. In January 1997, the Company announced that, pending Federal Communications Commission approval, it will acquire all four of the television stations of First Media Television, L.P. The acquisition price for the purchased assets of First Media is $435 million, which Meredith will pay through a combination of bank debt and cash. The average term of the debt is expected to be approximately four years. The transaction is expected to close in mid-calendar 1997. Funds for the payment of interest and principal on the debt are expected to be provided by cash generated from future operating activities. In the first half of fiscal 1997, the Company spent $11.9 million for the repurchase of 267,000 shares of Meredith Corporation common stock on the open market under an authorization by its Board of Directors. No shares were repurchased in the first half of the prior year. As of December 31, 1996, approximately 1,042,000 additional shares could be repurchased under existing authorizations by the Board of Directors. The status of the repurchase program is reviewed at each quarterly Board of Directors meeting. Future repurchases of Company shares are expected to be reduced given the aforementioned proposed broadcasting acquisition. Dividends paid in the first six months of fiscal 1997 were $5.9 million (22 cents per share) compared with $5.5 million (20 cents per share) in the prior- year period. On February 3, 1997, the Board of Directors increased the quarterly dividend by 18 percent (two cents per share) to 13 cents per share effective with the dividend payable on March 14, 1997. On an annual basis, the effect of this quarterly dividend increase would be to increase dividends paid by approximately $2.1 million at the current number of shares outstanding. The Board of Directors also approved a two-for-one stock split, in the form of a share dividend, payable on March 17, 1997, to shareholders of record on February 28, 1997. - 17 - <PAGE> Expenditures for property, plant and equipment were $7.7 million in the first six months of fiscal 1997 compared to $19.2 million in the prior-year period. The decrease reflected prior-year spending for new office facilities in New York City and higher prior-year spending for broadcasting technical equipment. Capital expenditures for fiscal 1997 are expected to be approximately $32 million, slightly higher than fiscal 1996 capital spending of nearly $30 million. This includes approximately $18 million in planned spending in fiscal 1997 for the construction of a new office building and related improvements in Des Moines. Fiscal 1996 spending for this project totaled $7 million. Total cost of the project is estimated at approximately $40 million. The balance of the spending will occur in fiscal 1998. Funds for the new Des Moines building and other capital expenditures are expected to be provided by available cash, including cash from operating activities and short-term bank debt. The Company has made no other material commitments for capital expenditures. At this time, management expects that cash on hand, internally-generated cash flow and short-term bank debt under existing bank lines of credit will provide funds for any additional operating and recurring cash needs (e.g., working capital, cash dividends) for foreseeable periods. As mentioned previously, the proposed acquisition of the four First Media television stations will be funded by cash and bank debt. At December 31, 1996, Meredith Corporation had unused committed lines of credit totaling $30 million. The Company does not expect the need for any long-term source of cash to meet working capital requirements. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on November 11, 1996, at the Company's headquarters in Des Moines, Iowa. (b) The name of each director elected at the Annual Meeting is shown under Item 4.(c)(1). The other directors whose terms of office continued after the meeting were: Herbert M. Baum, Robert A. Burnett, Frederick B. Henry, Joel W. Johnson, William T. Kerr, Richard S. Levitt, E. T. Meredith III and Nicholas L. Reding. (c)(1) Proposal 1: Election of four Class I directors for terms expiring in 1999. Each nominee was elected in uncontested elections by the votes cast as follows: - 18 - <PAGE> Number of shareholder votes* ---------------------------- For Withheld Class I directors ---------- -------- Pierson M. Grieve 72,980,296 185,727 Robert E. Lee 72,994,138 171,885 Jack D. Rehm 72,809,411 356,612 Barbara S. Uehling 72,974,827 191,196 *As specified on the proxy card, if no vote For or Withhold was specified, the shares were voted For the election of the named director. (c)(2) Proposal 2: Approval of an additional reserve of 75,000 shares of Company common stock for issuance under the 1990 Restricted Stock Plan for Non-Employee Directors. Proposal 2 was approved by the votes cast as follows: Broker For Against Abstain Non-Votes ---------- --------- ------- --------- 69,144,016 1,533,050 264,492 2,224,465 (c)(3) Proposal 3: Approval of an additional reserve of 75,000 shares of Company common stock for issuance under the 1993 Stock Option Plan for Non-Employee Directors. Proposal 3 was approved by the votes cast as follows: Broker For Against Abstain Non-Votes ---------- --------- ------- --------- 68,744,340 1,692,580 504,638 2,224,465 (c)(4) Proposal 4: Approval of the 1996 Stock Incentive Plan. Proposal 4 was approved by the votes cast as follows: Broker For Against Abstain Non-Votes ---------- --------- ------- --------- 63,434,951 7,299,911 206,696 2,224,465 - 19 - <PAGE> Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3) Restated Bylaws, as amended 10.1) Employment agreement dated November 11, 1996 between Meredith Corporation and William T. Kerr 10.2) Consultancy Agreement, Amendment to Employment Agreement and Amendment to Restricted Stock Agreements dated November 11, 1996 between Meredith Corporation and Jack D. Rehm. (Reference is made to an Employment Agreement filed with the Commission as Exhibit 10c to the Company's Form 10-K for the year ended June 30, 1992 and Restricted Stock Agreements filed with the Commission as Exhibits 10b(1) and 10b(2) to the Company's Form 10-Q for the quarter ended September 30, 1992.) 10.3) 1992 Meredith Corporation Stock Incentive Plan Agreement dated July 1, 1996, between Meredith Corporation and William T. Kerr 10.4) 1996 Meredith Corporation Stock Incentive Plan Agreement dated August 14, 1996, between Meredith Corporation and William T. Kerr 10.5) Statement re: Meredith Corporation Nonqualified Stock Option Award Agreements with William T. Kerr 11) Statement re computation of per share earnings 27) Financial Data Schedule 99) Additional financial information from the Company's second quarter press release dated January 22, 1997 (b) Reports on Form 8-K On October 25, 1996, Meredith Corporation, through its cable venture, Meredith/New Heritage Partnership, reported the completion of the sale of its ownership interest in Meredith/New Heritage Strategic Partners, L.P. On November 11, 1996, Meredith Corporation's board of directors elected William T. Kerr, the Company's president and chief operating officer, as president and chief executive officer effective January 1, 1997. - 20 - <PAGE> SIGNATURE 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. MEREDITH CORPORATION Registrant (Larry D. Hartsook) Larry D. Hartsook Vice President - Finance (Principal Financial and Accounting Officer) Date: February 11, 1997 - 21 - <PAGE> Index to Exhibits Exhibit Number Item ------- ----------------------------------------------------------- 3 Restated Bylaws, as amended 10.1 Employment agreement dated November 11, 1996 between Meredith Corporation and William T. Kerr 10.2 Consultancy Agreement, Amendment to Employment Agreement and Amendment to Restricted Stock Agreements dated November 11, 1996 between Meredith Corporation and Jack D. Rehm. 10.3) 1992 Meredith Corporation Stock Incentive Plan Agreement dated July 1, 1996, between Meredith Corporation and William T. Kerr 10.4) 1996 Meredith Corporation Stock Incentive Plan Agreement dated August 14, 1996, between Meredith Corporation and William T. Kerr 10.5) Statement re: Meredith Corporation Nonqualified Stock Option Award Agreements with William T. Kerr 11 Statement re computation of per share earnings 27 Financial Data Schedule 99 Additional financial information from the Company's second quarter press release dated January 22, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 3 FOR 12-31-96 10-Q <TEXT> Exhibit 3 --------- BYLAWS OF MEREDITH CORPORATION Effective November 11, 1996 ARTICLE I. OFFICES The principal office of the corporation in the State of Iowa shall be located in the City of Des Moines, County of Polk, or as otherwise or more particularly identified in the most recently filed (at any time), annual report of the corporation on file with the Iowa Secretary of State. ARTICLE II. SHAREHOLDERS Section 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the second Monday in the month of November in each year, at the hour of 10:00 a.m., at the principal office of the corporation or at such other date, time and place as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice of the meeting, for the purpose of electing directors and transacting such other business as may properly come before the meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before an annual meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a shareholder of the corporation who was a shareholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation at the principal executive office of the corporation. To be timely, a shareholder's notice shall be delivered not less than 90 days prior to the first anniversary of the preceding year's meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not later than the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined herein) of the date of such meeting is first made. Page 1 of 28 <PAGE> Such shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (A) the name and address of such shareholder, as they appear on the corporation's books, and the name and address of such beneficial owner and (B) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner; and (iii) in the event that such business includes a proposal to amend either the Articles of Incorporation or the Bylaws of the corporation, the language of the proposed amendment. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with this paragraph, and the Chairman of the Board or other person presiding at an annual meeting of shareholders, may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures. For the purposes of this paragraph "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this paragraph, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these Bylaws shall be deemed to affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, may be called by the Chairman of the Board, the Chief Executive Officer, the Secretary or the Board of Directors. The holders of shares having not less than one-tenth of the voting power of the corporation may demand in writing stating the purpose or purposes, and signed, dated and delivered to the Secretary of the corporation, that a special meeting of the shareholders be held. The time, date and place of any such special meeting shall be determined by the Board of Directors or at its direction, by the Chairman. Business transacted at a special meeting of the shareholders shall be confined to the purpose or purposes of the meeting described in the notice of the meeting. Section 3. PLACE OF SHAREHOLDERS' MEETING. The Board of Directors may designate any place, either within or without the State of Iowa as the place of meeting for any annual meeting or for any special meeting of shareholders. If no designation is made the place of meeting shall be the principal office of the corporation in the State of Iowa. Page 2 of 28 <PAGE> Section 4. NOTICE OF MEETING. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten days, nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the Chief Executive Officer, the Secretary or the Board of Directors, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at the address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 5. POSTPONEMENT OF MEETINGS. Any previously scheduled annual or special meeting of shareholders may be postponed by resolution of the Board of Directors upon public announcement (as defined in Article II, Section 1 of these Bylaws) made on or prior to the date previously scheduled for such annual or special meeting. Section 6. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the first date on which notice of the meeting is mailed or the day before the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. In order to determine the shareholders entitled to demand a special meeting, the record date shall be the sixtieth day preceding the date of receipt by the corporation of written demands sufficient to require the calling of such meeting, unless otherwise fixed by the Board of Directors. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the Board of Directors selects a new record date or unless a new record date is required by law. Section 7. VOTING LISTS. After the record date for a meeting has been fixed, the officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged by voting group and within each Page 3 of 28 <PAGE> voting group, in alphabetical order, with the address of and the number and class of shares held by each, which list, for a period beginning two business days after notice of the meeting was first given for which the list was prepared and continuing through the meeting, shall be kept on file at the principal office of the corporation or at the place identified in the meeting notice in the city where the meeting will be held. The list shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The list furnished to the corporation by its stock transfer agent shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Section 8. QUORUM. At any meeting of the shareholders, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter, unless the representation of a different number is required by law, and in that case, the representation of the number so required shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting or a majority of the votes present may adjourn the meeting to another place, date or time. When a meeting is adjourned to another place, date or time, notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than one hundred twenty (120) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by the shareholder's duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. No holder of any share of any class of stock of the corporation shall sell the vote pertaining to such share or issue a proxy to vote such share in consideration of any sum of money or anything of value. Section 10. VOTING OF SHARES. Each outstanding share entitled to vote shall be entitled to vote as follows: (a) At each annual or special meeting of shareholders, each holder of common stock shall be entitled to one [1] vote in person or by proxy for each share of common stock standing in the holder's name on the stock transfer records of the corporation, and (except as provided in subsection Page 4 of 28 <PAGE> [b] of this Section 10) each holder of class B stock shall be entitled to ten [10] votes in person or by proxy for each share of class B stock standing in the holder's name on the stock transfer records of the corporation. Except as required pursuant to the Business Corporation Act of the State of Iowa, all actions submitted to a vote of shareholders shall be voted on by the holders of common stock and class B stock voting together as a single class. (b) Notwithstanding subsection [a] of this Section 10, each holder of class B stock shall be entitled to only one [1] vote, in person or by proxy, for each share of class B stock standing in the holder's name on the stock transfer records of the corporation with respect to the following matters: (i) The removal of any director of the corporation pursuant to Article IV of the Articles of Incorporation; (ii) Any amendment to the Articles of Incorporation which would permit the holders of stock of the corporation to amend, alter, change or repeal the Bylaws or any part thereof, pursuant to Article V of the Articles of Incorporation; and (iii) Any repeal or amendment of Article IV or Article VI of the Articles of Incorporation. Section 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted, either in person or by proxy, without a transfer of such shares. Shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares so held without a transfer of such shares into the name of the trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof if authority to do so is contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Page 5 of 28 <PAGE> Neither treasury shares nor, absent special circumstances, shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. Section 12. VOTING BY BALLOT. Voting by shareholders on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. ARTICLE III. BOARD OF DIRECTORS Section 1. GENERAL POWERS. The business and affairs of the corporation shall be managed by its Board of Directors. Section 2. NUMBER, TENURE AND QUALIFICATIONS; NOMINATIONS. Within the limits set forth in Article IV of the Articles of Incorporation, the number of directors of the corporation shall be as fixed from time to time by resolution of the Board of Directors. The directors shall be divided into classes, and hold office for the terms as provided in Article IV of the Articles of Incorporation. Directors need not be residents of the State of Iowa or shareholders of the corporation. Nominations of persons for election as directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Any shareholder entitled to vote for the election of directors may nominate a person or persons for election as director only if written notice of such shareholder's intent is delivered to the Secretary of the corporation at the principal executive office of the corporation (i) with respect to an election to be held at an annual meeting of shareholders, not later than 90 days prior to the first anniversary of the preceding year's annual meeting, or as set out below, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, not later than 10 days following the date on which public announcement (as defined in Article II, Section 1 of these Bylaws) of the date of such meeting is first made. In the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date of the annual meeting, notice by the shareholder must be delivered not less than 90 days prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding anything in the foregoing sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 100 days prior to the first anniversary of the preceding year's annual Page 6 of 28 <PAGE> meeting, a shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made. Such shareholder's notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and the name, address, age, and principal occupation or employment of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) the number and class of shares of the corporation which are owned by such shareholder and the beneficial owner, if any, and the number and class of shares, if any, beneficially owned by the nominee; (d) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee that is required to be disclosed in connection with the solicitation of proxies for the election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in a proxy statement as a nominee and to serving as a director if nominated). The Chairman of the Board or other person presiding at a meeting of shareholders may refuse to acknowledge the nomination of any person not made in accordance with the procedures prescribed by these Bylaws, and in that event the defective nomination shall be disregarded. Section 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Iowa, for the holding of additional regular meetings without other notice than such resolution. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the Chief Executive Officer, the Secretary or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Iowa, as the place for holding any special meeting of the Board of Directors called by them. Section 5. NOTICE. Notice of any special meeting of the Board of Directors shall be given at least two days previously thereto by written notice delivered personally or mailed to each director at the director's business address, or by telephone, cable, telefax, wireless or telegram. If mailed, Page 7 of 28 <PAGE> such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 6. QUORUM. A majority of the number of directors fixed pursuant to Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Section 7. MANNER OF ACTING. Except as otherwise specified in these Bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 8. VACANCIES. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for a term which shall expire at the next election of directors by the shareholders. A director elected by the shareholders to fill a vacancy shall be elected for the unexpired term of the director last elected by the shareholders with respect to the position being filled. Any directorship to be filled by reason of any increase in the number of directors by not more than thirty percent (30%) of the number of directors last approved by the shareholders, may be filled by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders. Section 9. COMPENSATION. By resolution of the Board of Directors, those directors who are not at the time active employees of the corporation may be paid an annual retainer. All directors may be reimbursed for expenses incurred in connection with their services. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 10. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless Page 8 of 28 <PAGE> the director's dissent shall be entered in the minutes of the meeting or unless the director shall file a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 11. INFORMAL ACTION BY DIRECTORS. Any action required to be taken at a meeting of the directors, or any other action which may be taken at a meeting of the directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. Section 12. EXECUTIVE COMMITTEE. An Executive Committee consisting of two or more members of the Board of Directors may be designated by the Board of Directors at the time of the annual meeting or at such other time as the Board of Directors may determine. The chairman of said committee shall be the person elected by the Board of Directors to the office of Chairman of the Executive Committee, and such officer shall be designated a member of said committee. If an Executive Committee is designated, it shall, during the intervals between the meetings of the Board of Directors and so far as it lawfully may, possess and exercise all of the authority of the Board of Directors in the management of the business of the corporation, in all cases in which specific directions shall not have been given by the Board of Directors, provided that notwithstanding the foregoing, the Executive Committee shall not have authority: (1) to authorize dividends or other distributions; (2) to approve or propose to shareholders actions or proposals required by the Iowa Business Corporation Act to be approved by shareholders; (3) to fill vacancies on the Board of Directors or any committee thereof; (4) to amend the Articles of Incorporation of the corporation; (5) to adopt, amend or repeal Bylaws; (6) to approve a plan of merger not requiring shareholder approval; (7) to authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors; (8) to authorize or approve the issuance or sale of, or any contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares; except Page 9 of 28 <PAGE> that the Board of Directors may authorize a committee or senior officer to do so within limits specifically prescribed by the Board of Directors; or (9) to remove the Chairman of the Board, Chairman of the Executive Committee, Chief Executive Officer or the President, or to appoint any person to fill a vacancy in any such office. Section 13. FINANCE COMMITTEE. A Finance Committee consisting of two or more members of the Board of Directors may be designated by the Board of Directors at the time of the annual meeting or at such time as the Board of Directors may determine. If a Finance Committee is designated, said committee's duties shall be to: (1) review corporate financial policies and procedures and make recommendations to the Board of Directors or the Executive Committee in regard thereto; (2) provide financial advice and counsel to management; (3) formulate dividend policy and make recommendations to the Board of Directors in regard thereto; (4) make provisions for the appointment of depositories of funds of the corporation and the specification of conditions of deposit and withdrawal of said funds; (5) review specific corporate financing plans and advise the Board of Directors or Executive Committee in regard thereto; (6) supervise corporate investment portfolios; (7) give consideration and approval or disapproval of capital expenditure requests by management within limits established by the Board of Directors; (8) review annual capital end operating budgets and advise the Board of Directors or Executive Committee regarding the financial implications thereof; (9) monitor the corporation's financial condition and standing in the financial and investment communities; (10) review and make recommendations to the Board of Directors concerning acquisitions and dispositions; Page 10 of 28 <PAGE> (11) monitor the risk management activities of the corporation; and (12) consider any other matters concerning the corporation's financial structure, condition, financing plans and policies and make recommendations to the Board of Directors on such matters. Section 14. COMPENSATION/NOMINATING COMMITTEE. A Compensation/Nominating Committee consisting of two or more members of the Board of Directors who are non-employee directors as defined in Rule 16b-3(b)(3)(i) under the Exchange Act and outside directors as defined in regulations under Section 162(m) of the Internal Revenue Code may be designated by the Board of Directors at the time of the annual meeting, or at such other time as the Board of Directors may determine. If a Compensation/Nominating Committee is designated, said committee's duties shall be to: (1) review and approve changes in corporate officers' compensation; (2) review and make recommendations to the Board of Directors on directors' compensation; (3) review the corporation's salary administration programs and make changes therein as may be required; (4) approve prior to adoption any management incentive, bonus or stock plans, all agreements related thereto, and administer and supervise such plans as the language thereof may require; (5) review and make recommendations to the Board of Directors on director stock plans and all agreements related thereto; (6) review all employee benefit plans, including the levels and types of benefits provided thereunder, and propose amendments thereto for approval by the Board of Directors; (7) recommend to the Board of Directors the appointment of such management personnel or committees as it deems desirable for the administration, detailed study, or recommendation of possible changes in employee benefit plans; (8) act as a nominating committee to propose and recommend to the Board of Directors nominees for election or appointment as directors; and (9) engage in such additional review and assessment as it may deem necessary or appropriate to perform the foregoing duties. Page 11 of 28 <PAGE> Section 15. AUDIT COMMITTEE. An Audit Committee consisting of two or more members of the Board of Directors who are independent of management within the meaning of the policy statement on audit committees issued by the New York Stock Exchange shall be designated by the Board of Directors at the time of the annual meeting, or at such other time as the board may determine. The duties of said committee shall be to: (1) review and recommend annually to the Board of Directors the engagement of independent public accountants to audit the books and records of the corporation and its subsidiaries; (2) meet prior to the start of any audit by the outside audit firm and review the scope of the audit to be performed; (3) meet prior to the publication of the annual report and review results of the audit by the outside audit firm for the year; (4) meet with and determine the responsibilities and scope of the internal audit department and review internal audit reports; (5) review the corporation's accounting principles and policies and internal accounting controls; (6) review the effect of changes in accounting principles or of other developments emanating from the profession, its standard board or any governmental authority; (7) carry on such other activities so as to give additional assurance regarding the financial information used by the Board of Directors in making decisions; (8) carry on such other activities so as to give additional assurance regarding the financial information distributed to outsiders; and (9) review the standards and policies of proper business conduct and practices for the corporation and its employees and monitor the implementation of, and the compliance with the standards and policies. Section 16. PENSION COMMITTEE. A Pension Committee consisting of two or more members of the Board of Directors may be designated by the Board of Directors at the time of the annual meeting or at such time as the Board of Directors may determine. If a Pension Committee is designated, said committee's duties shall be to: (1) review the corporation's pension plans and propose amendments thereto for approval by the Board of Directors; Page 12 of 28 <PAGE> (2) review the levels and types of benefits provided under the corporation's pension plans and other features thereof, including eligibility, vesting and the form of payment of benefits; (3) recommend to the Board of Directors investment policy and objectives for all employee pension funds, review the investment performance of such funds and recommend revision of the policy and objectives as may be required; (4) recommend to the Board of Directors the funding policies for all employee pension funds; (5) recommend to the Board of Directors the appointment of such management personnel or committees as it deems desirable for the administration, detailed study, or recommendation of possible changes in the corporation's pension plans; and (6) engage in such additional review and assessment as it may deem necessary or appropriate to perform the bargaining duties. Section 17. LEGAL AFFAIRS COMMITTEE. A Legal Affairs Committee consisting of two or more members of the Board of Directors may be designated by the Board of Directors at the time of the annual meeting, or such other time as the board may determine. If a Legal Affairs Committee is designated, said committee's duties shall be to: 1. review the structure, functions and personnel of the corporation's internal legal staff; 2. review the procedures established for the engagement of outside counsel and the monitoring of their activities; 3. meet with the general counsel of the corporation, and outside counsel engaged by the corporation, to review all significant threatened, pending and settled litigation involving the corporation; including the impact, or potential impact, of such matters upon the policies, planning, operations or finances of the corporation; 4. receive reports from the general counsel and outside counsel, as to changes in the law which have or could have an effect upon the corporation or its policies, planning, operations or finances, and assist in the development of strategies in response thereto; and 5. inquire into the existence, and encourage the development, of practices and procedures, including legal audits, which could benefit the corporation in avoiding litigation or other legal problems. Page 13 of 28 <PAGE> Section 18. COMMITTEE PROCEDURES. The chairman of each committee, other than the Executive Committee, shall be selected by the Board of Directors or by the Executive Committee. In the absence of the chairman of any committee, a temporary chairman may be appointed from among the members of the committee. Each committee shall keep minutes of the proceedings of its meetings which shall be submitted to the Board of Directors at the next meeting of the Board of Directors. A majority of members of any committee shall constitute a quorum for the transaction of business. Meetings of any committee shall be called upon the request of any member of the committee or the Chairman of the Board, Chief Executive Officer or the Secretary, and notice of such meetings shall in each instance be given to each member of the committee at least twenty-four hours before the meeting either orally or in writing. Expenses of attendance, if any, shall be paid for attendance at each meeting of any committee. Each director serving on a committee shall hold such office until the annual meeting held next after such director's designation, or until such director's successor shall have been designated. ARTICLE IV. OFFICERS Section 1. NUMBER. The officers of the corporation shall be a Chairman of the Board, a Chairman of the Executive Committee, a Chief Executive Officer, a President (who, unless otherwise determined by the Board, shall be the Chief Operating Officer of the corporation), one or more Group Presidents, one or more Executive Vice Presidents, one or more Senior Vice Presidents or one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Secretary, a Treasurer, and a Controller, and such other officers as the Board of Directors may from time to time designate by resolution, each of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person. In its discretion, the Board of Directors may delegate the powers or duties of any officer to any other officer or agents, notwithstanding any provision of these Bylaws, and the Board of Directors may leave unfilled for any such period as it may fix, any office except those of Chairman of the Board, Chief Executive Officer, President (unless the duties of President are performed by the Chief Executive Officer), Vice President-Finance and Secretary. Section 2. ELECTION AND TERM OF OFFICE. The officers of the corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until such officer's successor shall have been duly elected or until death or until such officer shall resign or shall have been removed in the manner hereinafter provided. Page 14 of 28 <PAGE> Section 3. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer or agent elected by the Board of Directors except the Chairman of the Board, Chairman of the Executive Committee, Chief Executive Officer and President, may be removed by the Executive Committee. Any officer or agent elected by the Board of Directors except the Chairman of the Board and the Chairman of the Executive Committee may be removed by the Chief Executive Officer. Section 4. VACANCIES. A vacancy in the office of Chairman of the Board, Chairman of the Executive Committee, Chief Executive Officer or President because of death, resignation, removal, disqualification or otherwise, may be filled only by the Board of Directors for the unexpired portion of the term. A vacancy in any other office may be filled by the Executive Committee or the Chief Executive Officer. Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors and shall be a member of the Executive Committee. The Chairman of the Board shall perform such other duties as may be prescribed by the Board of Directors from time to time and shall have the general powers and duties usually vested in the Chairman of the Board. Section 6. CHAIRMAN OF THE EXECUTIVE COMMITTEE. The Chairman of the Executive Committee shall be a member of that committee and preside at all of its meetings, and in the absence of the Chairman of the Board, shall preside at all meetings of the shareholders and the Board of Directors. The Chairman of the Executive Committee shall perform such other duties as may be prescribed by the Board of Directors from time to time. Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the principal executive officer of the corporation and, in general shall, subject to the authority of the Board of Directors, supervise and control all of the business, policies and affairs of the corporation and all other officers of the corporation except for the Chairman of the Board and the Chairman of the Executive Committee. The Chief Executive Officer shall have the general powers and duties usually vested in the principal executive officer of a corporation, unless the Board of Directors shall elect another person as President and shall delegate some or all of such powers and duties to the President. The Chief Executive Officer shall perform such other duties as may be prescribed by the Board of Directors from time to time. Page 15 of 28 <PAGE> Section 8. PRESIDENT. The President shall be the Chief Operating Officer of the corporation (unless otherwise determined by the Board of Directors). As the Chief Operating Officer, the President shall have the management of and exercise general supervision over the corporation's operating groups and all its Group Presidents, subject to the control and supervision of the Chief Executive Officer. The President shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer from time to time. Section 9. GROUP PRESIDENTS. Each Group President, within the limitations placed by the policies adopted by the Board of Directors or the Chief Executive Officer, shall be a corporate officer and shall be the Chief Operating Officer of the operating group assigned and shall in general supervise and control such business and affairs of the group and operations assigned thereto and perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer. Section 10. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. Each corporate Executive Vice President, Senior Vice President or Vice President shall perform such duties as may be assigned by the Board of Directors or the Chief Executive Officer. An Executive Vice President, Senior Vice President or Vice President may be assigned the operating authority for managing one or more operating units or service operations of the corporation as established by the Board of Directors. Upon assignment by the Board of Directors of operating authority for an operation or service unit, such Executive Vice President, Senior Vice President or Vice President shall in general supervise and control all of the business and affairs of such operation or service unit, subject only to such supervision and direction as the Board of Directors or the Chief Executive Officer may provide. Each Executive Vice President, Senior Vice President and Vice President shall be authorized to sign contracts and other documents related to the corporation or to the operations under such officer's supervision and control. Section 11. VICE PRESIDENT FINANCE. The Vice President-Finance shall be the principal and chief accounting and principal and chief finance officer of the corporation. In that capacity, the Vice President-Finance shall keep and maintain, or cause to be kept and maintained accurate, correct books and records of accounts of the properties and business transactions of the corporation, including accounts of the assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The Vice President-Finance shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors or by the Finance Committee appointed by the Board of Directors. The Vice President-Finance shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the Chairman of the Board, the Chief Executive Officer, the President and the Board Page 16 of 28 <PAGE> of Directors, upon their request, an account of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer. Section 12. THE SECRETARY. The Secretary shall: (a) prepare and keep the minutes of the meetings of the shareholders, the Board of Directors, and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder, unless such register is maintained by the transfer agent or registrar of the corporation; (e) authenticate the records of the corporation; (f) have general charge of the stock transfer books of the corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board of Directors or the Chief Executive Officer. Section 13. THE TREASURER. Subject to the supervision of the Vice President-Finance, the Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for monies due and payable to the corporation from any source whatsoever, and deposit all such monies in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article VI of these Bylaws; (b) be responsible for filing all required tax returns, and (c) in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned by the Board of Directors, the Chief Executive Officer or the Vice President-Finance. Section 14. THE CONTROLLER. The Controller shall maintain adequate records showing the financial condition of the corporation and the results of its operations by established accounting periods, and see that adequate audits thereof are regularly and currently made. The Controller shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chief Executive Officer or the Vice President-Finance. Section 15. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant Secretaries, when authorized by the Board of Directors, may sign with the Chairman of the Board, the Chief Executive Officer, the President or a Vice President certificates for shares of the corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Secretaries, in general, shall perform such duties as shall be Page 17 of 28 <PAGE> assigned to them by the Secretary, the Chief Executive Officer or the Board of Directors. The Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Treasurer, the Chief Executive Officer, the Board of Directors or the Vice President-Finance. Section 16. OTHER ASSISTANT AND ACTING OFFICERS. The Board of Directors or the Chief Executive Officer shall have the power to appoint any person to act as assistant to any officer, or to perform the duties of such officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer so appointed by the Board of Directors or the Chief Executive Officer shall have the power to perform all the duties of the office to which the person is so appointed to be assistant, or as to which the person is so appointed to act, except as such power may be otherwise defined or restricted by the Board of Directors. Section 17. SALARIES. The salaries of the officers shall be fixed from time to time by the Compensation/Nominating Committee of the Board of Directors and no officer shall be prevented from receiving such salary by reason of also being a director of the corporation. ARTICLE V. GROUPS AND STAFF Section 1. ESTABLISHMENT OF GROUPS. The Board of Directors or the Chief Executive Officer may cause the business to be divided into one or more groups, based upon product manufactured, geographical territory, character and type of operations, or upon such other basis as the Board of Directors or the Chief Executive Officer may from time to time determine to be advisable. The groups shall operate under the authority and direction of a Group President and may operate under trade names approved for such purpose as may be authorized by the Board of Directors or the Chief Executive Officer. Section 2. GROUP OFFICERS. The Group President of a group may appoint any number of group officers (who shall not, by virtue of such appointment, be corporate officers), and may remove any such group officer. Such officers shall have such authority as may from time to time be assigned by the Group President. Section 3. STAFF OFFICERS. The Chief Executive Officer may appoint any number of staff officers (who shall not, by virtue of such appointment, be corporate officers), and may remove any such staff officer as the Chief Executive Officer may deem appropriate from time to time. Such officers shall have such authority as may from time to time be assigned by the Chief Executive Officer. Page 18 of 28 <PAGE> ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Chairman of the Board, the Chairman of the Executive Committee, the Chief Executive Officer or the President may at any time execute and deliver any deeds, mortgages or bonds which the Board of Directors has authorized to be executed and delivered and may at any time execute and deliver any lease, bid, application, note, guarantee, consent, election, notice or other contract, document or instrument as may be required in the ordinary course and scope of the business of the corporation or as may be specifically authorized by the Board of Directors. The Chairman of the Board, the Chairman of the Executive Committee, the Chief Executive Officer or the President may in writing delegate the foregoing authority, and may delegate authority to redelegate such authority, to any other officer or officers, agent or agents, or other persons and the authority so delegated may be general or confined to specific instances. The Board of Directors may authorize any other officer or officers, agent or agents or other persons to execute and deliver any other contracts, documents or instruments and such authority may be general or confined to specific instances. Section 2. LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Section 3. EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. Section 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors or the Finance Committee, or committees or officers to whom the Board of Directors or the Finance Committee have delegated such authority may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. CERTIFICATES FOR SHARES. Certificates for shares of capital stock of the corporation shall be in such form as shall be determined by the Board of Directors. They shall be issued in consecutive order and shall be numbered in the order of their issue and shall be signed by the Chairman of the Board, the Chief Executive Officer, the President or a Vice President and by the Secretary or an Assistant Secretary, provided, however, that if any stock certificate is countersigned by a transfer agent, other than the corporation or Page 19 of 28 <PAGE> its employee, or by a registrar, other than the corporation or its employee, any other signature, including that of any such officer, on such certificate may be a facsimile, engraved, stamped or printed. In case any officer or agent who has signed or whose facsimile signature shall be used on any stock certificate shall cease to be such officer or agent of the corporation because of death, resignation or otherwise before such stock certificate shall have been delivered by the corporation, such stock certificate may nevertheless be issued and delivered as though the person or agent who signed the certificate or whose facsimile signature shall have been used thereon had not ceased to be such officer or agent of the corporation. Section 2. TRANSFER OF SHARES. Upon surrender to the corporation or its transfer agent of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. Section 3. RESTRICTIONS ON OWNERSHIP, TRANSFER AND VOTING. So long as the corporation or any of its subsidiaries is subject to any law of the United States or any state therein which restricts ownership or voting of capital stock by Aliens (as defined herein), not more than one-fifth of the shares outstanding shall be owned of record or voted by or for the account of Aliens or their representatives or affiliates. The Board of Directors may issue share certificates representing not more than one-fifth of the shares of the stock of the corporation at any time outstanding in special form which may be owned or held by Aliens, such certificates to be known as "Foreign Share Certificates" and to be so marked, but under no circumstances shall the total amount of voting stock of any class represented by Foreign Share Certificates, plus the amount of voting stock of that class owned by or for the account of Aliens and represented by certificates not so marked, exceed one-fifth of the aggregate number of outstanding shares of such class. Shares of stock shall be transferable on the books of the corporation by the holder thereof, in person or by duly authorized attorney, upon the surrender of the certificate representing the shares to be transferred, properly endorsed; provided, however, that shares of stock other than shares represented by Foreign Share Certificates shall be transferable to Aliens or any person holding for the account thereof only when the aggregate number of shares of stock owned by or for the account of Aliens will not then be more than one-fifth of the number of shares of stock outstanding. The Board of Directors may direct that, before shares of stock shall be transferred on the books of the corporation, the corporation may require information as to whether the proposed transferee is an Alien or will hold the stock for the account of an Alien. Page 20 of 28 <PAGE> If the stock records of the corporation shall at any time disclose Alien ownership of one-fifth or more of the voting stock of any class and it shall be found by the corporation that any certificate for shares marked "Domestic Share Certificate" is, in fact, held by or for the account of any Alien, the holder of the shares represented by that certificate shall not be entitled to vote, to receive dividends or to have any other rights with respect to such shares, except the right to transfer the shares to a Non-Alien (as defined herein). If the stock records of the corporation shall at any time disclose Alien ownership of one-fifth or more of the voting stock of any class and a request is made by an Alien to have shares registered in its name or for its account, the corporation shall be under no obligation to effect the transfer or to issue or reissue any stock certificates to or for the account of the Alien. In addition, if a proposed transferee of any shares is an Alien, and the transfer to such Alien would result in Alien ownership of one-fifth or more of the voting stock of any class, the corporation shall be under no obligation to effect the transfer or to issue or reissue any stock certificates to or for the account of the Alien. Further, if it is determined at any time that a transfer has resulted in Alien ownership of one-fifth or more of the voting stock of any class, the holder of the shares which resulted in the Alien ownership of one- fifth or more of the voting stock shall not be entitled to vote, to receive dividends or have any other rights with respect to such shares, except the right to transfer those shares to a Non-Alien. The Board of Directors shall establish rules, regulations and procedures to assure compliance with and enforcement of this Article VII, Section 3. The term "Alien" is defined to mean and include the following: (1) Any person (including an individual, a partnership, a corporation or an association or any other entity) who is not a United States citizen or is the representative of or fiduciary for any person who is not a United States citizen; (2) Any foreign government or the representative thereof; (3) Any corporation any officer of which is an Alien, or of which more than 25% of its directors are Aliens; (4) Any corporation or association organized under the laws of any foreign government; (5) Any corporation of which more than 20% of its stock is owned beneficially or of record or may be voted by Aliens, or which by any other means whatsoever direct or indirect control of the corporation is held or permitted to be exercised by Aliens; Page 21 of 28 <PAGE> (6) Any partnership, association or other entity which is owned or controlled by Aliens; (7) Any other person, corporation, trust, partnership or association deemed by the Board of Directors to be an Alien as to the United States or the corporation (or any subsidiary of the corporation). No person, holding shares of class B stock (hereinafter such class B stock is called "class B stock" and such holder thereof is called a "class B holder") may transfer, and the corporation shall not register the transfer of, such shares of class B stock, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a Permitted Transferee of such class B holder, which term shall have the following meanings: (i) In the case of a class B holder who is a natural person and the holder of record and beneficial owner of the shares of class B stock subject to said proposed transfer, "Permitted Transferee" means (A) the spouse of such class B holder, (B) a lineal descendant of a grandparent of such class B holder or a spouse of any such lineal descendant, (C) the trustee of a trust (including a voting trust) for the benefit of one or more class B holders, other lineal descendants of a grandparent of such class B holder, the spouse of such class B holder the spouses of such other lineal descendants and an organization contributions to which are deductible for federal income, estate or gift tax purposes (hereinafter called a "Charitable Organization"), and for the benefit of no other person, provided that such trust may grant a general or special power of appointment to such class B holder, the spouse of such class B holder, any lineal descendant of such class B holder or the spouse of any such lineal descendant, and may permit trust assets to be used to pay taxes, legacies and other obligations of the trust or the estate of such class B holder payable by reason of the death of such class B holder and provided that such trust prohibits transfer of shares of class B stock to persons other than Permitted Transferees, as defined in clause (ii) below, (D) the estate of such deceased class B holder, (E) a Charitable Organization established by such class B holder, such class B holder's spouse, a lineal descendant of a grandparent of such class B holder or a spouse of any such lineal descendant, and (F) a corporation all the outstanding capital stock of which is owned by, or a partnership all the partners of which are, one or more of such class B holders, other lineal descendants of a grandparent of such class B holder or a spouse of any such lineal descendant, and the spouse of such class B holder provided that if any share of capital stock of such a corporation (or of any survivor of a merger or consolidation of such a corporation), or any partnership interest in such a partnership, is acquired by any person who is not within such class of persons, all shares of class B stock then held by such Page 22 of 28 <PAGE> corporation or partnership, as the case may be, shall be deemed, without further action, to be automatically converted into shares of common stock, and stock certificates formerly representing such shares of class B stock shall thereupon and thereafter be deemed to represent the like number of shares of common stock. (ii) In the case of a class B holder holding the shares of class B stock subject to said proposed transfer as trustee pursuant to a trust other than a trust described in clause (iii) below, "Permitted Transferee" means (A) the person who established such trust and (B) a Permitted Transferee of such person determined pursuant to clause (i) above. (iii) In the case of a class B holder holding the shares of class B stock subject to said proposed transfer as trustee pursuant to a trust which was irrevocable on the record date for the initial distribution of shares of class B stock ("Record Date"), "Permitted Transferee" means any person to whom or for whose benefit principal may be distributed either during or at the end of the term of such trust whether by power of appointment or otherwise or any "Permitted Transferee" of such person determined pursuant to clause (i), (ii), (iv), (v) or (vi) hereof, as the case may be. (iv) In the case of a class B holder who is the record (but not beneficial) owner of the shares of class B stock subject to said proposed transfer as nominee for the person who was the beneficial owner thereof on the Record Date, "Permitted Transferee" means such beneficial owner and a Permitted Transferee of such beneficial owner determined pursuant to clause (i), (ii), (iii), (v) or (vi) hereof, as the case may be. (v) In the case of a class B holder which is a partnership and the holder of record and beneficial owner of the shares of class B stock subject to said proposed transfer, "Permitted Transferee" means any partner of such partnership or any "Permitted Transferee" of such partner determined pursuant to clause (i), (ii), (iii), (iv) or (vi) hereof, as the case may be. (vi) In the case of a class B holder which is a corporation (other than a Charitable Organization described in subclause (E) of clause (i) above and the holder of record and beneficial owner of the shares of class B stock subject to said proposed transfer, "Permitted Transferee" means any stockholder of such corporation receiving shares of class B stock through a dividend or through a distribution made upon liquidation of such corporation or any "Permitted Transferee" of such stockholder determined pursuant to clause (i), (ii), (iii), (iv) or (v) hereof, as the case may be. Page 23 of 28 <PAGE> (vii) In the case of a class B holder which is the estate of a deceased class B holder, or which is the estate of a bankrupt or insolvent class B holder, and provided such deceased, bankrupt or insolvent class B holder, as the case may be, was the record and beneficial owner of the shares of class B stock subject to said proposed transfer, "Permitted Transferee" means a Permitted Transferee of such deceased, bankrupt or insolvent class B holder as determined pursuant to clause (i), (v) or (vi) above, as the case may be. Notwithstanding anything to the contrary set forth herein, any class B holder may pledge such holder's shares of class B stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Article VII, Section 3. In the event of foreclosure or other similar action by the pledgee, such pledged shares of class B stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of common stock, as the pledgee may elect. For purposes of this Article VII, Section 3: (i) The relationship of any person that is derived by or through legal adoption shall be considered a natural one. (ii) Each joint owner of shares of class B stock shall be considered a "class B holder" of such shares. (iii) A minor for whom shares of class B stock are held pursuant to a Uniform Gifts or Transfers to Minors Act or similar law shall be considered a "class B holder" of such shares. (iv) Unless otherwise specified, the term "person" means both natural persons and legal entities. (v) The term "grandparent" means an ancestor in any degree born after January 1, 1976. Any purported transfer of shares of class B stock not permitted hereunder shall result, without further action, in the automatic conversion of the transferee's shares of class B stock into shares of common stock, effective on the date of such purported transfer. The corporation may, as a condition to the transfer or the registration of transfer of shares of class B stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. Page 24 of 28 <PAGE> Shares of class B stock shall be registered in the name(s) of the beneficial owner(s) thereof (as hereafter defined) and not in "street" or "nominee" names; provided, however, certificates representing shares of class B stock issued as a stock dividend on the corporation's then outstanding common stock may be registered in the same name and manner as the certificates representing the shares of common stock with respect to which the shares of class B stock were issued. For the purposes of this Article VII, Section 3, the term "beneficial owner(s)" of any shares of class B stock shall mean the person or persons who possess the power to dispose, or to direct the disposition, of such shares. The corporation shall note on the certificates representing the shares of class B stock that there are restrictions on transfer and registration of transfer imposed by this Article VII, Section 3. Section 4. REGISTERED SHAREHOLDERS. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable claim or other interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Iowa. Section 5. LOST CERTIFICATES. Upon the making of an affidavit that a certificate has been lost or destroyed, the Board of Directors may direct that a new certificate be issued to the person alleging the loss or destruction of such certificate. When authorizing such issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or such owner's legal representative to give the corporation a bond in such sums as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. Section 6. STOCK REGULATIONS. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of Iowa as they may deem expedient concerning the issue, transfer and registration of certificates representing shares of the corporation. ARTICLE VIII. FISCAL YEAR The fiscal year of the corporation shall begin on the first day of July and end on the thirtieth day of June in each year. Page 25 of 28 <PAGE> ARTICLE IX. DIVIDENDS The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Articles of Incorporation. ARTICLE X. SEAL The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation and the state of incorporation and the words, "Corporate Seal." ARTICLE XI. WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or director of the corporation under the provisions of the Articles of Incorporation or under the provisions of the Iowa Business Corporations Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XII. INDEMNIFICATION OF DIRECTORS, OFFICERS OR EMPLOYEES Section 1. RIGHT TO INDEMNIFICATION. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director, officer or employee of the corporation or is or was serving at the request of the corporation as director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the corporation to the fullest extent consistent with the laws of Iowa as the same now or may hereafter exist (but, in the case of any change, only to the extent that such change authorizes the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such change) against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall Page 26 of 28 <PAGE> inure to the benefit of the heirs, executors and administrators of such person; provided, however, that the right to indemnification conferred in this Section shall be conditioned upon the corporation being afforded the opportunity to participate directly on behalf of such person in such proceeding and any settlement discussions relating thereto. The right to indemnification conferred in this Section shall be a contract right and shall, except with respect to an action or proceeding against the corporation by an employee who is neither a director nor an officer of the corporation, include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition upon receipt by the corporation of an undertaking, by or on behalf of such director, officer or employee to repay all amounts so advanced if it shall ultimately be determined that the director, officer or employee is not entitled to be indemnified under this Section or otherwise. Section 2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section I of this Article is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has failed to meet a standard of conduct which makes it permissible under Iowa law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because such person has met such standard of conduct, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such standard of conduct, nor the termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall create a presumption that the claimant has failed to meet the required standard of conduct. Section 3. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Page 27 of 28 <PAGE> Section 4. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under Iowa law. Section 5. EXPENSES AS A WITNESS. To the extent that any director, officer or employee of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any proceeding, such person shall be reimbursed for all costs and expenses actually and reasonably incurred in connection therewith. Section 6. EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article by the shareholders or the directors of the corporation shall not adversely affect any right or protection of a director, officer or employee of the corporation existing at the time of such amendment, repeal or modification. Section 7. SEVERABILITY. In the event any one or more of the provisions contained in this Article shall, for any reason, be held to be invalid, illegal or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Article. ARTICLE XIII. AMENDMENTS These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors. Page 28 of 28 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 10.1 FOR 12-31-96 10-Q <TEXT> EXHIBIT 10.1 ------------ EMPLOYMENT AGREEMENT AGREEMENT entered into as of the 11th day of November, 1996, by and between MEREDITH CORPORATION, an Iowa corporation (the "Company"), and WILLIAM T. KERR ("Kerr"). W I T N E S S E T H: WHEREAS, Kerr has been employed by the Company since September 10, 1991, pursuant to an Employment Agreement of that same date; WHEREAS, the Company wishes to continue to employ Kerr pursuant to the terms and conditions hereof, and in order to induce Kerr to enter into this agreement (the "Agreement") and to secure the benefits to accrue from his performance hereunder is willing to undertake the obligations assigned to it herein; and WHEREAS, Kerr is willing to continue his employment with the Company under the terms hereof and to enter into the Agreement; NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Position; Duties; Responsibilities. 1.1 Kerr shall serve as Chief Executive Officer and President of the Company, and, as contemplated by Section 9.6, in such other position as elected by the Board of Directors of the Company. Kerr shall at all times report to and be subject to the supervision, control and direction of the Board of Directors of the Company. Kerr shall at all times be the most senior executive officer of the Company and all other officers shall report to him, except for Mr. Jack D. Rehm who shall remain as Chairman of the Board through December 31, 1997, and E. T. Meredith III. Kerr shall have such other responsibilities and authorities consistent with the status, titles and reporting requirements set forth herein as are appropriate to said positions, subject to change (other than diminution in position, authority, duties or responsibilities) from time to time by the Board of Directors of the Company. Anything to the contrary above notwithstanding, the Board of Directors may elect another employee of the Company to the office of President, which shall not constitute a breach by the Company of its obligation to Kerr under this paragraph so long as the compensation to be paid to Kerr under this Agreement is not reduced as a result of such election. - 1 - <PAGE> 1.2 During the course of his employment, Kerr agrees to devote his full time and attention and give his best efforts and skills to furthering the business and interests of the Company, which may include Kerr volunteering his time and efforts on behalf of charitable, civic, professional organizations and boards of other corporations. 2. Term. The term of employment under this Agreement shall commence as of January 1, 1997, and shall continue through December 31, 2001, unless sooner terminated in accordance with this Agreement, and thereafter as herein provided. Kerr's term of employment shall automatically renew for subsequent one (1) year terms, the first of which would begin on January 1, 2002, subject to the terms of this Agreement unless either party gives written notice ninety (90) days or more prior to the expiration of the then existing term of its decision not to renew. 3. Salary. 3.1 The Company shall pay Kerr a base salary during the term of employment at the minimum annual rate of Five Hundred Fifty Thousand Dollars ($550,000) ("Base Salary"), payable in accordance with the standard payroll practices of the Company. 3.2 It is understood that the Base Salary is to be Kerr's minimum annual compensation during Kerr's employment with the Company. The Base Salary may increase at the discretion of the Compensation/Nominating Committee of the Company's Board of Directors ("Compensation Committee"). "Base Salary" shall include all such increased amounts. 4. Long-Term Incentive Plans. 4.1 During the course of his employment, Kerr shall be eligible to participate in all long-term incentive plans, including, without limitation, stock incentive plans adopted by the Company and in effect (collectively, "Long-Term Incentive Plans"), at levels of awards to be granted by the Compensation Committee commensurate with the level of Kerr's responsibilities, and performance thereof. In partial consideration for Kerr's future employment with the Company, the Compensation Committee has granted and taken all other necessary action to award the following grants of non-qualified stock options under the Company's Stock Incentive Plans, which shall be in lieu of awards of non-qualified stock options that otherwise would be granted to Kerr in 1996, 1997 and 1998: - 2 - <PAGE> FMV FMV Exercise Exercise Options Price Options Price + 25% Total ------- -------- ------- ------------ ------- July 1, 1996 58,300 $42.187 29,200 $52.734 87,500 August 14, 1996 58,300 $40.625 29,200 $50.781 87,500 January 2, 1997 116,700 TBD 58,300 TBD 175,000 ------- ------- ------- TOTAL 233,300 116,700 350,000 ======= ======= ======= All necessary action to grant the options listed above as January 2, 1997, grants has been taken by the Compensation Committee and the only remaining action to be taken is the determination of the exercise price of the options based on the fair market price of the Company stock on January 2, 1997 (average of the high and low selling prices). The above-listed options will be exercisable on or after the fifth anniversary of the date of grant. Retirement (as defined under the Company's qualified retirement plans) will not accelerate the vesting of the above-listed options. The general terms of the Company's stock incentive plans shall apply to all grants of options under those plans except as otherwise provided herein or in the stock option agreements between Kerr and the Company. Copies of all stock incentive plans have been provided to Kerr. 4.2 In the event Kerr's employment with the Company is terminated prior to January 2, 1997, by reason of death or disability (as provided in Section 9.2), the non-qualified stock options to be granted to Kerr on January 2, 1997, pursuant to Section 4.1 shall be granted by the Company to Kerr's estate or to Kerr or Kerr's personal representative, as the case may require, provided that such stock options may not be granted from a Company stock incentive plan and therefore will be subject to all applicable restrictions under the regulations of the Securities and Exchange Commission. 4.3 Subject to the next sentence of this Section 4.3, should the non- qualified stock options to be granted on January 2, 1997, in Section 4.1 not be timely granted, Kerr shall have the right to terminate his services hereunder, by written notice to the Company, effective as of the last day of the month of receipt by the Company of any such notice but no later than March 31, 1997, and Kerr shall have no further obligation of any kind under or arising out of this Agreement (other than pursuant to Section 10). Should a circumstance or event not within the reasonable contemplation of the parties at the date hereof arise - 3 - <PAGE> on or before January 2, 1997, that makes it inadvisable or undesirable in the reasonable judgment of the Compensation Committee to grant to Kerr the non- qualified stock options on January 2, 1997, and should the Compensation Committee on or about such date, because of such intervening circumstance or event, instead bestow upon Kerr benefits of reasonably equivalent value and having comparable payment dates, Kerr shall thereupon forego his right of termination under the preceding sentence. Termination of Kerr's services under this Section 4.3 shall be treated as a termination of employment by the Company other than for Due Cause and shall be governed by the provisions of Section 9.4. 5. Bonus. 5.1 During the course of his employment, Kerr shall be eligible to participate in the Meredith Management Incentive Plan ("MIP"), for such period as it continues in effect, subject to the terms of the MIP, and to the discretion vested in the Compensation Committee under the MIP; provided, however, that the percentage of Base Salary payable as a target bonus under the MIP shall not be less than fifty percent (50%) (actual Company financial results may result in an actual bonus paid to Kerr equal to less than or more than fifty percent (50%) of Base Salary). 5.2 All bonuses pursuant to this Section 5 shall be paid to Kerr in conformance with the Company's normal bonus pay policies following the end of the respective fiscal year. For the purpose of this Section 5, the phrase "paid with respect to the fiscal year" shall include payments made outside of the fiscal year but for such fiscal year and shall exclude payments made in the fiscal year that are for another fiscal year. 6. Short-Term Disability. During any period of short-term disability, the Company will continue to pay to Kerr the Base Salary throughout the period of short-term disability, but in no event beyond April 30, 2006. In addition, Kerr will continue to receive all rights and benefits under the benefit plans and programs of the Company in which Kerr is a participant as determined in accordance with the terms of such plans and programs, and Kerr shall be eligible to receive the benefit of the bonus for the year or years in which the short-term disability occurs without reduction for the period of short-term disability. In the event of Kerr's death during a period of short-term disability, the provisions of Section 9.1 shall apply. For the purposes of this Agreement, short-term disability shall be defined as the incapacitation of Kerr by reason of sickness, accident or other physical or mental disability which continues for a period not to exceed the fifth month anniversary of the date of the cause or onset of such incapacitation. In the event Kerr becomes permanently disabled (as determined under Section 9.2), the provisions of Section 9.2 shall apply. - 4 - <PAGE> 7. Employee Benefit Plans. 7.1 During Kerr's employment with the Company and subject to all eligibility requirements, and to the extent permitted by law, Kerr will have the opportunity to participate in all employee benefit plans and programs generally available to the Company's employees in accordance with the provisions thereof as in effect from time to time, including, without limitation, medical coverage, group life insurance, holidays and vacations, Meredith Savings and Investment Plan (401k) and the Meredith Employees' Retirement Income Plan, but not including the Company's short-term and long- term disability plans. 7.2 In addition to benefits described in Section 7.1, Kerr shall also receive or participate in, to the extent permitted by law, the various perquisites and plans generally available to officers of the Company in accordance with the provisions thereof as in effect from time to time including, without limitation, the following perquisites to the extent the Company continues to offer them: an automobile or automobile allowance, country club dues, dining club dues, tax and estate planning, supplemental medical plan and executive life insurance (if insurable). In addition, Kerr shall participate in the Meredith Replacement Benefit Plan and the Meredith Supplemental Benefit Plan. 7.3 In addition to the other pension benefits, qualified and non- qualified, to be provided Kerr under this Section 7, the Company agrees to continue to provide a non-qualified retirement program for Kerr as described in the attached Exhibit A ("SERP"); however, Kerr's entitlements to benefits under such non-qualified retirement programs are subject to termination under the provisions of Sections 9.3, 9.5 and 9.9 below. Except as provided in Section 9.3, 9.5 and 9.9, the SERP shall not be subject to termination or amendment by the Company without the consent of Kerr, which may be withheld for any or no reason. If at any time the SERP cannot operate because of prohibitions of law and Kerr is otherwise eligible to receive benefits under the terms of the SERP, the Company agrees to make a payment or payments to Kerr or, if applicable, to his estate to provide the economic equivalent (giving effect to the time use of money) to him or his beneficiaries, provided that no such payments shall be made if such payments would be prohibited by law. It is the intention of the parties, should the circumstances contemplated by the preceding sentence occur, that payments to Kerr in lieu of payments under the SERP shall be made at the time and in the manner permissible that most nearly approximates the time and manner in which payments would have been made under the SERP. - 5 - <PAGE> 8. Expense Reimbursements. During Kerr's employment with the Company, Kerr will be entitled to receive reimbursement by the Company for all reasonable, out-of-pocket expenses incurred by him (in accordance with policies and procedures established by the Company), in connection with his performing services hereunder, provided Kerr properly accounts therefor. In consideration of Kerr's use of his own residence while conducting business in New York City, the Company agrees to pay Kerr Two Hundred Twenty-five Dollars ($225) for each night Kerr is reasonably required to spend in New York City on account of his attention to the Company's business in New York City or environs. 9. Consequences of Termination of Employment. 9.1 Death. In the event of the death of Kerr during the term of this Agreement or during the period when payments are being made pursuant to Sections 6 or 9.2, this Agreement shall terminate and all obligations to Kerr shall cease as of the date of death except that, (a) the Company will pay the Base Salary until the end of the month of the first anniversary of Kerr's death (but not beyond April 30, 2006), and (b) all rights and benefits of Kerr under the benefit plans and programs of the Company including, without limitation, the SERP in which Kerr is a participant, will be provided as determined in accordance with the terms and provisions of such plans and programs. Any bonus (or amounts in lieu thereof) pursuant to Section 5, payable for the fiscal year in which Kerr's death occurs, shall be determined by the Compensation Committee at its meeting following the end of such fiscal year pro rata to the date of death and promptly paid to Kerr's estate. All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards. 9.2 Disability. If Kerr shall become permanently incapacitated by reasons of sickness, accident or other physical or mental disability, as such incapacitation is certified by a physician chosen by the Company and reasonably acceptable to Kerr (if he is not then unable to exercise sound judgment), and shall therefore be unable to perform his normal duties hereunder, then the employment of Kerr hereunder and this Agreement may be terminated by Kerr or the Company upon thirty (30) days' written notice to the other party following such certification. Should Kerr not acquiesce (or should he be unable to acquiesce) in the selection of the certifying doctor, a doctor chosen by Kerr (or if he is not then able to exercise sound judgment, by his spouse or personal representative) and reasonably acceptable to the Company shall be required to concur in the medical determination of incapacitation, failing which the two doctors shall designate a third doctor whose decision shall be determinative as of the end of the calendar month in which such concurrence or third-doctor decision, as the case may be, is made. The Company shall - 6 - <PAGE> thereafter pay to Kerr, at such times as Base Salary provided for in Section 3 of this Agreement would normally be paid, 100% of Base Salary for the first twelve months following such termination, 75% of Base Salary for the next twelve-month period and 50% of Base Salary for the remaining period of what would have constituted the current term of employment but for termination by reason of disability (but in no event beyond April 30, 2006). Following the termination pursuant to this Section 9.2, the Company shall pay or provide to Kerr such other rights and benefits of participation under the employee benefit plans and programs of the Company including, without limitation, the SERP in which Kerr is a participant, to the extent that such continued participation is not otherwise prohibited by applicable law or by the express terms and provisions of such plans and programs. All benefits provided under this Section 9.2 shall be in replacement of and not in addition to benefits payable under the Company's short-term and long-term disability plans. All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards. 9.3 Due Cause. The Company may terminate Kerr's employment, remove him as an officer and director of the Company and terminate this Agreement at any time for Due Cause. In the event of such termination for Due Cause, Kerr shall continue to receive Base Salary payments provided for in this Agreement only through the date of such termination for Due Cause, and Kerr shall be entitled to no further benefits under this Agreement, except that any rights and benefits Kerr may have under the employee benefit plans and programs of the Company, in which Kerr is a participant, shall be determined in accordance with the terms and provisions of such plans and programs. Kerr understands and agrees that in the event of the termination of employment, removal as an officer and director and termination of this Agreement pursuant to this Section 9.3: (a) All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards; (b) the Company shall have no further obligation to pay any bonus to Kerr under the terms of the MIP or this Agreement; and (c) the Company shall have no obligation to provide benefits under the SERP, but that the obligations of Kerr under Section 10 shall remain in full force and effect. The term "Due Cause" shall mean repeated and gross negligence in fulfillment of, or repeated failure of Kerr to fulfill his material obligations under this Agreement, in either event after due written notice thereof, or serious willful misconduct by Kerr in respect of his obligations hereunder. Due Cause should not include, without limitation, (w) refusal by Kerr of an assignment not consistent with the status, titles and reporting requirements set forth herein or contemplated hereby, or (x) bad judgment or negligence of Kerr, or (y) any act or omission (other than one constituting a material breach of trust committed in willful or reckless - 7 - <PAGE> disregard of the interests of the Company and undertaken for personal gain) in respect of which a determination could properly have been made by the Board of Directors of the Company that Kerr met the applicable standard of conduct prescribed for indemnification or reimbursement under the Bylaws of the Company or the laws of Iowa, in each case in effect at the time of such act or omission, or (z) any act or omission with respect to which notice of termination is given more than twelve (12) months after the earliest date on which any non-employee director of the Company who was not a party to such act or omission knew or should have known of such act or omission. 9.4 At Will. The other provisions of this Agreement notwithstanding, the Company may terminate Kerr's employment, remove him as an officer and director and terminate this Agreement at any time for whatever reason it deems appropriate, with or without cause and with or without prior notice. In the event of such a termination of Kerr's employment and this Agreement, Kerr shall have no further obligations of any kind under or arising out of the Agreement (except for the obligations of Kerr under Section 10) and the Company shall be obligated only to pay Kerr the following: (a) Base Salary and the bonus amounts provided in Section 5 of this Agreement through the end of the then current term of employment as provided in Section 2 of this Agreement, but no less than a total of twelve (12) months of Base Salary and target bonus under the MIP or successor plans; (b) an additional amount equal to Twelve Dollars and Fifty Cents ($12.50) per share for each share of restricted Company stock awarded to Kerr in 1991 for which the restriction period has not lapsed on the date of the termination of employment pursuant to this Section 9.4 (which per share amount shall be adjusted in the event of a stock split); and (c) any other amounts due and owing not then paid. Kerr agrees that the payments described in this Section 9.4 shall be full and adequate compensation to Kerr for all damages Kerr may suffer as a result of the termination of his employment pursuant to this Section 9.4 or Sections 4.3, 9.6, 9.7, 9.8 or 9.10 and hereby waives and releases the Company from any and all obligations or liabilities to Kerr arising from or in connection with Kerr's employment with the Company or the termination of his employment including, without limitation, all rights and claims Kerr may have under federal, state or local statutes, regulations or ordinances or under any common law principles of breach of contract or the covenant of good faith and fair dealing, defamation, wrongful discharge, intentional infliction of emotional distress or promissory estoppel; provided, however, that any rights and benefits Kerr may have under the employee benefit plans and programs of the Company, including, without limitation, the SERP, in which Kerr is a participant, shall be determined in accordance with the terms and provisions of such plans and programs. After the date of termination under this Section 9.4 or Sections 4.3, 9.6, 9.7, 9.8 or 9.10, Kerr shall not be treated as an employee for purposes of the Company's employee benefit plans or programs even though he may continue to receive payments as provided in this Section 9.4. All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance - 8 - <PAGE> with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards. 9.5 Employee Voluntary. In the event Kerr terminates his employment of his own volition prior to the end of the term of this Agreement, except for a termination as described in Sections 4.3, 9.6, 9.7, 9.8 or 9.10, such termination shall constitute a voluntary termination and in such event the Company's only obligation to Kerr shall be to make Base Salary payments provided for in this Agreement through the period ending with the date of such voluntary termination. Except as may be otherwise expressly provided in Section 4.3, 6, 7.3, and 9.2, but subject to the following provisions of this Section 9.5, any rights and benefits Kerr may have under the employee benefit plans and programs of the Company, in which he is a participant, shall be determined in accordance with the terms and provision of such plans and programs. Kerr understands and agrees that in the event of the termination of employment pursuant to this Section 9.5: (a) All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards;(b) the Company shall have no further obligation to pay any bonus to Kerr under the terms of the MIP or this Agreement; and (c) the Company shall have no obligation to provide benefits under the SERP, but that the obligations of Kerr under Section 10 shall remain in full force and effect. 9.6 Failure to Elect or Re-elect as Chairman of the Board of Directors. In the event Kerr is not elected to the position of Chairman of the Board of Directors of the Company effective on or about January 1, 1998, Kerr shall have the right to terminate his employment with the Company within ninety (90) days of being notified that such election will not occur by said date or, if not so notified, on or at any time after January 2, 1998, but before April 1, 1998, and in any such case, such termination shall be deemed to be termination by the Company without "Due Cause". In the event Kerr is not re-elected to or is removed from the position of Chairman of the Board (for reasons other than for Due Cause), Kerr shall have the right to terminate his employment with the Company within ninety (90) days of being notified of such action, and such termination shall be deemed to be termination by the Company without "Due Cause," and such termination shall be treated in accordance with the terms of Section 9.4 above. If Kerr shall terminate his employment and such termination is deemed to be termination by the Company without Due Cause pursuant to this Section or Sections 4.3, 9.7, 9.8 or 9.10, Kerr shall be entitled to the same rights and benefits, and free of all further obligations of any kind under or arising out of this Agreement (except for obligations under Section 10), all as provided in connection with a termination pursuant to Section 9.4 above. Kerr agrees that the payments described in Section 9.4 shall be full and adequate compensation - 9 - <PAGE> to Kerr for all damages he may suffer as a result of the termination of his employment pursuant to this Section or Sections 4.3, 9.7, 9.8 or 9.10, and hereby waives and releases the Company from any and all obligations or liabilities to Kerr arising from or in connection with Kerr's employment with the Company or the termination of his employment including, without limitation, all rights and claims Kerr may have under federal, state or local statutes, regulations or ordinances or under any common law principles of breach of contract or the covenant of good faith and fair dealing, defamation, wrongful discharge, intentional infliction of emotional distress or promissory estoppel; provided, however, that any rights and benefits Kerr may have under the employment benefit plans and programs of the Company, including, without limitation, the SERP, in which Kerr is a participant, shall be determined in accordance with the terms and provisions of such plans and programs. All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards. 9.7 Failure to Re-elect as Chief Executive Officer, Director or Member of Executive Committee. If at any time Kerr is not re-elected to or is removed from the office of Chief Executive Officer, or as a Director of the Company or as a member of the Executive Committee of the Company's Board of Directors (for reasons other than for Due Cause), Kerr shall have the right to terminate his employment with the Company by giving written notice within ninety (90) days after the date of such action, and such termination shall be deemed to be termination by the Company without "Due Cause," and such termination shall be treated in accordance with the terms of Section 9.4 above. 9.8 Effect of Non-Renewal. If at any time the Company gives notice pursuant to Section 2 of its decision not to renew this Agreement, Kerr shall have the right to terminate his employment with the Company, as of such date or at any time thereafter, in which case, such termination shall be deemed to be termination by the Company without "Due Cause," and such termination shall be treated in accordance with the terms of Section 9.4 above. 9.9 Retirement Before Age 65. In the event Kerr elects to retire from employment with the Company and commence the available benefits under certain of the Company's benefit plans and programs prior to attaining age 65, Kerr shall receive retirement benefits under the SERP only to the extent and in the amounts as determined by the Board of Directors of the Company. Termination of employment pursuant to Section 9.4, 9.6, 9.7, 9.8 or 9.10, shall not be deemed to be retirement within the meaning of this Section and Kerr shall be entitled to retirement benefits under the SERP. All awards of restricted stock, stock options and any other benefits under the Long-Term Incentive Plans shall be handled in accordance with the terms of the relevant plan and agreements entered into between Kerr and the Company with respect to such awards. - 10 - <PAGE> 9.10 Change in Control. In the event of a "Change in Control," as that term is defined in the Severance Agreement by and between Kerr and the Company dated September 10, 1991 ("Severance Agreement"), and Kerr's employment is not terminated by the Company and Kerr is not entitled to terminate his employment with the Company for "Good Reason" or otherwise under terms of the Severance Agreement, Kerr may nonetheless terminate this Agreement and his employment with the Company and such termination shall be deemed to be termination by the Company without "Due Cause" if the Company remains in existence following the Change in Control as a subsidiary of the controlling party with Kerr as Chief Executive Officer of the Company, and such termination shall be treated in accordance with the terms of Section 9.4 above. 10. Covenants of Kerr. 10.1 Kerr acknowledges that as a result of the services to be rendered to the Company hereunder, Kerr will be brought into close contact with many confidential affairs of the Company, its subsidiaries and affiliates, not readily available to the public. Kerr further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character; that the business of the Company is national in scope; that its goods and services are marketed throughout the United States; and that the Company competes with other organizations that are or could be located in nearly any part of the United States. 10.2 In recognition of the foregoing, Kerr covenants and agrees that, except as is necessary in providing services under this Agreement or to the extent necessary to comply with law or the valid order of a court or government agency of competent jurisdiction, Kerr will not knowingly use for his own benefit nor knowingly divulge any Confidential Information and Trade Secrets of the Company, its subsidiaries and affiliated entities, which are not otherwise in the public domain and, so long as they remain Confidential Information and Trade Secrets not in the public domain, will not intentionally disclose them to anyone outside of the Company either during or after his employment. For the purposes of this Agreement, "Confidential Information and Trade Secrets" of the Company means information which is secret to the Company, its subsidiaries and affiliated entities. It may include, but is not limited to, information relating to the magazines, books, publications, products, services, television stations, real estate franchise operations, new and future concepts and business of the Company, its subsidiaries and affiliates, in the form of memoranda, reports, computer software and data banks, customer lists, employee lists, books, records, financial statements, manuals, papers, contracts and strategic plans. As a guide, Kerr is to consider information originated, owned, controlled or possessed by the Company, its subsidiaries or affiliated entities which is not disclosed in printed publications stated to be available for distribution outside the Company, its subsidiaries and affiliated entities as being secret and confidential. In instances where doubt does or should - 11 - <PAGE> reasonably be understood to exist in Kerr's mind as to whether information is secret and confidential to the Company, its subsidiaries and affiliated entities, Kerr agrees to request an opinion, in writing, from the Company. 10.3 Anything to the contrary in this Section 10 notwithstanding, Kerr shall disclose to the public and discuss such information as is customary or legally required to be disclosed by a Company whose stock is publicly traded, or that is in the best interests of the Company to do so. 10.4 Kerr will deliver promptly to the Company on the termination of his employment with the Company, or at any other time the Company may so request, all memoranda, notes, records, reports and other documents relating to the Company, its subsidiaries and affiliated entities, and all property owned by the Company, its subsidiaries and affiliated entities, which Kerr obtained while employed by the Company, and which Kerr may then possess or have under his control. 10.5 During and for a period of one (1) year after the termination of employment with the Company (except that the time period of such restrictions shall be extended by any period during which Kerr is in violation of this Section 10.5), Kerr will not: (a) knowingly interfere with, disrupt or attempt to disrupt, any then existing relationship, contractual or otherwise between the Company, its subsidiaries or affiliated entities, and any customer, client, supplier, or agent, it being understood that the right to seek or enter into contractual arrangements with independent contractors, including, without limitation, consultants, professionals, authors, advertisers and the like, shall not be abridged by reason of this Section 10; or (b) solicit, or assist any other entity in soliciting for employment, any person known to Kerr to be an agent or executive employee of the Company, its subsidiaries or affiliated entities. 10.6 Kerr will promptly disclose to the Company all inventions, processes, original works of authorship, trademarks, patents, improvements and discoveries related to the business of the Company, its subsidiaries and affiliated entities (collectively "Developments"), conceived or developed during Kerr's employment with the Company and based upon information to which he had access during the term of employment, whether or not conceived during regular working hours, through the use of the Company time, material or facilities or otherwise. All such Developments shall be the sole and exclusive property of the Company, and upon request Kerr shall deliver to the Company all outlines, descriptions and other data and records relating to such Developments, and shall execute any documents deemed necessary by the Company to protect the Company's rights hereunder. Kerr agrees upon request to assist the Company to obtain United States or foreign letters patent and copyright registrations covering inventions and original works of authorship belonging to the Company hereunder. If the Company is unable because of Kerr's mental or - 12 - <PAGE> physical incapacity to secure Kerr's signature to apply for or to pursue any application for any United States or foreign letters patent or copyright registrations covering inventions and original works of authorship belonging to the Company hereunder, then Kerr hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his agent and attorney in fact, to act for and in his behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by him. Kerr hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, that he may hereafter have for infringement of any patents or copyright resulting from any such application for letters patent or copyright registrations belonging to the Company hereunder. 10.7 Kerr agrees that the remedy at law for any breach or threatened breach of any covenant contained in this Section 10 will be inadequate and that the Company, in addition to such other remedies as may be available to it, in law or in equity, shall be entitled to injunctive relief without bond or other security. 10.8 Although the restrictions contained in Section 10.1, 10.2, 10.4 and 10.5 above are considered by the parties hereto to be fair and reasonable in the circumstances, it is recognized that restrictions of such nature may fail for technical reasons, and accordingly it is hereby agreed that if any of such restrictions shall be adjudged to be void or unenforceable for whatever reason, but would be valid if part of the wording thereof were deleted, or the period thereof reduced or the area dealt with thereby reduced in scope, the restrictions contained in Section 10.1, 10.2, 10.4 and 10.5 shall be enforced to the maximum extend permitted by law, and the parties consent and agree that such scope or wording may be accordingly judicially modified in any proceeding brought to enforce such restrictions. 10.9 Notwithstanding that Kerr's employment hereunder may expire or be terminated as provided in Sections 2, 4.3 or 9 above, this Agreement shall continue in full force and effect insofar as is necessary to enforce the covenants and agreements of Kerr contained in this Section 10. 11. Arbitration. The parties shall use their best efforts and good will to settle all disputes by amicable negotiations. The Company and Kerr agree that, with the express exception of any dispute or controversy arising under Section 9.2 or Section 10 of this Agreement or as may be required under Section 3(g) of the Severance Agreement, any controversy or claim arising out of or in any way relating to Kerr's employment with the Company, including, without limitation, any and all disputes concerning this Agreement and the termination of this - 13 - <PAGE> Agreement that are not amicably resolved by negotiation, shall be settled by arbitration in Des Moines, Iowa, or such other place agreed to by the parties, as follows: (a) Any such arbitration shall be heard before a panel consisting of one (1) to three (3) arbitrators, each of whom shall be impartial. Except as the parties may otherwise agree, all arbitrators shall be appointed in the first instance by the President of the Iowa State Bar Association or, in the event of his unavailability by reason of disqualification or otherwise, by the Chairman of the Executive Committee of said Bar Association. In determining the number and appropriate background of the arbitrators, the appointing authority shall give due consideration to the issues to be resolved, but his decision as to the number of arbitrators and their identity shall be final. (b) An arbitration may be commenced by any party to this Agreement by the service of a written Request for Arbitration upon the other affected party. Such Request for Arbitration shall summarize the controversy or claim to be arbitrated, and shall be referred by the complaining party to the appointing authority for appointment of arbitrators ten (10) days following such service or thereafter. If the panel of arbitrators is not appointed by the appointing authority within thirty (30) days following such reference, any party may apply to any court within the State of Iowa for an order appointing arbitrators qualified as set forth below. No Request for Arbitration shall be valid if it relates to a claim, dispute, disagreement or controversy that would have been time barred under the applicable statute of limitations had such claim, dispute, disagreement or controversy been submitted to the courts of the State of Iowa. (c) All attorneys' fees and costs of the arbitration shall in the first instance be borne by the respective party incurring such costs and fees, but the arbitrators shall have the discretion to award costs and/or attorneys' fees as they deem appropriate under the circumstances. The parties hereby expressly waive punitive damages, and under no circumstances shall an award contain any amount that in any way reflects punitive damages. (d) Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (e) It is intended that controversies or claims submitted to arbitration under this Section 11 shall remain confidential, and to that end it is agreed by the parties that neither the facts disclosed in the arbitration, the issues arbitrated, nor the views or opinions of any persons concerning them, shall be disclosed by third persons at any time, except to the extent necessary to enforce an award or judgment or as required by law or in response to legal process or in connection with such arbitration. - 14 - <PAGE> 12. Successors and Assigns. 12.1 Assignment by the Company. This Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company, subject, however, to the right of Kerr to terminate this Agreement under Section 9.10. 12.2 Assignment by Kerr. Kerr may not assign this Agreement or any part thereof; provided, however, that nothing herein shall preclude one or more beneficiaries of Kerr from receiving any amount that may be payable following the occurrence of his legal incompetency or his death and shall not preclude the legal representative of his estate from receiving such amount or from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of the intestacy applicable to his estate. 13. Governing Law. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of Iowa without reference to the principles of conflict of laws. 14. Entire Agreement. This Agreement and the attached Exhibits contain all the understandings and representations between the parties hereto pertaining to the subject of the employment of Kerr by the Company and supersedes all undertakings and agreements, whether oral or in writing, if any there be, previously entered into by them with respect thereto other than those agreements listed on the attached Exhibit B. 15. Amendment or Modification; Waiver. No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing, signed by Kerr and by a duly authorized officer of the Company and approved in advance by the Compensation Committee. Except as otherwise specifically provided in this Agreement, no wavier by either party hereto of any breach by the other party of any condition or provision of the Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time. - 15 - <PAGE> 16. Notices. Any notice to be given hereunder shall be in writing and delivered personally or sent by overnight mail, such as Federal Express, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: If to Company: Chairman of the Compensation/Nominating Committee Board of Directors Meredith Corporation 1716 Locust Street Des Moines, Iowa 50309-3023 with a copy to: Thomas L. Slaughter, Esquire Vice President-General Counsel & Secretary Meredith Corporation 1716 Locust Street Des Moines, Iowa 50309-3023 If to Kerr: P.O. Box 1545 Litchfield, Connecticut 06759 with a copy to: Edward Rover, Esquire White & Case 1155 Avenue of the Americas New York, N.Y. 10036 17. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 18. Withholding. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to Kerr or his beneficiaries, including his - 16 - <PAGE> estate, shall be subject to withholding and deductions as the Company may reasonably determine it should withhold or deduct pursuant to any applicable law or regulation. In lieu of withholding or deducting, such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment as permitted by law, provided it is satisfied in its sole discretion that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 19. Deferred Payments. Any amounts required under this Agreement to be paid to Kerr that Kerr can and does elect to defer under any Company benefit plan or program shall be deemed to have been paid to him for purposes of this Agreement. 20. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 21. Headings. Headings of the sections of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any section. 22. Knowledge and Representation. Kerr acknowledges that the terms of this Agreement have been fully explained to him, that Kerr understands the nature and extent of the rights and obligations provided under this Agreement, and that Kerr has been represented by legal counsel in the negotiation and preparation of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. MEREDITH CORPORATION /s/ William T. Kerr /s/ E. T. Meredith III - ------------------- By ------------------------- William T. Kerr E. T. Meredith III Chairman of the Executive Committee Dated: 11-11-96 Dated: 11-11-96 ------------------ ------------------ - 17 - <PAGE> The following supplemental exhibits to the Employment Agreement dated November 11, 1996, between Meredith Corporation and William T. Kerr have been omitted in this Form 10-Q filing. The Company agrees to provide these exhibits to the Commission upon request. Exhibit A Minimum Supplemental Retirement Benefit Program Exhibit A-1 Worksheet regarding Minimum Supplemental Retirement Benefit Exhibit B Listing of agreements pertaining to the subject of the employment of William T. Kerr by the Company - 18 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10.2 FOR 12-31-96 10-Q <TEXT> Exhibit 10.2 ------------ CONSULTANCY AGREEMENT, AMENDMENT TO EMPLOYMENT AGREEMENT AND AMENDMENT TO RESTRICTED STOCK AGREEMENTS This Agreement is entered into as of the 11th day of November, 1996, by and between Meredith Corporation (the "Company"), an Iowa corporation, and Jack D. Rehm ("Rehm"). WHEREAS, Rehm is currently employed by the Company as its Chairman and Chief Executive Officer pursuant to an Employment Contract dated July 1, 1992 (the "Employment Contract"); and WHEREAS, the Company and Rehm desire to extend the term of Rehm's employment with the Company, to provide for Rehm's services as consultant following the termination of his employment with the Company. NOW, THEREFORE, IT IS HEREBY AGREED by and between the Company and Rehm as follows: 1. EMPLOYMENT. Paragraph 1 of the Employment Contract is amended effective January 1, 1997, by deleting the first sentence and inserting the following in its place: The Company hereby agrees to employ Rehm through December 31, 1997, or until such date after October 31, 1997, and before December 31, 1997, as Rehm shall specify in writing before October 31, 1997, that his employment with Company shall be terminated, but in any event Rehm shall remain the Chairman of the Board of Directors through December 31, 1997. 2. COMPENSATION. Paragraph 2 of the Employment Contract is amended by adding the following sentence at the end: Rehm and Company agree that Rehm's annual salary base rate shall be no less than $500,000 for the period from July 1, 1997, through December 31, 1997 (or such earlier date as provided in Paragraph 1 above). 3. OTHER EMPLOYMENT RIGHTS. Paragraph 10 of the Employment Contract is amended by adding the following sentence at the end: - 1 - <PAGE> Notwithstanding anything to the contrary provided in this Agreement, Rehm shall not be eligible to participate in, and the Company shall have no obligation to provide any benefits to Rehm under the Company's Management Incentive Plan for the period following June 30, 1997 (or any portion thereof that Rehm remains an employee of Company). 4. RESTRICTED STOCK AGREEMENTS. (a) Paragraph 3 of the Restricted Stock Agreement dated September 22, 1992, by and between Company and Rehm with respect to 20,000 shares of restricted Company common stock (post the March 16, 1995, stock split) is amended by deleting the date "October 31, 1997," and inserting in its place, "the effective date of Employee's retirement from employment with the Company under the then established rules of the Company's tax-qualified retirement plan, but in any event no later than September 21, 2002." (b) Paragraph 3 of the Restricted Stock Agreement dated September 22, 1992, by and between Company and Rehm with respect to 54,862 shares of restricted Company common stock (post the March 16, 1995, stock split) is amended by deleting the date "October 31, 1997," and inserting in its place, "the effective date of Employee's retirement from employment with the Company under the then established rules of the Company's tax-qualified retirement plan, but in any event no later than September 21, 2002." 5. ELECTION AS DIRECTOR. At the Annual Meeting of Stockholders held on November 11, 1996, Rehm was re-elected a Director for a term to expire in 1999. The Company agrees to nominate him for re-election for a subsequent three-year term at the Annual Meeting of Stockholders in 1999, and Rehm agrees that he will serve in such capacity, if elected. 6. ENGAGEMENT AS CONSULTANT. The Company hereby agrees to retain Rehm as a consultant following the termination of his employment through December 31, 2000, but subject to termination by either party at any time upon 90 days' advance written notice. Rehm hereby accepts such employment as a consultant to the Company and agrees that during the period he is so retained he will render such consulting services to the Company from time to time as the Chief Executive Officer or the Board of Directors of the Company may reasonably request. In order to be in a position to render such consulting services and as a part of his duties as a member of the Board of Directors, Rehm shall keep himself reasonably informed as to the business and affairs of the Company. Rehm shall be available for conferences at times and places to be designated by the Company during the term of his engagement as a consultant; it being understood, however, that Rehm shall not be required to be available for conferences on less than three (3) calendar days' notice or at times when Rehm - 2 - <PAGE> has other regularly scheduled commitments, and that any one series of conferences shall not require Rehm's attendance for more than five (5) consecutive days. In addition, Rehm shall be ready to furnish consultation and advice by telephone, telegram or correspondence when reasonably requested. Rehm shall keep the Company informed from time to time of his regularly scheduled commitments and where he can be reached for such consultation and advice. Notwithstanding the foregoing, Rehm, upon ten (10) days' prior notice to the Company, may select any period up to two (2) consecutive calendar months in any calendar year in which he may not be obligated to render the consulting services contemplated hereby. 7. COMPENSATION FOR SERVICES AS CONSULTANT. In consideration of the agreement of Rehm to be ready to furnish consulting services and of the consulting services to be rendered by Rehm pursuant to Paragraph 6, the Company agrees to pay Rehm at a rate commensurate with the consulting services requested of him from time to time, but in no event at a rate of less than $150,000 per year. The compensation payable Rehm in accordance with this Paragraph 7 shall be paid from time to time at regular intervals. In addition, Rehm will be reimbursed for all legitimate business expenses incurred in connection with the provision of consulting services to the Company. During his engagement as a consultant, Rehm shall be entitled to the perquisites existing during his prior employment, including same or equivalent club memberships reimbursement, company automobile in accordance with Company policy, office space and support services, use of the Company aircraft on Company business, use of Company accommodations on Company business, and tax and financial planning from KPMG Peat Marwick. 8. HEALTH COVERAGE AFTER TERMINATION OF EMPLOYMENT. (a) As additional consideration for the consultancy services to be provided by Rehm under this Agreement, the Company agrees to provide at no cost to Rehm (other than any applicable income taxes) the following benefits: (i) Medicare Supplement coverage for Rehm that is the same coverage as provided for other retirees of the Company; (ii) Rehm's spouse will be covered by an individual Medicare Supplement plan; (iii) Rehm and his spouse will receive the same dental and prescription drug coverage as is provided to Company employees; and (iv) participation by Rehm and his spouse in the Company's officer medical reimbursement program. (b) Following the termination of the consultancy under this Agreement, Rehm will be eligible to continue the Medicare Supplement coverage at the cost applicable to a retiree from employment with the Company with the same number of years of continuous active service as an employee as Rehm. Further, Medicare Supplement coverage for Rehm's spouse, dental coverage, prescription drug coverage and participation in the - 3 - <PAGE> Company's officer medical reimbursement program will be terminated. At her election, the Medicare Supplement coverage may be continued by Rehm's spouse under an individual coverage plan with the premiums to be invoiced directly to Rehm's spouse. 9. RENEWAL OF CONSULTANCY. The term of Rehm's consultancy as provided in Paragraph 6 above may be renewed for up to two (2) subsequent one-year (1) terms by mutual agreement of the parties. 10. NON-COMPETITION. Paragraph 6(a) of the Employment Contract is deleted and the following is inserted in its place: Rehm agrees that during the period of his employment by the Company and during the period that he is a consultant to the Company and for a period of three (3) years following the termination of his consultancy, he shall not consult with, accept employment with, become or invest in, or in any way aid or abet any proprietorship, partnership, corporation or other business entity that is a competitor of the Company in the United States of America ("Prohibited Action"), except with the prior written consent of the Company. 11. INDEPENDENT CONTRACTOR. The parties agree that while acting as a consultant, Rehm shall at all times be an independent contractor and that nothing herein shall be construed to cause Rehm to be an employee of the Company. 12. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. Rehm may not assign this Agreement, in whole or in part. 13. GOVERNING LAW. This Agreement and the validity of its provisions shall be construed according to the laws of the State of Iowa. 14. ENTIRE AGREEMENT. This Agreement contains all the understandings and representations between the parties with respect to the subject of this Agreement. 15. AMENDMENT OR MODIFICATION; WAIVER. No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing. No provision to be performed by a party may be waived by the other except by in writing. No waiver by either party shall be deemed a waiver of a similar or dissimilar provision. 16. HEADING. Headings of the sections of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any section. - 4 - <PAGE> IN WITNESS WHEREOF, pursuant to authorization of its Board of Directors, the Company has caused this Agreement to be signed and Rehm has set his hand as of the 11th day of November, 1996. MEREDITH CORPORATION JACK D. REHM By: /s/ E. T. Meredith III /s/ Jack D. Rehm ----------------------------------- ---------------- E. T. Meredith III Chairman of the Executive Committee of the Board of Directors - 5 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 10-3 FOR 12-31-96 10-Q <TEXT> Exhibit 10.3 ------------ 1992 MEREDITH CORPORATION STOCK INCENTIVE PLAN AGREEMENT NONQUALIFIED STOCK OPTION AWARD You have been selected to be a Participant in the 1992 Meredith Corporation Stock Incentive Plan (the "Plan"), as specified below: OPTIONEE: William T. Kerr DATE OF GRANT: July 1, 1996 DATE OF EXPIRATION: June 30, 2006 NUMBER OF SHARES COVERED BY THIS AWARD: 58,300 OPTION PRICE: $42.187 THIS DOCUMENT CONSTITUTES PART OF THE PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS AGREEMENT, effective as of the Date of Grant set forth above, is between Meredith Corporation, an Iowa corporation (the "Company") and the Optionee named above pursuant to the provisions of the Plan. The parties hereto agree as follows: 1. Grant of Stock Option. The Company hereby grants to Optionee the Option to purchase the number of shares of Common Stock of the Company, $1.00 par value ("Common Stock") set forth above at the stated Option Price, which is 100% of the Fair Market Value on the Date of Grant, subject to the terms and conditions of the Plan and this Agreement. 2. Exercise of Stock Option. As long as the vesting requirements provided herein are met and the Option has not otherwise terminated or expired, the Optionee may exercise in whole or in part this Option at any time six months after the Date of Grant. All Options shall be vested and exercisable on and after July 1, 2001. 3. Procedure for Exercise of Options. This Option may be exercised by giving written notice to the Company at its executive offices, addressed to the attention of its Secretary. Such notice (a) shall be signed by the Optionee, his legal representative or a permitted transferee under this Agreement; (b) shall specify the number of full shares then elected to be purchased with respect to the Option; (c) unless a Registration Statement under the Securities Act of 1933 is in effect with respect to the shares to be purchased, shall contain a representation of Optionee that the shares of Common Stock are being acquired by him or her for investment and with no present intention of selling - 1 - <PAGE> or transferring them, and that he or she will not sell or otherwise transfer the shares except in compliance with all applicable securities laws and requirements of any stock exchange upon which the shares of Common Stock may then be listed; (d) shall be accompanied by payment in full of the Option Price of the shares to be purchased; and (e) Optionee's copy of this Agreement. The Option Price upon exercise of this Option shall be payable to the Company in full either (a) in cash or its equivalent (acceptable cash equivalents shall be determined at the sole discretion of the Committee); (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total price of the shares for which the Option is being exercised; (c) by a combination of (a) and (b); (d) by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and withholding taxes due to Company; or (e) such other methods of payment as the Committee at its discretion deems appropriate. As promptly as practicable after receipt of such notice and payment, the Company shall cause to be issued and delivered to the Optionee, his or her legal representative or permitted transferee under this Agreement, as the case may be, certificates for the shares so purchased, which may, if appropriate, be endorsed with appropriate restrictive legends as determined by the Committee. The Company shall maintain a record of all information pertaining to Optionee's rights under this Agreement, including the number of shares for which this Option is exercisable. If the Option shall have been exercised in full, this Agreement shall be returned to the Company and canceled. 4. Termination of Employment by Death. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by reason of death, any outstanding Options granted to Optionee that are not exercisable at the date of termination shall become fully exercisable, except for Options granted within six (6) months prior to the date of death, which Options shall become fully exercisable on the next business day after the sixth month anniversary of the Date of Grant. Optionee's beneficiary (or such persons that have acquired Optionee's rights under the Option by will or by the laws of descent and distribution) shall have the same right to exercise this Option as Optionee had during his or her lifetime, for a period ending on the Date of Expiration set forth above. 5. Termination of Employment by Disability. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by reason of Disability (as determined pursuant to the September 11, 1991, Employment Agreement by and between Kerr and Company, and any successor employment agreement (the "Employment Agreement")), any outstanding Options granted to Optionee that are not exercisable at the date of termination shall - 2 - <PAGE> become fully exercisable, except for Options granted within six (6) months prior to the date of termination, which Options shall become fully exercisable on the next business day after the sixth month anniversary of the Date of Grant. Optionee shall have the same right to exercise this Option as Optionee had during his employment for a period ending on the Date of Expiration set forth above. 6. Termination of Employment by Retirement. If Optionee's employment with the Company is terminated by reason of Retirement (as defined under the then established rules of the Company's tax-qualified retirement plans), any outstanding options granted to Optionee that are not exercisable at the date of termination shall be forfeited by Optionee and canceled by the Company. If, without having fully exercised this Option, Optionee's employment is terminated by reason of Retirement, Optionee shall have the same right to exercise options that are exercisable on the date of the termination of employment as Optionee had during his or her employment for a period ending on the Date of Expiration set forth above. 7. Termination of Employment Voluntarily by Kerr or for Due Cause. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by Company for "Due Cause" as defined under Section 9.3 of the Employment Agreement or by Optionee as "Employee Voluntary" as defined under Section 9.5 of the Employment Agreement, any outstanding options granted to Optionee under this Option that are not exercisable at the date of termination shall be forfeited by Optionee and canceled by the Company. Further, Optionee's rights under this Option shall terminate as of the date of the termination of employment, provided, however, that there shall be an exercise period for options that are exercisable at the date of employment termination of up to 30 days after the date of such termination, but such extension period shall not continue beyond the expiration of the term of this Option. 8. Termination of Employment for Other Reasons. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by Company "At Will" as defined under Section 9.4 of the Employment Agreement, or by Company for other reasons that are treated under the Employment Agreement in the same manner as being "At Will," including, without limitation, failure to renew as discussed under Section 9.8 of the Employment Agreement, or by Optionee for failure by the Company to elect him to the office of Chairman of the Company's Board of Directors effective on or about January 1, 1998, or by Optionee by reason of Optionee not being re-elected to serve as a Director of the Company or as a member of the Executive Committee of the Company's Board of Directors, any outstanding Options granted to Optionee that are not exercisable at the date of termination shall become fully exercisable, except for Options granted within six (6) months prior to the date of termination, which Options shall become fully exercisable on the next business day after the sixth month - 3 - <PAGE> anniversary of the Date of Grant. Optionee shall have the same right to exercise this Option as Optionee had during his employment for a period ending on the Date of Expiration. 9. Restrictions on Transfer. This Option may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, Optionee may transfer this Option, in whole or in part, to members of Optionee's immediate family or trusts or family partnerships for the benefit of such persons, provided, that no such transfer may be made prior to the amendment of the Plan to permit such transfers, and provided, further, that Optionee receive the advance written permission of the Company to make such a transfer and to further notify the Company upon the completion of the transfer. Further, this Option shall be exercisable during Optionee's lifetime only by Optionee, Optionee's legal representative or permitted transferee, as provided above. 10. Adjustments in Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Options, granted under the Plan, as may be determined to be appropriate and equitable by the Committee in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of Shares subject to any Award shall always be rounded to the nearest whole number. Any adjustment of an ISO under this paragraph shall be made in such a manner so as not to constitute a "modification" within the meaning of Section 425(h)(3) of the Code. 11. Rights as a Stockholder. Optionee shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to this Agreement until such time as the purchase price has been paid and the shares have been issued and delivered to him or her. 12. Continuation of Employment. This Agreement shall not confer upon Optionee any right to continuation of employment by the Company, nor shall this Agreement interfere in any way with the Company's right to terminate his or her employment at any time. 13. Miscellaneous. (a) This Agreement and the rights of Optionee hereunder are subject to all the terms and conditions (including Shareholder approval) of the Plan, as the same may be amended from time to time, as well as to such rules and regulations as the Committee may adopt for administration of - 4 - <PAGE> the Plan. The Committee shall have the right to impose such restrictions on any shares acquired pursuant to the exercise of this Option, as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such shares. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon Optionee. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. All terms used herein shall have the same meaning as in the Plan document. (b) With the approval of the Board, the Committee may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect Optionee's rights under this Agreement. (c) The Company shall have the authority to deduct or withhold, or require Optionee to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including Optionee's FICA obligation) required by law to be withheld with respect to any exercise of Optionee's rights under this Agreement without Optionee's written consent. Optionee may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, with respect to a Nonqualified Stock Option, by having the Company withhold shares of Common Stock having an aggregate Fair Market Value, on the date the tax is to be determined, equal to the amount required to be withheld. All elections shall be irrevocable and in writing, and shall be signed by Optionee in advance of the day that the transaction becomes taxable. (d) Optionee agrees to take all steps necessary to comply with all applicable provisions of Federal and state securities law in exercising Optionee's rights under this Agreement. (e) The Plan and this Agreement are not intended to qualify for treatment under the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). (f) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. - 5 - <PAGE> (g) To the extent not preempted by Federal law, this Agreement shall be governed by, and construed in accordance with the laws of the State of Iowa. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Date of Grant. MEREDITH CORPORATION By: /s/ Thomas L. Slaughter --------------------------- Thomas L. Slaughter Its: Vice President-General Counsel and Secretary /s/ William T. Kerr - ----------------------------------- Optionee, William T. Kerr 300 Walnut, #2405 Des Moines, IA 50309 Social Security number: ###-##-#### - 6 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>6 <DESCRIPTION>EXHIBIT 10-4 FOR 12-31-96 10-Q <TEXT> Exhibit 10.4 ------------ 1996 MEREDITH CORPORATION STOCK INCENTIVE PLAN AGREEMENT NONQUALIFIED STOCK OPTION AWARD You have been selected to be a Participant in the 1996 Meredith Corporation Stock Incentive Plan (the "Plan"), as specified below: OPTIONEE: William T. Kerr DATE OF GRANT: August 14, 1996 DATE OF EXPIRATION: August 13, 2006 NUMBER OF SHARES COVERED BY THIS AWARD: 58,300 OPTION PRICE: $40.625 THIS DOCUMENT CONSTITUTES PART OF THE PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS AGREEMENT, effective as of the Date of Grant set forth above, is between Meredith Corporation, an Iowa corporation (the "Company") and the Optionee named above pursuant to the provisions of the Plan. The parties hereto agree as follows: 1. Grant of Stock Option. The Company hereby grants to Optionee the Option to purchase the number of shares of Common Stock of the Company, $1.00 par value ("Common Stock") set forth above at the stated Option Price, which is 100% of the Fair Market Value on the Date of Grant, subject to the terms and conditions of the Plan and this Agreement. 2. Exercise of Stock Option. As long as the vesting requirements provided herein are met and the Option has not otherwise terminated or expired, the Optionee may exercise in whole or in part this Option at any time six months after the Date of Grant. All Options shall be vested and exercisable on and after August 14, 2001. 3. Procedure for Exercise of Options. This Option may be exercised by giving written notice to the Company at its executive offices, addressed to the attention of its Secretary. Such notice (a) shall be signed by the Optionee, his legal representative or permitted transferee under this Agreement; (b) shall specify the number of full shares then elected to be purchased with respect to the Option; (c) unless a Registration Statement under the Securities Act of 1933 is in effect with respect to the shares to be purchased, shall contain a representation of Optionee that the shares of Common Stock are being acquired by him or her for investment and with no - 1 - <PAGE> present intention of selling or transferring them, and that he or she will not sell or otherwise transfer the shares except in compliance with all applicable securities laws and requirements of any stock exchange upon which the shares of Common Stock may then be listed; (d) shall be accompanied by payment in full of the Option Price of the shares to be purchased; and (e) Optionee's copy of this Agreement. The Option Price upon exercise of this Option shall be payable to the Company in full either (a) in cash or its equivalent (acceptable cash equivalents shall be determined at the sole discretion of the Committee); (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total price of the shares for which the Option is being exercised; (c) by a combination of (a) and (b); (d) by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and withholding taxes due to Company; or (e) such other methods of payment as the Committee at its discretion deems appropriate. As promptly as practicable after receipt of such notice and payment, the Company shall cause to be issued and delivered to the Optionee, his or her legal representative or permitted transferee under this Agreement, as the case may be, certificates for the shares so purchased, which may, if appropriate, be endorsed with appropriate restrictive legends as determined by the Committee. The Company shall maintain a record of all information pertaining to Optionee's rights under this Agreement, including the number of shares for which this Option is exercisable. If the Option shall have been exercised in full, this Agreement shall be returned to the Company and canceled. 4. Termination of Employment by Death. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by reason of death, any outstanding Options granted to Optionee that are not exercisable at the date of termination shall become fully exercisable, except for Options granted within six (6) months prior to the date of death, which Options shall become fully exercisable on the next business day after the sixth month anniversary of the Date of Grant. Optionee's beneficiary (or such persons that have acquired Optionee's rights under the Option by will or by the laws of descent and distribution) shall have the same right to exercise this Option as Optionee had during his or her lifetime, for a period ending on the Date of Expiration set forth above. 5. Termination of Employment by Disability. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by reason of Disability (as determined pursuant to the September 11, 1991, Employment Agreement by and between Kerr and Company, and any successor employment agreement (the "Employment Agreement")), any outstanding Options granted to Optionee that are not exercisable at the date of termination shall - 2 - <PAGE> become fully exercisable, except for Options granted within six (6) months prior to the date of termination, which Options shall become fully exercisable on the next business day after the sixth month anniversary of the Date of Grant. Optionee shall have the same right to exercise this Option as Optionee had during his employment for a period ending on the Date of Expiration set forth above. 6. Termination of Employment by Retirement. If Optionee's employment with the Company is terminated by reason of Retirement (as defined under the then established rules of the Company's tax-qualified retirement plans), any outstanding options granted to Optionee that are not exercisable at the date of termination shall be forfeited by Optionee and canceled by the Company. If, without having fully exercised this Option, Optionee's employment is terminated by reason of Retirement, Optionee shall have the same right to exercise options that are exercisable on the date of the termination of employment as Optionee had during his or her employment for a period ending on the Date of Expiration set forth above. 7. Termination of Employment Voluntarily by Kerr or for Due Cause. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by Company for "Due Cause" as defined under Section 9.3 of the Employment Agreement or by Optionee as "Employee Voluntary" as defined under Section 9.5 of the Employment Agreement, any outstanding options granted to Optionee under this Option that are not exercisable at the date of termination shall be forfeited by Optionee and canceled by the Company. Further, Optionee's rights under this Option shall terminate as of the date of the termination of employment, provided, however, that there shall be an exercise period for options that are exercisable at the date of employment termination of up to 30 days after the date of such termination, but such extension period shall not continue beyond the expiration of the term of this Option. 8. Termination of Employment for Other Reasons. If, without having fully exercised this Option, Optionee's employment with the Company is terminated by Company "At Will" as defined under Section 9.4 of the Employment Agreement, or by Company for other reasons that are treated under the Employment Agreement in the same manner as being "At Will," including, without limitation, failure to renew as discussed under Section 9.8 of the Employment Agreement, or by Optionee for failure by the Company to elect him to the office of Chairman of the Company's Board of Directors effective on or about January 1, 1998, or by Optionee by reason of Optionee not being re-elected to serve as a Director of the Company or as a member of the Executive Committee of the Company's Board of Directors, any outstanding Options granted to Optionee that are not exercisable at the date of termination shall become fully exercisable, except for Options granted within six (6) months prior to the date of termination, which Options shall become fully exercisable on the - 3 - <PAGE> next business day after the sixth month anniversary of the Date of Grant. Optionee shall have the same right to exercise this Option as Optionee had during his employment for a period ending on the Date of Expiration. 9. Restrictions on Transfer. This Option may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, Optionee may transfer this Option, in whole or in part, to members of Optionee's immediate family or trusts or family partnerships for the benefit of such persons, provided, that Optionee receive the advance written permission of the Company to make such a transfer and to further notify the Company upon the completion of the transfer. Further, this Option shall be exercisable during Optionee's lifetime only by Optionee, Optionee's legal representative or permitted transferee, as provided above. 10. Adjustments in Authorized Shares. If the Company shall at any time change the number of issued shares of Common Stock without new consideration to the Company (such as by stock dividends or stock splits), the number of shares to be delivered under this Option and the price of the shares subject to this Option shall be equitably adjusted so that the aggregate consideration payable to the Company, if any, shall not be changed. In the case of any merger, consolidation or combination of the Company with or into another corporation, other than a merger, consolidation or combination in which the Company is the continuing corporation and which does not result in the outstanding Common Stock of the Company being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), the Option shall have the right to receive upon exercise of this Option the Acquisition Consideration receivable upon such Acquisition by a holder of the number of shares of Common Stock which might have been obtained upon exercise of the Option, as the case may be, immediately prior to such Acquisition. 11. Change in Control. Immediately upon a change in control of the Company all outstanding Options shall become exercisable. For purposes hereof, a change in control of the Company shall be deemed to have occurred on the first to occur of any of the following dates: (a) on the date the Board of Directors of the Company votes to approve and recommends a stockholder vote to approve: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Common Stock and Class B Stock would be converted into cash, securities or other property, other than any consolidation or merger of the Company in which the holders of the Common Stock and Class B Stock immediately prior to the - 4 - <PAGE> consolidation or merger have at least a majority of the ownership in and voting power of the surviving corporation immediately after the consolidation or merger; or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (iii) any plan or proposal for the liquidation or dissolution of the Company; or (b) on the date any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, hereinafter the "1934 Act"), other than the Company's Savings and Investment Plan or similar successor plan, shall become the beneficial owner (within the meaning of Rule 13d-3 under the 1934 Act) of thirty percent (30%) or more of the outstanding voting power of the Company except as a result of actions beyond the control of such person, including, without limitation, as a result of a shift in voting power of the Company as a result of the conversion by other persons of their Class B Stock into Common Stock; or (c) on the date, during any period of twenty-four (24) consecutive months on which individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election of each new director comprising the majority was approved by a vote of at least a 2/3 majority of the Directors still in office who were Directors at the beginning of the period. Notwithstanding anything to the contrary contained herein, no change in control shall be deemed to have occurred for the purpose of this Plan by virtue of any combination or agreement among shareholders of the Company who are descendants of E.T. Meredith, the founder of the Company, or trusts for the benefit of such persons. 12. Rights as a Stockholder. Optionee shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to this Agreement until such time as the purchase price has been paid and the shares have been issued and delivered to him or her. 13. Fair Market Value. For the purposes of this Agreement, Fair Market Value shall mean the average of the high and low market prices at which a share of the Company common stock shall have traded on the valuation date or on the next preceding trading date if the valuation date is not a trading day as reported in the Midwest edition of The Wall Street Journal. - 5 - <PAGE> 14. Continuation of Employment. This Agreement shall not confer upon Optionee any right to continuation of employment by the Company, nor shall this Agreement interfere in any way with the Company's right to terminate his or her employment at any time. 15. Miscellaneous. (a) This Agreement and the rights of Optionee hereunder are subject to all the terms and conditions (including Shareholder approval) of the Plan, as the same may be amended from time to time, as well as to such rules and regulations as the Committee may adopt for administration of the Plan. The Committee shall have the right to impose such restrictions on any shares acquired pursuant to the exercise of this Option, as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such shares. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon Optionee. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. All terms used herein shall have the same meaning as in the Plan document. (b) With the approval of the Board, the Committee may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect Optionee's rights under this Agreement. (c) The Company shall have the authority to deduct or withhold, or require Optionee to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including Optionee's FICA obligation) required by law to be withheld with respect to any exercise of Optionee's rights under this Agreement without Optionee's written consent. Optionee may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, with respect to a Nonqualified Stock Option, by having the Company withhold shares of Common Stock having an aggregate Fair Market Value, on the date the tax is to be determined, equal to the amount required to be withheld. All elections shall be irrevocable and in writing, and shall be signed by Optionee in advance of the day that the transaction becomes taxable. - 6 - <PAGE> (d) Optionee agrees to take all steps necessary to comply with all applicable provisions of Federal and state securities law in exercising Optionee's rights under this Agreement. (e) The Plan and this Agreement are not intended to qualify for treatment under the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). (f) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. (g) To the extent not preempted by Federal law, this Agreement shall be governed by, and construed in accordance with the laws of the State of Iowa. 15. Effectiveness. The effectiveness of this Agreement and the grant of the Options hereunder is contingent upon the approval of the Plan by the stockholders of the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Date of Grant. MEREDITH CORPORATION By: /s/ Thomas L. Slaughter ----------------------- Thomas L. Slaughter Its: Vice President-General Counsel and Secretary /s/ William T. Kerr - ------------------------------- Optionee, William T. Kerr 300 Walnut, #2405 Des Moines, IA 50309 Social Security number: ###-##-#### - 7 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>7 <DESCRIPTION>EXHIBIT 10-5 FOR 12-31-96 10-Q <TEXT> Exhibit 10.5 ------------ Statement re: Meredith Corporation Nonqualified Stock Option Award Agreements with William T. Kerr Meredith Corporation has two other nonqualified stock option award agreements with William T. Kerr that are substantially identical, in all material respects to the agreements filed as Exhibits 10.3 and 10.4 in this Form 10-Q for the period ended December 31, 1996, except as to the number of stock options awarded and the stock option price. Such agreements are not filed herewith, pursuant to Instruction 2. to Item 601 of Regulation S-K. The numbers of stock options awarded and the stock option prices reflected in those two agreements are as follows: # of Stock Options Awarded Stock Option Price --------------- ------------------ Under an agreement substantially 29,200 $52.734 identical to the agreement filed as Exhibit 10.3 in this Form 10-Q Under an agreement substantially 29,200 $50.781 identical to the agreement filed as Exhibit 10.4 in this Form 10-Q </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>8 <DESCRIPTION>EXHIBIT 11 FOR 12-31-96 10-Q <TEXT> Exhibit 11 ---------- MEREDITH CORPORATION Computation of Primary and Fully Diluted Per Common Share Earnings - Treasury Stock Method For the Six Months Ended December 31, 1996 and 1995 (Unaudited) Weighted average number of shares (in thousands) 1996 1995 Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- Weighted average number of shares outstanding in thousands 26,835 26,835 27,536 27,536 Dilutive effect of unexercised stock options in thousands 982 1,110 653 740 ------ ------ ------ ------ Total 27,817 27,945 28,189 28,276 ====== ====== ====== ====== Primary and fully diluted earnings per common share 1996 1995 Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- Earnings per share from continuing operations $1.06 $1.05* $ .91 $ .91 Discontinued operation 1.00 1.00 ( .03) ( .03) ----- ----- ----- ----- Net earnings per share $2.06 $2.05 $ .88 $ .88 ===== ===== ===== ===== *Dilution is less than three percent from primary earnings per share. Note: Primary - Based on average market prices for the period. Fully Diluted - Based on the higher of the average market price for the period or the market price at December 31 of each year. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>9 <DESCRIPTION>FDS EXHIBIT 27 FOR 12-31-96 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement of Earnings for the six months ended December 31, 1996 of Meredith Corporation and Subsidiaries AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000065011 <NAME> MEREDITH CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 76,135 <SECURITIES> 20,060 <RECEIVABLES> 97,530<F1> <ALLOWANCES> 0 <INVENTORY> 24,400 <CURRENT-ASSETS> 304,035 <PP&E> 189,564 <DEPRECIATION> 107,970 <TOTAL-ASSETS> 731,260 <CURRENT-LIABILITIES> 267,975 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 26,754 <OTHER-SE> 278,270 <TOTAL-LIABILITY-AND-EQUITY> 731,260 <SALES> 408,952 <TOTAL-REVENUES> 408,952 <CGS> 168,898 <TOTAL-COSTS> 168,898 <OTHER-EXPENSES> 11,227 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 1,071 <INCOME-PRETAX> 52,093 <INCOME-TAX> 22,556 <INCOME-CONTINUING> 29,537 <DISCONTINUED> 27,693 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 57,230 <EPS-PRIMARY> 2.06 <EPS-DILUTED> 0 <FN> <F1>Net of allowances </FN> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>10 <DESCRIPTION>EXHIBIT 99 FOR 12-31-96 10-Q <TEXT> Exhibit 99 ---------- MEREDITH CORPORATION FISCAL 1997 SECOND QUARTER EARNINGS PER SHARE AT-A-GLANCE - -- The chart below depicts comparable quarterly and fiscal-year earnings per share before special items and discontinued operations: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year -------- -------- -------- -------- ----------- F1993 .12 .18 .21 .19 .70 F1994 .17 .26 .32 .26 1.01 F1995 .27 .38 .38 .39 1.42 F1996 .34 .45 .49 .54 1.82 F1997 .45 .61 - -- Fiscal 1997 second quarter earnings per share from continuing operations were 61 cents, a 36 percent increase over the prior-year quarter. Prior- year second quarter earnings per share from continuing operations before non-recurring items were 45 cents. - -- Fiscal 1997 net earnings include a post-tax gain of $1.00 per share in discontinued operations from the sale of the Company's remaining interests in cable television systems. - -- Fiscal 1997 second quarter net earnings were $1.61 per share, compared to prior-year earnings from continuing operations and net earnings of 57 cents per share, including a gain of 12 cents per share from the sale of the book clubs. - -- Fiscal 1997 year-to-date earnings from continuing operations were $1.06 per share, a 34 percent increase over prior-year-to-date comparable earnings per share of 79 cents. - -- Fiscal 1997 year-to-date net earnings were $2.06 per share, including the gain from the sale of the discontinued cable operations. In the prior year, net earnings were 88 cents per share, including a gain from the sale of the book clubs and a first-quarter loss of 3 cents per share in discontinued cable operations. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

MEE

https://www.sec.gov/Archives/edgar/data/37748/0000892569-97-000689.txt

-----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, FNa+ZTNKHbz+N7Nu0SLv4/oY9yghtXqQgo1eyElOXQkZg06B1MRI4o+RQzN0gP2B nnYHgx7csXFM9yczOO/2FQ== <SEC-DOCUMENT>0000892569-97-000689.txt : 19970318 <SEC-HEADER>0000892569-97-000689.hdr.sgml : 19970318 ACCESSION NUMBER: 0000892569-97-000689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970317 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLUOR CORP/DE/ CENTRAL INDEX KEY: 0000037748 STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600] IRS NUMBER: 950740960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07775 FILM NUMBER: 97557866 BUSINESS ADDRESS: STREET 1: 3333 MICHELSON DR CITY: IRVINE STATE: CA ZIP: 92730 BUSINESS PHONE: 7149752000 FORMER COMPANY: FORMER CONFORMED NAME: FLUOR CORP LTD DATE OF NAME CHANGE: 19710624 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR PERIOD ENDED JANUARY 31, 1997 <TEXT> <PAGE> 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 January 31, 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: 1-7775 FLUOR CORPORATION ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) <TABLE> <S> <C> Delaware 95-0740960 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization </TABLE> 3353 Michelson Drive, Irvine, CA 92698 ----------------------------------------------------------------------------- (Address of principal executive offices) (714) 975-2000 ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 ( ) As of February 28, 1997 there were 84,131,278 shares of common stock outstanding. <PAGE> 2 FLUOR CORPORATION FORM 10-Q JANUARY 31, 1997 <TABLE> <CAPTION> TABLE OF CONTENTS PAGE <S> <C> Part I: Financial Information Condensed Consolidated Statement of Earnings for the Three Months Ended January 31, 1997 and 1996..................................................... 2 Condensed Consolidated Balance Sheet at January 31, 1997 and October 31, 1996................................................................. 3 Condensed Consolidated Statement of Cash Flows for the Three Months Ended January 31, 1997 and 1996.............................................. 5 Notes to Condensed Consolidated Financial Statements................................ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 7 Changes in Backlog.................................................................. 10 Part II: Other Information.............................................................. 11 Signatures................................................................................. 12 . </TABLE> <PAGE> 3 PART I: FINANCIAL INFORMATION FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Three Months Ended January 31, 1997 and 1996 UNAUDITED <TABLE> <CAPTION> In thousands, except per share amounts 1997 1996 ---------- ---------- <S> <C> <C> REVENUES $3,434,061 $2,402,414 COSTS AND EXPENSES Cost of revenues 3,327,287 2,303,342 Corporate administrative and general expenses 10,870 13,263 Interest expense 5,542 3,441 Interest income (5,263) (7,395) ---------- ---------- Total Costs and Expenses 3,338,436 2,312,651 ---------- ---------- EARNINGS BEFORE INCOME TAXES 95,625 89,763 INCOME TAX EXPENSE 33,590 32,315 ---------- ---------- NET EARNINGS $ 62,035 $ 57,448 ========== ========== NET EARNINGS PER SHARE $ .73 $ .68 ========== ========== DIVIDENDS PER COMMON SHARE $ .19 $ .17 ========== ========== SHARES USED TO CALCULATE EARNINGS PER SHARE 84,866 84,407 ========== ========== </TABLE> See Accompanying Notes. 2 <PAGE> 4 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1997 and October 31, 1996 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1997 1996* ----------- ----------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 124,574 $ 246,964 Marketable securities 44,121 69,378 Accounts and notes receivable 767,861 742,547 Contract work in progress 578,027 561,490 Deferred taxes 44,456 50,157 Inventory and other current assets 151,310 126,287 ---------- ---------- Total current assets 1,710,349 1,796,823 ---------- ---------- Property, Plant and Equipment (net of accumulated depreciation, depletion and amortization of $862,902 and $821,212, respectively) 1,755,170 1,677,662 Investments and goodwill, net 217,362 192,879 Other 322,394 284,362 ---------- ---------- $4,005,275 $3,951,726 ========== ========== </TABLE> (Continued On Next Page) * Amounts at October 31, 1996 have been derived from audited financial statements. 3 <PAGE> 5 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1997 and October 31, 1996 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1997 1996* ----------- ----------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts and notes payable $ 648,442 $ 704,186 Commercial paper 159,526 29,916 Advance billings on contracts 434,617 445,807 Accrued salaries, wages and benefit plans 249,951 290,426 Other accrued liabilities 156,552 175,026 Current portion of long-term debt 2,739 207 ---------- ---------- Total current liabilities 1,651,827 1,645,568 ---------- ---------- Long-term debt due after one year 365 2,967 Deferred taxes 54,781 42,632 Other noncurrent liabilities 574,093 590,833 Commitments and Contingencies Shareholders' Equity Capital stock Preferred - authorized 20,000,000 shares without par value; none issued Common - authorized 150,000,000 shares of $0.625 par value; issued and outstanding - 84,029,206 shares and 83,791,197 shares, respectively 52,518 52,369 Additional capital 582,478 573,037 Retained earnings 1,123,653 1,077,559 Unamortized executive stock plan expense (31,973) (32,538) Cumulative translation adjustments (2,467) (701) ---------- ---------- Total shareholders' equity 1,724,209 1,669,726 ---------- ---------- $4,005,275 $3,951,726 ========== ========== </TABLE> See Accompanying Notes. *Amounts at October 31, 1996 have been derived from audited financial statements. 4 <PAGE> 6 FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended January 31, 1997 and 1996 UNAUDITED <TABLE> <CAPTION> $ in thousands 1997 1996 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 62,035 $ 57,448 Adjustments to reconcile net earnings to cash (utilized by) provided by operating activities: Depreciation, depletion and amortization 56,987 42,412 Deferred taxes 18,394 9,818 Change in operating assets and liabilities (185,221) (57,957) Other, net (18,931) (11,108) --------- --------- Cash (utilized by) provided by operating activities (66,736) 40,613 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (138,119) (107,910) E & C businesses acquired (30,603) - Proceeds from sales/maturities of marketable securities 25,257 21,521 Purchase of marketable securities - (33,636) Proceeds from sale of property, plant and equipment 7,074 5,956 Investments, net (9,469) (27,168) Trust fund contribution (22,593) - Other, net (6,853) (6,579) --------- --------- Cash utilized by investing activities (175,306) (147,816) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term borrowings 128,544 11,970 Payments on long-term debt - (320) Cash dividends paid (15,941) (14,176) Stock options exercised 8,615 11,021 Other, net (1,566) (254) --------- --------- Cash provided by financing activities 119,652 8,241 --------- --------- Decrease in cash and cash equivalents (122,390) (98,962) Cash and cash equivalents at beginning of period 246,964 292,934 --------- --------- Cash and cash equivalents at end of period $ 124,574 $ 193,972 ========= ========= </TABLE> See Accompanying Notes. 5 <PAGE> 7 FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (1) The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under generally accepted accounting principles and, therefore, should be read in conjunction with the company's October 31, 1996 annual report on Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three months ended January 31, 1997 are not necessarily indicative of results that can be expected for the full year. The condensed consolidated financial statements included herein are unaudited; however, they contain all adjustments (consisting of normal recurring accruals) which, in the opinion of the company, are necessary to present fairly its consolidated financial position at January 31, 1997 and its consolidated results of operations and cash flows for the three months ended January 31, 1997 and 1996. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. (2) Earnings per share is based on the weighted average number of common and, when appropriate, common equivalent shares outstanding in each period. Common equivalent shares are included when the effect of the potential exercise of stock options is dilutive. (3) Inventories comprise the following: <TABLE> <CAPTION> January 31, October 31, $ in thousands 1997 1996 ----------- ----------- <S> <C> <C> Coal $ 36,866 $ 28,809 Supplies and other 49,424 45,118 -------- -------- $ 86,290 $ 73,927 ======== ======== </TABLE> (4) Cash paid for interest was $4.6 million and $1.2 million for the three month periods ended January 31, 1997 and 1996, respectively. Income tax payments, net of refunds, were $19 million and $4 million during the three month periods ended January 31, 1997 and 1996, respectively. 6 <PAGE> 8 FLUOR CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the condensed consolidated financial statements and accompanying notes and the company's October 31, 1996 annual report on Form 10-K. RESULTS OF OPERATIONS Revenues for the three month period ended January 31, 1997 were $3.4 billion compared with $2.4 billion for the same period of 1996. Net earnings for the three month period ended January 31, 1997 were $62.0 million compared with $57.4 million for the same period of 1996. The increase in net earnings is primarily due to higher earnings from the Coal segment and lower corporate administrative and general expenses, offset by lower net interest. ENGINEERING AND CONSTRUCTION Revenues for the Engineering and Construction segment increased 45 percent for the three month period ended January 31, 1997 compared with the same period of 1996, due primarily to an increase in the volume of work performed. Despite the growth in revenues, operating profit for the three months ended January 31, 1997 increased only slightly compared with the same period of 1996. First quarter 1997 results were impacted by two items. As part of its normal review process, the company determined that certain of its actuarially determined insurance accruals substantially exceeded anticipated liabilities. Accordingly, a credit was recorded to adjust these accruals to appropriate levels. A majority of the insurance related credit was offset by provisions on two fixed price power projects identified as part of the company's recurring evaluation of projects in progress. Evaluation of cost implications and recoupment opportunities will continue in the second quarter, however, the company determined it was appropriate to record provisions at this time. Margins, which may fluctuate from time to time as a result of changes in both the timing and mix of engineering and construction projects, declined in the first quarter of 1997 compared with the same period of 1996. Lower margins reflect the impact of the stage of completion and mix of projects in progress, competitive market conditions and slower than anticipated earnings growth on recent investments. New awards for the three months ended January 31, 1997 were $3.6 billion compared with $3.0 billion for the three months ended January 31, 1996. Approximately 45 percent of first quarter 1997 new awards were for projects located outside the United States. The uncertain timing and, in some cases, large size of new awards can create variability in the company's award pattern, consequently, future award trends are difficult to predict with certainty. There were no significant large project awards in the first quarter of 1997. 7 <PAGE> 9 The following table sets forth backlog for each of the company's Engineering and Construction business groups: <TABLE> <CAPTION> January 31, October 31, January 31, $ in millions 1997 1996 1996 ----------- ----------- ---------- <S> <C> <C> <C> Process $ 5,236 $ 4,903 $ 7,316 Industrial 6,374 6,496 4,061 Power/Government 3,430 3,621 3,157 Diversified Services 937 737 574 ------- ------- ------- Total backlog $15,977 $15,757 $15,108 ======= ======= ======= U.S. $ 7,486 $ 7,326 $ 6,642 Outside U.S. 8,491 8,431 8,466 ------- ------- ------- Total backlog $15,977 $15,757 $15,108 ======= ======= ======= </TABLE> The composition of backlog by business group has remained relatively unchanged since year end. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments do occur. Backlog has been adjusted to reflect project cancellations, deferrals, and revised project scope and cost, both upwards and downwards. COAL Revenues increased 18 percent for the three month period ended January 31, 1997 compared with the same period in 1996. The increase was due primarily to increased sales of both metallurgical and steam coal, offset slightly by lower steam coal prices. The increase in metallurgical coal revenues reflects an increased market share of sales to steel producers. Steam coal revenues increased due primarily to higher demand from electric utility customers. Gross profit and operating profit increased for the three months ended January 31, 1997 compared with the same period in 1996 due primarily to the increased sales volume of both metallurgical and steam coal and lower costs of metallurgical coal. OTHER Net interest for the three months ended January 31, 1997 decreased compared with the same period of 1996 due primarily to lower interest earning assets in addition to higher short-term interest bearing liabilities. 8 <PAGE> 10 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Adoption of the new accounting standards prescribed by SFAS No. 123 is optional. The company will adopt the "disclosure only" alternative under SFAS No. 123 and continue accounting for its plans under previous accounting standards. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 redefines the standards for computing earnings per share and is effective for the company's fiscal year 1998. The company believes adoption of the new standards will not have a material impact on future earnings per share calculations. FINANCIAL POSITION AND LIQUIDITY The change in operating assets and liabilities from period to period is affected by the mix, stage of completion and commercial terms of engineering and construction projects. In 1996, operating working capital was favorably impacted by the receipt of a large customer advance. The company expects to have adequate resources available from operating cash flows, cash and short-term investments, revolving credit and other banking facilities, capital market sources and commercial paper to provide for its capital needs for the foreseeable future. During December 1996 the company filed a shelf registration statement with the Securities and Exchange Commission for the sale of up to $400 million of debt securities. In March 1997, $300 million of 6.95 percent notes due on March 1, 2007 were issued under this filing. The company anticipates using the proceeds for general corporate purposes, which may include working capital, capital expenditures, the reduction of commercial paper balances, a previously announced share repurchase program and possible acquisitions. In December 1996, TRS Staffing Solutions, the company's provider of temporary staffing personnel, acquired the ConSol group, which specializes in staffing personnel in the fields of information technology and allied health. For the three months ended January 31, 1997, capital expenditures were $138.1 million, including $88 million related to Massey Coal. Dividends paid in the three months ended January 31, 1997 were $15.9 million ($.19 per share) compared with $14.2 million ($.17 per share) for the same period of 1996. 9 <PAGE> 11 FLUOR CORPORATION CHANGES IN BACKLOG Three Months Ended January 31, 1997 and 1996 UNAUDITED <TABLE> <CAPTION> $ in millions 1997 1996 --------- --------- <S> <C> <C> Backlog - beginning of period $15,757.4 $14,724.9 New awards 3,590.6 2,988.5 Adjustments and cancellations, net (243.2) (434.6) Work performed (3,128.3) (2,170.6) --------- --------- Backlog - end of period $15,976.5 $15,108.2 ========= ========= </TABLE> 10 <PAGE> 12 PART II : OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. None. 11 <PAGE> 13 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. FLUOR CORPORATION ---------------------------------------- (Registrant) Date: March 17, 1997 /s/ J. Michal Conaway ---------------------------------------- J. Michal Conaway, Senior Vice President and Chief Financial Officer /s/ V.L. Prechtl -------------------------------------------- V. L. Prechtl, Vice President and Controller 12 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT JANUARY 31, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1997 <PERIOD-END> JAN-31-1997 <CASH> 124,574 <SECURITIES> 44,121 <RECEIVABLES> 767,861 <ALLOWANCES> 0 <INVENTORY> 86,290 <CURRENT-ASSETS> 1,710,349 <PP&E> 2,618,072 <DEPRECIATION> 862,902 <TOTAL-ASSETS> 4,005,275 <CURRENT-LIABILITIES> 1,651,827 <BONDS> 365 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 52,518 <OTHER-SE> 1,671,691 <TOTAL-LIABILITY-AND-EQUITY> 4,005,275 <SALES> 0 <TOTAL-REVENUES> 3,434,061 <CGS> 0 <TOTAL-COSTS> 3,327,287 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 5,542 <INCOME-PRETAX> 95,625 <INCOME-TAX> 33,590 <INCOME-CONTINUING> 62,035 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 62,035 <EPS-PRIMARY> .73 <EPS-DILUTED> .73 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

MNR

https://www.sec.gov/Archives/edgar/data/67625/0000067625-97-000001.txt

-----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, IwEPtwFn9vPBuLqlQTNsi0913dSzaupiuRQBpYNQ5vmfGRfmtyKzEiImsBw8DiBE KpWiQtPjFOL1MHAFfhkTBw== <SEC-DOCUMENT>0000067625-97-000001.txt : 19970225 <SEC-HEADER>0000067625-97-000001.hdr.sgml : 19970225 ACCESSION NUMBER: 0000067625-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970206 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT CORP CENTRAL INDEX KEY: 0000067625 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 221897375 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04258 FILM NUMBER: 97519001 BUSINESS ADDRESS: STREET 1: 125 WYCKOFF RD STREET 2: PO BOX 335 CITY: EATONTOWN STATE: NJ ZIP: 07724 BUSINESS PHONE: 9085424927 MAIL ADDRESS: STREET 1: PO BOX 335 STREET 2: 125 WYCKOFF ROAD CITY: EATONTOWN STATE: NJ ZIP: 07724 FORMER COMPANY: FORMER CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19900403 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ For the Quarter ended Commission File December 31, 1996 No. 2-29442 MONMOUTH REAL ESTATE INVESTMENT CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 22-1897375 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 Wyckoff Road, Eatontown, New Jersey 07724 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code:(908)542-4927 ---------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was re- quired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark whether the financial statements required by instruction H have been reviewed by an independent public ac- countant. Yes ___ No X The number of shares or other units outstanding of each of the issuer's classes of securities as of December 31, 1996 was 3,918,254. Page 1 <PAGE> MONMOUTH REAL ESTATE INVESTMENT CORPORATION FOR THE QUARTER ENDED DECEMBER 31, 1996 C O N T E N T S Page No. Part I - Financial Information Item 1 - Financial Statements (Unaudited): Balance Sheets 3 Statements of Income 4 Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 Part II- Other Information 9 Signatures 10 Page 2 <PAGE> <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION BALANCE SHEETS AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1996 12/31/96 9/30/96 <S> <C> <C> ASSETS Real Estate Investments: Land $ 4,929,924 $ 4,929,924 Buildings, Improvements and Equipment, Net of Accumulated Depreciation of $4,714,629 and $4,494,322, respectively 25,110,092 25,294,699 Mortgage Loans Receivable 250,432 262,585 ___________ ___________ Total Real Estate Investments 30,290,448 30,487,208 Cash and Cash Equivalents 1,332,575 244,394 Securities Available for Sale at Fair Value 3,371,260 607,975 Interest and Other Receivables 571,301 552,091 Prepaid Expenses 61,134 123,669 Lease Costs - Net of Accumulated Amortization 86,352 55,347 Other Assets 546,593 467,392 ___________ ___________ TOTAL ASSETS $36,259,663 $32,538,076 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage Notes Payable $14,967,722 $15,216,610 Loans Payable 3,750,000 500,000 Deferred Gain - Installment Sale 179,989 185,989 Other Liabilities 615,415 526,095 ___________ ___________ Total Liabilities 19,513,126 16,428,694 ___________ ___________ Shareholders' Equity: Common Stock-Class A-$.01 Par Value, 8,000,000 Shares Authorized, 3,918,254 and 3,800,924 Shares Issued and Outstanding, respectively 39,183 38,009 Common Stock-Class B-$.01 Par Value, 100,000 Shares Authorized, No shares Issued or Outstanding -0- -0- Additional Paid-in Capital 16,710,011 16,044,359 Unrealized Holding Gain on Securities Available for Sale 170,373 27,014 Undistributed Income (173,030) -0- ___________ ___________ Total Shareholders' Equity 16,746,537 16,109,382 ___________ ___________ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,259,663 $32,538,076 =========== =========== Unaudited See Accompanying Notes to Financial Statements Page 3 </TABLE> <PAGE> <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 <S> <C> <C> INCOME: Rental and Occupancy Charges $1,250,158 $1,054,614 Interest and Other Income 47,773 77,145 __________ __________ TOTAL INCOME 1,297,931 1,131,759 __________ __________ EXPENSES: Interest Expense 408,901 316,384 Real Estate Taxes 144,969 47,684 Operating Expenses 83,467 81,512 Office and General Expenses 135,244 138,265 Depreciation 220,307 196,329 __________ __________ TOTAL EXPENSES 992,888 780,174 __________ __________ INCOME BEFORE GAINS 305,043 351,585 Gains on Sale of Assets- Investment Property 6,000 6,000 __________ __________ NET INCOME $ 311,043 $ 357,585 ========== ========== PER SHARE INFORMATION Weighted Average Shares Outstanding 3,856,890 3,443,273 ========== ========== Net Income Per Share $ 0.08 $ 0.10 ========== ========== Unaudited See Notes to Financial Statements Page 4 </TABLE> <PAGE> <TABLE> <CAPTION> MONMOUTH REAL ESTATE INVESTMENT CORPORATION STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 <S> <C> <C> 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 311,043 $ 357,585 Noncash Items Included in Net Income: Depreciation 220,307 196,329 Amortization 43,637 26,653 Gain on Sale of Investments (6,000) (72,933) Changes In: Interest and Other Receivables (19,210) 27,203 Prepaid Expenses 62,535 (18,653) Other Assets and Lease Costs (126,343) 7,828 Other Liabilities 89,320 57,774 __________ ___________ NET CASH PROVIDED FROM OPERATING ACTIVITIES 575,289 581,786 __________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES Collections on Installment Sales 12,153 8,285 Additions to Land, Buildings, Improvements and Equipment (35,700) (4,724) Purchase of Securities Available for Sale (2,619,926) (37,754) Proceeds from Sale of Securities Available for Sale -0- 214,650 __________ ___________ NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES (2,643,473) 180,457 __________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Loans 5,000,000 -0- Principal Payments on Loans (1,750,000) -0- Principal Payments of Mortgages (248,888) (729,943) Financing Costs on Debt (27,500) -0- Proceeds from Issuance of Class A Common Stock 460,683 440,171 Dividends Paid (277,930) (242,070) ___________ ___________ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 3,156,365 (531,842) ___________ ___________ Net Increase in Cash and Cash Equivalents 1,088,181 230,401 Cash and Cash Equivalents at Beginning of Period 244,394 144,019 ___________ ___________ Cash and Cash Equivalents at End of Period $ 1,332,575 $ 374,420 =========== =========== Unaudited See Accompanying Notes to Financial Statements Page 5 </TABLE> <PAGE> MONMOUTH REAL ESTATE INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING POLICY The interim financial statements furnished herein reflect all adjust- ments which were, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at December 31, 1996 and for all periods presented. All adjustments made in the interim period were of a normal recurring nature. Certain footnote disclosures which would substantially duplicate the disclosures contained in the audited financial statements and notes thereto included in the Annual Report of Monmouth Real Estate Investment Corporation (the Company) for the year ended September 30, 1996 have been omitted. NOTE 2 - SECURITIES AVAILABLE FOR SALE During the quarter ended December 31, 1996, the Company purchased securities available for sale in the amount of $2,619,926. Total securities available at fair value at December 31, 1996 amounted to $3,371,260 which includes an unrealized holding gain of $170,373. NOTE 3 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN On December 16, 1996, the Company paid $484,073 as a dividend of $.125 per share to shareholders of record November 15, 1996. For the quarter ended December 31, 1996, the Company received $666,826 from the Dividend Reinvestment and Stock Purchase Plan (DRIP). There were 117,330 new shares issued resulting in 3,918,254 shares outstanding. NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the quarter ended December 31, 1996 and 1995 for interest are $408,901 and $316,384, respectively. During the quarter ended December 31, 1996 and 1995, the Company had dividend reinvestments of $206,143 and $189,273, respectively, which required no cash transfers. NOTE 5 - LOANS PAYABLE On October 4, 1996, the Company entered into a $5,000,000 term loan with Summit Bank which may be used for acquisitions or working capital purposes. The loan bears interest at prime plus 1/2%. Principal payments of $250,000 plus interest are due quarterly. This loan matures on October 4, 2001. The outstanding balance of this loan was $3,750,000 on December 31, 1996. Page 6 <PAGE> MONMOUTH REAL ESTATE INVESTMENT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN FINANCIAL CONDITION The Company generated net cash provided from operating activities of $575,289 for the current three months as compared to $581,786 for the prior period. Funds from operations (defined as net income, excluding gains from sales of property, plus depreciation) were $525,350 for the current three months as compared to $547,914 for the prior period. The Company raised $666,826 from the issuance of shares of common stock through a Dividend Reinvestment and Stock Purchase Plan (DRIP). Current cash dividends paid amounted to $484,073. Securities Available for Sale increased by $2,763,285 due to purchases of $2,619,926 and unrealized holding gain of $170,373. Mortgage notes payable decreased by $248,888 during the three months ended December 31, 1996. This decrease was the result of principal repayments. Loans payable increased by $3,250,000 as a result of a new term loan with Summit Bank. The Company borrowed $5,000,000 from Summit Bank of which $1,750,000 was repaid. MATERIAL CHANGES IN RESULTS OF OPERATIONS Rental and occupany charges increased by $195,544 for the three months ended December 31, 1996 as compared to the three months ended December 31, 1995. This increase was due to acquisitions during fiscal 1996 as well as an increase in occupancy charges. There was a corresponding increase in real estate taxes. Interest and other income decreased by $29,372 for the three months ended December 31, 1996 as compared to the three months ended December 31, 1995. This is primarily as a result of the gain on liquidation of equity securities in the prior period. Interest expense increased by $92,517 for the three months ended December 31, 1996 as compared to the three months ended December 31, 1995 as a result of the new loan with Summit Bank. Real estate taxes increased by $97,285 for the three months ended December 31, 1996 as compared to the three months ended December 31, 1995. This was the result of 1996 acquisitions and the timing of real estate taxes paid. There was a corresponding increase in rental and occupancy charges. Depreciation expense increased by $23,978 for the three months ended December 31, 1996, as compared to the three months ended December 31, 1995 due to the real estate acquisitions in fiscal 1996. Operating expenses and office and general expenses remained relatively stable for the three months ended December 31, 1996 as compared to the three months ended December 31, 1995 Page 7 <PAGE> MONMOUTH REAL ESTATE INVESTMENT CORPORATION MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities decreased during the three months ended December 31, 1996 to $575,289 as compared to $581,786 generated during the three months ended December 31, 1995. Other Assets at December 31, 1996 included deposits of $254,804 for the acquisition of a warehouse facility. The Company has been raising capital through the DRIP and investing in net leased industrial properties. The Company owns fourteen properties of which ten carried mortgage loans totaling $14,967,722 at December 31, 1996. The Company believes that funds generated from operations, the Dividend Reinvestment and Stock Purchase Plan, together with the ability to finance and refinance its properties will provide sufficient funds to adequately meet its obligations over the next several years. Page 8 <PAGE> PART II: OTHER INFORMATION MONMOUTH REAL ESTATE INVESTMENT CORPORATION ITEM 1: LEGAL PROCEEDINGS - None ITEM 2 CHANGES IN SECURITIES - None ITEM 3: DEFAULTS UPON SENIOR SECURITIES - None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE ITEM 5: OTHER INFORMATION - None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS - None (b) REPORTS ON FORM 8-K - None Page 9 <PAGE> 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. MONMOUTH REAL ESTATE INVESTMENT CORPORATION Date: February 6, 1997 By:/s/ Eugene W. Landy EUGENE W. LANDY, President Date: February 6, 1997 By:/s/ Anna T. Chew ANNA T. CHEW Controller Page 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MONMOUTH REAL ESTATE INVESTMENT CORPORATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 1,332,575 <SECURITIES> 3,371,260 <RECEIVABLES> 571,301 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 5,336,270 <PP&E> 34,754,645 <DEPRECIATION> 4,714,629 <TOTAL-ASSETS> 36,259,663 <CURRENT-LIABILITIES> 615,415 <BONDS> 14,967,722 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 39,183 <OTHER-SE> 16,707,354 <TOTAL-LIABILITY-AND-EQUITY> 36,259,663 <SALES> 0 <TOTAL-REVENUES> 1,303,931 <CGS> 0 <TOTAL-COSTS> 228,436 <OTHER-EXPENSES> 355,551 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 408,901 <INCOME-PRETAX> 311,043 <INCOME-TAX> 0 <INCOME-CONTINUING> 311,043 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 311,043 <EPS-PRIMARY> .08 <EPS-DILUTED> .08 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

MSFT

https://www.sec.gov/Archives/edgar/data/789019/0000891020-97-000207.txt

-----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, R/pwwvd2yKepdZKneTpxfy9pV7tP10AsbcfSs67+GKmohyfXBE/9iyWqiVebelEO 0hVkLHte095BjyNieVVPsw== <SEC-DOCUMENT>0000891020-97-000207.txt : 19970222 <SEC-HEADER>0000891020-97-000207.hdr.sgml : 19970222 ACCESSION NUMBER: 0000891020-97-000207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROSOFT CORP CENTRAL INDEX KEY: 0000789019 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 911144442 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14278 FILM NUMBER: 97534239 BUSINESS ADDRESS: STREET 1: ONE MICROSOFT WAY #BLDG 8 STREET 2: NORTH OFFICE 2211 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2068828080 MAIL ADDRESS: STREET 1: ONE MICROSOFT WAY - BLDG 8 STREET 2: NORTH OFFICE 2211 CITY: REDMOND STATE: WA ZIP: 98052-6399 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDED 12/31/96 <TEXT> <PAGE> 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 [ ] 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 0-14278 MICROSOFT CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-1144442 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (206) 882-8080 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 [ ] The number of shares outstanding of the registrant's common stock as of January 31, 1997 was 1,203,155,525. <PAGE> 2 MICROSOFT CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 INDEX PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Item 1. Financial Statements Page ---- <S> <C> <C> a) Income Statements for the Three and Six Months Ended December 31, 1995 and 1996............ 1 b) Balance Sheets as of June 30, 1996 and December 31, 1996................................ 2 c) Cash Flows Statements for the Six Months Ended December 31, 1995 and 1996...................... 3 d) Notes to Financial Statements............................................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 5 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.......................... 8 Item 6. Exhibits and Reports on Form 8-K............................................. 8 SIGNATURE...................................................................................... 9 </TABLE> <PAGE> 3 Part I. Financial Information ITEM 1. FINANCIAL STATEMENTS MICROSOFT CORPORATION INCOME STATEMENTS (In millions, except earnings per share)(Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1995 1996 1995 1996 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net revenues $ 2,195 $ 2,680 $ 4,211 $ 4,975 ------------------------------------------------------------------------------------------------- Operating expenses: Cost of revenues 330 296 652 546 Research and development 313 485 615 917 Sales and marketing 690 737 1,311 1,362 General and administrative 76 81 139 167 ------------------------------------------------------------------------------------------------- Total operating expenses 1,409 1,599 2,717 2,992 ------------------------------------------------------------------------------------------------- Operating income 786 1,081 1,494 1,983 Interest income 76 105 142 197 Other income (expense) 23 (46) 19 (95) ------------------------------------------------------------------------------------------------- Income before income taxes 885 1,140 1,655 2,085 Provision for income taxes 310 399 581 730 ------------------------------------------------------------------------------------------------- Net income 575 741 1,074 1,355 Preferred stock dividends 1 1 ------------------------------------------------------------------------------------------------- Net income available for common shareholders $ 575 $ 740 $ 1,074 $ 1,354 ================================================================================================= Earnings per share (1) $ 0.45 $ 0.57 $ 0.84 $ 1.04 ================================================================================================= Weighted average shares outstanding (1) 1,276 1,304 1,278 1,299 ================================================================================================= </TABLE> (1) Share and per share amounts for the three and six months ended December 31, 1995 have been restated to reflect a two-for-one stock split in December 1996. See accompanying notes. - -------------------------------------------------------------------------------- 1 <PAGE> 4 MICROSOFT CORPORATION BALANCE SHEETS (In millions) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> June 30 Dec. 31 1996 1996(1) --------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and short-term investments $ 6,940 $ 9,160 Accounts receivable 639 975 Other 260 307 --------------------------------------------------------------------------------------- Total current assets 7,839 10,442 Property, plant, and equipment 1,326 1,322 Equity investments 675 804 Other assets 253 218 --------------------------------------------------------------------------------------- Total assets $10,093 $12,786 ======================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 808 $ 848 Accrued compensation 202 289 Income taxes payable 484 480 Unearned revenues 560 1,013 Other 371 514 --------------------------------------------------------------------------------------- Total current liabilities 2,425 3,144 --------------------------------------------------------------------------------------- Minority interest 125 --------------------------------------------------------------------------------------- Put warrants 635 --------------------------------------------------------------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock - shares authorized 100; outstanding 12.5 980 Common stock and paid-in capital - shares authorized 4,000; outstanding 1,194 and 1,198 2,924 3,541 Retained earnings 3,984 5,121 --------------------------------------------------------------------------------------- Total stockholders' equity 6,908 9,642 --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,093 $12,786 ======================================================================================= </TABLE> (1) Unaudited See accompanying notes. - -------------------------------------------------------------------------------- 2 <PAGE> 5 MICROSOFT CORPORATION CASH FLOWS STATEMENTS (In millions)(Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Six Months Ended December 31 1995 1996 ------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATIONS Net income $ 1,074 $ 1,355 Depreciation and amortization 147 306 Current liabilities 892 709 Accounts receivable (187) (326) Other current assets (25) (43) ------------------------------------------------------------------------- Net cash from operations 1,901 2,001 ------------------------------------------------------------------------- CASH FLOWS FROM FINANCING Common stock issued 173 314 Common stock repurchased (472) (1,024) Preferred stock issued 980 Stock option income tax benefits 71 226 ------------------------------------------------------------------------- Net cash from (used for) financing (228) 496 ------------------------------------------------------------------------- CASH FLOWS USED FOR INVESTMENTS Additions to property, plant, and equipment (204) (216) Equity investments and other (203) (66) Short-term investments (906) (1,725) ------------------------------------------------------------------------- Net cash used for investments (1,313) (2,007) ------------------------------------------------------------------------- Net change in cash and equivalents 360 490 Effect of exchange rates on cash 1 5 Cash and equivalents, beginning of period 1,962 2,601 ------------------------------------------------------------------------- Cash and equivalents, end of period 2,323 3,096 Short-term investments, end of period 3,694 6,064 ------------------------------------------------------------------------- Cash and short-term investments, end of period $ 6,017 $ 9,160 ========================================================================= </TABLE> See accompanying notes. - -------------------------------------------------------------------------------- 3 <PAGE> 6 MICROSOFT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- BASIS OF PRESENTATION In the opinion of management, the accompanying balance sheets and related interim statements of income and cash flows include all adjustments (consisting only of normal recurring items) necessary for their fair presentation in conformity with generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Examples include provisions for returns and bad debts and the length of product life cycles and buildings' lives. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and financial statements and notes thereto included in the Microsoft Corporation 1996 Form 10-K. STOCK SPLIT Effective December 9, 1996, outstanding shares of common stock were split two-for-one. All prior share and per share amounts have been restated to reflect the stock split. EARNINGS PER SHARE Earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effects of outstanding stock options using the treasury stock method and preferred shares using the if-converted method. STOCKHOLDERS' EQUITY Microsoft repurchases common stock on the open market. This program provides shares for issuance to employees under the Company's stock option and stock purchase plans. During the first two quarters of fiscal 1997, the Company repurchased 16.7 million shares for $1.10 billion. To enhance its stock repurchase program, Microsoft sells equity put warrants to independent third parties. These put warrants entitle the holders to sell shares of Microsoft common stock to the Company on certain dates at specified prices. On December 31, 1996, 28 million warrants were outstanding with strike prices ranging between $60 and $67 per share. The warrants expire at various dates between the fourth quarter of fiscal 1997 and the fourth quarter of fiscal 1998 and are exercisable only at maturity. These put warrant contracts permit a net-share settlement method in addition to cash settlement or physical delivery at the Company's option, thus Microsoft is no longer required to reflect a put warrant liability on the accompanying balance sheet. During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred stock. Dividends are payable quarterly in arrears. In December 1999, each preferred share is convertible into common shares or an equivalent amount of cash determined by a formula that provides a floor price of $79.875 and a cap of $102.24 per preferred share. Net proceeds of $980 million are expected to be used for repurchase of common shares. MICROSOFT NETWORK PARTNERSHIP During October 1996, Microsoft and a subsidiary of Tele-Communications, Inc. (TCI) terminated a partnership under which TCI owned a 20% minority interest in The Microsoft Network, LLC, owner of the business assets of MSN(TM), The Microsoft Network, an online service. Due to the evolving nature of the online industry and MSN's move to a Web-based offering, the original direction of the partnership changed and both Microsoft and TCI agreed to terminate this partnership focused exclusively on MSN. In return for approximately $125 million of TCI securities, Microsoft became the sole owner of MSN and the minority interest on the accompanying balance sheet was eliminated. There was no other material financial impact of the dissolution. CONTINGENCIES In an ongoing investigation, the Antitrust Division of the U.S. Department of Justice requested information from Microsoft in September 1996 concerning Web browsers. Microsoft is also subject to various legal proceedings and claims that arise in the ordinary course of business. Management currently believes that resolving these matters will not have a material adverse impact on the Company's financial position or its results of operations. - -------------------------------------------------------------------------------- 4 <PAGE> 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers (PCs) and servers; server applications for client/server environments; business and consumer productivity applications; software development tools; and Internet and intranet software and technologies. The Company has recently expanded its interactive content efforts, including MSN, the Microsoft Network online service, various Internet-based services, and entertainment and information software programs. Microsoft also sells personal computer books and input devices, and researches and develops advanced technologies for future software products. REVENUES Revenues were $2.68 billion in the second quarter of fiscal 1997, an increase of 22% over the comparable quarter of fiscal 1996. On a year-to-date basis, revenues were $4.98 billion, 18% greater than the comparable period of the prior fiscal year. Revenue growth rates were higher in the first two quarters of the prior year due to the introduction of the Microsoft(R) Windows(R) 95 operating system and Microsoft Office for Windows 95. Software license volume increases have been the principal factor in the Company's revenue growth. The average selling price per license has decreased, primarily because of general shifts in the sales mix from retail packaged products to licensing programs, from new products to product upgrades, and from stand-alone desktop applications to integrated product suites. Average revenue per license from original equipment manufacturer (OEM) licenses and corporate license programs, such as Microsoft Select, is lower than average revenue per license from retail versions. Likewise, product upgrades have lower prices than new products. Also, prices of integrated suites, such as Microsoft Office, are less than the sum of the prices for the individual programs included in these suites when such programs are licensed separately. A portion of the Company's revenues will be earned later than billed. Unearned revenues as of December 31, 1996 on the accompanying balance sheet were $1.01 billion. Approximately $665 million of this amount represented the unearned portion of Windows desktop operating systems revenues attributable to future support commitments, Internet browser updates, and other unspecified enhancements that will be recognized ratably over the products' life cycles, currently estimated to be two years. As discussed below, unearned revenues associated with upgrade rights for Microsoft Office 97 were $200 million. The balance of unearned revenues was primarily attributable to maintenance and other subscription contracts. PRODUCT GROUPS Platforms product group revenues were $1.49 billion in the second quarter of fiscal 1997, compared to $1.13 billion for the same period of 1996, an increase of 32%. On a year-to-date basis, platforms product group revenues increased to $2.68 billion from $2.17 billion. Platforms product group revenues are primarily from licenses of PC operating systems, business systems with client/server architectures, and software development tools. As expected, revenues from retail upgrade versions of Windows 95 decreased compared to the comparable quarters of the prior year, the period during which Windows 95 was released. Total Windows 95 unit volume continued to build, as units licensed through the OEM channel increased strongly. English and certain European language versions of Windows NT(R) 4.0 were released during the first quarter of fiscal 1997, while a Japanese version was released during the second quarter. These product introductions fueled revenue increases for both Windows NT Workstation and Windows NT Server during both quarters. Applications and content product group revenues were $1.19 billion in the second quarter of fiscal 1997, increasing 12% from $1.07 billion in the second quarter of fiscal 1996. For the first two quarters of fiscal 1997, applications and content product revenues were $2.30 billion, compared to $2.05 billion in the corresponding period of 1996. Applications and content product group revenues include primarily licenses of desktop and consumer productivity applications, interactive media programs, and PC input devices. Integrated suites generate most desktop application revenues. The primary programs in Microsoft Office are the Microsoft Word word processor, the Microsoft Excel spreadsheet, and the Microsoft PowerPoint(R) presentation graphics program. Various versions of Office, which are available for Windows 32-bit, Windows 16-bit, and Macintosh operating systems, also include applications such as the Microsoft Access(R) database management program, the Microsoft Schedule+ calendar and scheduling program, and an email client license. The sales mix of 32-bit versions of Microsoft Office continued to increase. Applications and Content revenues grew at a rate lower than recent levels due to the gradual reduction of the - -------------------------------------------------------------------------------- 5 <PAGE> 8 amount of product in the channel in anticipation of the launch of the newest version of the Company's primary desktop application product (Microsoft Office 97). Also, unearned revenues of $200 million attributed to upgrade rights impacted the growth rate. Most versions of Microsoft Office for Windows 95 shipped during the second quarter carried a "technological guarantee" that entitled customers to a free upgrade to the corresponding Microsoft Office 97 version of the product. Associated revenues will be recognized when the upgrade delivery obligation is fulfilled. SALES CHANNELS Microsoft distributes its products primarily through OEM licenses, corporate licenses, and retail packaged products. OEM channel revenues are license fees from original equipment manufacturers. Microsoft has three major geographic sales and marketing organizations: the U.S. and Canada, Europe, and elsewhere in the world (Other International). Sales of corporate licenses and packaged products in these channels are primarily to distributors and resellers. OEM earned revenues were $866 million in the second quarter compared to the $672 million recorded in the comparable quarter of the prior year. On a year-to-date basis, OEM revenues were $1.53 billion, compared to $1.22 billion in fiscal 1996. The primary source of OEM revenues is the licensing of desktop operating systems. The percentage of new PCs with Windows 95 preinstalled increased to more than 75% of reported shipments during the second quarter of fiscal 1997, while MS-DOS and Windows 3.x continued to be preinstalled on many of the remainder of PCs sold by OEMs. The above-mentioned ratable revenue recognition policy was extended to Windows operating systems licensed through the OEM channel in the third quarter of the prior fiscal year. Revenues in the U.S. and Canada were $759 million in the second quarter of fiscal 1997 compared to $632 million in the second quarter of 1996. Revenues in the first half of fiscal 1997 were $1.57 billion, compared to $1.38 billion recorded last year. Revenues in Europe were $631 million in the second quarter of fiscal 1997 compared to $569 million in the prior year. European revenues were $1.06 billion in the first half of 1997 compared to $995 million the prior year. Growth rates slowed in the U.S. and Canadian and European channels due to the strong sales of Windows 95 and Microsoft Office for Windows 95 the prior year, reflecting typical retail upgrade sales patterns of new versions of PC operating systems and desktop applications. Other International channel revenues increased 32% to $424 million in the second quarter of fiscal 1997 from $322 million in the second quarter of fiscal 1996, reflecting strong sales in Japan. On a year-to-date basis, Other International revenues were $817 million in fiscal 1997 compared to $619 million the prior year. Excluding the impact of the shipment of retail upgrade versions of Windows 95 and Microsoft Office for Windows 95 in the first half of fiscal 1996, the trend has continued toward a higher percentage of corporate licensing versus packaged products. Microsoft's operating results are affected by foreign exchange rates. Had the exchange rates in effect during the second quarter of the prior year been in effect during the second quarter of 1997, translated revenues in Europe would have been $15 million higher and translated Other International revenues would have been $20 million higher. Since much of Microsoft's international manufacturing costs and operating expenses are also incurred in local currencies, the relative translation impact of exchange rates on net income is less than on revenues. Also, a portion of planned translated international finished goods revenues in fiscal 1997 is hedged with purchased options. OPERATING EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES Cost of revenues as a percentage of revenues was 11.0% in the second quarter of fiscal 1997 compared to 15.0% in the second quarter of 1996, and 11.0% in the first half of fiscal 1997 versus 15.5% in the first half of 1996. The decrease was primarily due to high shipments of retail upgrade versions of Windows 95 and Microsoft Office for Windows 95 in the comparable periods of the prior year. Cost of revenues also decreased because of general trends toward more corporate licensing and more shipments of products on CD-ROM, which carry lower cost of goods than floppy disks. Research and development expenses increased 55% to $485 million (18.1% of revenues) in the second quarter of fiscal 1997 from $313 million (14.3% of revenues) in the corresponding quarter of 1996. The continued increase in research and development expenses in fiscal 1997 resulted primarily from planned hiring of software developers and higher levels of third-party development costs. - -------------------------------------------------------------------------------- 6 <PAGE> 9 Sales and marketing expenses were $737 million in the second quarter of fiscal 1997 compared with $690 million in 1996. As a percentage of revenues, sales and marketing expenses were 27.5% and 31.4% in the respective second quarters of fiscal 1997 and 1996. Sales and marketing expenses as a percent of revenues in fiscal 1997 decreased due to the high level of marketing and support associated with the launch of Windows 95 in 1996. General and administrative expenses were $81 million (3.0% of revenues) in the second quarter of fiscal 1997 and $76 million (3.5% of revenues) in the second quarter of 1996. Fiscal 1997 increases were due to growth in the systems and number of people necessary to support overall increases in the scope of the Company's operations. Interest income increased as a result of a larger investment portfolio generated by cash from operations. Other expenses increased in both the first and second quarters of 1997 due to recognition of the Company's share of operational expenses of joint ventures, including DreamWorks Interactive and the MSNBC entities. The effective income tax rate was 35% in all periods. NET INCOME Net income for the second quarter of fiscal 1997 was $741 million. Net income as a percentage of revenues was 27.6% in the second quarter of fiscal 1997 compared with 26.2% in the second quarter of 1996. The increase in net income as a percentage of revenues in fiscal 1997 was primarily the result of substantial reductions in relative cost of revenues and sales and marketing expenses, partially offset by increases in research and development and funding of joint ventures. FINANCIAL CONDITION Microsoft's cash and short-term investment portfolio totaled $9.16 billion at December 31, 1996. The portfolio is diversified among security types, industries, and individual issuers. Microsoft's investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S. dollar denominated securities, but also includes foreign currency positions in anticipation of continued international expansion. The portfolio is primarily invested in short-term securities to minimize interest rate risk and facilitate rapid deployment in the event of immediate cash needs. Microsoft has no material long-term debt and has $70 million of standby multicurrency lines of credit that support foreign currency hedging and international cash management. Stockholders' equity at December 31, 1996 was $9.64 billion. Cash generated from operations has been sufficient historically to fund Microsoft's investment in research and development activities and facilities expansion. Research and development investments will continue in existing and advanced areas of technology. Microsoft's cash will be used to acquire technology and to fund ventures and other strategic opportunities. Additions to property, plant, and equipment are expected to continue, including new facilities and computer systems for research and development, sales and marketing, product support, and administrative staff. Commitments for constructing new buildings were $450 million on December 31, 1996. Cash will also be used to repurchase common stock to provide shares for employee stock option and purchase plans. Microsoft enhances its repurchase program by selling put warrants. See notes to financial statements. During December 1996, Microsoft issued 12.5 million 2.75% preferred shares. See notes to financial statements. During fiscal 1996, Microsoft and National Broadcasting Company (NBC) established two joint ventures: a 24-hour cable news and information channel and an interactive online news service. Microsoft agreed to pay $220 million over a five-year period for its interest in the cable venture and to pay one-half of operational funding of both joint ventures for a multiyear period. Management believes existing cash and short-term investments together with funds generated from operations will be sufficient to meet operating requirements for the next twelve months. Microsoft's cash and short-term investments are available for strategic investments, mergers and acquisitions, other potential large-scale cash needs that may arise, and to fund an increased stock buyback program over historical levels to reduce the dilutive impact of the Company's employee stock option and purchase programs. Despite recent increases in stock repurchases, the buyback program has not kept pace with employee stock option grants or exercises. Beginning in fiscal 1990, Microsoft has repurchased 134 million common shares for $4.2 billion while 336 million shares were issued under the Company's employee stock option and purchase plans. The market value of all outstanding stock options was $21.8 billion as of December 31, 1996. Microsoft has not paid cash dividends on its common stock. The preferred stock pays $2.196 per annum per share. - -------------------------------------------------------------------------------- 7 <PAGE> 10 Part II. Other Information ITEM 1. LEGAL PROCEEDINGS See notes to financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held on November 12, 1996, the following proposals were adopted by the margins indicated: 1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. <TABLE> <CAPTION> NUMBER OF SHARES --------------------------- FOR WITHHELD ----------- --------- <S> <C> <C> William H. Gates 536,874,375 2,152,263 Paul G. Allen 536,871,320 2,155,318 Jill E. Barad 534,523,936 4,502,702 Richard A. Hackborn 536,917,381 2,109,257 David F. Marquardt 536,933,188 2,093,450 Robert D. O'Brien 536,719,379 2,307,259 William G. Reed, Jr. 536,971,762 2,054,876 Jon A. Shirley 536,964,036 2,062,602 </TABLE> 2. To approve an amendment to the Company's 1991 Stock Option Plan to reserve an additional 200,000,000 shares (restated to reflect the two-for-one stock split) of common stock for issuance thereunder. For 307,280,849 Against 129,627,668 Abstain 2,290,050 3. To approve the adoption of the 1997 Employee Stock Purchase Plan, including the reservation of 200,000,000 shares (restated to reflect the two-for-one stock split) of common stock thereunder. For 422,180,091 Against 14,998,735 Abstain 2,019,762 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 11. Computation of Earnings Per Share is on page 10. 27. Financial Data Schedule (B) REPORTS ON FORM 8-K Microsoft filed no reports on Form 8-K during the quarter ended December 31, 1996. ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. - -------------------------------------------------------------------------------- 8 <PAGE> 11 Signature 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. Microsoft Corporation Date: February 13, 1997 By:/s/ Michael W. Brown --------------------------- Michael W. Brown, Vice President, Finance; Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) - -------------------------------------------------------------------------------- 9 <PAGE> 12 EXHIBIT INDEX EXHIBITS 11. Computation of Earnings Per Share 27. Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> 1 EXHIBIT 11. MICROSOFT CORPORATION COMPUTATION OF EARNINGS PER SHARE (In millions, except earnings per share) (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 ------------------- ---------------- 1995 1996 1995 1996 ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Weighted average number of common shares outstanding 1,180 1,196 1,180 1,195 Common stock equivalents - stock options 96 107 98 104 Common stock equivalents - preferred stock 1 ----------------------------------------------------------------------------------------------------------- Average common and common stock equivalents outstanding (1) 1,276 1,304 1,278 1,299 =========================================================================================================== Net income $ 575 $ 741 $1,074 $1,355 =========================================================================================================== Earnings per share (1) (2) $ 0.45 $ 0.57 $ 0.84 $ 1.04 =========================================================================================================== </TABLE> (1) Share and per share amounts for the three and six months ended December 31, 1995 have been restated to reflect a two-for-one stock split in December 1996. (2) Fully diluted earnings per share have not been presented because the effects are not material. - -------------------------------------------------------------------------------- 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> $9,160 <SECURITIES> 0 <RECEIVABLES> 975 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 10,442 <PP&E> 2,512 <DEPRECIATION> 1,190 <TOTAL-ASSETS> 12,786 <CURRENT-LIABILITIES> 3,144 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 980 <COMMON> 3,541 <OTHER-SE> 5,121 <TOTAL-LIABILITY-AND-EQUITY> 12,786 <SALES> 4,975 <TOTAL-REVENUES> 4,975 <CGS> 546 <TOTAL-COSTS> 546 <OTHER-EXPENSES> 2,446 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 2,085 <INCOME-TAX> 730 <INCOME-CONTINUING> 1,355 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,355 <EPS-PRIMARY> 1.04 <EPS-DILUTED> 1.04 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

MU

https://www.sec.gov/Archives/edgar/data/723125/0001012870-97-000553.txt

-----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, Cx+L3uHp0SkqGcBxnndN81KDz6KOhfU4n255/n+VeMTnD0dC3BSi/3z49ABQ95zI nsBj+JsqJrzFoy41EZJHPg== <SEC-DOCUMENT>0001012870-97-000553.txt : 19970326 <SEC-HEADER>0001012870-97-000553.hdr.sgml : 19970326 ACCESSION NUMBER: 0001012870-97-000553 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970227 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRON TECHNOLOGY INC CENTRAL INDEX KEY: 0000723125 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 751618004 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10658 FILM NUMBER: 97562108 BUSINESS ADDRESS: STREET 1: 8000 S FEDERAL WAY STREET 2: PO BOX 6 CITY: BOISE STATE: ID ZIP: 83707 BUSINESS PHONE: 2083684000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> FORM 10-Q ------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 27, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------- Commission File Number: 1-10658 MICRON TECHNOLOGY, INC. State or other jurisdiction of incorporation or organization: Delaware ------------- Internal Revenue Service -- Employer Identification No. 75-1618004 8000 S. Federal Way, Boise, Idaho 83706-9632 (208) 368-4000 ------------- 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 ----- ----- The number of outstanding shares of the registrant's common stock as of March 20, 1997 was 210,185,457. <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- MICRON TECHNOLOGY, INC. Consolidated Balance Sheets (Dollars in millions, except for par value data) <TABLE> <CAPTION> February 27, August 29, As of 1997 1996 _________________________________________________________________________________________________ <S> <C> <C> (Unaudited) ASSETS Cash and equivalents $ 582.9 $ 276.1 Liquid investments 6.0 10.7 Receivables 304.0 347.4 Inventories 331.7 251.4 Prepaid expenses 12.0 13.4 Deferred income taxes 52.3 65.0 -------- -------- Total current assets 1,288.9 964.0 Product and process technology, net 41.6 43.2 Property, plant and equipment, net 2,715.4 2,708.1 Other assets 18.3 36.2 -------- -------- Total assets $4,064.2 $3,751.5 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 521.6 $ 423.7 Short-term debt -- 90.0 Deferred income 10.4 7.8 Equipment purchase contracts 47.6 67.8 Current portion of long-term debt 113.7 75.2 -------- -------- Total current liabilities 693.3 664.5 Long-term debt 291.3 314.6 Deferred income taxes 204.1 157.4 Non-current product and process technology 43.8 43.5 Other liabilities 24.9 15.7 -------- -------- Total liabilities 1,257.4 1,195.7 -------- -------- Minority interests 125.9 53.8 Commitments and contingencies Common stock, $0.10 par value, authorized 1.0 billion shares, issued and outstanding 210.0 million and 208.8 million shares, respectively 21.0 20.9 Additional capital 450.1 434.7 Retained earnings 2,209.8 2,046.4 -------- -------- Total shareholders' equity 2,680.9 2,502.0 -------- -------- Total liabilities, minority interests and shareholders' equity $4,064.2 $3,751.5 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Operations (Amounts in millions, except for per share data) (Unaudited) <TABLE> <CAPTION> February 27, February 29, For the quarter ended 1997 1996 ___________________________________________________________________________________ <S> <C> <C> Net sales $ 876.2 $ 996.5 ------- ------- Costs and expenses: Cost of goods sold 657.5 552.1 Selling, general and administrative 94.9 75.4 Research and development 46.8 48.0 Restructuring charge -- 29.9 ------- ------- Total costs and expenses 799.2 705.4 ------- ------- Operating income 77.0 291.1 Gain on sale of investments and subsidiary stock, net 205.1 3.0 Interest (expense) income, net (1.8) 4.4 ------- ------- Income before income taxes and minority interests 280.3 298.5 Income tax provision (131.2) (112.3) Minority interests in net (income) loss (6.4) 2.0 ------- ------- Net income $ 142.7 $ 188.2 ======= ======= Earnings per share: Primary $ 0.66 $ 0.87 Fully diluted 0.66 0.87 Number of shares used in per share calculations: Primary 215.5 215.2 Fully diluted 216.2 215.2 Cash dividend declared per share -- $ 0.05 </TABLE> See accompanying notes to consolidated financial statements. <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Operations (Amounts in millions, except for per share data) (Unaudited) <TABLE> <CAPTION> February 27, February 29, For the six months ended 1997 1996 _____________________________________________________________________________________ <S> <C> <C> Net sales $1,604.3 $2,182.3 -------- -------- Costs and expenses: Cost of goods sold 1,230.3 1,090.2 Selling, general and administrative 170.8 148.6 Research and development 94.0 94.6 Restructuring charge -- 29.9 -------- -------- Total costs and expenses 1,495.1 1,363.3 -------- -------- Operating income 109.2 819.0 Gain on sale of investments and subsidiary stock, net 214.3 3.5 Interest (expense) income, net (3.9) 12.8 -------- -------- Income before income taxes 319.6 835.3 Income tax provision (146.8) (316.9) Minority interests in net income (9.5) (1.7) -------- -------- Net income $ 163.3 $ 516.7 ======== ======== Earnings per share: Primary $ 0.76 $ 2.39 Fully diluted 0.76 2.39 Number of shares used in per share calculations: Primary 215.0 216.4 Fully diluted 215.6 216.4 Cash dividend declared per share -- $ 0.10 </TABLE> See accompanying notes to consolidated financial statements. <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited) <TABLE> <CAPTION> February 27, February 29, For the six months ended 1997 1996 ____________________________________________________________________________________________________ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 163.3 $ 516.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 227.9 172.1 Restructuring charge -- 29.9 Decrease in receivables 43.8 36.0 Increase in inventories (80.3) (103.8) Increase in accounts payable and accrued expenses 97.9 1.0 Increase in deferred income taxes 59.4 1.6 Increase in long-term product and process rights 0.3 37.0 Net gains from subsidiary stock and investment sales (214.3) (3.5) Other 50.4 6.5 ------- ------- Net cash provided by operating activities 348.4 693.5 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of available-for-sale and held-to-maturity securities (2.2) (184.5) Proceeds from sales and maturities of securities 32.7 603.4 Expenditures for property, plant and equipment (150.6) (950.1) Proceeds from sale of subsidiary stock 199.9 -- Other 0.9 (3.5) ------- ------- Net cash provided by (used for) investing activities 80.7 (534.7) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on equipment purchase contracts (110.0) (112.0) Net borrowings (repayments) on lines of credit (90.0) 200.0 Proceeds from issuance of debt 70.7 33.1 Repayments of long-term debt (57.6) (14.0) Proceeds from issuance of common stock 16.2 13.3 Payment of dividends -- (20.7) Proceeds from issuance of stock by subsidiary 49.0 1.0 Other (0.6) (0.4) ------- ------- Net cash provided by (used for) financing activities (122.3) 100.3 ------- ------- Net increase in cash and equivalents 306.8 259.1 Cash and equivalents at beginning of period 276.1 128.1 ------- ------- Cash and equivalents at end of period $ 582.9 $ 387.2 ======= ======= SUPPLEMENTAL DISCLOSURES Income taxes refunded (paid), net $ 25.1 $(416.7) Interest paid (15.4) (4.1) Noncash investing and financing activities: Equipment acquisitions on contracts payable and capital leases 89.7 151.2 </TABLE> See accompanying notes to consolidated financial statements. <PAGE> Notes to Consolidated Financial Statements (All tabular dollar amounts are stated in millions) 1. Unaudited Interim Financial Statements In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position of Micron Technology, Inc., and subsidiaries (the "Company"), and their consolidated results of operations and cash flows. This report on Form 10-Q for the quarter ended February 27, 1997, should be read in conjunction with the Company's Annual Report to Shareholders and/or Form 10-K for the year ended August 29, 1996. <TABLE> <CAPTION> <S> <C> <C> <C> 2. Receivables February 27, August 29, 1997 1996 ___________________________________________________________________________________ Trade receivables $ 303.1 $288.2 Income taxes receivable 3.9 69.1 Other 12.3 17.6 Allowance for returns and discounts (7.0) (18.5) Allowance for doubtful accounts (8.3) (9.0) --------- ---------- $ 304.0 $347.4 ========= ========== 3. Inventories February 27, August 29, 1997 1996 ___________________________________________________________________________________ Finished goods $ 54.0 $54.3 Work in progress 154.0 112.8 Raw materials and supplies 123.7 84.3 --------- ---------- $ 331.7 $251.4 ========= ========== 4. Product and process technology, net February 27, August 29, 1997 1996 ___________________________________________________________________________________ Product and process technology, at cost $ 172.6 $167.5 Less accumulated amortization (131.0) (124.3) --------- ---------- $ 41.6 $43.2 ========= ========== 5. Property, plant and equipment, net February 27, August 29, 1997 1996 ___________________________________________________________________________________ Land $ 37.6 $37.3 Buildings 789.8 674.4 Machinery and equipment 2,233.3 2,073.4 Construction in progress 659.6 753.9 --------- ---------- 3,720.3 3,539.0 --------- ---------- Less accumulated depreciation and amortization (1,004.9) (830.9) --------- ---------- $ 2,715.4 $2,708.1 ========= ========== </TABLE> As of February 27, 1997 property, plant and equipment included unamortized costs of $627 million for the Company's semiconductor memory manufacturing facility in Lehi, Utah, of which $588 million has not been placed in service and is not being depreciated. The completion of this project has been delayed, and the Company expects to complete the facilities when market conditions warrant. Market conditions which the Company expects to evaluate include, but are not limited to, world-wide market supply and demand of semiconductor products and the Company's operations, cash flows and alternative uses of capital. <PAGE> Notes to Consolidated Financial Statements, continued <TABLE> <CAPTION> <S> <C> <C> <C> 6. Accounts payable and accrued expenses February 27, August 29, 1997 1996 ____________________________________________________________________________________________________ Accounts payable $ 216.4 $232.4 Salaries, wages and benefits 84.2 67.3 Product and process technology payable 74.9 39.7 Income taxes payable 63.2 22.7 Other 82.9 61.6 ------- ---------- $ 521.6 $423.7 ======= ========== 7. Long-term debt February 27, August 29, 1997 1996 ____________________________________________________________________________________________________ Notes payable in periodic installments through July 2015, weighted average interest rate of 7.31% and 7.28%, respectively $ 356.5 $322.0 Capitalized lease obligations payable in monthly installments through August 2002, weighted average interest rate of 7.75% and 7.72%, respectively 39.2 42.8 Noninterest bearing obligations, $2.9 million due October 1997, $1.9 million due December 1997 and $1.1 million due March 1998, weighted average imputed interest rate of 6.78% and 7.17%, respectively 5.9 21.6 Note payable, due June 1998, weighted average interest rate of 5.14% and 5.30%, respectively 3.0 3.0 Other 0.4 0.4 ------- ---------- 405.0 389.8 Less current portion (113.7) (75.2) ------- ---------- $ 291.3 $314.6 ======= ========== </TABLE> 8. Earnings per share Earnings per share is computed using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options and affect earnings per share when they have a dilutive effect. 9. Gain on sale of investments and subsidiary stock The Company recorded pretax gains of $193 million on subsidiary stock transactions and a pretax gain of $12 million relating to the divestiture of an investment in the second quarter of 1997. In the first quarter of 1997 the Company recorded a pretax gain of $10 million relating to the sale of an investment. In a public offering in February 1997, MTI sold 12.4 million shares of Micron Electronics, Inc. ("MEI") common stock for net proceeds of $200 million ($16.15 per share) and MEI sold 3 million newly issued shares for net proceeds of $48 million ($16.15 per share), resulting in a consolidated pretax gain of $190 million. The sales reduced the Company's ownership from approximately 79% to approximately 64% of the outstanding common stock of MEI. The Company has recognized a deferred tax liability on the resultant gain from the sale of MEI common stock in the second quarter of 1997. <PAGE> Notes to Consolidated Financial Statements, continued 10. Restructuring In 1996, the Company's subsidiary, MEI, adopted and completed a plan to discontinue the manufacture and sale of ZEOS brand PC systems. The Company recorded a restructuring charge of $29.9 million in the second quarter of 1996, comprised principally of $14.5 million relating to the disposition of ZEOS components and systems and $13.0 million to write off unamortized goodwill. 11. Income taxes The effective tax rate in the second quarter and first six months of fiscal 1997 was 47% and 46%, respectively. Exclusive of the $96 million provision for income tax related to the gain on the sale of MEI common stock, the Company's estimated annual effective tax rate for 1997 is 40%. The provision for income tax related to the gain on the sale of MEI stock was 50% of the pretax gain because the Company's book basis exceeded the tax basis of its investment in MEI, primarily as a result of unremitted earnings, previously expected to be realized through dividends, and the gain on issuance of stock by MEI. 12. Commitments As of February 27, 1997 the Company had commitments extending into fiscal 1998 of approximately $182 million for equipment purchases and $45 million for the construction of buildings. 13. Contingencies Periodically, the Company is made aware that technology used by the Company in the manufacture of some or all of its products may infringe on product or process technology rights held by others. The Company has accrued a liability and charged operations for the estimated costs of settlement or adjudication of asserted and unasserted claims for infringement prior to the balance sheet date. Determination that the Company's manufacture of products has infringed on valid rights held by others could have a material adverse effect on the Company's financial position, results of operations or cash flows and could require changes in production processes and products. The Company is currently party to various other legal actions arising out of the normal course of business, none of which are expected to have a material effect on the Company's financial position or results of operations. <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- The following discussion contains trend information and other forward looking statements that involve a number of risks and uncertainties. The Company's actual results could differ materially from the Company's historical results of operations and those discussed in the forward looking statements. Factors that could cause actual results to differ materially are included, but are not limited to, those identified in "Certain Factors." All period references are to the Company's fiscal periods ended February 27, 1997, November 28, 1996, August 29, 1996, or February 29, 1996 unless otherwise indicated. All tabular dollar amounts are stated in millions. Micron Technology, Inc., and its subsidiaries (hereinafter referred to collectively as the "Company" or "MTI") design, develop, manufacture and market semiconductor memory products, primarily DRAM. Through its approximately 64% owned subsidiary, Micron Electronics, Inc. ("MEI"), the Company also develops, markets, manufactures, and supports PC systems, and operates a contract manufacturing and semiconductor component recovery business. Net income for the second quarter of 1997 was $143 million, or $0.66 per fully diluted share, on net sales of $876 million. For the second quarter of 1996 net income was $188 million, or $0.87 per fully diluted share, on net sales of $996 million. For the first six months of 1997, net income was $163 million, or $0.76 per fully-diluted share, on net sales of $1,604 million compared to net income of $517 million, or $2.39 per fully diluted share, on net sales of $2,182 million for the first six months of 1996. The Company reported net sales of $728 million and net income of $21 million, or $0.10 per fully diluted share, for its first quarter of 1997. Results of operations for the second quarter of 1997 included a $94 million after-tax gain on the sale of MEI stock and a $7 million after-tax gain on the divestiture of another investment. The Company previously reported a $6 million after-tax gain on the sale of an investment in its first quarter of 1997. Fully diluted earnings per share benefited by $0.48 and $0.50 for the second quarter and six months of 1997, respectively, from these gain transactions. Results of operations for the second quarter of 1996 were adversely affected by a $29.9 million pre-tax restructuring charge resulting from the decisions by its then approximately 80% owned subsidiary, MEI, to discontinue sales of ZEOS brand PC systems and to close the related PC manufacturing operations in Minneapolis, Minnesota. The restructuring charge reduced fully diluted earnings per share in the second quarter and first six months of 1996 by $0.09. RESULTS OF OPERATIONS NET SALES The following table presents the Company's net sales by related products or services. The value of the Company's semiconductor memory products included in PC systems and other products is included in the caption "Semiconductor memory products." The caption "Other" includes revenue from contract manufacturing and module assembly services, construction management services, government contracts, and licensing fees. <TABLE> <CAPTION> Second Quarter Six Months Ended -------------------------------------- ------------------------------------------ 1997 1996 1997 1996 ----------------- ----------------- --------------------- ------------------ Net Sales % Net Sales % Net Sales % Net Sales % ----------------- ----------------- -------------------- ------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Semiconductor memory products $401.5 45.8% $646.0 64.8% $ 743.7 46.4% $1,515.4 69.4% Personal computer systems 395.4 45.1% 264.9 26.6% 729.2 45.4% 499.0 22.9% Other 79.3 9.1% 85.6 8.6% 131.4 8.2% 167.9 7.7% ------ ----- ------ ---- -------- ----- -------- ----- Total net sales $876.2 100.0% $996.5 100.0% $1,604.3 100.0% $2,182.3 100.0% ====== ===== ====== ===== ======== ===== ======== ===== </TABLE> Net sales of semiconductor memory products for the second quarter of 1997 decreased by 38% as compared to the second quarter of 1996, primarily due to the sharp decline in average selling prices which was partially offset by increased production of semiconductor memory products. Average selling prices per megabit of memory declined approximately 84% from the second quarter of 1996 to the second quarter of 1997. The Company's principal <PAGE> memory product in the second quarter of 1997 was the 16 Meg DRAM, which comprised approximately 83% of megabit sales of semiconductor memory. Total megabits produced in the second quarter of 1997 more than tripled the megabits produced in the second quarter of 1996. Megabit production for the first six months of 1997 represented an increase of 183% over megabit production for the first six months of 1996. These production increases were principally due to the conversion of all fabs to 8-inch wafer processing, the transition to the 16 Meg DRAM as the Company's principal memory product, ongoing transitions to successive reduced die size ("shrink") versions of existing memory products, and enhanced yields on existing memory products. Average selling prices for the Company's semiconductor memory products in the second quarter of 1997 were 18% lower than in the first quarter of 1997. Megabit production for the second quarter of 1997 represented a 55% increase in production over the first quarter of 1997, principally due to a shift in the Company's product mix to higher relative volumes of higher density components, transitions to successive shrink versions of existing memory products, and enhanced yields on existing memory products. Net sales of PC systems for the second quarter and first six months of 1997, less the value of the Company's semiconductor memory products included therein, increased by approximately 49% and 46%, respectively, compared to the corresponding periods in 1996. Net sales of PC systems increased in the second quarter and first six months of 1997 compared to the corresponding periods in 1996 primarily as a result of increased PC units sold. Unit sales of PC systems in the second quarter and first six months of 1997 were approximately 45% and 33% higher, respectively, than in the same periods in 1996. Demand for the Company's PC systems was largely attributable to increased name recognition of the Company's PC systems and the continued acceptance of the direct sales channel for PC products. Net sales of PC systems in the second quarter of 1997, less the value of the Company's semiconductor memory products included therein, were approximately 18% higher compared to the first quarter of 1997, primarily as a result of a seasonal increase in units sold and slightly higher overall average selling prices for the Company's PC systems. <TABLE> <CAPTION> GROSS MARGIN Second Quarter Six Months Ended ----------------------------- ------------------------------------ 1997 Change 1996 1997 Change 1996 ----------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Gross margin $218.7 (50.8%) $444.5 $373.9 (65.8%) $1,092.2 as a % of net sales 25.0% 44.6% 23.3% 50.0% </TABLE> The Company's gross margin percentage was lower in the second quarter and first six months of 1997 than in the corresponding periods of 1996, primarily as a result of a lower gross margin percentage on sales of the Company's semiconductor memory products. The Company's gross margin percentage of 25% for the second quarter of 1997 was higher than the gross margin percentage of 21% for the first quarter of 1997, primarily due to improved gross margins on semiconductor memory products during the second quarter. The Company's gross margin percentage on sales of semiconductor products was 32% in the second quarter of 1997 compared to 24% in the first quarter of 1997 and 62% in the second quarter of 1996. The increase in gross margin percentage from first quarter to second quarter is primarily the result of decreases in per unit manufacturing costs. The decline in gross margin percentage from second quarter 1997 to second quarter 1996 is primarily the result of an 84% decline in average selling prices. Decreases in per unit manufacturing costs for 1997 periods compared with corresponding 1996 periods were achieved through significant increases in die per wafer and conversion of all fabs to 8- inch wafer processing, transitions to shrink versions of existing products, shifts in the Company's mix of semiconductor memory products to a higher average density, and improved manufacturing yields. The gross margin percentage provided by the Company's PC operations was lower in the second quarter of 1997 compared to the first quarter of 1997, primarily due to lowered selling prices for its notebook products. The Company continues to experience significant pressure on its gross margins as a result of intense competition in the PC industry and consumer expectations of more powerful PC systems at lower prices. The gross margin percentage for sales of the Company's PC systems was higher in the second quarter and first six months of 1997 compared to corresponding periods in 1996. <PAGE> SELLING, GENERAL AND ADMINISTRATIVE <TABLE> <CAPTION> Second Quarter Six Months Ended ------------------------ -------------------------- 1997 Change 1996 1997 Change 1996 ------------------------ -------------------------- <S> <C> <C> <C> <C> <C> <C> Selling, general and administrative $94.9 26.0% $75.4 $170.8 15.0% $148.6 as a % of net sales 10.8% 7.6% 10.6% 6.8% </TABLE> The higher level of selling, general and administrative expenses during the second quarter and first six months of 1997 as compared to comparable periods of 1996 resulted primarily from an increased number of administrative employees associated with expanded PC operations, increased advertising costs associated with the Company's PC systems and a higher level of compensation costs associated with the Company's performance based compensation programs. RESEARCH AND DEVELOPMENT <TABLE> <CAPTION> Second Quarter Six Months Ended --------------------------- ------------------------- 1997 Change 1996 1997 Change 1996 --------------------------- ------------------------- <S> <C> <C> <C> <C> <C> <C> Research and development $46.8 (2.5%) 48.0 $94.0 (0.6%) $94.6 as a % of net sales 5.3% 4.8% 5.9% 4.3% </TABLE> Research and development expenses vary primarily with the number of wafers processed, personnel, and the cost of advanced equipment dedicated to new product and process development. Research and development efforts are continually devoted to developing leading process technology which determines its ability to transition to next generation products. Currently process technology is moving from .35 micron (mu) toward .30(mu) in the current year and to .25(mu) and .18(mu) in the next several years for development of future generation semiconductor products. Application of current developments in advanced process technology are focused on shrink versions of the Company's 16 Meg DRAM and development of the 16 Meg SDRAM and the 64 Meg DRAM and SDRAM. Industry-wide PC manufacturers are driving the evolution from EDO (extended data out) DRAM technology to SDRAM at a rate commensurate with their customers' need for faster speed. The Company expects this transition to accelerate through 1998 and expects its development efforts in SDRAM will enable it to meet volume customer demand when this transition occurs. Other research and development efforts are devoted to the design of SRAM, 256 Meg DRAMs, and design and development of new technologies including remote intelligent communications (RIC) products and Flash semiconductor memory products. GAIN ON SALE OF INVESTMENTS AND SUBSIDIARY STOCK The Company recorded pretax gains of $193 million on subsidiary stock transactions and a pretax gain of $12 million relating to the divestiture of an investment in its statement of operations for the second quarter of 1997. In the first quarter of 1997 the Company recorded a pretax gain of $10 million relating to the sale of an investment. In a public offering in February 1997, MTI sold 12.4 million shares of MEI common stock for net proceeds of $200 million and MEI sold 3 million newly issued shares for net proceeds of $48 million, resulting in a consolidated pretax gain of $190 million. The sales reduced the Company's ownership from approximately 79% to approximately 64% of the outstanding common stock of MEI. INCOME TAXES The effective tax rate in the second quarter and first six months of 1997 was 47% and 46%, respectively. Exclusive of the $96 million provision for income tax related to the gain on the sale of MEI common stock, the Company's estimated annual effective tax rate for 1997 is 40%. The provision for income tax related to the gain on the sale of MEI common stock was 50% of the pretax gain because the Company's book basis exceeded the tax basis of its investment in MEI, primarily as a result of unremitted earnings, previously expected to be realized through dividends, and the gain on issuance of common stock by MEI. <PAGE> LIQUIDITY AND CAPITAL RESOURCES As of February 27, 1997, the Company had cash and liquid investments totaling $589 million, representing an increase of $302 million during the first six months of 1997. Approximately $200 million of the Company's consolidated cash and liquid investments were held by MEI. Cash generated from operations by MEI is not readily available to finance operations or other expenditures of MTI. During the first six months of 1997 the Company's inventories increased by $80 million. Raw materials and work in progress inventories as of February 27, 1997 increased 47% and 37%, respectively, compared to levels as of August 29, 1996. The increase in raw materials inventories was mainly attributable to the growth in PC operations. The increase in work in progress inventories was due to higher costs associated with 8-inch wafer processing and the move to the 16 Meg DRAM as the Company's principal semiconductor memory product. The Company's principal sources of liquidity during the first six months of 1997 were cash flows from operations of $348 million, net cash proceeds from the sale of subsidiary stock of $253 million and equipment financing of $71 million. The principal uses of funds in the first six months of 1997 were $168 million for repayments of equipment contracts and long-term debt, $151 million for property, plant and equipment and net repayments of the Company's bank lines of credit of $90 million. Cash flow from operations for the first six months of 1997 was lower than cash flow from operations for the first six months of 1996 primarily as a result of lower overall average selling prices for semiconductor memory products. Cash flow from operations depends significantly on average selling prices and variable cost per part for the Company's semiconductor memory products. In 1996, the rate of decline in average selling prices for semiconductor memory products surpassed the rate at which the Company was able to decrease per unit manufacturing costs. As of February 27, 1997, the Company had contractual commitments extending into fiscal 1998 of approximately $183 million for equipment purchases and approximately $45 million for the construction of facilities. The Company estimates it will spend approximately $650 million in 1997 for purchases of equipment, construction and improvement of buildings, primarily to enhance capacity and product and process technology at its existing facilities. The Company believes that in order to pursue development of new product and process technologies at a rate commensurate to the Company's competition, and to support future growth, achieve operating efficiencies, and enhance product quality, it must continue to invest in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. As the Company considers its long-term capacity and product and process technology enhancement programs it continues to evaluate a number of financing alternatives, including additional financing from external sources. In this regard, the Company filed an undesignated shelf registration statement on December 20, 1996 for up to $1 billion in debt or equity securities to give the Company the flexibility, if and when financing is advantageous, to effect an appropriately sized offering. The Company has a $400 million revolving credit agreement expiring in May 1999. As of February 27, 1997, the Company had no borrowings outstanding under the facility. The agreement contains certain restrictive covenants, including a borrowing base tied to the Company's accounts receivable, an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) covenant, and a maximum net loss covenant. As of February 27, 1997, the Company was in compliance with all covenants under the facility. MEI has an unsecured revolving credit facility with two financial institutions providing for borrowings of up to $40 million. As of February 27, 1997, MEI had no borrowings outstanding under the agreement. Borrowings are limited based on the amount of MEI's eligible receivables. As of February 27, 1997, MEI was eligible to borrow the full $40 million pursuant to the agreement. <PAGE> CERTAIN FACTORS In addition to the factors discussed elsewhere in this Form 10-Q and in the Company's Form 10-K for the fiscal year ended August 29, 1996, the following are important factors which could cause actual results or events to differ materially from those contained in any forward looking statements made by or on behalf of the Company. The semiconductor memory industry is characterized by rapid technological change, frequent product introductions and enhancements, difficult product transitions, relatively short product life cycles, and volatile market conditions. These characteristics historically have made the semiconductor industry highly cyclical, particularly in the market for DRAMs, which are the Company's primary products. Although the Company experienced a degree of pricing stability for its semiconductor memory products in the closing weeks of the second quarter of 1997, the selling prices for the Company's semiconductor memory products fluctuate significantly with real and perceived changes in the balance of supply and demand for these commodity products. The Company is unable to ascertain whether the stabilization of DRAM prices in the closing weeks was indicative of a change in industry supply and demand, capacity or inventory levels. With the exception of the relatively stable DRAM pricing late in the second quarter of 1997, growth in world-wide supply has outpaced growth in world-wide demand in recent periods, resulting in a significant decrease in average selling prices for the Company's semiconductor memory products. In 1996, the rate of decline in average selling prices for semiconductor memory products surpassed the rate at which the Company was able to decrease per unit manufacturing costs, and, as a result, the Company's cash flows were significantly adversely affected, particularly in the second half of 1996. In the first quarter of 1997 the rate of decline in average selling prices for semiconductor memory products was commensurate with the rate of decline in the Company's per unit manufacturing costs and in the second quarter the rate of decline in the Company's per unit manufacturing costs for semiconductor memory products surpassed the rate of decline in average selling prices. However, there can be no assurance that the trend experienced in the first two quarters of 1997 will continue. In the event that average selling prices decline at a faster rate than that at which the Company is able to decrease per unit manufacturing costs, the Company could be materially adversely affected in its operations, cash flows and financial condition. Additionally, although some of the Company's competitors have announced adjustments to the rate at which they will implement capacity expansion programs, many of the Company's competitors have already added significant capacity for the production of semiconductor memory products. The amount of capacity to be placed into production and future yield improvements by the Company's competitors could dramatically increase world-wide supply of semiconductor memory and increase downward pressure on pricing. Further, the Company has no firm information with which to determine inventory levels of its competitors, or to determine the likelihood that substantial inventory liquidation may occur and cause further downward pressure on pricing. Approximately 77% of the Company's sales of semiconductor memory products during the first six months of 1997 were directly into the PC or peripheral markets. DRAMs are the most widely used semiconductor memory component in most PC systems. The Company believes that the rate of growth in average world-wide sales of PC systems has declined and may remain below prior periods' growth rates for the foreseeable future. In addition, the growth rate in the amount of semiconductor memory per PC system may decrease in the future. Should demand for PC systems decrease or the growth rate in the amount of memory per PC system decrease, growth in demand for semiconductor memory could also decrease, placing further downward pressure on selling prices for the Company's semiconductor memory products. The Company is unable to predict changes in industry supply, major customer inventory management strategies, or end user demand, which are significant factors influencing pricing for the Company's semiconductor memory products. The Company's operating results are significantly impacted by the operating results of its consolidated subsidiaries, in particular MEI. As DRAM prices have fallen and as unit shipments of PC systems have increased, MTI's consolidated results of operations have been increasingly affected by MEI's results of operations. MEI's past operating results have been, and its future operating results may be, subject to fluctuations, on a quarterly and an annual basis, as a result of a wide variety of factors, including, but not limited to, critical component availability, manufacturing and production constraints, fluctuating component costs, fluctuating market pricing for computer and semiconductor memory products, industry competition, the timing of new product introductions by the Company and its competitors, inventory obsolescence, seasonal cycles common in the PC industry, seasonal government purchasing cycles, the effects of product reviews and industry awards, changes in product mix and the timing of orders <PAGE> from and shipments to OEM customers. The Company's net income is affected by its ownership percentage of its subsidiaries. Changing circumstances, including but not limited to, changes in the Company's core operations, alternative uses of capital, and market conditions, could result in the Company changing its ownership interest in its subsidiaries. The Company is engaged in ongoing efforts to enhance its production processes to reduce the die size of existing products and to increase capacity. The result of such efforts has led to a significant increase in recent quarters in megabit production. There can be no assurance that the Company can maintain or approximate increases in megabit production at a level approaching that experienced in recent quarters or that the Company will not experience decreases in manufacturing yield or production as it attempts to implement future technologies. Further, from time to time, the Company experiences volatility in its manufacturing yields, as it is not unusual to encounter difficulties in ramping shrink versions of existing devices or new generation devices to commercial volumes. The Company's ability to reduce per unit manufacturing costs of its semiconductor memory products is largely dependent on its ability to design and develop new generation products and shrink versions of existing products and its ability to ramp such products at acceptable rates to acceptable yields, of which there can be no assurance. Historically, the Company has reinvested substantially all cash flow from semiconductor memory operations in capacity expansion and improvement programs. The Company's cash flow from operations depends primarily on average selling prices and per unit manufacturing costs of the Company's semiconductor memory products. In the event that average selling prices decline faster than the rate at which the Company is able to decrease per unit manufacturing costs, the Company may not be able to generate sufficient cash flows from operations to sustain operations. The Company has a $400 million revolving credit agreement expiring in May 1999. There can be no assurance that the Company will continue to be able to meet the terms of the covenants or be able to borrow the full amount of the credit facility. There can be no assurance that external sources of liquidity will be available to fund the Company's operations or its capacity and product and process technology enhancement programs. Failure to obtain financing would hinder the Company's ability to make continued investments in such programs, which could materially adversely affect the Company's business, results of operations and financial condition. The semiconductor and PC industries have experienced a substantial amount of litigation regarding patent and other intellectual property rights. In the future, litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to defend the Company against claimed infringement of the rights of others. The Company has from time to time received, and may in the future receive, communications alleging that the technology used by the Company in the manufacture of some or all of its products may infringe on product or process technology rights held by others. The Company has entered into a number of patent and intellectual property license agreements with third parties, some of which require one-time or periodic royalty payments. It may be necessary or advantageous in the future for the Company to obtain additional patent licenses or to renew existing license agreements, some of which expired at the end of calendar year 1996. The Company is unable to predict whether these license agreements can be obtained or renewed on terms acceptable to the Company. Failure to obtain or renew such licenses could result in litigation. Further, adverse determinations that the Company's manufacturing processes or products have infringed on the product or process rights held by others could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or require material changes in production processes or products, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. <PAGE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) The following are filed as a part of this report: Exhibit Number Description of Exhibit ------ ------------------------------------------------------------------- 10.120 Form of Agreement and Amendment to Severance Agreement between the Company and its executive officers 11 Computation of per share earnings for the quarters ended February 27, 1997 and February 29, 1996 27 Financial Data Schedule (b) The registrant did not file any reports on Form 8-K during the fiscal quarter ended February 27, 1997. <PAGE> 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. Micron Technology, Inc. ----------------------- (Registrant) Dated: March 24, 1997 /s/ Wilbur G. Stover, Jr. ------------------------- Wilbur G. Stover, Jr., Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.120 <SEQUENCE>2 <DESCRIPTION>AGREEMENT AND AMENDMENT TO SEVERANCE AGREEMENT <TEXT> <PAGE> EXHIBIT 10.120 AGREEMENT AND AMENDMENT TO SEVERANCE AGREEMENT This Agreement and Amendment to Severance Agreement (the "Agreement") is by and between Micron Technology, Inc., a Delaware corporation (the "Company"), and ((NAME)), an individual and Officer of the Company (the "Officer"), and is effective as of November 25, 1996 (the "Effective Date"). WHEREAS, the Company and the Officer are parties to a Severance Agreement effective as of ((DATE)), (the "Severance Agreement"); and WHEREAS, the Company and the Officer desire to amend the Severance Agreement and to confirm their mutual understanding and agreement with respect thereto; NOW, THEREFORE, in consideration of mutual promises made herein, the parties agree as follows: 1. Consideration. In consideration of the covenants and agreements made ------------- herein by the Officer, including but not limited to the agreement to amend the Severance Agreement as set forth in Paragraph 2 below, the Company agrees (i) to accelerate certain benefits under the Company's Executive Bonus Plan (the "Bonus Plan") and to provide certain additional benefits as set forth in Paragraph 3 below, and (ii) to accelerate the vesting of the Officer's stock options as provided in Paragraph 4 below. 2. Amendment to Severance Agreement. Paragraph 2(a) of the Severance -------------------------------- Agreement (relating to the "Transition Period") shall be amended by substituting "six months" for "two years." Except as expressly modified by Paragraphs 2 and 5 of this Agreement, the Severance Agreement shall remain in full force and effect according to its terms. 3. Cash Payment/Discount Stock Options. The Company shall calculate a ----------------------------------- benefit amount (the "Benefit Amount") equal to the sum of (i) any unpaid amounts attributable to fiscal years of the Company that ended prior to the Effective Date that would be payable to the Officer under the Bonus Plan in 1999 and 2000 under the terms of that Plan assuming the Officer remained employed by the Company through such dates (the "Accelerated Bonus Amount"), and (ii) 1-1/2 times the Officer's current base salary (the "Salary Amount"). Within ten (10) business days following the Effective Date, the Company shall pay to the Officer, in cash, an amount equal to one-half the Benefit Amount, less applicable withholding. In addition, the Company shall grant, as of the Effective Date, one or more stock options under either of the Company's stock option plans for a number of shares determined by dividing one-half of the Benefit Amount by the "option price discount." For this purpose, the "option price discount" shall mean an amount equal to 75% of the fair market value of the Company's common stock as of November 25, 1996 (the determination date). For this purpose, "fair market value" shall be determined in accordance with the terms of the applicable stock option plan. The exercise price attributable to such option or options shall be 25% of the fair market value as so determined. Any shares <PAGE> issuable to the Officer in connection with the option or options granted pursuant to this Paragraph 3 may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by laws of descent or distribution until the second anniversary of the Effective Date. The benefits payable to the Officer under this Paragraph 3 shall be in complete satisfaction of the Officer's rights to any payments in 1999 or 2000 under the Bonus Plan attributable to fiscal years of the Company that ended prior to the Effective Date, and the Officer shall have no further rights to such amounts. 4. Option Acceleration. As of the Effective Date, any Company stock ------------------- options held by the Officer immediately prior to the Effective Date which would vest and become exercisable at any time during calendar years 1997 and 1998 (assuming the Officer's continued employment) shall vest and become exercisable on the Effective Date. In all other respects, vesting and exercisability with respect to such options shall remain the same and shall not accelerate except as otherwise required under the terms of the applicable option plan. Except as expressly modified by this Paragraph 4, such options shall remain in full force and effect according to their terms. 5. Agreement not to Compete or Solicit. As further consideration for the ----------------------------------- promise made herein by the Company, the Officer agrees to execute, effective as of the Effective Date, Attachment 1 hereto ("Agreement not to Compete or Solicit"), which agreement supersedes the noncompete provisions of Paragraph 2 of the Severance Agreement. 6. Miscellaneous. This Agreement and the documents referred to herein ------------- represent the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. IN WITNESS WHEREOF, the parties have executed their approval. MICRON TECHNOLOGY, INC. Date:______________________ __________________________________________ Date:______________________ __________________________________________ Officer <PAGE> ATTACHMENT 1 TO "AGREEMENT AND AMENDMENT TO SEVERANCE AGREEMENT" BY AND BETWEEN MICRON TECHNOLOGY, INC. AND /NAME/ MICRON TECHNOLOGY, INC. AGREEMENT NOT TO COMPETE OR SOLICIT This Non-Competition Agreement ("Agreement") is made and entered into effective as of November 25, 1996, by and between Micron Technology, Inc., a Delaware corporation ("Micron"), and NAME~ ("Executive"). RECITALS -------- A. Executive is currently employed by Micron in the capacity of /TITLE/. B. Micron is currently engaged in a highly competitive world-wide business of designing, developing, manufacturing, and marketing semiconductor memory products (including, but not limited to, DRAM, SRAM, Flash and SGRAM), other silicon-based integrated circuit products (including but not limited to remote intelligent communications and field emission displays), personal computers, custom complex printed circuit boards, memory modules and system level assemblies. C. Executive's position with Micron is a position of trust and confidence which allows Executive access to confidential, proprietary and other information provided to Executive solely for use in a manner consistent with the best interests of Micron and consistent with Executive's duty of loyalty. For example, and not by way of limitation, Executive has access to confidential and proprietary information concerning Micron's (and its subsidiaries) manufacturing operations, assets (including strength of its patent portfolio), contracts, customers, personnel, strategic plans, prospects, research and development projects, technologies (both process and product), engineering and design capabilities, and financial strength. D. Micron and Executive have heretofore (or contemporaneously herewith) entered into a severance agreement effective as of DATE~, as amended (the "Severance Agreement") and "Agreement and Amendment to Severance Agreement" pursuant to which Micron has agreed to provide certain levels of remuneration to Executive in exchange for (a) the clarification of Executive's non-compete obligations under the Severance Agreement and (b) the modification of the Severance Agreement as set forth in the Executive's Agreement and Amendment to Severance Agreement. <PAGE> AGREEMENT In consideration of the foregoing, the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. COVENANT NOT TO COMPETE. During the Period of Restriction, Executive shall ----------------------- not, alone or in association with others, as owner, shareholder, employee, officer, director, partner, lender, investor, consultant, principal, agent, independent contractor, co-venturer, or in any other capacity, directly or indirectly engage in, have a financial interest in, or be in any way connected or affiliated with or render advice or service to, any person, firm, business or enterprise In Competition With Micron. a. Definitions. ----------- (1) Period of Restriction. The phrase "Period of Restriction" as --------------------- used throughout this Agreement is defined to mean the period commencing on the date of this Agreement and continuing during the term of Executive's employment with Micron and for a period of two (2) years after the Termination Date. (2) Termination Date. The phrase "Termination Date" as used in the ---------------- prior paragraph and throughout this Agreement shall mean the date on which either Micron or Executive shall receive written notice from the other that Executive's active employment with Micron is terminated for any reason, voluntary or involuntary, with or without cause. In the event Executive's employment with Micron is terminated and Executive is later rehired by Micron in the same or any other position, the phrase "Termination Date" shall refer to the most recent effective date of Executive's termination from employment with Micron. (3) In Competition With Micron. The phrase "In Competition With -------------------------- Micron" as used throughout this Agreement shall be deemed to include competition with Micron or its respective successors or assigns, or the businesses of any of them. A person, firm, business or enterprise is In Competition With Micron if it is engaged in the design, development, manufacture, or marketing of semiconductor memory products (including, but not limited to, DRAM, SRAM, Flash and SGRAM), other silicon-based integrated circuit products (including, but not limited to, remote intelligent communications and field emission displays), personal computers, custom complex printed circuit boards, memory modules and system level assemblies or any other business in which Micron, or any subsidiary or affiliate of Micron, is currently engaged or becomes engaged prior to the Termination Date, and any business which is substantially similar to or competitive with any such business. For purposes of this Agreement, and without limiting the generality of the foregoing, the parties agree and acknowledge that Texas Instruments, Phillips Semiconductor, Samsung, Mitsubishi, Motorola, LG Semicon, NEC, Hitachi, Fujitsu, Hyundai, Mosell Vitelic, Winbond, Vanguard, Advanced Micron Devices, Inc., IBM, Intel, SGS Thompson, Dallas Semiconductor, Pixtech, Kingston Technology Corp., PNY Electronics, Simple Technology, Compaq, Dell, Gateway, AST, Toshiba, and Apple are In Competition With Micron. Nothing in this Agreement shall be interpreted or construed to prevent Executive from purchasing or holding for investment less than 3% of outstanding capital stock of any corporation with a class of equity securities which are regularly traded either on a national securities exchange or in the over-the-counter market. <PAGE> b. Acknowledgment of Reasonableness of Restrictions. Executive ------------------------------------------------ specifically acknowledges and agrees that the nature of the limitations upon Executive's activities as specified herein, together with the duration and scope of such restrictions, are reasonable limitations on Executive's post-employment activities and that the restrictions are required to preserve, promote and protect the business, accounts, proprietary information and good-will of Micron and impose no greater restraint than is reasonably necessary to secure such protection. c. Interpretation of Covenant. In the event that any provision of this -------------------------- Covenant not to Compete shall be held invalid or unenforceable by a court of competent jurisdiction by reason of the duration or scope thereof, such invalidity or unenforceability shall attach only to the specific provision determined to be unenforceable and the covenant shall remain in full force and effect for the greatest time period and for the broadest scope permitted by applicable law. Executive and Micron intend that this Covenant not to Compete shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and one for each and every political subdivision of each and every other country where the Covenant not to Compete is effective. 2. NON-INTERFERENCE OR SOLICITATION OR DIVERSION OF BUSINESS. During the --------------------------------------------------------- Period of Restriction, Executive shall not, directly or indirectly, personally or through others, contact, solicit, advise, encourage, induce, or consult any client, account, or customer of Micron for the purpose or with the effect of causing such client, account or customer to purchase, license or otherwise obtain products or services from a person, firm, business or entity In Competition With Micron. Similarly, during the Period of Restriction, Executive shall not, directly or indirectly interfere with the business relationship between Micron and its customers, dealers, distributors, suppliers, vendors, independent contractors, service providers, or other parties with which Micron has business relationships, or encourage or induce (or attempt to induce) any such party to terminate its relationship with Micron, or to modify the terms of such relationship in a manner adverse to the best interests of Micron. 3. NON-SOLICITATION OF EMPLOYEES. During the Period of Restriction, Executive ----------------------------- shall not directly or indirectly, personally or through others, (a) employ or solicit for employment, or advise or recommend to any other person, firm, business or entity that they employ or solicit for employment, any employee of Micron; provided however, that this paragraph shall not preclude Executive from giving an employment reference at the request of an employee of Micron or at the request of a prospective employer of such employee or (b) encourage, induce, attempt to induce, solicit or attempt to solicit any employee of Micron or any of its subsidiaries to leave his or her employment with Micron or any of its subsidiaries. 4. CONFLICTING OBLIGATIONS. Executive agrees that, during the term of ----------------------- Executive's employment with Micron, Executive will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which Micron is now engaged or becomes involved during the term of Executive's employment, nor will Executive engage in any other activities that conflict with Executive's obligations and duties to Micron. 5. ACCOUNTING FOR PROFITS. Executive covenants and agrees that in the event ---------------------- Executive violates any of Executive's restrictions or obligations under this Agreement Micron shall be entitled to an accounting and payment of all profits, compensation, commissions, remunerations or other benefits <PAGE> which Executive directly or indirectly has received and/or may receive as a result of, growing out of or in connection with the violation of any such restrictions or obligations. Executive and Micron acknowledge and agree that such remedy shall be in addition to and not in limitation of any injunctive relief or other rights or remedies to which Micron is or may be entitled at law, in equity or under this Agreement. 6. INDEMNIFICATION. Without in any way limiting any other rights or remedies --------------- otherwise available to Micron at law or in equity, Executive shall hold harmless and indemnify Micron from and against, and shall compensate and reimburse Micron for, any loss, damage, injury, decline in value, lost opportunity, liability, exposure, claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including reasonable attorneys' fees) charge, cost (including costs of investigation) or expense of any nature (collectively, the "Damages") which are directly or indirectly suffered or incurred at any time by Micron, or to which Micron otherwise becomes subject (regardless of whether or not such Damages relate to a third party claim), and that arise from or are directly or indirectly connected with any breach of any covenant or obligation of Executive contained herein. 7. ENTITLEMENT TO EQUITABLE RELIEF. Micron and Executive acknowledge and ------------------------------- agree that the breach by Executive of any restriction or obligation under this Agreement will cause Micron substantial, immediate and irreparable harm, that the extent of damages will be difficult to measure, and, consequently, there is no adequate remedy at law in the event of such breach. Accordingly, Micron and Executive hereby agree that Micron shall be entitled to injunctive relief, without prejudice to any other right Micron may have in law or in equity under this Agreement, by bringing an appropriate action for such remedy in any court of competent jurisdiction which Micron, in its sole discretion, deems appropriate. 8. GENERAL PROVISIONS. ------------------ (a) Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Idaho applicable to contracts entered into and to be performed entirely within such State. (b) Jurisdiction and Venue. Micron and Executive acknowledge the personal ---------------------- jurisdiction of, and consent to venue in, the courts of the State of Idaho for any action arising out of or in any way related to the interpretation and enforcement of this Agreement. (c) Entire Agreement. Except as otherwise specifically provided herein, ---------------- this Agreement sets forth the entire agreement and understanding between Micron and Executive relating to the subject matter hereof and supersedes all prior understandings and agreements with respect thereto, including, but not limited to, the noncompete provisions of Paragraph 2 of the Severance Agreement. No modification of or amendment to this Agreement, or any waiver of any rights under this Agreement, will be effective unless in a writing signed by the party to be charged. Any subsequent change or changes in Executive's duties, salary or compensation will not affect the validity or scope of this Agreement. <PAGE> (d) Severability. If one or more of the provisions of this Agreement are ------------ deemed void by law, then the remaining provisions shall continue in full force and effect. This provision shall be construed and interpreted in a manner consistent with paragraph 1.c. of this Agreement. (e) Termination of Employment. Nothing in this Agreement shall be ------------------------- construed to give to Executive any right to employment for any specific period of time, or to affect in any manner whatsoever the right or power of Micron to terminate Executive's employment, for any reason or no reason, with or without cause. (f) Legal Fees. In any action to interpret or enforce the terms of this ---------- Agreement, whether in law or in equity, the prevailing party shall be entitled to recover its reasonable attorneys' fees, expert witness fees, and out-of- pocket costs incurred in connection with such action in addition to any other relief it may be awarded. (g) Successors and Assigns. This Agreement will be binding upon ---------------------- Executive's heirs, executors, administrators and other legal representatives and will be for the benefit of Micron, its successors and assigns. (h) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original, but all of which shall be deemed one and the same instrument. IN WITNESS WHEREOF, Micron and the Executive have executed this Agreement effective as of the date first set forth above. MICRON: EXECUTIVE: Signature: _________________________ Signature: ______________________________ ((signature)) ((NAME)) ((sig_title_1)) ((sig_title_2)) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF PER SHARE EARNINGS <TEXT> <PAGE> EXHIBIT 11 MICRON TECHNOLOGY, INC. Computation of Per Share Earnings (Amounts in millions except for per share data) February 27, February 29, Quarter Ended 1997 1996 - ------------------------------------------------------------------------ PRIMARY Weighted average shares outstanding 209.7 207.3 Net effect of dilutive stock options 5.8 7.9 ------ ------ Total shares 215.5 215.2 ====== ====== Net income $142.7 $188.2 ====== ====== Primary earnings per share $ 0.66 $ 0.87 ====== ====== FULLY DILUTED Weighted average shares outstanding 209.7 207.3 Net effect of dilutive stock options 6.5 7.9 ------ ------ Total shares 216.2 215.2 ====== ====== Net income $142.7 $188.2 ====== ====== Fully diluted earnings per share $ 0.66 $ 0.87 ====== ====== <PAGE> EXHIBIT 11 MICRON TECHNOLOGY, INC. Computation of Per Share Earnings (Amounts in millions except for per share amounts) February 27, February 29, For the six months ended 1997 1996 - ----------------------------------------------------------------------- PRIMARY Weighted average shares outstanding 209.4 207.0 Net effect of dilutive stock options 5.6 9.4 ------ ------ Total shares 215.0 216.4 ====== ====== Net income $163.3 $516.7 ====== ====== Primary earnings per share $ 0.76 $ 2.39 ====== ====== FULLY DILUTED Weighted average shares outstanding 209.4 207.0 Net effect of dilutive stock options 6.2 9.4 ------ ------ Total shares 215.6 216.4 ====== ====== Net income $163.3 $516.7 ====== ====== Fully diluted earnings per share $ 0.76 $ 2.39 ====== ====== </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> AUG-28-1997 <PERIOD-END> FEB-27-1997 <CASH> 583 <SECURITIES> 6 <RECEIVABLES> 319 <ALLOWANCES> (15) <INVENTORY> 332 <CURRENT-ASSETS> 1289 <PP&E> 3,720 <DEPRECIATION> (1,005) <TOTAL-ASSETS> 4,064 <CURRENT-LIABILITIES> 693 <BONDS> 291 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 21 <OTHER-SE> 2,660 <TOTAL-LIABILITY-AND-EQUITY> 4,064 <SALES> 1,604 <TOTAL-REVENUES> 1,604 <CGS> 1,230 <TOTAL-COSTS> 1,495 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 4 <INCOME-PRETAX> 320 <INCOME-TAX> 147 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 163 <EPS-PRIMARY> .76 <EPS-DILUTED> .76 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

NAV

https://www.sec.gov/Archives/edgar/data/808450/0000808450-97-000003.txt

-----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, PjztHeOqNEkbnhsK+PSZfcsc5n4O2gzUOxEBKb7CBqouV/HTEX0k8ewiY/7lDhen j+ktjmrqCncWgzBPwOzxJw== <SEC-DOCUMENT>0000808450-97-000003.txt : 19970317 <SEC-HEADER>0000808450-97-000003.hdr.sgml : 19970317 ACCESSION NUMBER: 0000808450-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970314 SROS: CSE SROS: NASD SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW CENTRAL INDEX KEY: 0000808450 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 363359573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09618 FILM NUMBER: 97556419 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362032 MAIL ADDRESS: STREET 2: 455 N CITYFRONT PLAZA DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NAVISTAR HOLDING INC DATE OF NAME CHANGE: 19870528 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE 1> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 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 1-9618 N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of March 10, 1997, the number of shares outstanding of the registrant's common stock was 59,050,497 and the Class B Common was 24,292,606. <PAGE> <PAGE 2> NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ----------------------------- INDEX ----- Page Reference --------- Part I. Financial Information: Item 1. Financial Statements: Statement of Income -- Three Months Ended January 31, 1997 and 1996 ............ 3 Statement of Financial Condition -- January 31, 1997, October 31, 1996 and January 31, 1996 . 4 Statement of Cash Flow -- Three Months Ended January 31, 1997 and 1996 ............ 5 Notes to Financial Statements ............................. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............... 10 Part II. Other Information: Item 1. Legal Proceedings ................................ 13 Item 6. Exhibits and Reports on Form 8-K ................. 13 Signature ................................................. 14 Exhibit 11 .................................................. E-1 <PAGE> <PAGE 3> PART I - FINANCIAL INFORMATION ------------------------------ <TABLE> <CAPTION> ITEM 1. Financial Statements STATEMENT OF INCOME (Unaudited) -------------------------------------------------------------------------- Millions of dollars, except per share data -------------------------------------------------------------------------- Three Months Ended January 31 ----------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------- 1997 1996 ------ ------ <S> <C> <C> Sales and revenues Sales of manufactured products ............. $1,240 $1,362 Finance and insurance revenue .............. 45 55 Other income ............................... 11 15 ------ ------ Total sales and revenues ................. 1,296 1,432 ------ ------ Costs and expenses Cost of products and services sold ......... 1,076 1,199 Postretirement benefits .................... 51 57 Engineering and research expense ........... 30 29 Marketing and administrative expense ....... 83 73 Interest expense ........................... 17 18 Financing charges on sold receivables ...... 7 9 Insurance claims and underwriting expense .. 8 12 ------ ------ Total costs and expenses ................. 1,272 1,397 ------ ------ Income before income taxes ............. 24 35 Income tax expense ..................... 9 13 ------ ------ Net income ................................. 15 22 Less dividends on Series G preferred stock . 7 7 ------ ------ Net income applicable to common stock ...... $ 8 $ 15 ====== ====== Net income per common share ................ $ .10 $ .20 ====== ====== Average number of common and dilutive common equivalent shares outstanding (millions) ............................... 73.7 73.8 <FN> See Notes to Financial Statements. </TABLE> <PAGE> <PAGE 4> <TABLE> <CAPTION> STATEMENT OF FINANCIAL CONDITION (Unaudited) - --------------------------------------------------------------------------- Millions of dollars - --------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------------------------- January 31 October 31 January 31 1997 1996 1996 ------------ ---------- ---------- <S> <C> <C> <C> ASSETS - ------------------------------- Cash and cash equivalents ..... $ 197 $ 487 $ 186 Marketable securities ......... 448 394 620 ------ ------ ------ 645 881 806 Receivables, net .............. 1,311 1,655 1,511 Inventories ................... 452 463 498 Property, net of accumulated depreciation and amortization of $864, $842 and $783 ...... 773 770 684 Investments and other assets .. 238 213 205 Intangible pension assets ..... 314 314 283 Deferred tax asset, net ...... 1,024 1,030 1,080 ------ ------ ------ Total assets .................. $4,757 $5,326 $5,067 ====== ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Liabilities Accounts payable, principally trade ............ $ 714 $ 820 $ 822 Debt: Manufacturing operations ..... 113 115 127 Financial services operations. 947 1,305 1,096 Postretirement benefits liability .................... 1,278 1,351 1,272 Other liabilities .............. 783 819 864 ------ ------ ------ Total liabilities .......... 3,835 4,410 4,181 ------ ------ ------ Commitments and contingencies Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) ................ 240 240 240 Series D convertible junior preference stock (liquidation preference $4 million) ....... 4 4 4 Common stock (51.0 million shares issued) ............... 1,642 1,642 1,641 Class B Common stock (24.3 million shares issued) . 491 491 491 Retained earnings (deficit) - balance accumulated after the deficit reclassification as of October 31, 1987 ....... (1,425) (1,431) (1,460) Common stock held in treasury, at cost ...................... (30) (30) (30) ------ ------ ------ Total shareowners' equity .. 922 916 886 ------ ------ ------ Total liabilities and shareowners' equity ...... $4,757 $5,326 $5,067 ====== ====== ====== <FN> See Notes to Financial Statements. </TABLE> <PAGE> <PAGE 5> <TABLE> <CAPTION> STATEMENT OF CASH FLOW (Unaudited) ------------------------------------------------------------------------- For the Three Months Ended January 31 (Millions of dollars) ------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------- 1997 1996 ------ ------ <S> <C> <C> Cash flow from operations Net income ..................................... $ 15 $ 22 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization ................ 33 28 Deferred income taxes ........................ 8 10 Other, net ................................... (26) (7) Change in operating assets and liabilities: Receivables .................................. 111 87 Inventories .................................. 11 (84) Prepaid and other current assets ............. (19) (13) Accounts payable ............................. (178) (107) Other liabilities ............................ (95) (168) ------ ------ Cash used in operations ........................ (140) (232) ------ ------ Cash flow from investment programs Purchase of retail notes and lease receivables .................................. (208) (265) Collections/sales of retail notes and lease receivables ....................... 497 521 Purchase of marketable securities .............. (165) (243) Sales or maturities of marketable securities ... 113 184 Capital expenditures ........................... (25) (23) Other investment programs, net ................. (12) (4) ------ ------ Cash provided by investment programs ........... 200 170 ------ ------ Cash flow from financing activities Issuance of debt ............................... 79 - Principal payments on debt ..................... (13) (1) Net decrease in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs .......... (409) (229) Dividends paid ................................. (7) (7) ------ ------ Cash used in financing activities .............. (350) (237) ------ ------ Cash and cash equivalents Decrease during the period ................... (290) (299) At beginning of the year ..................... 487 485 ------ ------ Cash and cash equivalents at end of the period . $ 197 $ 186 ====== ====== <FN> See Notes to Financial Statements. </TABLE> <PAGE> <PAGE 6> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note A. Summary of Accounting Policies Navistar International Corporation is a holding company whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" refers to Navistar International Corporation and its consolidated subsidiaries. The consolidated financial statements include the results of Transportation's manufacturing operations and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing and financial services operations have been eliminated to arrive at the consolidated totals. The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the 1996 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein. In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flow for the periods presented. Interim results are not necessarily indicative of results for the full year. Certain 1996 amounts have been reclassified to conform with the presentation used in the 1997 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first three months of 1997 and 1996 were $22 million and $24 million, respectively. There were no consolidated tax payments made during the first three months of 1997 and 1996. Note C. Income Taxes The benefit of Net Operating Loss (NOL) carryforwards is recognized as a deferred tax asset in the Statement of Financial Condition, while the Statement of Income includes income taxes calculated at the statutory rate. The amount reported does not represent cash payment of income taxes except for certain state income, foreign withholding and federal alternative minimum taxes which are not material. In the Statement of Financial Condition, the deferred tax asset is reduced by the amount of deferred tax expense or increased by a deferred tax benefit recorded during the year. Until the company has utilized its significant NOL carryforwards, the cash payment of federal income taxes will be minimal. Note D. Receivables On January 1, 1997, the company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" for all applicable transactions. As a result, certain 1997 balance sheet items have been reclassified. Restatement of prior periods is not permitted. The new standard did not have a material effect on the company's net income or financial position. Note E. Inventories Inventories are as follows: January 31 October 31 January 31 Millions of dollars 1997 1996 1996 - -------------------------------------------------------------------------- Finished products ................ $ 246 $ 242 $ 244 Work in process .................. 83 97 106 Raw materials and supplies ....... 123 124 148 -------- -------- -------- Total inventories ................ $ 452 $ 463 $ 498 ======== ======== ======== <PAGE> <PAGE 7> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note F. Financial Instruments During the first quarter of 1997, the company did not enter into any derivative contracts, nor were there any derivative financial instruments outstanding at January 31, 1997. The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. These instruments totaled $41 million at January 31, 1997. Note G. Environmental Matters In the fourth quarter of 1994, Transportation recorded a charge for potential clean-up costs related to two formerly owned businesses, Wisconsin Steel and Solar Turbines, Inc. (Solar), as disclosed in Note 4 to the company's Annual Report on Form 10-K. During the third quarter of 1995, Transportation and Solar entered into an agreement providing for the joint funding of future site studies and necessary corrective action at the facility. The agreement also provides for arbitration to resolve a dispute over past remediation costs incurred by Solar. In March 1997, the U.S. Department of Justice and Transportation approved the final consent decree in settlement of a dispute related to the Wisconsin Steel property. The agreement provides for an $11 million payment to the Economic Development Administration in settlement of various environmental related commercial issues. There has been no change in the company's estimate of the anticipated clean-up costs of the Wisconsin Steel and Solar sites reported at October 31, 1996. Note H. Stock-Based Compensation Effective November 1, 1996, the company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, the company will continue to account for stock-based compensation arrangements under Accounting Principles Board Opinion No. 25. Had compensation costs for the company's stock-based compensation plans been determined in accordance with the fair value provisions of SFAS 123, the application of the standard would not have had a material effect on the company's net income and net income per share for the quarter ended January 31, 1997 as reported. <PAGE> <PAGE 8> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note I. Supplemental Financial Information Navistar International Corporation (with financial services operations on an equity basis)in millions of dollars: Three Months Ended January 31 ---------------------- Condensed Statement of Income 1997 1996 - ------------------------------------ -------- -------- Sales of manufactured products ..... $ 1,240 $ 1,362 Other income ....................... 10 15 -------- -------- Total sales and revenues ........... 1,250 1,377 -------- -------- Cost of products sold .............. 1,071 1,196 Postretirement benefits ............ 51 57 Engineering and research expense ... 30 29 Marketing and administrative expense 76 65 Other expenses ..................... 21 22 -------- -------- Total costs and expenses ........... 1,249 1,369 -------- -------- Income before income taxes Manufacturing operations ......... 1 8 Financial services operations .... 23 27 -------- -------- Income before income taxes ..... 24 35 Income tax expense ................. 9 13 -------- -------- Net income ......................... $ 15 $ 22 ======== ======== Condensed Statement January 31 October 31 January 31 of Financial Condition 1997 1996 1996 - ------------------------------- ---------- ---------- ---------- Cash, cash equivalents and marketable securities ... $ 476 $ 707 $ 639 Receivables, net............... 204 181 163 Inventories ................... 452 463 498 Property and equipment, net ... 656 666 634 Equity in financial services subsidiaries ....... 319 306 290 Other assets .................. 485 462 450 Deferred tax asset, net ....... 1,024 1,030 1,080 -------- -------- -------- Total assets ............. $ 3,616 $ 3,815 $ 3,754 -------- -------- -------- Accounts payable, principally trade ........... $ 664 $ 771 $ 759 Debt .......................... 103 115 127 Postretirement benefits liabilities ................. 1,270 1,344 1,264 Other liabilities ............. 657 669 718 Shareowners' equity ........... 922 916 886 -------- -------- -------- Total liabilities and shareowners' equity. $ 3,616 $ 3,815 $ 3,754 ======== ======== ======== <PAGE> <PAGE 9> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note I. Supplemental Financial Information (continued) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars: Three Months Ended January 31 ---------------------- Condensed Statement of Cash Flow 1997 1996 - ------------------------------------- -------- -------- Cash flow from operations Net income .......................... $ 15 $ 22 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization .. 29 24 Equity in earnings of nonconsolidated companies, net of dividends received .... (14) (7) Deferred income taxes .......... 8 10 Other, net ..................... (7) 5 Change in operating assets and liabilities ................... (158) (270) -------- -------- Cash used in operations ............. (127) (216) -------- -------- Cash flow from investment programs Purchase of marketable securities ... (150) (218) Sales or maturities of marketable securities ............. 91 160 Capital expenditures ................ (25) (23) Advance to Navistar Financial Corporation ............. (74) - Other investment programs, net ...... 4 6 -------- -------- Cash used in investment programs .... (154) (75) -------- -------- Cash flow from financing activities . (10) (8) -------- -------- Cash and cash equivalents Decrease during the period .......... (291) (299) At beginning of the year ............ 452 461 -------- -------- Cash and cash equivalents at end of the period .............. $ 161 $ 162 ======== ======== <PAGE> <PAGE 10> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Certain statements under this caption constitute "forward-looking statements" under the Reform Act, which involve risks and uncertainties. Navistar International Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading "Business Environment." The company reported net income of $15 million, or $0.10 per common share, for the first quarter ended January 31, 1997 reflecting lower sales and revenues. Net income was $22 million, or $0.20 per common share, for the same period last year. The company's manufacturing operations reported income before income taxes of $1 million compared with pretax income of $8 million in the first quarter of 1996 reflecting a decline in demand for trucks. The financial services operations' pretax income for the first three months of 1997 was $23 million, a decline from the $27 million reported in 1996. Navistar Financial Corporation's (NFC) income before income taxes was $22 million for the first quarter of 1997 compared with $27 million in 1996. The change is a result of lower income on sales of retail receivables and a lower volume of wholesale financing. During the first quarter of 1997, sales of receivables totaled $487 million with a gain of $7 million compared with $525 million sold a year ago with a gain of $12 million. Sales and Revenues. First quarter 1997 industry retail sales of Class 5 through 8 trucks totaled 71,600 units, a decrease of 11% from 1996. Class 8 heavy truck sales of 42,600 units during the first quarter of 1997 were 12% lower than the 1996 level of 48,600 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, declined 10% to 29,000 units. Industry sales of school buses, which accounted for 19% of the medium truck market decreased 18%. Sales and revenues for the first quarter of 1997 totaled $1,296 million, 9% lower than the $1,432 million reported for the comparable quarter in 1996. Sales of trucks, mid-range diesel engines and service parts for the first quarter of 1997 totaled $1,240 million compared with $1,362 million reported for the same period in 1996. The company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market with a 26.6% market share for the first quarter of 1997, an increase from the 25.1% market share reported in 1996. (Sources: American Automobile Manufacturer's Association, the United States Motor Vehicle Manufacturer's Association and R. L. Polk & Company.) Shipments of mid-range diesel engines by the company to other original equipment manufacturers during the first quarter of 1997 totaled 41,000 units, an 8% increase from the same period of 1996. Higher shipments to a domestic automotive manufacturer to meet consumer demand for the light trucks and vans which use this engine was the primary reason for the increase. Service parts sales of $186 million in the first quarter of 1997 increased 5% from the prior year's level. Finance and insurance revenue was $45 million compared with $55 million in the first quarter of 1996 primarily as a result of a decline in wholesale note revenue. <PAGE> <PAGE 11> Costs and expenses. Manufacturing gross margin was 13.6% of sales for the first quarter of 1997 compared with 12.2% for the same period in 1996. The increase in gross margin reflects improved operating performance and pricing. Marketing and administrative expense increased to $83 million in 1997 from $73 million in the first quarter of 1996 reflecting investment in the implementation of the company's strategy to reduce costs and complexity in its manufacturing processes. Liquidity and Capital Resources Cash flow is generated from the manufacture and sale of trucks, mid- range diesel engines and service parts as well as product financing and insurance coverage provided to Transportation's dealers and retail customers by the financial services operations. Historically, funds to finance Transportation's products are obtained from a combination of commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues, sales of finance receivables and equity capital. NFC's current debt ratings have made bank borrowings and sales of finance receivables the most economic sources of cash. Insurance operations are funded through internal operations. Total cash, cash equivalents and marketable securities of the company amounted to $645 million at January 31, 1997, $881 million at October 31, 1996 and $806 million at January 31, 1996. Cash used in operations during the first quarter of 1997 totaled $140 million, primarily from a net change in operating assets and liabilities of $170 million. The net change in operating assets and liabilities includes a $111 million decrease in receivables offset by a reduction in accounts payable of $178 million resulting from lower production. Other liabilities declined by $95 million reflecting a $105 million pension payment. Investment programs provided $200 million in cash reflecting a net decrease in retail notes and lease receivables as collections and sales of receivables exceeded purchases by $289 million. Other investment activities used $52 million for a net increase in marketable securities and $25 million to fund capital expenditures for truck product improvements, to increase mid-range diesel engine capacity and for programs to improve cost performance. Financing activities used cash to pay $7 million in dividends on the Series G Preferred shares and to reduce notes and debt outstanding under the bank revolving credit facility and asset-backed and other commercial paper program by $409 million offset by a $79 million increase in debt. Receivable sales were a significant source of funding in 1997 and 1996. During the first quarter of 1997 and of 1996, NFC sold $487 million and $525 million, respectively, of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC). NFRRC has filed registration statements with the Securities and Exchange Commission which provide for the issuance of up to $5,000 million of asset-backed securities. At January 31, 1997, the remaining shelf registration available to NFRRC was $1,973 million. NFC also utilizes a $500 million revolving wholesale note sales trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The sales trusts are comprised of three $100 million tranches of investor certificates maturing serially from 1997 to 1999 and a $200 million tranche maturing in 2004. As of January 31, 1997, $72 million of the tranche maturing in 1997 has been paid and the remaining $28 million will amortize over the next few months. The ongoing commitment will then be $400 million. At January 31, 1997, available funding under NFC's amended and restated credit facility and the asset-backed commercial paper facility was $704 million, of which $142 million was used to back short-term debt at January 31, 1997. The remaining $562 million, when combined with unrestricted cash and cash equivalents made $574 million available to fund the general business purposes of NFC at January 31, 1997. <PAGE> <PAGE 12> The company had outstanding capital commitments of $24 million at January 31, 1997, which consist of truck and engine development and ongoing facility maintenance programs. In November 1996, the company announced plans to spend $167 million, over the next two years, to construct a new truck assembly facility in Mexico. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements, capital expenditures and anticipated payments of preferred dividends. Management also believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. Business Environment Sales of Class 5 through 8 trucks are cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Although the general economy remains stable, demand for new trucks continues to decline. As a result, the Class 5 through 8 truck market experienced a significant decline in the rate of new truck orders in the first quarter of 1997 compared with the same period of 1996. The decline in the number of new orders has reduced the company's order backlog to 29,100 units at January 31, 1997 from 34,600 units at January 31, 1996. Accordingly, retail deliveries during the remainder of 1997 will be highly dependent on the rate at which new truck orders are received. The company will evaluate order receipts and backlog throughout the year and will balance production with demand as appropriate. The company currently projects 1997 United States and Canadian Class 8 heavy truck demand to be 170,000 units, a 13% decrease from 1996. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 112,000 units, unchanged from 1996. Demand for school buses is expected to decline slightly in 1997 to 31,500 units. Mid-range diesel engine shipments by the company to original equipment manufacturers in 1997 are expected to be 176,500 units, 8% higher than in 1996. The company's service parts sales are projected to grow 6% to $809 million. <PAGE> <PAGE 13> Navistar International Corporation and Consolidated Subsidiaries PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings Incorporated herein by reference from Item 3 - "Legal Proceedings" in the company's definitive Form 10-K dated January 22, 1997, Commission File No. 1-9618. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10-Q Page --------- 11. Computation of Net Income Per Share E-1 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended January 31, 1997. <PAGE> <PAGE 14> SIGNATURE --------- 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. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ----------------------------------- J. Steven Keate Vice President and Controller (Principal Accounting Officer) March 14, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> <PAGE 1> EXHIBIT 11 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- COMPUTATION OF NET INCOME PER COMMON SHARE A. Primary: See the Statement of Income of this Form 10-Q. B. Full Dilution: Net income per common share assuming full dilution is computed by assuming that all options and warrants which are exercisable below market prices are exercised and the proceeds applied to reduce common stock outstanding. The computations assume that convertible preferred and preference stock are converted to common stock. Income is divided by the average number of common shares outstanding and unconditionally issuable at the end of each month during the period, adjusted for the net effects of the exercise of options and warrants and the conversion of convertible preferred and preference stocks. THREE MONTHS ENDED JANUARY 31 ------------------- Millions of dollars 1997 1996 - ---------------------------------------------------------------------- Net income ...................................... $ 15 $ 22 ======== ======== Average common and common equivalent shares (millions): Average common shares outstanding as adjusted per primary calculations (millions) ........... 74.3 73.8 Assuming conversion of Series G Preferred Stock . .6 .6 -------- -------- Average common and dilutive common equivalent shares as adjusted ................. 74.9 74.4 ======== ======== Income per common share assuming full dilution (dollars): Net income ...................................... $ .20 # $ .29 # ======== ======== - --------------- # This calculation is submitted in accordance with Regulation S-K item 601(b)(11) of the Securities Exchange Act although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1997 <PERIOD-END> JAN-31-1997 <CASH> 197 <SECURITIES> 448 <RECEIVABLES> 1340 <ALLOWANCES> (29) <INVENTORY> 452 <CURRENT-ASSETS> 0<F1> <PP&E> 1637 <DEPRECIATION> (864) <TOTAL-ASSETS> 4757 <CURRENT-LIABILITIES> 0<F1> <BONDS> 1060 <PREFERRED-MANDATORY> 0 <PREFERRED> 244 <COMMON> 2133 <OTHER-SE> (1455) <TOTAL-LIABILITY-AND-EQUITY> 4757 <SALES> 1240 <TOTAL-REVENUES> 1296 <CGS> 1076 <TOTAL-COSTS> 1272 <OTHER-EXPENSES> 51 <LOSS-PROVISION> 3 <INTEREST-EXPENSE> 17 <INCOME-PRETAX> 24 <INCOME-TAX> (9) <INCOME-CONTINUING> 15 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 15 <EPS-PRIMARY> 0.10 <EPS-DILUTED> 0.10 <FN> <F1>The company has adopted an unclassified presentation in the Statement of Financial Condition. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

NKE

https://www.sec.gov/Archives/edgar/data/320187/0000320187-97-000001.txt

-----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, M8Whb24pqeu+KNurYK3ndI/0FspZZyLjOOguUopD4ioQosQpbeWuJQoIXV8FkeIW 5LjcFF0+f6RuQXsoHQUIfA== <SEC-DOCUMENT>0000320187-97-000001.txt : 19970115 <SEC-HEADER>0000320187-97-000001.hdr.sgml : 19970115 ACCESSION NUMBER: 0000320187-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIKE INC CENTRAL INDEX KEY: 0000320187 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 930584541 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10635 FILM NUMBER: 97505819 BUSINESS ADDRESS: STREET 1: ONE BOWERMAN DR CITY: BEAVERTON STATE: OR ZIP: 97005-6453 BUSINESS PHONE: 5036416453 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter Ended November 30, 1996 Commission file number - 1-10635 NIKE, Inc. (Exact name of registrant as specified in its charter) OREGON 93-0584541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Bowerman Drive, Beaverton, Oregon 97005-6453 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 671-6453 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 . ___ ___ Common Stock shares outstanding as of November 30, 1996 were: _________________ Class A 101,731,470 Class B 186,633,670 _________________ 288,365,140 ========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Nov. 30, May 31, 1996 1996 ________ _______ (in thousands) ASSETS Current assets: Cash and equivalents $ 267,534 $ 262,117 Accounts receivable 1,572,426 1,346,125 Inventories (Note 3) 981,080 931,151 Deferred income taxes 104,820 93,120 Prepaid expenses 145,096 94,427 __________ _________ Total current assets 3,070,956 2,726,940 __________ _________ Property, plant and equipment 1,200,747 1,047,705 Less accumulated depreciation 442,990 404,246 __________ __________ 757,757 643,459 Identifiable intangible assets and goodwill 471,394 474,812 Other assets 121,048 106,417 __________ __________ $4,421,155 $3,951,628 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,214 $ 7,301 Notes payable 432,517 445,064 Accounts payable 465,686 455,034 Accrued liabilities 521,351 480,407 Income taxes payable 42,774 79,253 __________ __________ Total current liabilities 1,465,542 1,467,059 Long-term debt 98,970 9,584 Non-current deferred income taxes 1,802 1,883 Other long-term liabilities 34,832 41,402 Commitments and contingencies (Note 4) - - Redeemable Preferred Stock 300 300 Shareholders' equity: Common Stock at stated value (Note 2): Class A convertible-101,731 and 102,240 shares outstanding 152 153 Class B-186,634 and 185,018 shares outstanding 2,704 2,702 Capital in excess of stated value 179,973 154,833 Foreign currency translation adjustment (1,716) (16,501) Retained earnings 2,638,596 2,290,213 ___________ __________ 2,819,709 2,431,400 ___________ __________ $4,421,155 $3,951,628 ========== ========== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, __________________ __________________ 1996 1995* 1996 1995* ____ ____ ____ ____ (in thousands, except per share data) <S> <C> <C> <C> <C> Revenues $2,107,034 $1,356,758 $4,388,960 $3,056,778 _________ _________ _________ _________ Costs and expenses: Cost of sales 1,277,628 828,129 2,639,747 1,841,508 Selling and administrative 530,453 353,715 1,059,990 722,758 Interest 10,228 8,527 22,894 19,778 Other expense (income) (147) 7,375 8,494 17,624 ________ ________ _________ _________ 1,818,162 1,197,746 3,731,125 2,601,668 ________ ________ _________ _________ Income before income taxes 288,872 159,012 657,835 455,110 Income taxes 112,000 61,200 254,900 175,200 ________ ________ _________ _________ Net income $ 176,872 $ 97,812 $ 402,935 $ 279,910 ========= ========= ========== ========== Net income per common share(Note 2) $ 0.60 $ 0.34 $ 1.36 $ .96 ========= ========= ========== ========== Dividends declared per common share $ 0.10 $ 0.08 $ 0.18 $ 0.14 ========= ========= ========== ========== Average number of common and common equivalent shares (Note 2) 297,022 293,988 296,693 292,840 ========= ========= ========== ========== </TABLE> *For comparable purposes with 1996, results for the three and six months ended November 30, 1995 have been adjusted to reflect the elimination of the one month lag in reporting by certain of the Company's international operations. See further discussion under Note 5. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended November 30, _________________ 1996 1995 ____ ____ (in thousands) <S> <C> <C> Cash provided (used) by operations: Net income $402,935 $279,910 Income charges (credits) not affecting cash: Depreciation 58,199 41,629 Deferred income taxes and purchased tax benefits (5,910) (10,513) Other 23,642 10,185 Changes in other working capital components (353,850) (228,501) ________ _______ Cash provided by operations 125,016 92,710 ________ _______ Cash (used) provided by investing activities: Additions to property, plant and equipment (187,579) (96,111) Disposals of property, plant and equipment 19,353 3,533 Increase in other assets (25,476) (2,770) Decrease in other liabilities (9,652) -- _______ _______ Cash used by investing activities (203,354) (95,348) _______ _______ Cash provided (used) by financing activities: Additions to long-term debt 99,789 1,012 Reductions in long-term debt including current portion (10,023) (27,103) (Decrease) increase in notes payable (27,710) 58,670 Proceeds from exercise of options 13,242 12,709 Repurchase of stock -- (18,756) Dividends paid - common and preferred (43,153) (35,800) _______ _______ Cash provided (used) by financing activities 32,145 (9,268) _______ _______ Effect of exchange rate changes on cash 8,606 (9,169) _______ _______ Effect of May 1996 cash flow activity for certain subsidiaries (Note 5) 43,004 -- _______ _______ Net (decrease) increase in cash and equivalents 5,417 (21,075) Cash and equivalents, May 31, 1996 and 1995 262,117 220,935 _______ _______ Cash and equivalents, November 30, 1996 and 1995 $267,534 $199,860 ======== ======== </TABLE> *For comparable purposes with 1996, results for the six months ended November 30, 1995 have been adjusted to reflect the elimination of the one month lag in reporting by certain of the Company's international operations. See further discussion under Note 5. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Summary of significant accounting policies: ___________________________________________ Basis of Presentation: The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period(s). The interim financial information and notes thereto should be read in conjunction with the Company's latest annual report to shareholders. The results of operations for the three (3) and six (6) months ended November 30, 1996 are not necessarily indicative of results to be expected for the entire year. NOTE 2 - Net income per common share: ___________________________ Net income per common share is computed based on the weighted average number of common and common equivalent (stock option) shares outstanding for the period(s). On October 23, 1996 the Company issued additional shares in connection with a two-for-one stock split effected in the form of a 100% stock dividend on outstanding Class A and Class B common stock. The per common share amounts in the Consolidated Financial Statements and accompanying notes have been adjusted to reflect this stock split. NOTE 3 - Inventories: ___________ Inventories by major classification are as follows: Nov. 30, May 31, 1996 1996 ________ ________ (in thousands) Finished goods $902,547 $874,700 Work-in-process 44,737 28,940 Raw materials 33,796 27,511 ________ ________ $981,080 $931,151 ======== ======== NOTE 4 - Commitments and contingencies: _____________________________ There have been no other significant subsequent developments relating to the commitments and contingencies reported on the Company's most recent Form 10-K. NOTE 5 - Change in year-end of certain subsidiaries: __________________________________________ Prior to fiscal year 1997, certain of the Company's international operations reported their results of operations on a one month lag which allowed more time to compile results. The Company has taken steps to improve its internal reporting procedures that has allowed for more timely reporting of these operations. Beginning in the first quarter of fiscal year 1997, the one month lag was eliminated. As a result, the May 1996 loss from operations for these entities of $4.1 million was recorded directly to retained earnings in the first quarter of the current year. The change affected the previously reported quarterly periods for these operations and thus, the income satement and cash flow statement have been presented to show comparable results for the quarter and year as if the change had occurred in the prior year. The effect of the change is not material to the consolidated balance sheet and as a result the balance sheet as of May 31, 1996 has not been adjusted. NOTE 6 - Subsequent Event: ______________ In December of 1996, the Company issued $200 million seven-year notes maturing December 1, 2003, with a stated rate of 6.375%. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating Results _________________ Net income increased 81% over the prior year's second quarter, rising to $176.9 million, or $0.60 per share, from $97.8 million, or $0.34 per share last year. Year-to-date net income increased 44% to $402.9 million, $3 million more than the Company's net income for the entire 1995 fiscal year. Revenues were $2.1 billion, up 55% for the quarter and 44% year-to-date. This quarter is the ninth straight quarter of double digit increases in total revenues. Gross margin percentage increased slightly for both the quarter and year-to- date, while selling and administrative expenses decreased as a percentage of revenues for the quarter, but increased as a percentage of revenues on a year-to-date basis. Revenues for the quarter increased $750.3 million over the $1.4 billion reported in the same period of the prior year. U.S. revenues increased $459.9 million, or 63%, for the second quarter, and $840.3 million, or 49%, on a year-to-date basis. U.S. apparel increased 93% over last year's second quarter and has increased more than 85% in each of the last six quarters. U.S. footwear increased $277.8 million, or 52%, over last year's second quarter due to a 48% increase in pairs sold and a 4% increase in average selling price. Increases can be seen in almost all categories, the most significant being men's basketball up 38%, men's running up 90%, men's cross- training up 57%, and women's fitness up 79%. For the quarter international revenues increased $292.2 million, or 60%, with strong growth in both footwear and apparel. Year-to-date, international revenues increased $495.0 million, or 46%. All regions showed double digit increases for the quarter with Europe up 42%, comprised of a 37% increase in footwear and a 53% increase in apparel; Asia Pacific was up 96%, with a 111% growth rate in footwear and a 73% increase in apparel; and the Americas region was up 45%, increasing 25% in footwear and 135% in apparel. Japan, now the largest country outside the U.S. in revenues, increased 171% in the quarter and 111% for the year. The impact of exchange rates on the quarter's revenue was a decrease of $38 million, or 8%. For the year, rates have decreased revenues by $93 million, or 9%. Other brands, which includes Cole Haan (R), Tetra Plastics, Sports Specialties and Bauer Inc., decreased slightly, $1.8 million, (1%), for the quarter and $3.1 million, (1%), year-to-date. The breakdown of revenues follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, 1996 1995(1) % Change 1996 1995(1) % Change ____ ____ ___ ____ ____ ___ (in thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Footwear $ 816,283 $ 538,497 52% $1,818,386 $1,330,065 37% U.S. Apparel 377,870 195,795 93 730,255 378,278 93 __________ __________ __________ _________ Total United States 1,194,153 734,292 63 2,548,641 1,708,343 49 __________ __________ __________ _________ International Footwear 517,229 330,162 57 1,065,767 757,194 41 International Apparel 262,021 156,896 67 494,360 307,947 61 __________ __________ __________ _________ Total International 779,250 487,058 60 1,560,127 1,065,141 46 __________ __________ __________ _________ Other Brands 133,631 135,408 (1) 280,192 283,294 (1) __________ __________ _________ _________ Total Revenues $2,107,034 $1,356,758 55% $4,388,960 $3,056,778 44% ========== ========== === ========= ========= === </TABLE> (1) For comparable purposes with 1996, results for the three and six months ended November 30, 1995 have been adjusted to reflect the elimination of the one month lag in reporting by certain of the Company's international operations. See further discussion under Note 5. Consolidated gross margin percentage was 39.4% for the quarter compared to 39.0% for last year's second quarter. Year-to-date margins are at 39.9% compared to 39.8% for last year. The increase in gross margin percentage is primarily attributed to footwear price increases taking effect in this quarter as well as changes to product and customer mix during the period. The Company continues to place strong emphasis on inventory management, minimizing foreign exchange risk and production sourcing in order to maximize gross profit. Gross profit percentages for the remainder of fiscal year 1997 are expected to be affected by both strong demand for NIKE products and increased pricing levels, offset by increased levels of air freight to meet the delivery dates or increasing customer orders. At this time, Management expects the percentage for the full year to be up only slightly from last fiscal year's percentage.* Selling and administrative expenses increased $177 million over the previous year's second quarter and $337 million year-to-date. As a percentage of revenues, expenses have decreased to 25.2% for the quarter, down from 26.1% for the same period last year. On a year-to-date basis, expenses have increased to 24.2%, up from 23.6%. For the quarter, the revenue growth outstripped the expenses, resulting in a lower percentage, however, increased spending on advertising and marketing, as well as increased infrastructure costs, make up the majority of both the dollar and percentage increases. At this time, Management expects selling and administrative expenses as a percentage of revenues for the year will approximate the prior year.* Interest expense increased for both the quarter and year-to-date over the prior year due to increased short-term borrowings for growing operations, mostly in Europe and Asia Pacific. Other expense decreased $7.5 million for the quarter and $9.1 million year-to-date primarily due to decreased conversion loss on foreign transactions, gains on the disposal of fixed assets, and income earned from a promotional event in Japan. The Company's effective tax rate for the year-to-date was 38.75% compared to 38.5% in the prior year. The slight increase is due primarily to higher state income taxes on U.S. earnings. At this time, Management anticipates the tax rate for fiscal 1997 will remain at approximately 38.75%.* Worldwide orders for NIKE Brand athletic footwear and apparel scheduled for delivery from December 1996 through April 1997 were approximately $4.1 billion, 54% higher than such orders booked in the comparable period of the prior year. These orders and the percentage growth in these orders are not necessarily indicative of the growth in revenues which the Company will experience for the subsequent periods. This is because the mix of advance futures and "at once" orders has shifted significantly toward futures orders as the NIKE brand becomes more established in all areas, specifically in the U.S. apparel business and in international regions. The mix of advance orders to "at once" orders will continue to vary as the U.S. apparel business and international operations continue to account for a greater percentage of total revenues and as each places a greater emphasis on futures programs.* Finally, exchange rates can cause differences in the comparisons.* As further explained in Note 5, prior to fiscal year 1997, certain of the Company's international operations reported their results of operations on a one month lag in order to allow more time for compiling results. The Company has taken steps to improve its internal reporting procedures which have allowed for more timely reporting of these operations. Beginning in the first quarter of fiscal year 1997, the one month lag was eliminated. As a result, the May 1996 operational results for these entities of a $4.1 million loss was recorded to retained earnings in the first quarter of the current year. The change affected the previously reported quarterly periods for these operations, and thus, the income statement and cash flow statement have been adjusted in order to show comparable results for the previous periods as if the change had occurred in the prior year. Throughout this discussion, comparisons to last year are also stated as they would have appeared had these entities reported on a same month basis. LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remains strong at November 30, 1996. Since May 31, 1996, total assets grew $470 million to approximately $4.4 billion and shareholder's equity increased $388 million to $2.8 billion. Working capital increased $346 million, and the Company's current ratio increased to 2.10:1 at November 30, 1996 from 1.86:1 at May 31, 1996. Cash provided by operations included year-to-date net income of $403 million plus the year-to-date non-cash depreciation charge of $58 million. Cash used by changes in other working capital components totaled $354 million due, in large part, to increases in accounts receivable and inventory. Since May 31, 1996, accounts receivable increased $226 million (17%) due to the high level of revenues compared to the same period in the prior year. Inventory levels increased $50 million from May 31, as total international inventory increased $52 million in order to support revenue volume. Inventory turns increased to 5.56 at November 30, 1996 from 5.01 at May 31, 1996. Cash used in investing activities totaled $203 million for the first six months of fiscal 1997. Additions to property, plant and equipment totaled $188 million with the most significant components related to the continued consolidation of European footwear warehouses, the overall expansion of U.S. operations and the continued expansion of NIKE Town retail locations in the U.S. Cash provided from financing activities included an increase from May 31, 1996 of $100 million in long-term debt due, primarily, to the Company's Japanese subsidiary borrowing 10.5 billion yen in the first quarter. Cash was used to decrease notes payable by $28 million and to pay dividends totaling $43 million. During the quarter, the Company announced a 33% increase in the quarterly cash dividend to $.10 per share from the previous $.075 per share. The Company's commercial paper program requires the support of committed and uncommitted lines of credit. There was $6 million outstanding under this program at November 30, 1996. The Company has $500 million available in committed unused lines of credit and, at November 30, 1996, no amounts were outstanding under this credit facility. NIKE's debt-to-equity ratio at November 30, 1996 remained constant from May 31 at .6:1. In December of 1996, the Company issued $200 million of seven-year notes, maturing December 1, 2003 (see Note 6). The proceeds from the sale of the notes, received December 13, 1996, will be used for general corporate purposes including, without limitation, refinancing, in part, short-term debt. Management believes that funds generated by operations, together with currently available resources and long-term debt arrangements,will continue to adequately finance anticipated fiscal 1997 expenditures.* *The marked items are forward-looking statements that involve risks and uncertainties detailed from time to time in reports filed by NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K. Part II - Other Information Item 1. Legal Proceedings: There have been no material changes from the information previously reported under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. Item 6. Exhibits and Reports on Form 8-K: (a) EXHIBITS: 3.1 Restated Articles of Incorporation, as amended (incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the first quarter ended August 31, 1995). 3.2 Third Restated Bylaws, as amended (incorporated by referencec from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the first quarter ended August 31, 1995). 4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1). 4.2 Third Restated Bylaws, as amended (see Exhibit 3.2). 10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc., Bank of America National Trust & Savings Association, individually and as Agent, and the other banks party thereto (in- corporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter rended August 31, 1995). 10.2 Form of non-employee director Stock Option Agreement (incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993).* 10.3 Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 21, 1987). 10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan (incorporated by reference from Registration Statement No. 33-29262 on Form S-8 filed by the Company on June 16, 1989).* 10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 17, 1990).* 10.6 Collateral Assignment Split-Dollar Agreement between NIKE, Inc. and Philip H. Knight dated March 10, 1994 (incorporated by reference from Exhibit 10.7 to the Company's Annual Report on Form 10-K for he fiscal year ended May 31, 1994).* 10.7 NIKE, Inc. Executive performance Sharing Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 18, 1995).* 10.8 NIKE, Inc. Supplemental Executive Savings Plan * 12.1 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. (b) The following reports on Form 8-K were filed by the Company during the first quarter of fiscal 1997: Form 8-K September 16, 1996 ITEM 5 OTHER EVENTS Press release announcing the first quarter earnings, and a restatement of con- solidated financial state- ments and accompanying notes. 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. NIKE, Inc. An Oregon Corporation BY: /s/ Robert S. Falcone ________________________ Robert S. Falcone Vice President, Chief Financial Officer DATED: January 14, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.8 <SEQUENCE>2 <TEXT> Exhibit NIKE, INC. SUPPLEMENTAL EXECUTIVE SAVINGS PLAN 1995 RESTATEMENT June 1, 1995 NIKE, Inc. an Oregon corporation One Bowerman Drive Beaverton, OR 97005-6453 "Company" The Company adopted a Supplemental Executive Savings Plan effective February 1, 1994 to provide an opportunity for executive employees to set aside additional amounts for retirement on a tax deferred basis and to provide a limited make-up of profit sharing contributions lost as a result of the $150,000 limit on compensation counted under the Company's 401(k) Savings and Profit Sharing Plan for Employees of NIKE, Inc. (the "Profit Sharing Plan"). The make-up contribution is being expanded effective June 1, 1995 through adoption of a separate NIKE, Inc. Supplemental Executive Profit Sharing Plan. In order to continue the provisions for elective tax deferred savings, the Company adopts this 1995 Restatement of the Supplemental Executive Savings Plan (the "Plan"). 1. Employers; Administration; Plan Year. 1.1 The Plan shall apply to the Company and to other members of the Controlled Group designated by the Company. The "Controlled Group" is the controlled group of corporations, as defined in Internal Revenue Code Section 1563(a), of which the Company is a member. The term "Employer" refers to the Company and such a designated member of the Controlled Group. 1.2 The Plan shall be administered by the Retirement Committee established under the Profit Sharing Plan (the "Committee"). The Committee shall interpret the Plan, determine eligibility and the amount of benefits, maintain records, and generally be responsible for seeing that the purposes of the Plan are accomplished. The Committee may delegate all or part of its administrative duties to others. 1.3 "Plan Year" means the 12-month period starting each June 1 and ending on the following May 31. 2. Eligibility; Deferral Election. 2.1 An executive employee of an Employer shall be eligible to defer compensation under the Plan for a Plan Year if the employee's annual salary rate from the Employer as of the June 1 at the start of such Plan Year equals or exceeds $150,000 or such higher amount as is fixed with cost-of-living adjustments under Internal Revenue Code Section 401(a)(17). 2.2 An employee eligible under 2.1 may elect to defer compensation for each Plan Year by completing a "Deferral Election" in a form prescribed by the Committee, signing it and returning it to the Committee. The Deferral Election shall designate a dollar amount or percentage to be deferred out of the employee's annual salary and annual Performance Sharing Plan bonus, which dollar amount or percentage may be different as between salary and bonus. A deferral of bonus shall be controlled by the Deferral Election for the Plan Year in which the bonus is paid. To be effective for any Plan Year, the Deferral Election must be returned before June 1 of the Plan Year, except as provided in 2.3. A Deferral Election shall apply to a single Plan Year and shall be irrevocable after the start of that Plan Year, except as follows. A Participant may elect at any time to reduce the amount or percentage to be deferred from salary earned in the remainder of the Plan Year to zero. Such an election shall be effective for the remainder of the Plan Year and shall be irrevocable. A new Deferral Election must be returned to continue deferrals for subsequent Plan Years. 2.3 An executive employee who comes into a position with an annual salary rate at or above the level described in 2.1 during a Plan Year, whether by hire from outside the Company or promotion to a higher salary level, shall be eligible to defer the Participant's salary for the remainder of the Plan Year. To be effective, a Deferral Election by such a Participant must be returned within 30 days of the date the Participant becomes eligible. The provisions of 2.2 on irrevocability and reduction to zero shall apply to elections under this 2.3. This 2.3 shall be effective January 1, 1997. The 30-day election period for all executive employees who moved into an eligible position since June 1, 1996 shall expire January 30, 1997. 2.4 The Employer shall reduce the Participant's salary or bonus by the amounts deferred under 2.2 or 2.3 and shall credit such amounts to the Participant's Account under 3.1. Amounts due for FICA taxes on the elected amounts shall be withheld from the Participant's remaining salary and bonus. 2.5 "Participant" means an executive employee who is eligible for and elects deferral of compensation under 2.2 or 2.3. 3. Accounts. 3.1 Each Participant who defers compensation under 2.2 or 2.3 shall have an "Account" in this Plan. All deferred compensation amounts elected by a Participant shall be credited to the Participant's Account as of the date they would have been paid to the Participant if not deferred. 3.2 Each Account shall be credited with Interest monthly until the entire Account has been paid out. "Interest" means an amount calculated at a rate equal to 120 percent of the federal mid-term rate in effect on the last business day of the month, as published from time to time by the Internal Revenue Service. 3.3 A Participant's Account shall be fully vested at all times. 4. Trust. The Company shall establish a trust (the "Trust") with a financial institution as trustee for payment of benefits under the Plan. The Trust shall be a grantor trust for tax purposes. The Trust shall provide that any assets contributed to the trustee shall be used exclusively for payment of benefits under this Plan except in the event the Company becomes insolvent, in which case the Trust assets shall be held for payment of the Company's obligations to its general creditors. 5. Payment of Benefits to the Participant. 5.1 The "Payment Amount" shall be the vested balance in the Participant's Account, including deferred compensation and Interest. 5.2 The Payment Amount shall be payable to a Participant under the Plan upon termination of all employment of the Participant with the Controlled Group. A Participant who is receiving benefits from Employer on account of disability shall not be treated as having a termination of employment until such benefits cease and the Participant does not return to work. 5.3 A Participant's termination under 5.2 shall constitute a retirement for purposes of this Plan if at the time of termination the Participant has attained age 55 and has been continuously employed for five or more years within the Controlled Group. 5.4 The form of payment shall be as follows. If the Participant's termination of employment under 5.2 is not a retirement as described in 5.3, the Payment Amount shall be based on Interest accrued to the end of the month of employment termination and payment shall be made in a lump sum as soon as practicable after such month end. If the termination is a retirement, the Payment Amount shall be paid in one of the following ways as determined under 5.5: (a) In a lump sum on the January 1 following the date of employment termination. (b) In ten substantially equal annual installments beginning on the January 1 following the date of employment termination. 5.5 The Participant shall select the form of payment under 5.4 on a form provided by the Committee for that purpose. A Participant's selection shall be irrevocable for amounts credited to the Participant's Account while the selection is in effect and for any Interest attributable to such amounts. A Participant may change the form of payment by written notice to the Committee. Such a change shall be effective on the first day of the Plan Year beginning after the Committee receives notice of the change. A change of payment form shall apply only to amounts credited to the Participant's Account after the change becomes effective and Interest attributable thereto. If the Payment Amount as of the January 1 following the date of employment termination is less than $100,000, payment shall be made as provided in 5.4(a) regardless of the form selected by the Participant. If no form of payment is selected by a Participant, payment shall be made in the form described in 5.4(b). 5.6 If all or a portion of any payment of benefits under this Section 5 to a Participant would not be deductible for federal income tax purposes by the Company because of a limitation on the total amount of the Participant's deductible compensation from the Company, including any other such compensation already paid to the Participant earlier in the same fiscal year of the Company, the following shall apply: (a) Payment of the nondeductible amount shall be deferred until the first day of the following fiscal year of the Company. (b) If the amount deferred under (a) would exceed the limitation on the total amount of the Participant's deductible compensation from the Company for the following fiscal year, the excess shall be deferred to the first day of succeeding fiscal years until all of the Payment Amount falls underneath the limitation on total deductible compensation, subject to (c). (c) In no event shall any payment be deferred under this 5.6 more than three years from the date scheduled for payment under 5.4. (d) Interest shall continue to be credited under 3.3 during the period of deferral under this 5.6. 5.7 The Company may withhold from any payments any deductions required by law. 6. Death Benefits. 6.1 A Participant's Payment Amount shall be payable under 6.2 through 6.4 on the Participant's death regardless of the provisions of Section 5. 6.2 On death, the Payment Amount shall be paid to the Participant's Beneficiary as follows: (a) If the Beneficiary is the surviving spouse or permanent partner of the Participant, the amount for which the Participant had selected installments under 5.4(b) shall be paid to the Beneficiary by installments in accordance with the selection, beginning within 30 days after the Participant's death. (b) Any amount not described in (a) shall be paid to the Beneficiary in a lump sum within 30 days after the Participant's death. (c) If the Payment Amount as of the date of death is less than $100,000, payment shall be made as provided in (b) regardless of whether the Beneficiary is the surviving spouse or permanent partner. 6.3 "Beneficiary" means the death beneficiary designated by the Participant under the Profit Sharing Plan unless the Participant submits to the Committee a different designation for this Plan on a form provided for the purpose, which shall then control. If the Participant has no surviving Beneficiary designated under either plan, the Beneficiary shall be the following, in order of priority: (a) The Participant's surviving spouse. (b) The Participant's surviving children in equal shares. (c) The beneficiaries designated by the Participant under the Company's LifeTrek program. (d) The Participant's estate. 6.4 If a surviving spouse or permanent partner Beneficiary is receiving installments and dies when a balance remains, the balance shall be paid in a lump sum to the spouse's or permanent partner's estate. 6.5 A designation of a spouse beneficiary by a Participant who is subsequently divorced from that spouse shall be automatically revoked by the divorce unless the Participant renews the designation after the divorce. 7. Change of Control. 7.1 Notwithstanding the provisions of Sections 5 and 6, the Payment Amount shall be paid to each Participant, or to the Beneficiary of each deceased Participant, in a lump sum within 30 days after the date of a Change of Control. 7.2 A "Change of Control" means any of the following: (a) The purchase or other acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (Act), or any comparable successor provisions, or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally. (b) The approval by the stockholders of the Company of a reorganization, merger, or consolidation with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities. (c) A liquidation or dissolution of the Company. (d) A sale of all or substantially all of the Company's assets. 8. Withdrawals. 8.1 A Participant or a surviving spouse or permanent partner Beneficiary may withdraw vested amounts from the Accounts before those amounts would otherwise have been paid because of Financial Hardship, as determined by the Committee. The withdrawal shall be limited to the amount reasonably necessary to meet the Financial Hardship. 8.2 "Financial Hardship" means a Participant's or a surviving spouse or permanent partner Beneficiary's immediate and substantial financial need that cannot be met from other reasonably available resources and is caused by one or more of the following: (a) Medical expenses for the Participant or Beneficiary, a member of the Participant's or Beneficiary's immediate family or household, or other dependent. (b) Loss of or damage to a Participant's or Beneficiary's possessions or property due to casualty. (c) Other extraordinary and unforeseeable circumstances arising from events beyond the Participant's or Beneficiary's control. 8.3 The Committee shall establish guidelines and procedures for implementing withdrawals. An application shall be written, be signed by the Participant or the surviving spouse or permanent partner Beneficiary and include a statement of facts causing the Financial Hardship and any other facts required by the Committee. 8.4 The withdrawal date shall be fixed by the Committee. The Committee may require a minimum advance notice and may limit the amount, time and frequency of withdrawals. 9. Amendment; Termination. 9.1 The Company may amend this Plan effective the first day of any month by notice to the Participants, except the rate of Interest credited under 3.2 may not be reduced without the consent of a Participant as to the balance in the Participant's Account as of the date of the reduction. 9.2 At any time the Company may terminate the Plan and pay out all Accounts to the Participants or Beneficiaries entitled to the Payment Amounts and thereby discharge all the benefit obligations of the Plan. Upon such termination any assets remaining in the trust provided for in Section 4 shall be returned to the Company. 9.3 If the Internal Revenue Service issues a final ruling that any amounts deferred under this Plan will be subject to current income tax, all amounts to which the ruling is applicable shall be paid to the Participants within 30 days. 10. Claims Procedure. 10.1 Any person claiming a benefit or requesting an interpretation, ruling or information under the Plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable. 10.2 If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional materials or information required and an explanation of why it is necessary. (c) An explanation of the Plan's claim review procedure. 10.3 The initial notice of denial shall normally be given within 90 days of receipt of the claim. If special circumstances require an extension of time, the claimant shall be so notified and the time limit shall be 180 days. 10.4 Any person whose claim or request is denied or who has not received a response within 30 days may request review by notice in writing to the Committee. The original decision shall be reviewed by the Committee, which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. 10.5 The decision on review shall ordinarily be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be so notified and the time limit shall be 120 days. The decision shall be in writing and shall state the reasons and the relevant plan provisions. All decisions on review shall be final and bind all parties concerned. 11. General Provisions. 11.1 If suit or action is instituted to enforce any rights under this Plan, the prevailing party may recover from the other party reasonable attorneys' fees at trial and on any appeal. 11.2 Any notice under this Plan shall be in writing and shall be effective when actually delivered or, if mailed, when deposited as first class mail postage prepaid. Mail shall be directed to the Company at the address stated in this Plan, to the Participant's last known home address shown in the Company's records, or to such other address as a party may specify by notice to the other parties. Notices to an Employer or the Committee shall be sent to the Company's address. 11.3 The rights of a Participant under this Plan are personal. Except for the limited provisions of Section 6, no interest of a Participant or one claiming through a Participant may be directly or indirectly assigned, transferred or encumbered and no such interest shall be subject to seizure by legal process or in any other way subjected to the claims of any creditor. 11.4 Following termination of employment, a Participant shall not be an employee of an Employer or an affiliate for any purpose, and payments under Sections 5 and 6 shall not constitute salary or wages. A Participant shall receive such payments as retirement benefits, not as compensation for performance of any substantial services. 11.5 Amounts payable under this Plan shall be an obligation of the Company and the Trust provided by Section 4. If an Employer merges, consolidates, or otherwise reorganizes or if its business or assets are acquired by another company, this Plan shall continue with respect to those eligible individuals who continue in the employ of the successor company. The transition of Employers shall not be considered a termination of employment for purposes of this Plan. In such an event, however a successor corporation may terminate this Plan as to its Participants on the effective date of the succession by notice to Participants within 30 days after the succession. 11.6 The Committee may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the person's best interest to make payments to others for the benefit of the person entitled to payment. In that event, the Committee may in its discretion direct that payments be made as follows: (a) To a parent or spouse or a child of legal age; (b) To a legal guardian; or (c) To one furnishing maintenance, support, or hospitalization. 12. Effective Date This Restatement shall be effective June 1, 1995, except as follows. The changes in 2.1 on eligibility to defer compensation shall be effective June 1, 1996 for eligibility in the Plan Year beginning on that date. The change in 2.2 to base deferral of bonuses on the election for the Plan Year in which the bonus is paid shall first apply to the bonus paid in the Plan Year beginning on June 1, 1996. Adopted: November 15, 1995 NIKE, INC. By: MARCIA A. STILWELL Executed: December 17, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12.1 <SEQUENCE>3 <TEXT> NIKE, Inc. Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges Six Months Ended November 30, ________________ 1995* 1996 ____ ____ (dollars in thousands) Net income $279,910 $402,935 Income taxes 175,200 254,900 ________ ________ Income before income taxes 455,110 657,835 ________ ________ Add fixed charges Interest expense (A) 19,778 24,289 Interest component of leases (B) 8,384 11,866 _________ ________ Total fixed charges 28,162 36,155 _________ ________ Earnings before income taxes and fixed charges (C) $483,272 $692,595 ======== ======== Ratio of earnings to total fixed charges 17.16 19.16 ======== ======== *For comparable purposes with 1996, results for the six months ended November 30, 1995 have been adjusted to reflect the elimination of the one month lag in reporting by certain of the Company's international operations. See further discussion under Note 5. (A) Interest expense includes interest both expensed and capitalized. (B) Interest component of leases includes one-third of rental expense, which approximates the interest component of operating leases. (C) Earnings before income taxes and fixed charges is exclusive of capitalized interest. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NOVEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-END> NOV-30-1996 <CASH> 267,534 <SECURITIES> 0 <RECEIVABLES> 1,572,426 <ALLOWANCES> 50,071 <INVENTORY> 981,080 <CURRENT-ASSETS> 3,070,956 <PP&E> 1,200,747 <DEPRECIATION> 442,990 <TOTAL-ASSETS> 4,421,155 <CURRENT-LIABILITIES> 1,465,542 <BONDS> 98,970 <COMMON> 2,856 <PREFERRED-MANDATORY> 0 <PREFERRED> 300 <OTHER-SE> 2,816,853 <TOTAL-LIABILITY-AND-EQUITY> 4,421,155 <SALES> 4,388,960 <TOTAL-REVENUES> 4,388,960 <CGS> 2,639,747 <TOTAL-COSTS> 2,639,747 <OTHER-EXPENSES> 1,056,607 <LOSS-PROVISION> 11,877 <INTEREST-EXPENSE> 22,894 <INCOME-PRETAX> 657,835 <INCOME-TAX> 254,900 <INCOME-CONTINUING> 402,935 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 402,935 <EPS-PRIMARY> 1.36 <EPS-DILUTED> 1.36 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

NOVL

https://www.sec.gov/Archives/edgar/data/758004/0000758004-97-000009.txt

-----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, PR+VLdXUmJRTJNafdOBKgfJCIevtBgJl8sYuRo08yDhFPZnQ/sFNnscWd4kSTLyb 4uaiXAEnCJW7naCZmQPqbA== <SEC-DOCUMENT>0000758004-97-000009.txt : 19970318 <SEC-HEADER>0000758004-97-000009.hdr.sgml : 19970318 ACCESSION NUMBER: 0000758004-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970317 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 97557607 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84097 BUSINESS PHONE: 8012226600 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Quarter Ended January 31, 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: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) dentification No.) 122 East 1700 South Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) 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 As of February 28, 1997 there were 346,876,410 shares of the registrant's common stock outstanding. </PAGE> <PAGE> <TABLE> Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS <S> <C> <C> Jan. 31, Oct. 26, Dollars in thousands, except per share data 1997 1996 - --------------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $ 1,102,321 $ 1,024,755 Receivables, less allowances ($58,669 - January; $60,940 - October) 393,490 452,327 Inventories 20,201 16,837 Prepaid expenses 53,578 59,009 Deferred income taxes 51,085 37,831 - --------------------------------------------------------------------------- Total current assets 1,620,675 1,590,759 Property, plant and equipment, net 400,516 394,684 Other assets 61,812 64,023 - --------------------------------------------------------------------------- Total assets $ 2,083,003 $ 2,049,466 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 73,518 $ 96,933 Accrued compensation 50,207 54,731 Accrued marketing liabilities 50,999 48,402 Other accrued liabilities 94,651 118,133 Income taxes payable 34,231 Deferred revenue 49,976 46,573 - --------------------------------------------------------------------------- Total current liabilities 353,582 364,772 Minority interests 16,540 17,035 Put Warrants 46,650 52,150 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 346,742,970 shares-January 346,059,050 shares-October 34,674 34,606 Additional paid-in capital 316,004 309,831 Retained earnings 1,317,469 1,266,657 Unearned stock compensation (2,239) (4,141) Cumulative translation adjustment 679 1,183 Unrealized gain (loss) on investments (356) 7,373 - --------------------------------------------------------------------------- Total shareholders' equity 1,666,231 1,615,509 - --------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,083,003 $ 2,049,466 =========================================================================== See notes to consolidated unaudited condensed financial statements. </TABLE> </PAGE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME Fiscal Quarter Ended --------------------------------- <S> <C> <C> Amounts in thousands, Jan. 31, Jan. 27, except per share data 1997 1996 - --------------------------------------------------------------------------- Net sales $374,847 $437,919 Cost of sales 75,971 96,011 - --------------------------------------------------------------------------- Gross profit 298,876 341,908 Operating expenses Sales and marketing 127,890 123,465 Product development 71,755 78,633 General and administrative 37,731 38,538 Restructuring charges __ 18,442 - --------------------------------------------------------------------------- Total operating expenses 237,376 259,078 Income from operations 61,500 82,830 Other income (expense) Investment income 16,614 14,900 Other, net (2,837) (2,150) - --------------------------------------------------------------------------- Other income, net 13,777 12,750 - --------------------------------------------------------------------------- Income before taxes 75,277 95,580 Income taxes 24,465 32,019 - --------------------------------------------------------------------------- Net income $ 50,812 $ 63,561 =========================================================================== Weighted average shares outstanding 347,095 371,585 =========================================================================== Net income per share $ 0.15 $ 0.17 =========================================================================== See notes to consolidated unaudited condensed financial statements. </TABLE> </PAGE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS <S> <C> <C> Fiscal Quarter Ended ------------------------ Jan. 31, Jan. 27, Amounts in thousands 1997 1996 - ----------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 50,812 $ 63,561 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 23,816 24,919 Stock plans income tax benefits 1,803 2,343 Decrease (increase) in receivables 58,837 (47,590) (Increase) in inventories (3,364) (2,444) Decrease in prepaid expenses 5,431 3,935 (Increase) in deferred income taxes (13,049) (1,122) (Decrease) in current liabilities, net (11,190) (17,046) - ----------------------------------------------------------------------------------- Net cash provided from operating activities 113,096 26,556 - ----------------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 2,685 5,597 Repurchases of common stock -- (106,117) Sale of put warrants 2,300 -- Settlement of put warrants (6,250) -- - ----------------------------------------------------------------------------------- Net cash (used) from financing activities (1,265) (100,520) - ----------------------------------------------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (27,543) (12,784) Purchases of short-term investments (714,467) (1,062,216) Maturities of short-term investments 506,110 889,193 Sales of short-term investments 166,868 161,820 Other 1,007 3,469 - ----------------------------------------------------------------------------------- Net cash (used) by investing activities (68,025) (20,518) - ----------------------------------------------------------------------------------- Total Increase (decrease) in cash and cash equivalents $ 43,806 $ (94,482) Cash and cash equivalents - beginning of period 145,521 312,164 - ----------------------------------------------------------------------------------- Cash and cash equivalents - end of period 189,327 217,682 Short-term investments - end of period 912,994 1,030,242 - ----------------------------------------------------------------------------------- Cash and short-term investments - end of period $1,102,321 $1,247,924 =================================================================================== See notes to consolidated unaudited condensed financial statements. </TABLE> </PAGE> <PAGE> NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should therefore, be read in conjunction with the Company's fiscal 1996 Annual Report to Shareholders. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. In the first quarter of fiscal 1997, the Company implemented a change to its fiscal year and month ending dates. The Company will now recognize its fiscal year end on the last calendar day of October, as opposed to prior years on the last Saturday in October. Likewise, each fiscal month end will now end on the last calendar day of each month, and each fiscal quarter will have a unique number of days as opposed to the consistent 13 weeks in prior years. Implementing this change, resulted in an extra five days in the first fiscal quarter of 1997 which the Company believes did not have a material impact on its financial position, results of operations, or cash flows. B.Significant Events In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of UNIX technology royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6 million shares of SCO common stock, resulting in ownership of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million in cash. This resulted in an ownership position of approximately 17% of the outstanding Corel common stock. The Company reported a one-time gain of $20 million in the second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of approximately $50 million over the next five years. During the second quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in that quarter. Because the Company has experienced strong growth in revenue from software licensing programs, the Company decided to reduce channel inventories to better match evolving purchase patters. The Company estimates that it reduced product inventories in the worldwide distribution channel during the second fiscal quarter of 1996 by approximately $225 million. This was accomplished primarily by reducing shipments to distributors during the second quarter. Additionally, net returns of approximately $20 million were accepted during the second quarter related to this policy change. </PAGE> <PAGE> <TABLE> C. Cash and Short-term Investments All marketable debt and equity securities are included in cash and short-term investments and are considered available-for- sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders equity. Municipal securities included in short-term investments have contractual maturities from 1-5 years. Money market preferreds have contractual maturities of less than 90 days. No other short-term investments have contractual maturities. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. <S> <C> <C> <C> <C> Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Jan. 31, 1997 Gains Losses Jan. 31, 1997 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents Cash $ 98,985 $ -- $ -- $ 98,985 Repurchase agreements 19,740 -- 19,740 Taxable money market fund 40,590 -- 40,590 Municipal securities 31,565 -- 31,565 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 190,880 $ $ -- $ 190,880 - ------------------------------------------------------------------------------------------------- Short-term investments Municipal securities $ 408,805 $ 2,481 $ -- $ 411,286 Money market preferreds 237,800 -- -- 237,800 Mutual funds 95,682 30 (3) 95,709 Equity securities 169,734 33,617 (36,705) 166,646 - ------------------------------------------------------------------------------------------------- Short-term investments $ 912,021 $ 36,128 $ (36,708) $ 911,441 - ------------------------------------------------------------------------------------------------- Cash and short-term investments $1,102,901 $ 36,128 $ (36,708) $1,102,321 - ------------------------------------------------------------------------------------------------- Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Oct. 26, 1996 Gains Losses Oct. 26, 1996 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents Cash $ 77,374 $ -- $ -- $ 77,374 Repurchase agreements 4,526 -- -- 4,526 Tax exempt money market fund 36,821 -- -- 36,821 Municipal securities 26,800 -- -- 26,800 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 145,521 $ -- $ -- $ 145,521 - ------------------------------------------------------------------------------------------------- Short-term investments Municipal securities $ 376,510 $ 1,524 $ (12) $ 378,022 Money market mutual funds 78,514 -- -- 78,514 Money market preferreds 224,000 -- -- 224,000 Mutual funds 14,151 14 (10) 14,155 Equity securities 174,054 35,432 (24,943) 184,543 - ------------------------------------------------------------------------------------------------- Short-term investments $ 867,229 $36,970$ (24,965) $ 879,234 - ------------------------------------------------------------------------------------------------- Cash and short-term investments $1,012,750 $36,970 $ (24,965) $1,024,755 - ------------------------------------------------------------------------------------------------- During the first quarter of fiscal 1997 the Company had realized gains of $6 million on the sale of securities compared to realized gains of $4 million in the first quarter of fiscal 1996. </PAGE> </TABLE> <PAGE> D. Income Taxes The Company's estimated effective tax rate for the first quarter of fiscal 1997 was 32.5% compared to 33.5% in the first quarter of fiscal 1996. The Company paid cash amounts for income taxes of $3 million and $2 million, in the first quarter of fiscal 1997 and 1996, respectively. E. Commitments and Contingencies The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company s operations. At January 31, 1997 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At January 31, 1997 standby letters of credit of approximately $300,000 were outstanding under this agreement. The Company is a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. F. Put Warrants In the first quarter of fiscal 1997, the Company sold put warrants on 2 million shares of its common stock for $2 million, callable on specific dates in the third quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. During the first quarter of fiscal 1997, the Company settled put warrants obligations on 2 million shares for cash of $6 million. During fiscal 1996, the Company sold put warrants on 9 million shares of its common stock for $12 million, callable on specific dates in the third and fourth quarters of fiscal 1996 and the first and second quarters of fiscal 1997. During fiscal 1996, the Company settled put warrant obligations on 5 million shares for cash of $6 million. The put warrant liability is the amount the Company would be obligated to pay if all the outstanding put warrants were exercised at the strike price without a cash settlement. The proceeds from the issuance of the put options were accounted for as additional paid-in-capital. The Company expects to settle the put warrant obligations with cash and thereby eliminate the liability. As of the end of the first quarter of fiscal 1997, the cash settlement would be approximately $2 million. G. International Sales The Company markets internationally both directly to end users and through distributors who sell to dealers and end users. For the fiscal quarters ended January 31, 1997 and January 27, 1996, sales to international customers were approximately $172 million and $218 million, respectively. In the first quarters of fiscal 1997 and fiscal 1996, 62% and 63%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total sales in either period. Except for one multi-national distributor, which accounted for 18% of revenue in the first quarter of 1997 and 13% of revenue in the first quarter of fiscal 1996, no customer accounted for more than 10% of revenue in any period. H. Net Income Per Share Net income per share is computed using the weighted average number of common shares outstanding during the periods, including common stock equivalents (unless antidilutive). Common stock equivalents consist of outstanding stock options. </PAGE> <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the world s leading network software provider. The Company offers a wide range of network solutions for distributed network, Internet, intranet and small-business markets. During fiscal 1996, Novell sold its UnixWare and personal productivity applications product lines in exchange for significant ownership interests in the two acquiring companies. Also during fiscal 1996, the Company significantly reduced the amount of its product held by distributors by reducing shipments into the distribution channel by approximately $225 million in the second quarter. These actions significantly reduced fiscal 1996 reported revenue and make meaningful year-to-year comparisons difficult. In the first quarter of fiscal 1997, the Company implemented a change to its fiscal year and month ending dates. The Company will now recognize its fiscal year end on the last calendar day of October, as opposed to prior years on the last Saturday in October. Likewise, each fiscal month end will now end on the last calendar day of each month, and each fiscal quarter will have a unique number of days as opposed to the consistent 13 weeks in prior years. Implementing this change, resulted in an extra five days in the first fiscal quarter of 1997 which the Company believes did not have a material impact on its financial position, results of operations, or cash flows Results of Operations Net Sales Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------- Net sales (millions) $375 -14% $438 =================================================================== Novell s product lines can be categorized into three areas, all within the software industry. They are server operating environments; network services; UNIX royalties, and education, service and other. While revenue decreased from the first quarter of 1996 to the first quarter of 1997, analysis of the individual product categories characterizes the changes that have occurred. Server operating environments revenues increased by 10% or $23 million in the first quarter of 1997 compared to the first quarter of 1996. Growth in the IntranetWare product family of $54 million or 41% growth from the first quarter of 1996 was somewhat offset by a decrease in the NetWare 3 product family of $31 million or a 32% decline from the first quarter of 1996. Network services revenues decreased by 14% or $13 million in the first quarter of 1997 compared to the first quarter of 1996. The decrease is mainly the result of decreases in TCP/IP access products of $13 million, Host Connectivity products of $3 million and NetWare multi-protocol router of $2 million, somewhat offset by 34% growth or a $7 million increase in GroupWise, the Company s electronic messaging workgroup application. UNIX royalties revenue decreased 68% or $21 million in the first quarter of 1997 compared to the first quarter of 1996. The decrease was attributable to a one-time $19 million paid up royalty recognized in the sale of UNIX and the UnixWare product line to SCO in the first quarter of 1996. Education, service and other revenues decreased by 21% or $9 million in the first quarter of 1997 compared to the first quarter of 1996. The decrease was a result of lower revenues in training and other product categories, with an increase in service related revenue. International sales represented 46% of total sales in the first quarter of 1997 compared to 50% in the first quarter of 1996. This change is a result of a 8% decrease in domestic revenues compared to a 21% decrease in international revenues in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. </PAGE> <PAGE> Gross Profit Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------ Gross profit (millions) $299 -13% $342 Percentage of net sales 80% 78% ================================================================== The gross margin percentage increased in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996 due to lower material costs due to an increase in licensing revenue and the decrease in sales from the lower margin personal productivity applications product line. Operating Expenses Q1 Q1 1997 Change 1996 - ----------------------------------------------------------------- Sales and marketing (millions) $128 4% $123 Percentage of net sales 34% 28% - ----------------------------------------------------------------- Product development (millions) $72 -9% $79 Percentage of net sales 19% 18% - ------------------------------------------------------------------ General and administrative (millions) $38 -3% $39 Percentage of net sales 10% 9% - ------------------------------------------------------------------ Restructuring charges (millions) -- -- $18 Percentage of net sales -- 4% - ------------------------------------------------------------------ Total operating expenses (millions) $237 -8% $259 Percentage of net sales 63% 59% ================================================================== Sales and marketing expenses increased as a percentage of net sales in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. The increase as a percentage of net sales and in absolute dollars is attributable to higher corporate marketing expenses. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses increased as a percentage of net sales in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996 but decreased in absolute dollars primarily due to the sale of the UnixWare and personal productivity application product lines. General and administrative expenses increased as a percentage of net sales in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996, while decreasing slightly in absolute dollars. During the first quarter of fiscal 1996 the Company incurred 18 million of tax deductible restructuring charges for redundant facilities and excess personnel as the Company prepared for the sale of its personal productivity applications product line. Overall, operating expenses, excluding nonrecurring charges, have declined less rapidly than revenues in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996 due to sales and marketing expenses associated with new product releases. Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------ Employees 5,796 -19% 7,137 Annualized revenue per employee (000's) $257 9% $235 ================================================================== In fiscal 1996, the Company reduced its employment by 1,725 employees as the Company completed the sale of it s UnixWare and personal productivity applications product lines and terminated or transitioned former UnixWare and personal productivity group employees to Corel, SCO, and other third parties. Other Income (Expense) Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------ Other income (expense), net (millions) $14 8% $13 Percentage of net sales 4% 3% ================================================================== </PAGE> <PAGE> The primary component of other income (expense) is investment income, which was $17 million in the first quarter of fiscal 1997 compared to $15 million in the first quarter of fiscal 1996. The increase is the result of higher realized capital gains as well as higher average yields on lower average cash balances. In order to achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur some market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. Income Taxes Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------- Income taxes (millions) $24 -25% $32 Percentage of net sales 6% 7% Effective tax rate 33% 34% =================================================================== The Company's estimated tax rate for fiscal 1997 is 32.5%, compared to 30.0% in fiscal 1996. The effective tax rate for fiscal 1997 is higher than the effective tax rate for fiscal 1996 as a result of higher anticipated earnings in fiscal 1997. Net Income and Net Income Per Share Q1 Q1 1997 Change 1996 - ------------------------------------------------------------------- Net income (millions) $51 -20% $64 Percentage of net sales 14% 15% Net income per share $.15 -12% $.17 =================================================================== Liquidity and Capital Resources Q1 Q4 1997 Change 1996 - ------------------------------------------------------------------- Cash and short-term investments (millions) $1,102 8% $1,025 Percentage of total assets 53% 50% =================================================================== Cash and short-term investments increased to $1,102 million at January 31, 1997 from $1,025 million at October 26, 1996. The major reason for this increase was the $113 million provided by operation activities, offset by the $28 million of cash used for expenditures on property, plant and equipment, and the $8 million used by other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. The Company's principal source of liquidity has been from operations. At January 31, 1997, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments and flexibility in a dynamic and competitive operating environment. During the first fiscal quarter of 1997, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short-term investments together with internally generated funds. Borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1997 are anticipated to be approximately $80 million, but could be reduced if the growth of the Company is less than presently anticipated. </PAGE> <PAGE> Future Results The Company s future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products of reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; and litigation. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, as discussed above. Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote E of the Company s financial statements contained in Part I, Item 1 of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description - ------ ----------- 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended January 31, 1997. - ----------------------------- *Filed herewith </PAGE> <PAGE> SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. ------------ (Registrant) Date: March 12, 1997 /s/ Joseph A. Marengi --------------------- Joseph A. Marengi President and Chief Operating Officer Principal Executive Officer) Date: March 12, 1997 /s/ James R. Tolonen -------------------- James R. Tolonen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) </PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1997 <PERIOD-END> JAN-31-1997 <CASH> 139,327 <SECURITIES> 912,994 <RECEIVABLES> 393,490 <ALLOWANCES> (58,669) <INVENTORY> 20,201 <CURRENT-ASSETS> 1,620,675 <PP&E> 747,289 <DEPRECIATION> (346,773) <TOTAL-ASSETS> 2,083,003 <CURRENT-LIABILITIES> 353,582 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 34,674 <OTHER-SE> 1,631,557 <TOTAL-LIABILITY-AND-EQUITY> 2,083,003 <SALES> 374,847 <TOTAL-REVENUES> 374,847 <CGS> 75,971 <TOTAL-COSTS> 75,971 <OTHER-EXPENSES> 237,376 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 75,277 <INCOME-TAX> 24,465 <INCOME-CONTINUING> 50,812 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 50,812 <EPS-PRIMARY> .15 <EPS-DILUTED> .15 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/80424/0000080424-97-000006.txt

-----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, OhOYxggA5nd/6Ix+OT2XEacoFf+EazS01lzXAhOvfJ97agcGBxgumK6mABqiAaMy TvqZHJ1V/J9ZVeSDv1quvQ== <SEC-DOCUMENT>0000080424-97-000006.txt : 19970221 <SEC-HEADER>0000080424-97-000006.hdr.sgml : 19970221 ACCESSION NUMBER: 0000080424-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCTER & GAMBLE CO CENTRAL INDEX KEY: 0000080424 STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840] IRS NUMBER: 310411980 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00434 FILM NUMBER: 97523688 BUSINESS ADDRESS: STREET 1: ONE PROCTER & GAMBLE PLZ CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5139831100 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1996 Commission file number 1-434 THE PROCTER & GAMBLE COMPANY (Exact name of registrant as specified in its charter) Ohio 31-0411980 (State of incorporation) (I.R.S. Employer Identification No.) One Procter & Gamble Plaza, Cincinnati, Ohio 45202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (513) 983-1100 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 . There were 679,464,805 shares of Common Stock outstanding as of January 24, 1997. PART I. FINANCIAL INFORMATION Item 1. Financial Statements The Consolidated Statements of Earnings of The Procter & Gamble Company and subsidiaries for the three and six months ended December 31, 1996 and 1995, the Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996, and the Consolidated Statements of Cash Flows for the six months ended December 31, 1996 and 1995 follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim period reported. However, such financial statements may not be necessarily indicative of annual results. Certain reclassifications of prior year's amounts have been made to conform with the current year's presentation. <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS <CAPTION> Millions of Dollars Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 1996 1995 1996 1995 ------- ------- -------- -------- <S> <C> <C> <C> <C> NET SALES $9,142 $9,090 $18,045 $18,117 Cost of products sold 5,068 5,265 10,070 10,476 Marketing, research, and administrative expenses 2,553 2,473 4,907 4,854 -------- -------- --------- --------- OPERATING INCOME 1,521 1,352 3,068 2,787 Interest expense 134 123 246 246 Other income, net 45 52 101 114 -------- -------- --------- --------- EARNINGS BEFORE INCOME TAXES 1,432 1,281 2,923 2,655 Income taxes 488 445 1,000 923 -------- -------- --------- --------- NET EARNINGS $ 944 $ 836 1,923 $ 1,732 ======== ======== ========= ========= PER COMMON SHARE: Net earnings $ 1.35 $ 1.18 $ 2.74 $ 2.45 Net earnings assuming full dilution $ 1.26 $ 1.11 $ 2.56 $ 2.29 Dividends $ .45 $ .40 $ .90 $ .80 AVERAGE COMMON SHARES OUTSTANDING 682.2 686.5 </TABLE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> Amounts in Millions December 31 June 30 1996 1996 ASSETS --------- --------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 2,189 $ 2,074 Investment securities 532 446 Accounts receivable 2,928 2,841 Inventories Materials and supplies 1,257 1,254 Work in process 279 210 Finished products 1,691 1,666 Deferred income taxes 764 598 Prepaid expenses and other current assets 1,481 1,718 --------- --------- TOTAL CURRENT ASSETS 11,121 10,807 --------- --------- PROPERTY, PLANT, AND EQUIPMENT 18,641 18,112 LESS ACCUMULATED DEPRECIATION 7,371 6,994 --------- --------- TOTAL PROPERTY, PLANT, AND EQUIPMENT 11,270 11,118 --------- --------- GOODWILL AND OTHER INTANGIBLE ASSETS 4,203 4,281 OTHER NON-CURRENT ASSETS 1,526 1,524 --------- --------- TOTAL ASSETS $28,120 $27,730 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> CURRENT LIABILITIES Accounts payable and accruals $ 6,846 $ 6,709 Debt due within one year 1,118 1,116 --------- --------- TOTAL CURRENT LIABILITIES 7,964 7,825 --------- --------- LONG-TERM DEBT 4,283 4,670 DEFERRED INCOME TAXES 698 638 OTHER NON-CURRENT LIABILITIES 2,864 2,875 SHAREHOLDERS' EQUITY Preferred stock 1,874 1,886 Common stock-shares outstanding-Dec. 31 679.5 680 686 -June 30 685.6 Additional paid-in capital 968 862 Currency translation adjustments (436) (418) Reserve for ESOP debt retirement (1,645) (1,676) Retained earnings 10,870 10,382 --------- --------- TOTAL SHAREHOLDERS' EQUITY 12,311 11,722 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,120 $27,730 ========= ========= </TABLE> <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS <CAPTION> Amounts in Millions Six Months Ended December 31 1996 1995 -------- -------- <S> <C> <C> CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $2,074 $2,028 OPERATING ACTIVITIES Net earnings 1,923 1,732 Depreciation, depletion and amortization 667 651 Deferred income taxes (89) 164 Increase in accounts receivable (83) (421) Increase in inventories (102) (190) Change in accounts payable and accruals 222 (549) Change in other operating assets and liabilities 74 (531) Other 10 269 -------- -------- TOTAL OPERATING ACTIVITIES 2,622 1,125 -------- -------- INVESTING ACTIVITIES Capital expenditures (847) (992) Proceeds from asset sales and retirements 268 239 Acquisitions (121) (147) Change in investment securities (82) (300) -------- -------- TOTAL INVESTING ACTIVITIES (782) (1,200) -------- -------- FINANCING ACTIVITIES Dividends to shareholders (667) (601) Additions to short-term debt 23 848 Additions to long-term debt 8 64 Reduction of long-term debt (350) (419) Proceeds from stock options 50 32 Purchase of treasury shares (776) (175) -------- -------- TOTAL FINANCING ACTIVITIES (1,712) (251) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (13) (34) -------- -------- CHANGE IN CASH AND CASH EQUIVALENTS 115 (360) -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $2,189 $1,668 ======== ======== </TABLE> Item 2. Management Discussion and Analysis Results of Operations - --------------------- Worldwide net earnings for the second quarter of fiscal year 1997 were $944 million, a 13% increase over the same quarter of the prior year. Earnings per share for the quarter were $1.35 per share, a 14% increase over the same quarter of last year. The difference between the net earnings and earnings per share increases was primarily due to the company's stock repurchase program. Net sales for the quarter were $9.14 billion, up 1% compared to prior year second quarter sales of $9.09 billion. Worldwide unit volume grew 2% from the second quarter a year ago. The difference between the sales and unit volume trends was largely due to weaker currencies in Europe and Asia, primarily Germany and Japan. For the first six months of the fiscal year, worldwide net earnings were $1.92 billion, an 11% increase over the prior year. Earnings per share were $2.74 per share, a 12% increase over the prior year. Worldwide unit volume for the first six months was up 2% over the prior year, while net sales were stable, primarily reflecting unfavorable exchange rates. The company's results were impacted by competitive pressures in Japan and difficult economic conditions in Latin America. In addition, the continued roll-out of the Efficient Consumer Response program (ECR) within Europe and Asia has impacted results. Specifically, as ECR is rolled out in new markets, trade inventories are reduced, which negatively impacts short-term growth rate trends. When implemented several years ago in the United States, this program resulted in negative short-term business effects, but yielded stronger consumer loyalty and improved profit margins longer term. Gross margin was 44.6% for the current quarter, compared to 42.1% in the second quarter of the prior year and 41.2% for the full fiscal year ended June 30, 1996. The key driver of the gross margin improvement has been lower commodity prices, primarily pulp which declined in the latter part of the prior year, and cost reduction programs throughout the company. Operating margin was 16.6% compared to 14.9% in the prior second quarter and 13.6% for the prior fiscal year, reflecting the higher gross margins, partially offset by increased costs related to marketing, research and administrative activities. North America - ------------- Net sales for the North America region increased 3% compared with the same quarter a year ago, on a 5% unit volume increase. The net sales and unit volume progress was achieved despite capacity constraints in certain key categories, particularly tissue and towel. Net earnings for the region increased 15%, benefiting from lower commodity prices and cost reductions. The region's volume growth was led by the laundry and cleaning business, specifically, strong growth in the laundry and fabric softener categories. Food and beverage also posted strong volume growth on the strength of the snacks category, which is benefiting from increased capacity, and the coffee category. The paper business also increased total unit volume, despite continued capacity constraints in the tissue and towel categories, due to growth generated from feminine hygiene products. The paper business led the region's earnings growth, primarily due to lower pulp prices, which declined in the latter part of the prior year. Beauty Care increased volumes, led by strong growth in the hair care and deodorants categories. Excluding the impacts of the prior year divestiture of the Company's share of a joint venture, unit volume in the health care business increased modestly due to increased volume in oral care. Importantly, despite the modest unit volume growth, health care's earnings showed significant improvement due to increased licensing activity. For the first six months of the fiscal year, the North American region had net sales and unit volume growth of 2% and 3%, respectively. Net earnings increased 12% over the same period in the prior year. Europe, Middle East and Africa - ------------------------------ Net sales in Europe, Middle East and Africa for the second quarter were stable, as unfavorable exchange rates and lower pricing offset a 4% increase in volume. Net earnings for the quarter grew 24% compared to the same period a year ago, reflecting the margin improvement impact of lower costs, led by pulp. Central and Eastern Europe led the region's volume growth, increasing shipments by nearly 40%, with strong gains in most core segments. Middle East and Africa also had double-digit volume growth. Western Europe's unit volume declined slightly. For the July-December period, the region's net sales declined 1%. Unit volume and net earnings increased 4% and 17% respectively, for the same period. Asia - ---- Second quarter operations in Asia continue to be impacted by the competitive environment in Japan, the impact of the ECR roll-out and exchange rate effects. Sales for the region declined 8% compared to the same quarter of the prior year on a unit volume decline of 7%. Importantly, China's unit volume growth improved over the first quarter. A 5% decline in the region's sales attributable to unfavorable exchange rates was offset by more favorable pricing. Net earnings in Asia for the second quarter increased 12% on improved margins. Net sales and unit volume for the July-December period declined 10% and 8%, respectively. Net earnings increased 2% over the same period in the prior year. Latin America - ------------- Net sales in Latin America increased 3% in the second quarter, despite a 3% decline in volume, due to pricing designed to address inflation and devaluation, particularly in Mexico. The unit volume decline was caused by the continued economic difficulties and slow economic recovery in certain key markets. Net earnings for the region increased 35% on improved margins, reflecting both pricing and cost reductions from standardization and simplification efforts. For the July-December period, net sales and net earnings were up 1% and 24%, respectively. Unit volume was down 5% compared to the same period in the prior year. Restructuring Reserve Status - ---------------------------- In the year ended June 30, 1993, a reserve of $2.4 billion was established to cover a worldwide restructuring effort to consolidate manufacturing systems and reduce overhead costs. The primary elements of this reserve were costs related to fixed asset disposals and separations. The balance of the reserve at December 31, 1996 was approximately $490 million, with approximately half of the balance representing planned fixed asset disposals, all of which have been announced. The restructuring program is expected to be substantially completed during the current fiscal year. Based on current management estimates, the cost of the program is expected to approximate the original estimate. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K The Company filed Current Reports on Form 8-K containing information pursuant to Item 9 entitled "Sales of Equity Securities Pursuant to Regulations," dated November 18, 1996, December 3, 1996, December 16, 1996, December 20, 1996, January 7, 1997, January 17, 1997 and January 28, 1997 and an Amended Current Report on Form 8-K containing information pursuant to Item 9 entitled "Sales of Equity Securities Pursuant to Regulations," dated December 3, 1996. 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. THE PROCTER & GAMBLE COMPANY E. H. EATON - -------------------------------------- E. H. Eaton Vice President and Comptroller (Principal Accounting Officer) Date: February 11, 1997 EXHIBIT INDEX Exhibit No. Page No. (3-1) Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Annual Report on Form 10-K for the year ended June 30, 1993) (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> EXHIBIT (11) <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES =============================================== COMPUTATION OF EARNINGS PER SHARE ----------------------------------------------- <CAPTION> Amounts in Millions, Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 ------------------ ---------------- 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> NET EARNINGS PER SHARE - ---------------------- Net earnings $ 944 $ 836 $1,923 $1,732 Deduct preferred stock dividends 26 26 52 52 -------- -------- -------- -------- Net earnings applicable to common stock $ 918 $ 810 $1,871 $1,680 - --------------------------------------- ======== ======== ======== ======== Average number of common shares outstanding 682.2 686.5 682.2 686.5 Per Share - --------- Net earnings per share $ 1.35 $ 1.18 $ 2.74 $ 2.45 ======== ======== ======== ======== NET EARNINGS PER SHARE ASSUMING FULL DILUTION - ------------------------------- Net earnings $ 944 $ 836 $1,923 $1,732 Deduct differential -- preferred vs. common dividends 8 10 16 20 -------- -------- -------- -------- Net earnings applicable to common stock $ 936 $ 826 $1,907 $1,712 - --------------------------------------- ======== ======== ======== ======== Average number of common shares outstanding 682.2 686.5 682.2 686.5 Add potential effect of: Exercise of options 10.9 9.4 10.9 9.4 Conversion of preferred stock 51.2 52.1 51.2 52.1 -------- -------- -------- -------- Average number of common shares outstanding, assuming full dilution 744.3 748.0 744.3 748.0 ======== ======== ======== ======== Per share assuming full dilution - -------------------------------- Net earnings per share assuming full dilution 1.26 1.11 2.56 2.29 ======== ======== ======== ======== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT (12) <TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES =============================================== COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ------------------------------------------------- <CAPTION> Millions of Dollars Six Months Years Ended June 30 Ended Dec. 31 -------------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1995 1996 ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> EARNINGS AS DEFINED - ---------------------------------- Earnings from operations before income taxes after eliminating undistributed earnings of equity method investees $2,870 $ 294 $3,307 $4,022 $4,695 $2,663 $2,937 Fixed charges excluding capitalized interest 584 631 569 571 576 268 294 ------ ------ ------ ------ ------ ------ ------ TOTAL EARNINGS, AS DEFINED $3,454 $ 925 $3,876 $4,593 $5,271 $2,931 $3,231 ====== ====== ====== ====== ====== ====== ====== FIXED CHARGES, AS DEFINED - -------------------------------------------- Interest expense (including capitalized interest) $ 535 $ 577 $ 501 $ 511 $ 493 $ 247 $ 246 1/3 of rental expense 74 79 87 83 92 22 48 ------ ------ ------ ------ ------ ------ ------ TOTAL FIXED CHARGES, AS DEFINED $ 609 $ 656 $ 588 $ 594 $ 585 $ 269 $ 294 ====== ====== ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES 5.7 1.4 6.6 7.7 9.0 10.9 11.0 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000080424 <NAME> THE PROCTER & GAMBLE COMPANY <MULTIPLIER> 1,000,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-START> JUL-1-1996 <PERIOD-END> DEC-31-1996 <EXCHANGE-RATE> 1 <CASH> 2,189 <SECURITIES> 532 <RECEIVABLES> 2,928 <ALLOWANCES> 0 <INVENTORY> 3,227 <CURRENT-ASSETS> 11,121 <PP&E> 18,641 <DEPRECIATION> 7,371 <TOTAL-ASSETS> 28,120 <CURRENT-LIABILITIES> 7,964 <BONDS> 4,283 <PREFERRED-MANDATORY> 0 <PREFERRED> 1,874 <COMMON> 680 <OTHER-SE> 9,757 <TOTAL-LIABILITY-AND-EQUITY> 28,120 <SALES> 18,045 <TOTAL-REVENUES> 18,045 <CGS> 10,070 <TOTAL-COSTS> 4,907 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 246 <INCOME-PRETAX> 2,923 <INCOME-TAX> 1,000 <INCOME-CONTINUING> 1,923 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,923 <EPS-PRIMARY> 2.74 <EPS-DILUTED> 1.56 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/77385/0000077385-97-000002.txt

-----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, HZ2m9sUah6YLQCPhxyTvb6p6vb8F3WLDjo9FNztVIEVmLlcXF/FT+Sic2yPLI2el VFxkBjbPQh2Ket0gf6ITRA== <SEC-DOCUMENT>0000077385-97-000002.txt : 19970222 <SEC-HEADER>0000077385-97-000002.hdr.sgml : 19970222 ACCESSION NUMBER: 0000077385-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES ENERGY CORP CENTRAL INDEX KEY: 0000077385 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 362642766 STATE OF INCORPORATION: IL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05540 FILM NUMBER: 97526096 BUSINESS ADDRESS: STREET 1: 24TH FLOOR STREET 2: 130 EAST RANDOLPH DRIVE CITY: CHICAGO STATE: IL ZIP: 60601-6207 BUSINESS PHONE: 3122404299 MAIL ADDRESS: STREET 1: 130 EAST RANDOLPH DRIVE CITY: CHICAGO STATE: IL ZIP: 60601 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLES GAS CO/ DATE OF NAME CHANGE: 19600201 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5540 PEOPLES ENERGY CORPORATION (Exact name of registrant as specified in its charter) Illinois 36-2642766 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Address of principal executive offices) (Zip Code) (312) 240-4000 (Registrant's telephone number, including area code) 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 34,981,497 shares of Common Stock, without par value, outstanding at January 31, 1997. <TABLE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Peoples Energy Corporation CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended December 31, December 31, ------------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Thousands, except per-share amounts) <S> <C> <C> <C> <C> OPERATING REVENUES: Gas sales $343,301 $275,173 $1,124,897 $ 901,659 Transportation 38,929 39,270 128,535 129,332 Other 4,918 3,162 14,768 12,892 -------- -------- ---------- ---------- Total Operating Revenues 387,148 317,605 1,268,200 1,043,883 -------- -------- ---------- ---------- OPERATING EXPENSES: Gas costs 188,594 129,871 588,598 441,220 Operation 54,159 54,129 220,328 204,501 Maintenance 11,526 10,055 47,113 42,363 Depreciation and amortization 18,451 16,655 72,430 66,545 Taxes - Income 23,344 21,512 58,452 36,888 - State & local revenue 39,295 33,765 126,702 112,239 - Other 5,027 5,073 21,956 21,759 -------- -------- ---------- ---------- Total Operating Expenses 340,396 271,060 1,135,579 925,515 -------- -------- ---------- ---------- OPERATING INCOME 46,752 46,545 132,621 118,368 -------- -------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Interest income 515 2,654 3,282 11,361 Interest on long-term debt of subsidiaries (8,927) (10,951) (35,803) (45,812) Other interest expense (915) (1,998) (4,030) (8,081) Income taxes (81) 926 (6,846) (2,364) Miscellaneous - net 146 (1,060) 15,588 (329) -------- -------- --------- -------- Total Other Income and Deductions (9,262) (10,429) (27,809) (45,225) -------- -------- --------- -------- NET INCOME $ 37,490 $ 36,116 $ 104,812 $ 73,143 ======== ======== ========= ======== Average Shares of Common Stock Outstanding 34,973 34,928 34,954 34,913 Earnings Per Share of Common Stock $ 1.07 $ 1.03 $ 3.00 $ 2.10 ======== ======== ========= ======== Dividends Declared Per Share $ 0.46 $ 0.45 $ 1.84 $ 1.80 ======== ======== ========= ======== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, December 31, 1996 September 30, 1995 (Unaudited) 1996 (Unaudited) ----------- ------------ ----------- (Thousands) <S> <C> <C> <C> PROPERTIES AND OTHER ASSETS - --------------------------- CAPITAL INVESTMENTS: Property, plant and equipment, at original cost $2,058,831 $2,046,156 $1,999,439 Less - Accumulated depreciation 678,801 665,077 635,123 ---------- ---------- ---------- Net property, plant and equipment 1,380,030 1,381,079 1,364,316 Other investments 13,794 12,348 10,391 ---------- ---------- ---------- TOTAL CAPITAL INVESTMENTS - NET 1,393,824 1,393,427 1,374,707 ---------- ---------- ---------- CURRENT ASSETS: Cash 8,838 4,684 5,938 Cash equivalents 16,845 33,086 27,399 Receivables - Customers, net of allowance for uncollectible accounts of $27,329, $26,211, and $18,447, respectively 137,503 68,675 130,437 Other 25,330 32,399 7,905 Accrued unbilled revenues 90,766 29,314 68,731 Materials and supplies, at average cost 17,408 16,128 16,242 Gas in storage, at last-in, first-out cost 78,496 65,502 105,367 Gas costs recoverable through rate adjustments 41,951 19,920 4,988 Prepayments 16,836 12,287 1,727 Other 900 900 1,100 ---------- ---------- ---------- TOTAL CURRENT ASSETS 434,873 282,895 369,834 ---------- ---------- ---------- OTHER ASSETS: Regulatory assets of subsidiaries 81,931 91,498 71,449 Deferred charges 18,108 15,930 15,048 ---------- ---------- ---------- TOTAL OTHER ASSETS 100,039 107,428 86,497 ---------- ---------- ---------- TOTAL PROPERTIES AND OTHER ASSETS $1,928,736 $1,783,750 $1,831,038 ========== ========== ========== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, December 31, 1996 September 30, 1995 (Unaudited) 1996 (Unaudited) ----------- ------------ ----------- (Thousands of Dollars) <S> <C> <C> <C> CAPITALIZATION AND LIABILITIES - ------------------------------ CAPITALIZATION: Common Stockholders' Equity: Common stock, without par value Authorized - 60,000,000 shares Outstanding - 34,979,929, 34,960,399, and 34,937,321 shares, respectively $ 278,282 $ 277,881 $ 277,629 Retained earnings 424,704 403,304 384,976 ---------- ---------- ---------- Total Common Stockholders' Equity 702,986 681,185 662,605 Long-term debt of subsidiaries, exclusive of sinking fund payments and maturities due within one year 527,039 527,064 527,104 ---------- ---------- ---------- TOTAL CAPITALIZATION 1,230,025 1,208,249 1,189,709 ---------- ---------- ---------- CURRENT LIABILITIES: Interim loans of subsidiaries 29,025 2,625 12,025 Accounts payable 200,783 147,972 161,827 Dividends payable on common stock 16,091 16,082 15,722 Customer gas service and credit deposits 40,728 42,390 43,897 Sinking fund payments and maturities, due within one year - Long-term debt of subsidiaries -- -- 8,000 Accrued taxes 72,420 32,821 63,291 Gas sales revenue refundable through rate adjustments 15,818 13,921 52,032 Accrued interest 7,155 10,796 7,303 Temporary LIFO liquidation credit 1,603 -- 1,389 ---------- ---------- ---------- TOTAL CURRENT LIABILITIES 383,623 266,607 365,486 ---------- ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes - primarily accelerated depreciation 234,882 230,948 211,899 Investment tax credits being amortized over the average lives of related property 35,032 35,439 36,638 Other 45,174 42,507 27,306 ---------- ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 315,088 308,894 275,843 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES $1,928,736 $1,783,750 $1,831,038 ========== ========== ========== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> Three Months Ended December 31, ------------------ 1996 1995 ---- ---- (Thousands) <S> <C> <C> OPERATING ACTIVITIES: Net Income $ 37,490 $ 36,116 Adjustments to reconcile net income to net cash: Depreciation and amortization 18,451 16,655 Deferred income taxes and investment tax credits - net 1,379 79 Change in deferred credits and other liabilities 4,816 864 Change in other assets 5,986 (31,017) Other -- 19 Change in current assets and liabilities: Receivables - net (61,759) (79,729) Accrued unbilled revenues (61,452) (47,564) Materials and supplies (1,280) 224 Gas in storage (12,994) (4,821) Gas costs recoverable (22,031) 1,217 Accounts payable 52,811 59,450 Customer gas service and credit deposits (1,662) 3,320 Accrued taxes 39,599 35,132 Gas sales revenue refundable 1,897 (27,470) Accrued interest (3,641) (5,494) Temporary LIFO liquidation credit 1,603 1,389 Prepayments (4,549) 575 -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,336) (41,055) -------- -------- INVESTING ACTIVITIES: Capital expenditures of subsidiaries - construction (15,874) (19,784) Other assets 632 12,583 Other capital investments (2,203) (43) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (17,445) (7,244) -------- -------- FINANCING ACTIVITIES: Interim loans of subsidiaries - net 26,400 11,125 Trust fund - bond redemption -- 237 Retirement of long-term debt of subsidiaries (25) (90,770) Dividends paid on common stock (16,082) (15,711) Proceeds from issuance of common stock 401 516 -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,694 (94,603) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (12,087) (142,902) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,770 176,239 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,683 $ 33,337 ======== ======== <FN> The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> Peoples Energy Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Peoples Energy Corporation (Company) and its wholly owned subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas), North Shore Gas Company (North Shore Gas), Peoples District Energy Corporation (Peoples District Energy), Peoples Energy Services Corporation, Peoples Energy Resources Corp., and Peoples NGV Corp., and comprise the assets, liabilities, revenues, expenses, and underlying common stockholders' equity of these companies. Income is principally derived from the Company's utility subsidiaries, Peoples Gas and North Shore Gas. The statements have been prepared by the Company in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) and reflect all adjustments that are, in the opinion of management, necessary to present fairly the results for the interim periods herein and to prevent the information from being misleading. Certain footnote disclosures and other information, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted from these interim financial statements, pursuant to SEC rules and regulations. Therefore, the statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. Certain items previously reported for the prior periods have been reclassified to conform with the presentation in the current periods. The business of the Company's utility subsidiaries is influenced by seasonal weather conditions because a large element of the utilities' customer load consists of gas used for space heating. Weather-related deliveries can, therefore, have a significant positive or negative impact on net income. Accordingly, the results of operations for the interim periods presented are not indicative of the results to be expected for all or any part of the balance of the current fiscal year. 2. SIGNIFICANT ACCOUNTING POLICIES 2A Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2B Revenue Recognition Gas sales revenues are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month. 2C Regulated Operations Peoples Gas' and North Shore Gas' utility operations are subject to regulation by the Illinois Commerce Commission (Commission). Regulated operations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This standard controls the application of generally accepted accounting principles for companies whose rates are determined by an independent regulator such as the Commission. Regulatory assets represent certain costs that are expected to be recovered from customers through the ratemaking process. When incurred, such costs are deferred as assets in the balance sheet and subsequently recorded as expenses when those same amounts are reflected in revenues. 2D Income Taxes The Company follows the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on Peoples Gas and North Shore Gas, certain adjustments made to deferred income taxes are, in turn, debited or credited to regulatory assets or liabilities. 2E Statement of Cash Flows For purposes of the balance sheet and the statement of cash flows, the Company considers all short-term liquid investments with maturities of three months or less to be cash equivalents. <TABLE> Income taxes and interest paid (excluding capitalized interest) were as follows: <CAPTION> For the three months ended December 31, 1996 1995 ----------------------------------------------- (Thousands) <S> <C> <C> Income taxes paid $ 3,877 $ 1,451 Interest paid 13,201 16,946 </TABLE> 2F Recovery of Gas Costs, Including Charges for Transition Costs Under the tariffs of Peoples Gas and North Shore Gas, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or as a current asset (with a contra entry to Gas Costs). The Commission conducts annual proceedings regarding, for each gas utility, the reconciliation of revenues from the Gas Charge and related costs incurred for gas. In such proceedings, costs recovered by a utility through the Gas Charge are subject to challenge. Such proceedings regarding Peoples Gas and North Shore Gas for fiscal years 1995 and 1996 are currently pending before the Commission. Pursuant to Federal Energy Regulatory Commission (FERC) Order 636 and successor orders, pipelines are allowed to recover from their customers so-called transition costs. These costs arise from the restructuring of pipeline service obligations required by the 636 Orders. The utilities are currently recovering pipeline charges for transition costs through the Gas Charge. (See Notes 3A and 3B.) 3. RATES AND REGULATION 3A Utility Rate Proceedings Peoples Gas' Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of Peoples Gas that are designed to increase annual revenues by approximately $30.8 million, exclusive of additional charges for revenue taxes. Peoples Gas was allowed a rate of return on original-cost rate base of 9.19 per cent, which reflects an 11.10 per cent cost of common equity. The new rates were implemented on November 14, 1995. A group of industrial transportation customers have appealed the Commission's order to the Illinois Appellate Court. Any change made by the Appellate Court would have a prospective effect only. North Shore Gas' Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of North Shore Gas that are designed to increase annual revenues by approximately $5.6 million, exclusive of additional charges for revenue taxes. North Shore Gas was allowed a rate of return on original-cost rate base of 9.75 per cent, which reflects an 11.30 per cent cost of common equity. The new rates were implemented on November 14, 1995. A group of industrial transportation customers has appealed the Commission's order to the Illinois Appellate Court. Any change made by the Appellate Court would have a prospective effect only. FERC Order 636 Cost Recovery. In 1994, the Commission issued orders providing for the full recovery of pipeline charges for FERC Order 636 transition costs from Peoples Gas' and North Shore Gas' gas service customers. The Commission directed that gas supply realignment (GSR) costs (one of the four categories of transition costs) be recovered on a uniform volumetric basis from all transportation and sales customers. A group of industrial transportation customers has filed a petition with the Illinois Supreme Court appealing the Commission's orders. If the Illinois Supreme Court accepts the appeal, any changes made by it to the Commission's orders would have a prospective effect only. (See Notes 2F and 3B.) 3B FERC Orders 636, 636-A, and 636-B FERC Order 636 and successor orders require pipelines to make separate rate filings to recover transition costs. The utilities are subject to charges for transition cost recovery by Natural Gas Pipeline Company of America (Natural). Under a Stipulation and Agreement filed by Natural and approved by FERC, Natural's charges to the utilities for GSR transition costs (the largest category of such costs for Peoples Gas and North Shore Gas) are subject to a cap of approximately $103 million for Peoples Gas and $25 million for North Shore Gas. Peoples Gas and North Shore Gas are currently recovering transition costs through the Gas Charge. At December 31, 1996, Peoples Gas and North Shore Gas have made payments of $76.8 million and $18.8 million, and have accrued an additional $26.2 million and $6.2 million, respectively, toward the caps. The 636 Orders are not expected to have a material effect on financial position or results of operations of the Company or its subsidiaries. (See Notes 2F and 3A.) 4. ENVIRONMENTAL MATTERS 4A Former Manufactured Gas Plant Operations The Company's utility subsidiaries, their predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas (Manufactured Gas Sites). In connection with manufacturing and storing gas, various by-products and waste materials were produced, some of which might have been disposed of rather than sold. Under certain laws and regulations relating to the protection of the environment, the subsidiaries might be required to undertake remedial action with respect to some of these materials. Three of the Manufactured Gas Sites are discussed in more detail below. Peoples Gas and North Shore Gas, under the supervision of the Illinois Environmental Protection Agency (IEPA), are conducting investigations of 29 Manufactured Gas Sites. These investigations may require the utility subsidiaries to perform additional investigation and remediation. The investigations are in a preliminary stage and are expected to occur over an extended period of time. In 1990, North Shore Gas entered into an Administrative Order on Consent (AOC) with the United States Environmental Protection Agency (EPA) and the IEPA to implement and conduct a remedial investigation/feasibility study (RI/FS) of a Manufactured Gas Site located in Waukegan, Illinois, where manufactured gas and coking operations were formerly conducted (Waukegan Site). The RI/FS is comprised of an investigation to determine the nature and extent of contamination at the Waukegan Site and a feasibility study to develop and evaluate possible remedial actions. North Shore Gas entered into the AOC after being notified by the EPA that North Shore Gas, General Motors Corporation (GMC) and Outboard Marine Corporation were each a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) with respect to the Waukegan Site. A PRP is potentially liable for the cost of any investigative and/or remedial work that the EPA determines is necessary. Other parties identified as PRPs did not enter into the AOC. Under the terms of the AOC, North Shore Gas is responsible for the cost of the RI/FS. North Shore Gas believes, however, that it will recover a significant portion of the costs of the RI/FS from other entities. GMC has agreed to share equally with North Shore Gas in funding of the RI/FS cost, without prejudice to GMC's or North Shore Gas' right to seek a lesser cost responsibility at a later date. Peoples Gas has observed what appear to be gas purification wastes on a Manufactured Gas Site in Chicago, formerly called the 110th Street Station, and property contiguous thereto (110th Street Station Site). Peoples Gas has fenced the 110th Street Station Site and is conducting a study under the supervision of the IEPA to determine the feasibility of a limited removal action. The current owner of a site in Chicago, formerly called Pitney Court Station, filed suit against Peoples Gas in federal district court under CERCLA. The suit seeks recovery of the past and future costs of investigating and remediating the site and an order directing Peoples Gas to remediate the site. Peoples Gas is contesting this suit. The utility subsidiaries are accruing and deferring the costs they incur in connection with all of the Manufactured Gas Sites, including related legal expenses, pending recovery through rates or from insurance carriers or other entities. At December 31, 1996, the total of the costs deferred by the subsidiaries, net of recoveries and amounts billed to other entities, was $17.4 million. This amount includes an estimate of the costs of completing the studies required by the EPA at the Waukegan Site and the investigations being conducted under the supervision of the IEPA referred to above. The amount also includes an estimate of the costs of remediation at the Waukegan Site and at the 110th Street Station site in Chicago, at the minimum amount of the current estimated range of such costs. The costs of remediation at the other sites cannot be determined at this time. While each subsidiary intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time. Peoples Gas and North Shore Gas have filed suit against a number of insurance carriers for the recovery of environmental costs relating to the utilities' former manufactured gas operations. The suit asks the court to declare that the insurers are liable under policies in effect between 1937 and 1986 for costs incurred or to be incurred by the utilities in connection with their five Manufactured Gas Sites in Chicago and Waukegan. The utilities are also asking the court to award damages stemming from the insurers' breach of their contractual obligation to defend and indemnify the utilities against these costs. At this time, management cannot determine the timing and extent of the subsidiaries' recovery of costs from their insurance carriers. Accordingly, the costs deferred at December 31, 1996 have not been reduced to reflect recoveries from insurance carriers. Costs incurred by Peoples Gas or North Shore Gas for environmental activities relating to former manufactured gas operations will be recovered from insurance carriers or other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the subsidiaries in connection with former manufactured gas operations will not have a material adverse effect on financial position or results of operations of the subsidiaries. Peoples Gas and North Shore Gas are recovering the costs of environmental activities relating to the utilities' former manufactured gas operations, including carrying charges on the unrecovered balances, under rate mechanisms approved by the Commission. At December 31, 1996, the subsidiaries had recovered $10.2 million of such costs through rates. 4B Former Mineral Processing Site in Denver, Colorado In 1994, North Shore Gas received a demand from the S.W. Shattuck Chemical Company, Inc. (Shattuck), a responsible party under CERCLA, for reimbursement, indemnification and contribution for response costs incurred at a former mineral processing site in Denver, Colorado. Shattuck is a wholly owned subsidiary of Salomon, Inc. (Salomon). The demand alleges that North Shore Gas is a successor-in-interest to certain companies that were allegedly responsible during the period 1934-1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. The cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million. Salomon has provided financial assurance for the performance of the remediation at the site. North Shore Gas does not believe that it has liability for the response costs, but cannot determine the matter with certainty. At this time, North Shore Gas cannot reasonably estimate what range of loss, if any, may occur. In the event that North Shore Gas incurred liability, it would pursue reimbursement from insurance carriers, other responsible parties, if any, and through its rates for utility service. North Shore Gas filed a declaratory judgment action against Salomon in the District Court for the Northern District of Illinois. The suit asks the court to declare that North Shore Gas is not liable for response costs incurred or to be incurred at the Denver site. Salomon has filed a counterclaim for costs incurred and to be incurred by Salomon and Shattuck with respect to the site. 4C Gasoline Release in Wheeling, Illinois In June 1995, North Shore Gas received a letter from the IEPA informing North Shore Gas that it was not in compliance with certain provisions of the Illinois Environmental Protection Act which prohibit water pollution within the State of Illinois. On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming North Shore Gas and four other parties as defendants. The complaint alleges that the violations are the result of a gasoline release that occurred in Wheeling, Illinois in June 1992 when a contractor who was installing a pipeline for North Shore Gas accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. North Shore Gas is contesting this suit. Management does not believe the outcome of this suit will have a material adverse effect on financial position or results of operations of the Company or North Shore Gas. 5. COVENANTS REGARDING RETAINED EARNINGS North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At December 31, 1996, such restrictions amounted to $11.6 million out of North Shore Gas' total retained earnings of $69.6 million; accordingly, $58 million are available for the payment of cash dividends and the purchase or redemption of capital stock. 6. EXPIRATION OF GAS STORAGE CONTRACTS Peoples Gas and North Shore Gas had certain natural gas storage contracts with Natural that expired on or before December 1, 1995. Associated with the expiration of the contracts, the utilities realized a gain, after income taxes, of approximately $8.9 million for the 12 months ended December 31, 1996. 7. TAX MATTERS On September 30, 1993, the Company received notification from the Internal Revenue Service (IRS) that settlement of past income tax returns had been reached for fiscal years 1978 through 1990. The IRS settlement resulted in payments of principal and interest to the Company in 1994 in total amount of approximately $28 million, or $21.6 million after income taxes. Both Peoples Gas and North Shore Gas received regulatory authorization to defer the recognition of the settlement amount in income for fiscal year 1993, and to recognize their respective portions of the settlement amount in income for fiscal years 1994 and 1995. Each utility represented to the Commission that, having received this accounting authorization, it would not file a request for an increase in base rates before December 1994. As a result of the Commission's accounting authorization, Peoples Gas and North Shore Gas amortized to operation expense approximately $9.8 million, or $7.5 million after income taxes, for the 12 months ended December 31, 1995. The effect was to offset increases in costs that the utilities would incur during the period. 8. LONG-TERM DEBT 8A Interest-Rate Adjustments The rate of interest on the City of Joliet 1984 Series C Bonds, which are secured by Peoples Gas' Adjustable-Rate First Mortgage Bonds, Series W, is subject to adjustment annually on October 1. Owners of the Series C Bonds have the right to tender such bonds at par during a limited period prior to that date. Peoples Gas is obligated to purchase any such bonds tendered if they cannot be remarketed. All Series C Bonds that were tendered prior to October 1, 1996, have been remarketed. The interest rate on such bonds is 3.95 per cent for the period October 1, 1996, through September 30, 1997. The rate of interest on the City of Chicago 1993 Series B Bonds, which are secured by Peoples Gas' Adjustable-Rate First Mortgage Bonds, Series EE, is subject to adjustment annually on December 1. Owners of the Series B Bonds have the right to tender such bonds at par during a limited period prior to that date. Peoples Gas is obligated to purchase any such bonds tendered if they cannot be remarketed. All Series B Bonds that were tendered prior to December 1, 1996, have been remarketed. The interest rate on such bonds is 3.70 per cent for the period December 1, 1996, through November 30, 1997. Peoples Gas classifies these adjustable-rate bonds as long-term liabilities, since it would refinance them on a long-term basis if they could not be remarketed. In order to ensure its ability to do so, on February 1, 1994, Peoples Gas established a $37.4 million three year line of credit with The Northern Trust Company, which has since been extended to January 31, 1999. 8B Bonds Redeemed On December 29, 1995, Peoples Gas redeemed, from general corporate funds, approximately $87 million aggregate principal amount of the City of Joliet's 1984 Gas Supply Revenue Refunding Bonds, Series A and B, which were secured by Peoples Gas' Series U and V First and Refunding Mortgage Bonds. On February 1, 1996, North Shore Gas redeemed $8 million aggregate principal amount of its Series I First Mortgage Bonds using the proceeds of a short-term bank loan as well as other monies of North Shore Gas. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Net Income Net income increased $1.4 million, to $37.5 million, for the current three-month period, due mainly to rate increases that went into effect on November 14, 1995 for Peoples Gas and North Shore Gas (see Note 3A of the Notes to Consolidated Financial Statements). In addition, net income benefited from increased other operating revenues, lower pension expenses, and reduced interest expense. These increases were partially offset by higher provisions for depreciation and amortization expense and for uncollectible accounts as well as lower interest income and a decline in natural gas deliveries arising principally from energy conservation measures. Net income increased $31.7 million, to $104.8 million, for the current 12-month period, due primarily to the full calendar year's effect of the aforementioned rate increases and to weather that was 8 per cent colder than in the year-ago period. In addition, net income benefited from a one-time gain associated with the expiration of certain natural gas storage contracts (see Note 6 of the Notes to Consolidated Financial Statements), lower pension expenses, and reduced interest expense. These increases were partly offset by higher operation and depreciation and amortization expenses, the prior period's recognition of a federal income tax settlement (see Note 7 of the Notes to Consolidated Financial Statements), and lower interest income. <TABLE> A summary of variations affecting income between periods is presented below, with explanations of significant differences following: <CAPTION> Three Months Ended 12 Months Ended December 31, 1996 December 31,1996 Increase/(Decrease) Increase/(Decrease) from Prior Period from Prior Period ------------------ ------------------- (Thousands of dollars) Amount Per Cent Amount Per Cent - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net operating revenues (a) $5,290 3.4 $62,476 12.7 Operation and maintenance expenses 1,501 2.3 20,577 8.3 Depreciation and amortization expense 1,796 10.8 5,885 8.8 Income taxes 1,832 8.5 21,564 58.5 Other income and deductions (1,167) (11.2) (17,416) (38.5) Net Income 1,374 3.8 31,669 43.3 - --------------------------------------------------------------------------------- <FN> (a) Operating revenues, net of gas costs and revenue taxes. </TABLE> Net Operating Revenues Gross revenues of Peoples Gas and North Shore Gas are affected by changes in the unit cost of the subsidiaries' gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the subsidiaries. The direct customer purchases have no effect on net income because the utilities provide transportation service for such gas volumes and recover margins similar to those applicable to conventional gas sales. Changes in the unit cost of gas do not significantly affect net income because the utilities' tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 2F of the Notes to Consolidated Financial Statements.) The utilities' tariffs also provide for dollar-for-dollar recovery of the cost of revenue taxes imposed by the State and various municipalities. Since income is not significantly affected by changes in revenue from customers' gas purchases from producers or marketers rather than from the subsidiaries, changes in gas costs, or changes in revenue taxes, the discussion below pertains to "net operating revenues" (operating revenues, net of gas costs and revenue taxes). The Company considers net operating revenues to be a more pertinent measure of operating results than gross revenues. Net operating revenues increased $5.3 million, to $159.3 million, for the current three-month period, due mainly to the effect of the aforementioned rate increases which improved net operating revenues by $4.6 million ($2.8 million after income taxes). Also, net operating revenues increased $1.9 million for environmental costs recovered through rates and the sale of interests in certain oil and gas rights ($863,000). These increases were partly offset by a reduction in natural gas deliveries reflecting customer conservation measures. Net operating revenues increased $62.5 million, to $552.9 million, for the current 12-month period, due primarily to the impact of the rate increases that amounted to $31.8 million ($19.2 million after income taxes). Also, weather that was 8 per cent colder than the comparable prior period improved net operating revenues by about $13.2 million ($8 million after income taxes). See Other Matters - Operating Statistics for details of selected financial and operating information by gas service classification. Operation and Maintenance Expenses Operation and maintenance expenses increased $1.5 million, to $65.7 million, for the current three-month period, due mainly to increases of $1.5 million for the provision for uncollectible accounts, which resulted largely from greater sales revenues, and $1.9 million for environmental costs recovered through rates. These increases were partially offset by decreased pension expenses of $1.3 million, primarily resulting from changes in actuarial assumptions. Operation and maintenance expenses increased $20.6 million, to $267.4 million, for the current 12-month period, due principally to the reduction of expense of $9.8 million resulting from the prior period's recognition of an IRS settlement. (See Note 7 of the Notes to Consolidated Financial Statements.) Also, the provision for uncollectible accounts increased $6.4 million, due mostly to higher sales revenues attributable to colder weather and increased rates. In addition, increases between periods resulted from maintenance of mains ($4.7 million), environmental costs recovered through rates ($5.1 million), reengineering costs ($1.8 million), and outside services ($2.5 million). These increases were offset, in part, by decreased pension expenses of $12.3 million, reflecting a net gain from the settlement of portions of pension plan obligations and changes in actuarial assumptions. Depreciation and Amortization Expense Depreciation and amortization expense increased $1.7 million, to $18.5 million, and $5.9 million, to $72.4 million, for the current three- and 12-month periods, respectively, due primarily to the amortization of costs associated with the closing of Peoples Gas' synthetic natural gas-making (SNG) Plant and depreciable property additions. Income Taxes Income taxes, exclusive of taxes in other income and deductions, increased $1.8 million, to $23.3 million, and $21.6 million, to $58.5 million, for the current three- and 12-month periods, respectively, due principally to higher pre-tax income. Other Income and Deductions Other income and deductions decreased $1.2 million for the current three-month period, due primarily to less interest on long-term debt in connection with the early redemption of first mortgage bonds (see Note 8B of the Notes to Consolidated Financial Statements) and to decreased interest on amounts refundable to customers. These decreases were partially offset by lower interest income reflecting lower cash balances available for investment. Other income and deductions decreased $17.4 million for the current 12-month period, due principally to less interest on long-term debt reflecting the aforementioned bond redemptions and decreased interest on amounts refundable to customers. Additionally, the current period includes the gain of $8.9 million, after income taxes, associated with the expiration of certain natural gas storage contracts, (See Note 6 of the Notes to Consolidated Financial Statements). These decreases were partially offset by lower interest income due to lower cash balances. Other Matters Effect of Weather. Weather variations affect the volumes of gas delivered for heating purposes and, therefore, can have a significant positive or negative impact on net income, cash position, and coverage ratios. Accounting Standards. In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement requires recognition of impairment losses on long-lived assets when an asset's book value may not be recoverable. For regulated companies, the statement requires that regulatory assets be probable of recovery at every balance sheet date. This statement requires adoption no later than the Company's 1997 fiscal year. The Company does not expect the adoption of SFAS No. 121 to have a material effect on its financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement requires companies to either recognize compensation costs measured at fair value attributable to employee stock options or similar equity instruments at the grant date in net income, or, in the alternative, provide pro forma footnote disclosure on net income and earnings per share. This statement requires adoption no later than the Company's 1997 fiscal year. The Company anticipates electing the pro forma footnote disclosure provisions of this statement in 1997. Implementation is not expected to have a material effect on pro forma net income or earnings per share. FERC Order 636 Costs. In 1992, the FERC issued Order 636 and successor orders that required substantial restructuring of the service obligations of interstate pipelines. (See Notes 2F, 3A, and 3B of the Notes to Consolidated Financial Statements.) In 1994, the Commission entered orders providing for full recovery by Peoples Gas and North Shore Gas of FERC Order 636 transition costs from the Companys' respective gas service customers. The Commission's orders have been appealed to the Illinois Supreme Court. (See Notes 2F, 3A, and 3B of the Notes to Consolidated Financial Statements.) Reengineering Project. Peoples Gas and North Shore Gas are reengineering their business processes with the goal of increasing efficiency, responsiveness to customer needs, and cost effectiveness. Large Volume Gas Service Agreements. Peoples Gas has entered into gas service contracts with certain large volume customers under a specific rate schedule approved by the Commission. These contracts were negotiated to overcome the potential threat of bypassing the utility's distribution system. The impact on the net income of Peoples Gas as a result of these contracts is not material. <TABLE> Operating Statistics. The following table represents gas distribution margin components: <CAPTION> Three Months Ended Twelve Months Ended December 31, December 31, --------------------- --------------------- 1996 1995 1996 1995 ----- ----- ----- ----- <S> <C> <C> <C> <C> Operating Revenues (thousands): Gas Sales Residential $291,483 $233,776 $ 940,807 $ 760,065 Commercial 43,574 33,982 151,186 116,627 Industrial 8,244 7,415 32,904 24,967 -------- -------- ---------- ---------- 343,301 275,173 1,124,897 901,659 Transportation Residential 11,454 12,344 36,243 39,758 Commercial 15,241 16,677 49,815 53,362 Industrial 9,388 10,249 35,198 36,212 Contract Pooling 2,446 -- 6,879 -- Other 400 -- 400 -- -------- -------- ---------- ---------- 38,929 39,270 128,535 129,332 -------- -------- ---------- ---------- Other Revenues 4,918 3,162 14,768 12,892 -------- -------- ---------- ---------- Total Operating Revenues 387,148 317,605 1,268,200 1,043,883 Less _ Gas Costs 188,594 129,871 588,598 441,220 _ Revenues Taxes 39,295 33,765 126,702 112,239 -------- -------- ---------- ---------- Net Operating Revenues $159,259 $153,969 $ 552,900 $ 490,424 ======== ======== ========== ========== Deliveries (MDth): Gas Sales Residential 46,666 47,793 153,001 141,546 Commercial 7,669 7,417 27,642 23,708 Industrial 1,575 1,825 6,553 5,678 -------- -------- ---------- ---------- 55,910 57,035 187,196 170,932 -------- -------- ---------- ---------- Transportation (a) Residential 8,814 8,862 26,473 26,578 Commercial 12,712 13,772 41,401 44,210 Industrial 11,482 12,144 42,704 42,019 Other 10 -- 10 -- -------- -------- ---------- ---------- 33,018 34,778 110,588 112,807 -------- -------- ---------- ---------- Total Gas Sales and Transportation 88,928 91,813 297,784 283,739 ======== ======== ========== ========== Margin per Dth delivered $ 1.79 $ 1.68 $ 1.86 $ 1.73 <FN> (a)Volumes associated with contract pooling revenues are included in their respective customer classes. </TABLE> LIQUIDITY AND CAPITAL RESOURCES Indenture Restrictions. North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At December 31, 1996, such restrictions amounted to $11.6 million out of North Shore Gas' total retained earnings of $69.6 million; accordingly, $58 million are available for the payment of cash dividends and the purchase of redemption of capital stock. (See Note 5 of the Notes to Consolidated Financial Statements.) Rate Order. On November 8, 1995, the Commission issued orders approving changes in rates of Peoples Gas and North Shore Gas. (See Note 3A of the Notes to Consolidated Financial Statements.) Environmental Matters. The Company's utility subsidiaries are conducting environmental investigations and work at certain sites that were the location of former manufactured gas operations. (See Note 4A of the Notes to Consolidated Financial Statements.) In 1994, North Shore Gas received a demand from a responsible party under CERCLA for reimbursement, indemnification and contribution for response costs incurred at a former mineral processing site in Denver, Colorado. North Shore Gas filed a declaratory judgment action asking the court to declare that North Shore Gas is not liable for response costs relating to the site. (See Note 4B of the Notes to Consolidated Financial Statements.) On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming North Shore Gas and four other parties as defendants. The complaint alleges violations arising out of a gasoline release that occurred in Wheeling, Illinois in June 1992 when a contractor who was installing a pipeline for North Shore Gas accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. North Shore Gas is currently contesting this suit. (See Note 4C of the Notes to Consolidated Financial Statements.) District Energy. Peoples District Energy is a 50 per cent participant in a partnership, Trigen-Peoples District Energy Company, that provides district energy services to the McCormick Place Exposition and Convention Center in Chicago, Illinois. The other partner is a subsidiary of Trigen Energy Corporation (Trigen), a company whose primary business is constructing and operating district energy facilities. Neither the partnership nor its partners are regulated as a public utility. The Company and Trigen have provided a joint and several limited guarantee to the owner and operator of McCormick Place and also have certain limited obligations to the partnership's lender under a Sponsors Support and Equity Contribution Agreement. Bonds Redeemed. On December 29, 1995, Peoples Gas redeemed, from general corporate funds, approximately $87 million aggregate principal amount of the City of Joliet's 1984 Gas Supply Revenue Bonds, Series A and B, which were secured by Peoples Gas' Series U and V First and Refunding Mortgage Bonds. (See Note 8B of the Notes to Consolidated Financial Statements.) On February 1, 1996, North Shore Gas redeemed $8 million aggregate principal amount of its Series I First Mortgage Bonds using the proceeds of a short-term bank loan as well as other monies of North Shore Gas. (See Note 8B of the Notes to Consolidated Financial Statements.) Credit Lines. The utility subsidiaries have lines of credit of $129.4 million. At December 31, 1996, the utility subsidiaries had unused credit available from banks of $100.4 million. Interest Coverage. The fixed charges coverage ratios for Peoples Gas for the 12 months ended December 31, 1996, and for fiscal 1996 and 1995 were 5.23, 4.84, and 2.76, respectively. The corresponding coverage ratios for North Shore Gas for the same periods were 6.10, 5.62, and 2.93, respectively. Dividends. On February 5, 1997, the Directors of the Company voted to increase the regular quarterly dividend on the Company's common stock to 47 cents per share from 46 cents per share previously in effect. The annualized dividend rate now amounts to $1.88 per share. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 4 of the Notes to Consolidated Financial Statements for a discussion pertaining to environmental matters. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number Description of Document ------- -------------------------------------------- 10(a) Severance Agreement Between the Company and Richard E. Terry dated as of December 4, 1996. 10(b) Severance Agreement Between the Company and J. Bruce Hasch dated as of December 4, 1996. 10(c) Severance Agreement Between the Company and Michael S. Reeves dated as of December 4, 1996. 10(d) Severance Agreement Between the Company and James Hinchliff dated as of December 4, 1996. 27 Financial Data Schedule b. Reports on Form 8-K filed during the quarter ended December 31, 1996 None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Peoples Energy Corporation -------------------------- (Registrant) February 12, 1997 By: /s/ K. S. BALASKOVITS ----------------- ------------------------------ (Date) K. S. Balaskovits Vice President and Controller (Same as above) ------------------------------ Principal Accounting Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.A <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10(A) <TEXT> SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND RICHARD E. TERRY Chairman and Chief Executive Officer THIS AGREEMENT, effective as of December 4, 1996, by and between Peoples Energy Corporation, an Illinois corporation and Richard E. Terry, Chairman and Chief Executive Officer (the "Executive"). WITNESSETH WHEREAS, the Executive is a valuable employee of the Company and an integral part of the management of the Company; and WHEREAS, the Company wishes to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control; and WHEREAS, the Board of Directors of PEC, at its meeting on December 4, 1996, determined that it would be in the best interests of the Company and its shareholders to assure continuity in the management of the Company's administration and operations in the event of a Change in Control by entering into this Agreement with the Executive; NOW THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. Definitions. "AAA" shall have the meaning set forth in paragraph 5 of this Agreement. "Affiliate" shall mean the subsidiaries of PEC and other entities controlled by such subsidiaries. "Agreement" shall mean this Severance Agreement. "Benefit Service" shall mean the Benefit Service as defined in the PEC Retirement Plan. "Board" shall mean the Board of Directors of PEC. "Cause" shall mean the Executive's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company as determined in good faith by a vote of at least two-thirds of the non-employee directors of PEC at a meeting of the Board at which the Executive is provided an opportunity to be heard. "Change in Control" shall mean: (i) either (A) receipt by PEC of a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission ("SEC") pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC, or (B) actual knowledge by PEC of facts, on the basis of which any Person is required to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13 (d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC; (ii) purchase by any Person, other than PEC or a wholly-owned subsidiary of the Company, of shares pursuant to a tender or exchange offer to acquire any stock of PEC (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of PEC of (a) any consolidation or merger of PEC in which PEC is not the continuing or surviving corporation or pursuant to which shares of stock of PEC would be converted into cash, securities or other property, other than a consolidation or merger of PEC in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which PEC is the continuing or surviving corporation, but in which the common shareholders of PEC immediately prior to the consolidation or merger do not hold at least ninety (90) percent of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least ninety (90) percent of the common stock of the corporation which owns all of the common stock of PEC), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of PEC (Transfer Transaction), (except where (A) PEC owns all of the outstanding stock of the transferee entity or (B) the holders of PEC's common stock immediately prior to the Transfer Transaction own at least ninety (90) percent of the outstanding stock of the transferee entity, immediately after the Transfer Transaction), or (d) any consolidation or merger of PEC where, after the consolidation or merger, one Person owns one hundred (100) percent of the shares of stock of PEC (except where the holders of PEC's common stock immediately prior to such merger or consolidation own at least ninety (90) percent of the outstanding stock of such Person immediately after such consolidation or merger); or (iv) a change in the majority of the members of the Board within a twenty-four (24) month period, unless the election or nomination for election by PEC's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the twenty-four (24) month period. "Code" shall mean the United States Internal Revenue Code of 1986, as amended, or any successor thereto. "Company" shall mean PEC and include any Affiliate and successor or successors to PEC. "Compensation" shall mean the sum of (i) the Executive's annual rate of salary on the last day the Executive was an employee of the Company, including any elective contributions made by the Company on behalf of the Executive that are not includable in the gross income of the Executive under Section 125 or 402(a)(8) of the Code or any successor provision thereto, and including any amount of salary that has been deferred by the Executive, (ii) an award equal to the average of the amounts awarded to the Executive under the PEC STIC during the three years preceding termination of employment, and (iii) the economic equivalent value of any awards received by Executive under the PEC LTIC in the calendar year preceding termination of employment (as determined in good faith by the PEC Directors' Compensation- Nominating Committee). "Computed Award" shall mean Computed Award as defined in the PEC STIC. "Constructive Discharge" shall mean a good faith determination by the Executive that there has been any (i) material change by the Company of the Executive's functions, duties or responsibilities which change would cause the Executive's position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Executive of duties and responsibilities inconsistent with his position, (ii) assignment or reassignment by the Company of the Executive, without the Executive's consent, to another place of employment more than fifty (50) miles from the Executive's current place of employment, (iii) liquidation, dissolution, consolidation or merger of PEC, or transfer of all or substantially all of its assets, other than a transaction or series of transactions in which the resulting or surviving transferee entity has, in the aggregate, a net worth at least equal to that of PEC immediately before such transaction and such resulting or surviving transferee entity expressly assumes this Agreement and all obligations and undertakings hereunder, or (iv) reduction, which is more than de minimis, in the Executive's total compensation (Compensation, perquisites and benefits). It is understood and agreed by all parties hereto that a reduction in (a) the amount the Executive receives under PEC STIC, (b) the awards received by the Executive under the PEC LTIC, or (c) the prerequisites or benefits of the Executive shall not be deemed a reduction if such amount received under the PEC STIC, awards received under the PEC LTIC, or such prerequisites or benefits are with respect to the PEC STIC, PEC LTIC and prerequisites, greater than that received by any Company officer and with respect to benefits, no less than that received by any Company officer. An event shall not be considered Constructive Discharge unless the Executive provides written notice to PEC specifying the event relied upon for Constructive Discharge within six months after the occurrence of such event. Within thirty days of receiving such written notice from the Executive, the Company may cure or cause to be cured the event upon which the Executive claims a Constructive Discharge and no Constructive Discharge shall have been considered to have occurred with respect to such event. PEC and the Executive, upon mutual written agreement, may waive any of the foregoing provisions which would otherwise constitute a Constructive Discharge. "Coverage Period" shall mean the period commencing with the month in which termination of employment as described in paragraph 3.a. of this Agreement shall have occurred, and ending thirty-six (36) months thereafter. "Effective Date" shall mean December 4, 1996. "PEC" shall mean Peoples Energy Corporation, an Illinois corporation. "PEC Directors' Compensation-Nominating Committee" shall mean the Peoples Energy Corporation Board of Directors' Compensation-Nominating Committee. "PEC LTIC" shall mean the Peoples Energy Corporation Long Term Incentive Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC Retirement Plan" shall mean the Peoples Energy Corporation Retirement Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC SRB" shall mean the Peoples Energy Corporation Supplemental Retirement Benefit Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC STIC" shall mean the Peoples Energy Corporation Short Term Incentive Compensation Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC TAP" shall mean the Peoples Energy Corporation Termination Allowance Plan as in effect on the Effective Date, as amended from time to time and as enhanced as described in that certain PEC brochure for nonunion employees titled, "Career Transition Opportunities", dated November 1996. "Plan Year" shall mean the Plan Year as defined under the PEC STIC. "Present Value Amount" shall mean the amount calculated by the PEC Directors' Compensation-Nominating Committee as of the date of the termination of the Executive's employment as described in paragraph 3.a., using as a mortality basis the mortality basis used by the PEC Retirement Plan for determining benefits, or if such mortality basis is not available, a mortality basis determined by the PEC Retirement Plan's consulting actuaries, and assuming a discount rate equal to the average of the yield on Thirty (30) year United States Treasury Bonds for the second calendar month preceding the Executive's termination of employment as described in paragraph 3.a. "Rule of Eighty-Five" shall mean the Rule of Eighty-Five as defined under the PEC Retirement Plan. "SARs" shall mean SARs as defined under the PEC LTIC. "Stock Options" shall mean Options as defined under the PEC LTIC. "Term" shall mean the term of this Agreement as set forth in paragraph 2. "Trust" shall mean the Trust under Peoples Energy Corporation Executive Deferred Compensation Plan and Supplemental Retirement Benefit Plan, Part A and Part B, dated September 22, 1995, as amended July 1, 1996, in effect on the Effective Date, as amended from time to time. 2. Term. This Agreement shall be effective as of the Effective Date and shall continue thereafter until the later of: (i) thirty-six (36) full calendar months following the date on which occurs any of the events described in subparagraphs (i), (ii) or (iv) of the definition of Change in Control in paragraph 1; or (ii) twenty-four (24) full calendar months following the date on which the transaction that was the subject of shareholder approval pursuant to subparagraph (iii) of the definition of Change in Control in paragraph 1 has been completed. 3. Severance Benefit. a. If, during the period commencing on the date of a Change in Control and ending on the last day of the Term, the Executive's employment hereunder is terminated by the Company for any reason, other than Cause, death, or disability, or is terminated by the Executive in the event of a Constructive Discharge, then, within five (5) business days after such termination, PEC shall pay to the Executive (if the Executive has died before receiving all payments to which he has become entitled hereunder to the beneficiary or estate of the Executive as described in paragraph 14) the sum of (i) accrued but unpaid salary and accrued but unused paid time off under the Company's "Paid Time Off Bank" policy for all nonunion employees, effective January 1, 1997, or any successor plan, (ii) severance pay in a lump sum cash amount equal to three (3) years of the Executive's Compensation, and (iii) the amount determined pursuant to paragraph 3.e. The Executive (if the Executive has died before receiving all payment to which he becomes entitled hereunder, the beneficiary or the estate of the Executive as described in paragraph 14) will be paid in cash within ten (10) business days after termination as described in paragraph 3.a., the Present Value Amount of the benefits accrued by the Executive under the PEC SRB, Part A and Part B on the date of termination of employment as described in this paragraph 3.a., determined as if the Executive had received credit for an additional three (3) years of Benefit Service. For purposes of determining the Executive's accrued benefits under the preceding sentence, such benefits shall be determined as full benefits, without actuarial reduction, as if the Executive qualified for the Rule of Eighty-Five under the PEC Retirement Plan and PEC SRB (regardless of whether the Executive so qualifies). All non-vested Options and SARs awarded to the Executive under the PEC LTIC shall be deemed vested as of the earlier of the date of a Change in Control as defined in this Agreement or Change in Control as defined in the PEC LTIC. The Company shall treat the Executive as employed by the Company for purposes of exercising Stock Options and SARs during the Coverage Period. All non-vested restricted stock awarded to the Executive under the PEC LTIC shall be deemed vested and owned by the Executive as of the earlier of the date of a Change in Control as defined in this Agreement or a Change in Control as defined in the PEC LTIC and such stock shall be delivered to the Executive within five (5) business days after the date of such Change in Control. The Executive's termination of employment with the Company to become an employee of a corporation which directly or indirectly owns one hundred percent (100%) of or which is owned one hundred percent (100%) by the Company shall not be considered a termination of employment for purposes of this Agreement. The subsequent termination of the Executive's employment from such corporation, without employment at a company that is wholly-owned by such corporation, shall be considered a termination of employment for purposes of this Agreement. b. During the longer of: (i) the Coverage Period or (ii) the period commencing with the date of the Executive's termination of employment as described in paragraph 3a and ending on the last day of the first month in which the Executive may retire under the PEC Retirement Plan and be eligible to receive a retirement annuity thereunder without actuarial reduction, the Executive shall be entitled to all benefits under the Company's welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), as if the Executive were still employed during such period, at the same level of benefits and at the same dollar cost to the Executive as is available to all of the Company's executives generally and if and to the extent that equivalent benefits shall not be payable or provided under any such plans, the Company shall pay or provide equivalent benefits on an individual basis; provided, however, that PEC's obligations under this paragraph 3.b. shall cease upon the date following the termination of the Executive's employment as described in paragraph 3.a. that the Executive is eligible to receive benefits under welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) provided by an employer of the Executive other than the Company. c. (i) If Independent Tax Counsel shall determine that the aggregate payments made to the Executive pursuant to this Agreement and any other payments to the Executive from the Company which constitute "parachute payments" as defined in Section 280G of the Code (or any successor provision thereto) ("Parachute Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount calculated at the highest marginal tax rate applicable to the Executive for the tax year in which such payments were paid to the Executive (determined by Independent Tax Counsel) such that after payment by the Executive of all federal, state and other taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the payments. For purposes of this paragraph 3.c., "Independent Tax Counsel" shall mean a lawyer, a certified public accountant with a nationally recognized accounting firm, or a compensation consultant with a nationally recognized actuarial and benefits consulting firm, with expertise in the area of executive compensation tax law, who shall be selected by the Executive and shall be reasonably acceptable to PEC, and whose fees and disbursements shall be paid by PEC. (ii) If Independent Tax Counsel shall determine that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that the Executive has substantial authority not to report any Excise Tax on the Executive's Federal income tax return. If the Executive is subsequently required to make a payment of any Excise Tax, then the Independent Tax Counsel shall determine in the same manner as a Gross-up Payment the amount (the amount of such additional payments are referred herein as "Gross-Up Underpayment") of such payment and any such Gross-Up Underpayment shall be promptly paid by PEC to or for the benefit of the Executive. The fees and disbursements of the Independent Tax Counsel shall be paid by PEC. (iii) The Executive shall notify PEC in writing within 15 days of any claim by the Internal Revenue Service that, if successful, would require the payment by PEC of a Gross-Up Payment. If PEC notifies the Executive in writing that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this subparagraph (iii) of paragraph 3.c., the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (C) cooperate with the Company in good faith in order to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, for any Excise Tax or federal and state income tax or other taxes, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. The Company shall control all proceedings taken in connection with such contest; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, PEC shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, from any Excise Tax or federal and state income tax or other taxes, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. (iv) If, after the receipt by the Executive of an amount advanced by PEC pursuant to subparagraph (iii) of paragraph 3.c., the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall within 10 days pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). d. In the event of any termination of the Executive's employment as described in paragraph 3.a., the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment. e. The Executive shall be paid the following described amounts pursuant to subparagraph (iii) of paragraph 3.a. If the Executive has not received an award under the STIC for the Plan Year in which his employment is terminated the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount equal to a prorated award for the portion of the Plan Year that the Executive was employed by the Company. If the Executive has not yet received payment of his award amount under the STIC for the Plan Year preceding the Executive's termination, the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount under the STIC for such Plan Year. 4. Source of Payments. All payments provided for in paragraph 3 shall be paid in cash from the general funds of PEC; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established or utilized by PEC to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company such right shall be no greater than the right of an unsecured creditor of the Company. 5. Litigation Expenses: Arbitration. a. PEC's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except as set forth in paragraph 7. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. PEC agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the Federal long-term rate in effect under Section 1274(d) of the Code, compounded monthly. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. The obligation of the Company under this paragraph 5. shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). b. In the event of any dispute or difference between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Executive may, in his sole discretion by written notice to PEC, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the Executive had notified PEC of his desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Illinois upon the application of the Executive. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal of further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Illinois, and shall be conducted in accordance with the Rules of the AAA. 6. Tax Withholding. The Company may withhold from any payments made under this Agreement all federal, state or other taxes, including excise taxes as shall be required pursuant to any law or governmental regulation or ruling. 7. Waiver and Releases. a. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, the Executive hereby waives, releases and forever discharges the Company from any and all claims he has or may have against the Company arising out of or relating to the following: (a) The PEC TAP, upon receipt by the Executive of all amounts due or owing to the Executive under this Agreement; and (b) The PEC SRB, Part A and Part B, provided that the amount paid to the Executive pursuant to the second and third sentences of paragraph 3.a. exceeds the amount of the Executive's accrued benefits under the PEC SRB, Part A and Part B as of the date of the Executive's termination of employment as described in paragraph 3.a. b. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, and as a condition precedent to receiving any payments under this Agreement, the Executive agrees to execute after the date of his termination as described in paragraph 3.a., a release substantially in the form of Exhibit A attached hereto and by this reference made a part hereof. 8. Amendment of Trust and Deposit of Assets. On or before December 31, 1996, PEC shall amend the Trust to provide that within ten (10) business days after the date of a Change in Control, PEC shall deposit cash into the Trust, in an amount equal to the following: (a) the payment obligations of PEC under the Peoples Energy Corporation's Executive Deferred Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan, and (b) the accrued benefits of the participants, as of the date of the Change in Control, under the PEC SRB, Part A and Part B. 9. Outplacement Services. Unless PEC offers outplacement services to the Executive during the Coverage Period, PEC shall reimburse the Executive for the costs of outplacement services incurred by the Executive up to a maximum amount of Seven Thousand Dollars ($7,000). 10. Entire Understanding. This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter hereof and supersedes any prior severance agreement between the Company and the Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of any kind elsewhere provided and not expressly provided for in this Agreement. 11. Severability. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. 12 Consolidation, Merger, or Sale of Assets. If PEC consolidates or merges into or with, or transfers all or substantially all of its assets to, another corporation the term "the Company" as used herein shall include such other corporation and this Agreement shall continue in full force and effect. 13. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class with return receipt as follows: a. to PEC: Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 Attention: E. P. Cassidy, Secretary b. to the Executive: Richard E. Terry Chairman and Chief Executive Officer Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 or to such other address as either party shall have previously specified in writing to the other. 14. No attachment. Except as required by law and as expressly provided in his paragraph 14, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. Notwithstanding the preceding sentence, the Executive may, by giving notice to PEC during the Executive's lifetime, designate a beneficiary or beneficiaries to whom the severance benefits described in paragraph 3.a. shall be transferred in the event of the Executive's death. Any such designation may be revoked or changed by the Executive at any time and from time to time by similar notice. If there is no such designated beneficiary living upon the death of the Executive or if all such designated beneficiaries die prior to the receipt by the Executive of the referenced severance benefits, such severance benefits shall be transferred to the Executive's surviving spouse or, if none, then such severance benefits will be transferred to the estate or personal representative of the Executive. If the Company, after reasonable inquiry, is unable to determine within twelve months after the Executive's death whether any designated beneficiary of the Executive did in fact survive the Executive, such beneficiary shall be conclusively presumed to have died prior to the Executive's death. 15. Binding Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns. 16. Modification and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 17. Headings of No Effect. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 18. Governing Law. This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Illinois without giving effect to the choice of law provisions in effect in such State. IN WITNESS WHEREOF, PEC has caused this Agreement to be executed by its officers thereunto duly authorized, and the Executive has signed this Agreement, all effective as of the date first above written. PEOPLES ENERGY CORPORATION By: /s/ HOMER J. LIVINGSTON, JR. --------------------------------------- Director and Chairman of the Compensation-Nominating Committee of the Board of Directors By: /s/ RICHARD E. TERRY -------------------------------------------- Richard E. Terry Chairman and Chief Executive Officer EXHIBIT A TO SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND EXECUTIVE, DATED DECEMBER 4, 1996 RELEASE AGREEMENT This Agreement is entered into on this ____ day of _______________, between Richard E. Terry, Chairman and Chief Executive Officer ("Executive") and Peoples Energy Corporation on behalf of Peoples Energy Corporation and any affiliate and successor or successors to Peoples Energy Corporation. 1. In consideration of the benefits to be paid and provided to the Executive under that certain Severance Agreement between Peoples Energy Corporation ("PEC") and the Executive, dated as of December 4, 1996, ("Severance Agreement") Executive waives, releases and forever discharges PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) from all claims which he may have against PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) arising out of the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Illinois Human Rights Act, or any other federal, state or local statute, regulation, ordinance, or doctrine of common law prohibiting discrimination on the basis of disability or age or race or gender or on any other substantially similar basis. 2. The Executive acknowledges that, prior to his execution of this Agreement, he was encouraged to review it with counsel or anyone else of his choosing. Executive states that he understands its meaning and that he knowingly, freely and voluntarily executes it. The Company encourages the Executive to consult with an attorney regarding this Agreement, accordingly, the offer contained in the Severance Agreement will remain open for twenty-one (21) days. If after review, the Executive wishes to accept, he should sign this document and return it to the Secretary of Peoples Energy Corporation. This Release will not become effective until seven days thereafter, and if the Executive changes his mind within that period, he may revoke this Release by notifying the Secretary of Peoples Energy Corporation. The Executive understands and agrees that no benefits will be paid or provided to the Executive under the Severance Agreement prior to the receipt by PEC of this release executed by the Executive. PEOPLES ENERGY CORPORATION: By: ___________________________________ _______________________ Date By: ___________________________________ ________________________ Richard E. Terry Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.B <SEQUENCE>3 <DESCRIPTION>EXHIBIT 10(B) <TEXT> SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND J. BRUCE HASCH President and Chief Operating Officer THIS AGREEMENT, effective as of December 4, 1996, by and between Peoples Energy Corporation, an Illinois corporation and J. Bruce Hasch, President and Chief Operating Officer (the "Executive"). WITNESSETH WHEREAS, the Executive is a valuable employee of the Company and an integral part of the management of the Company; and WHEREAS, the Company wishes to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control; and WHEREAS, the Board of Directors of PEC, at its meeting on December 4, 1996, determined that it would be in the best interests of the Company and its shareholders to assure continuity in the management of the Company's administration and operations in the event of a Change in Control by entering into this Agreement with the Executive; NOW THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. Definitions. "AAA" shall have the meaning set forth in paragraph 5 of this Agreement. "Affiliate" shall mean the subsidiaries of PEC and other entities controlled by such subsidiaries. "Agreement" shall mean this Severance Agreement. "Benefit Service" shall mean the Benefit Service as defined in the PEC Retirement Plan. "Board" shall mean the Board of Directors of PEC. "Cause" shall mean the Executive's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company as determined in good faith by a vote of at least two-thirds of the non-employee directors of PEC at a meeting of the Board at which the Executive is provided an opportunity to be heard. "Change in Control" shall mean: (i) either (A) receipt by PEC of a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission ("SEC") pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC, or (B) actual knowledge by PEC of facts, on the basis of which any Person is required to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13 (d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC; (ii) purchase by any Person, other than PEC or a wholly-owned subsidiary of the Company, of shares pursuant to a tender or exchange offer to acquire any stock of PEC (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of PEC of (a) any consolidation or merger of PEC in which PEC is not the continuing or surviving corporation or pursuant to which shares of stock of PEC would be converted into cash, securities or other property, other than a consolidation or merger of PEC in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which PEC is the continuing or surviving corporation, but in which the common shareholders of PEC immediately prior to the consolidation or merger do not hold at least ninety (90) percent of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least ninety (90) percent of the common stock of the corporation which owns all of the common stock of PEC), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of PEC (Transfer Transaction), (except where (A) PEC owns all of the outstanding stock of the transferee entity or (B) the holders of PEC's common stock immediately prior to the Transfer Transaction own at least ninety (90) percent of the outstanding stock of the transferee entity, immediately after the Transfer Transaction), or (d) any consolidation or merger of PEC where, after the consolidation or merger, one Person owns one hundred (100) percent of the shares of stock of PEC (except where the holders of PEC's common stock immediately prior to such merger or consolidation own at least ninety (90) percent of the outstanding stock of such Person immediately after such consolidation or merger); or (iv) a change in the majority of the members of the Board within a twenty-four (24) month period, unless the election or nomination for election by PEC's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the twenty-four (24) month period. "Code" shall mean the United States Internal Revenue Code of 1986, as amended, or any successor thereto. "Company" shall mean PEC and include any Affiliate and successor or successors to PEC. "Compensation" shall mean the sum of (i) the Executive's annual rate of salary on the last day the Executive was an employee of the Company, including any elective contributions made by the Company on behalf of the Executive that are not includable in the gross income of the Executive under Section 125 or 402(a)(8) of the Code or any successor provision thereto, and including any amount of salary that has been deferred by the Executive, (ii) an award equal to the average of the amounts awarded to the Executive under the PEC STIC during the three years preceding termination of employment, and (iii) the economic equivalent value of any awards received by Executive under the PEC LTIC in the calendar year preceding termination of employment (as determined in good faith by the PEC Directors' Compensation- Nominating Committee). "Computed Award" shall mean Computed Award as defined in the PEC STIC. "Constructive Discharge" shall mean a good faith determination by the Executive that there has been any (i) material change by the Company of the Executive's functions, duties or responsibilities which change would cause the Executive's position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Executive of duties and responsibilities inconsistent with his position, (ii) assignment or reassignment by the Company of the Executive, without the Executive's consent, to another place of employment more than fifty (50) miles from the Executive's current place of employment, (iii) liquidation, dissolution, consolidation or merger of PEC, or transfer of all or substantially all of its assets, other than a transaction or series of transactions in which the resulting or surviving transferee entity has, in the aggregate, a net worth at least equal to that of PEC immediately before such transaction and such resulting or surviving transferee entity expressly assumes this Agreement and all obligations and undertakings hereunder, or (iv) reduction, which is more than de minimis, in the Executive's total compensation (Compensation, perquisites and benefits). It is understood and agreed by all parties hereto that a reduction in (a) the amount the Executive receives under PEC STIC, (b) the awards received by the Executive under the PEC LTIC, or (c) the prerequisites or benefits of the Executive shall not be deemed a reduction if such amount received under the PEC STIC, awards received under the PEC LTIC, or such prerequisites or benefits are with respect to the PEC STIC, PEC LTIC and prerequisites greater than that received by any Company officer of lesser rank and with respect to benefits, no less than that received by any Company officer of lesser rank. An event shall not be considered Constructive Discharge unless the Executive provides written notice to PEC specifying the event relied upon for Constructive Discharge within six months after the occurrence of such event. Within thirty days of receiving such written notice from the Executive, the Company may cure or cause to be cured the event upon which the Executive claims a Constructive Discharge and no Constructive Discharge shall have been considered to have occurred with respect to such event. PEC and the Executive, upon mutual written agreement, may waive any of the foregoing provisions which would otherwise constitute a Constructive Discharge. "Coverage Period" shall mean the period commencing with the month in which termination of employment as described in paragraph 3.a. of this Agreement shall have occurred, and ending thirty-six (36) months thereafter. "Effective Date" shall mean December 4, 1996. "PEC" shall mean Peoples Energy Corporation, an Illinois corporation. "PEC Directors' Compensation-Nominating Committee" shall mean the Peoples Energy Corporation Board of Directors' Compensation-Nominating Committee. "PEC LTIC" shall mean the Peoples Energy Corporation Long Term Incentive Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC Retirement Plan" shall mean the Peoples Energy Corporation Retirement Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC SRB" shall mean the Peoples Energy Corporation Supplemental Retirement Benefit Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC STIC" shall mean the Peoples Energy Corporation Short Term Incentive Compensation Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC TAP" shall mean the Peoples Energy Corporation Termination Allowance Plan as in effect on the Effective Date, as amended from time to time and as enhanced as described in that certain PEC brochure for nonunion employees titled, "Career Transition Opportunities", dated November 1996. "Plan Year" shall mean the Plan Year as defined under the PEC STIC. "Present Value Amount" shall mean the amount calculated by the PEC Directors' Compensation-Nominating Committee as of the date of the termination of the Executive's employment as described in paragraph 3.a., using as a mortality basis the mortality basis used by the PEC Retirement Plan for determining benefits, or if such mortality basis is not available, a mortality basis determined by the PEC Retirement Plan's consulting actuaries, and assuming a discount rate equal to the average of the yield on Thirty (30) year United States Treasury Bonds for the second calendar month preceding the Executive's termination of employment as described in paragraph 3.a. "Rule of Eighty-Five" shall mean the Rule of Eighty-Five as defined under the PEC Retirement Plan. "SARs" shall mean SARs as defined under the PEC LTIC. "Stock Options" shall mean Options as defined under the PEC LTIC. "Term" shall mean the term of this Agreement as set forth in paragraph 2. "Trust" shall mean the Trust under Peoples Energy Corporation Executive Deferred Compensation Plan and Supplemental Retirement Benefit Plan, Part A and Part B, dated September 22, 1995, as amended July 1, 1996, in effect on the Effective Date, as amended from time to time. 2. Term. This Agreement shall be effective as of the Effective Date and shall continue thereafter until the later of: (i) thirty-six (36) full calendar months following the date on which occurs any of the events described in subparagraphs (i), (ii) or (iv) of the definition of Change in Control in paragraph 1; or (ii) twenty-four (24) full calendar months following the date on which the transaction that was the subject of shareholder approval pursuant to subparagraph (iii) of the definition of Change in Control in paragraph 1 has been completed. 3. Severance Benefit. a. If, during the period commencing on the date of a Change in Control and ending on the last day of the Term, the Executive's employment hereunder is terminated by the Company for any reason, other than Cause, death, or disability, or is terminated by the Executive in the event of a Constructive Discharge, then, within five (5) business days after such termination, PEC shall pay to the Executive (if the Executive has died before receiving all payments to which he has become entitled hereunder to the beneficiary or estate of the Executive as described in paragraph 14) the sum of (i) accrued but unpaid salary and accrued but unused paid time off under the Company's "Paid Time Off Bank" policy for all nonunion employees, effective January 1, 1997, or any successor plan, (ii) severance pay in a lump sum cash amount equal to three (3) years of the Executive's Compensation, and (iii) the amount determined pursuant to paragraph 3.e. The Executive (if the Executive has died before receiving all payment to which he becomes entitled hereunder, the beneficiary or the estate of the Executive as described in paragraph 14) will be paid in cash within ten (10) business days after termination as described in paragraph 3.a., the Present Value Amount of the benefits accrued by the Executive under the PEC SRB, Part A and Part B on the date of termination of employment as described in this paragraph 3.a., determined as if the Executive had received credit for an additional three (3) years of Benefit Service. For purposes of determining the Executive's accrued benefits under the preceding sentence, such benefits shall be determined as full benefits, without actuarial reduction, as if the Executive qualified for the Rule of Eighty-Five under the PEC Retirement Plan and PEC SRB (regardless of whether the Executive so qualifies). All non-vested Options and SARs awarded to the Executive under the PEC LTIC shall be deemed vested as of the earlier of the date of a Change in Control as defined in this Agreement or Change in Control as defined in the PEC LTIC. The Company shall treat the Executive as employed by the Company for purposes of exercising Stock Options and SARs during the Coverage Period. All non-vested restricted stock awarded to the Executive under the PEC LTIC shall be deemed vested and owned by the Executive as of the earlier of the date of a Change in Control as defined in this Agreement or a Change in Control as defined in the PEC LTIC and such stock shall be delivered to the Executive within five (5) business days after the date of such Change in Control. The Executive's termination of employment with the Company to become an employee of a corporation which directly or indirectly owns one hundred percent (100%) of or which is owned one hundred percent (100%) by the Company shall not be considered a termination of employment for purposes of this Agreement. The subsequent termination of the Executive's employment from such corporation, without employment at a company that is wholly-owned by such corporation, shall be considered a termination of employment for purposes of this Agreement. b. During the longer of: (i) the Coverage Period or (ii) the period commencing with the date of the Executive's termination of employment as described in paragraph 3a and ending on the last day of the first month in which the Executive may retire under the PEC Retirement Plan and be eligible to receive a retirement annuity thereunder without actuarial reduction, the Executive shall be entitled to all benefits under the Company's welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), as if the Executive were still employed during such period, at the same level of benefits and at the same dollar cost to the Executive as is available to all of the Company's executives generally and if and to the extent that equivalent benefits shall not be payable or provided under any such plans, the Company shall pay or provide equivalent benefits on an individual basis; provided, however, that PEC's obligations under this paragraph 3.b. shall cease upon the date following the termination of the Executive's employment as described in paragraph 3.a. that the Executive is eligible to receive benefits under welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) provided by an employer of the Executive other than the Company. c. (i) If Independent Tax Counsel shall determine that the aggregate payments made to the Executive pursuant to this Agreement and any other payments to the Executive from the Company which constitute "parachute payments" as defined in Section 280G of the Code (or any successor provision thereto) ("Parachute Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount calculated at the highest marginal tax rate applicable to the Executive for the tax year in which such payments were paid to the Executive (determined by Independent Tax Counsel) such that after payment by the Executive of all federal, state and other taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the payments. For purposes of this paragraph 3.c., "Independent Tax Counsel" shall mean a lawyer, a certified public accountant with a nationally recognized accounting firm, or a compensation consultant with a nationally recognized actuarial and benefits consulting firm, with expertise in the area of executive compensation tax law, who shall be selected by the Executive and shall be reasonably acceptable to PEC, and whose fees and disbursements shall be paid by PEC. (ii) If Independent Tax Counsel shall determine that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that the Executive has substantial authority not to report any Excise Tax on the Executive's Federal income tax return. If the Executive is subsequently required to make a payment of any Excise Tax, then the Independent Tax Counsel shall determine in the same manner as a Gross-up Payment the amount (the amount of such additional payments are referred herein as "Gross-Up Underpayment") of such payment and any such Gross-Up Underpayment shall be promptly paid by PEC to or for the benefit of the Executive. The fees and disbursements of the Independent Tax Counsel shall be paid by PEC. (iii) The Executive shall notify PEC in writing within 15 days of any claim by the Internal Revenue Service that, if successful, would require the payment by PEC of a Gross-Up Payment. If PEC notifies the Executive in writing that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this subparagraph (iii) of paragraph 3.c., the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (C) cooperate with the Company in good faith in order to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, for any Excise Tax or federal and state income tax or other taxes, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. The Company shall control all proceedings taken in connection with such contest; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, PEC shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, from any Excise Tax or federal and state income tax or other taxes, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. (iv) If, after the receipt by the Executive of an amount advanced by PEC pursuant to subparagraph (iii) of paragraph 3.c., the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall within 10 days pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). d. In the event of any termination of the Executive's employment as described in paragraph 3.a., the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment. e. The Executive shall be paid the following described amounts pursuant to subparagraph (iii) of paragraph 3.a. If the Executive has not received an award under the STIC for the Plan Year in which his employment is terminated the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount equal to a prorated award for the portion of the Plan Year that the Executive was employed by the Company. If the Executive has not yet received payment of his award amount under the STIC for the Plan Year preceding the Executive's termination, the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount under the STIC for such Plan Year. 4. Source of Payments. All payments provided for in paragraph 3 shall be paid in cash from the general funds of PEC; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established or utilized by PEC to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company such right shall be no greater than the right of an unsecured creditor of the Company. 5. Litigation Expenses: Arbitration. a. PEC's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except as set forth in paragraph 7. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. PEC agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the Federal long-term rate in effect under Section 1274(d) of the Code, compounded monthly. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. The obligation of the Company under this paragraph 5. shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). b. In the event of any dispute or difference between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Executive may, in his sole discretion by written notice to PEC, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the Executive had notified PEC of his desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Illinois upon the application of the Executive. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal of further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Illinois, and shall be conducted in accordance with the Rules of the AAA. 6. Tax Withholding. The Company may withhold from any payments made under this Agreement all federal, state or other taxes, including excise taxes as shall be required pursuant to any law or governmental regulation or ruling. 7. Waiver and Releases. a. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, the Executive hereby waives, releases and forever discharges the Company from any and all claims he has or may have against the Company arising out of or relating to the following: (a) The PEC TAP, upon receipt by the Executive of all amounts due or owing to the Executive under this Agreement; and (b) The PEC SRB, Part A and Part B, provided that the amount paid to the Executive pursuant to the second and third sentences of paragraph 3.a. exceeds the amount of the Executive's accrued benefits under the PEC SRB, Part A and Part B as of the date of the Executive's termination of employment as described in paragraph 3.a. b. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, and as a condition precedent to receiving any payments under this Agreement, the Executive agrees to execute after the date of his termination as described in paragraph 3.a., a release substantially in the form of Exhibit A attached hereto and by this reference made a part hereof. 8. Amendment of Trust and Deposit of Assets. On or before December 31, 1996, PEC shall amend the Trust to provide that within ten (10) business days after the date of a Change in Control, PEC shall deposit cash into the Trust, in an amount equal to the following: (a) the payment obligations of PEC under the Peoples Energy Corporation's Executive Deferred Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan, and (b) the accrued benefits of the participants, as of the date of the Change in Control, under the PEC SRB, Part A and Part B. 9. Outplacement Services. Unless PEC offers outplacement services to the Executive during the Coverage Period, PEC shall reimburse the Executive for the costs of outplacement services incurred by the Executive up to a maximum amount of Seven Thousand Dollars ($7,000). 10. Entire Understanding. This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter hereof and supersedes any prior severance agreement between the Company and the Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of any kind elsewhere provided and not expressly provided for in this Agreement. 11. Severability. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. 12 Consolidation, Merger, or Sale of Assets. If PEC consolidates or merges into or with, or transfers all or substantially all of its assets to, another corporation the term "the Company" as used herein shall include such other corporation and this Agreement shall continue in full force and effect. 13. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class with return receipt as follows: a. to PEC: Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 Attention: E. P. Cassidy, Secretary b. to the Executive: J. Bruce Hasch President and Chief Operating Officer Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 or to such other address as either party shall have previously specified in writing to the other. 14. No attachment. Except as required by law and as expressly provided in his paragraph 14, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. Notwithstanding the preceding sentence, the Executive may, by giving notice to PEC during the Executive's lifetime, designate a beneficiary or beneficiaries to whom the severance benefits described in paragraph 3.a. shall be transferred in the event of the Executive's death. Any such designation may be revoked or changed by the Executive at any time and from time to time by similar notice. If there is no such designated beneficiary living upon the death of the Executive or if all such designated beneficiaries die prior to the receipt by the Executive of the referenced severance benefits, such severance benefits shall be transferred to the Executive's surviving spouse or, if none, then such severance benefits will be transferred to the estate or personal representative of the Executive. If the Company, after reasonable inquiry, is unable to determine within twelve months after the Executive's death whether any designated beneficiary of the Executive did in fact survive the Executive, such beneficiary shall be conclusively presumed to have died prior to the Executive's death. 15. Binding Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns. 16. Modification and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 17. Headings of No Effect. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 18. Governing Law. This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Illinois without giving effect to the choice of law provisions in effect in such State. IN WITNESS WHEREOF, PEC has caused this Agreement to be executed by its officers thereunto duly authorized, and the Executive has signed this Agreement, all effective as of the date first above written. PEOPLES ENERGY CORPORATION By: /s/ HOMER J. LIVINGSTON, JR. --------------------------------------- Director and Chairman of the Compensation-Nominating Committee of the Board of Directors By: /s/ J. BRUCE HASCH ---------------------------------------------- J. Bruce Hasch President and Chief Operating Officer EXHIBIT A TO SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND EXECUTIVE, DATED DECEMBER 4, 1996 RELEASE AGREEMENT This Agreement is entered into on this ____ day of _______________, between J. Bruce Hasch, President and Chief Operating Officer ("Executive") and Peoples Energy Corporation on behalf of Peoples Energy Corporation and any affiliate and successor or successors to Peoples Energy Corporation. 1. In consideration of the benefits to be paid and provided to the Executive under that certain Severance Agreement between Peoples Energy Corporation ("PEC") and the Executive, dated as of December 4, 1996, ("Severance Agreement") Executive waives, releases and forever discharges PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) from all claims which he may have against PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) arising out of the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Illinois Human Rights Act, or any other federal, state or local statute, regulation, ordinance, or doctrine of common law prohibiting discrimination on the basis of disability or age or race or gender or on any other substantially similar basis. 2. The Executive acknowledges that, prior to his execution of this Agreement, he was encouraged to review it with counsel or anyone else of his choosing. Executive states that he understands its meaning and that he knowingly, freely and voluntarily executes it. The Company encourages the Executive to consult with an attorney regarding this Agreement, accordingly, the offer contained in the Severance Agreement will remain open for twenty-one (21) days. If after review, the Executive wishes to accept, he should sign this document and return it to the Secretary of Peoples Energy Corporation. This Release will not become effective until seven days thereafter, and if the Executive changes his mind within that period, he may revoke this Release by notifying the Secretary of Peoples Energy Corporation. The Executive understands and agrees that no benefits will be paid or provided to the Executive under the Severance Agreement prior to the receipt by PEC of this release executed by the Executive. PEOPLES ENERGY CORPORATION: By: ___________________________________ _______________________ Date By: ___________________________________ ________________________ J. Bruce Hasch Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.C <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10(C) <TEXT> SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND MICHAEL S. REEVES Executive Vice President THIS AGREEMENT, effective as of December 4, 1996, by and between Peoples Energy Corporation, an Illinois corporation and Michael S. Reeves, Executive Vice President (the "Executive"). WITNESSETH WHEREAS, the Executive is a valuable employee of the Company and an integral part of the management of the Company; and WHEREAS, the Company wishes to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control; and WHEREAS, the Board of Directors of PEC, at its meeting on December 4, 1996, determined that it would be in the best interests of the Company and its shareholders to assure continuity in the management of the Company's administration and operations in the event of a Change in Control by entering into this Agreement with the Executive; NOW THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. Definitions. "AAA" shall have the meaning set forth in paragraph 5 of this Agreement. "Affiliate" shall mean the subsidiaries of PEC and other entities controlled by such subsidiaries. "Agreement" shall mean this Severance Agreement. "Benefit Service" shall mean the Benefit Service as defined in the PEC Retirement Plan. "Board" shall mean the Board of Directors of PEC. "Cause" shall mean the Executive's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company as determined in good faith by a vote of at least two-thirds of the non-employee directors of PEC at a meeting of the Board at which the Executive is provided an opportunity to be heard. "Change in Control" shall mean: (i) either (A) receipt by PEC of a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission ("SEC") pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC, or (B) actual knowledge by PEC of facts, on the basis of which any Person is required to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13 (d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC; (ii) purchase by any Person, other than PEC or a wholly-owned subsidiary of the Company, of shares pursuant to a tender or exchange offer to acquire any stock of PEC (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of PEC of (a) any consolidation or merger of PEC in which PEC is not the continuing or surviving corporation or pursuant to which shares of stock of PEC would be converted into cash, securities or other property, other than a consolidation or merger of PEC in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which PEC is the continuing or surviving corporation, but in which the common shareholders of PEC immediately prior to the consolidation or merger do not hold at least ninety (90) percent of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least ninety (90) percent of the common stock of the corporation which owns all of the common stock of PEC), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of PEC (Transfer Transaction), (except where (A) PEC owns all of the outstanding stock of the transferee entity or (B) the holders of PEC's common stock immediately prior to the Transfer Transaction own at least ninety (90) percent of the outstanding stock of the transferee entity, immediately after the Transfer Transaction), or (d) any consolidation or merger of PEC where, after the consolidation or merger, one Person owns one hundred (100) percent of the shares of stock of PEC (except where the holders of PEC's common stock immediately prior to such merger or consolidation own at least ninety (90) percent of the outstanding stock of such Person immediately after such consolidation or merger); or (iv) a change in the majority of the members of the Board within a twenty-four (24) month period, unless the election or nomination for election by PEC's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the twenty-four (24) month period. "Code" shall mean the United States Internal Revenue Code of 1986, as amended, or any successor thereto. "Company" shall mean PEC and include any Affiliate and successor or successors to PEC. "Compensation" shall mean the sum of (i) the Executive's annual rate of salary on the last day the Executive was an employee of the Company, including any elective contributions made by the Company on behalf of the Executive that are not includable in the gross income of the Executive under Section 125 or 402(a)(8) of the Code or any successor provision thereto, and including any amount of salary that has been deferred by the Executive, (ii) an award equal to the average of the amounts awarded to the Executive under the PEC STIC during the three years preceding termination of employment, and (iii) the economic equivalent value of any awards received by Executive under the PEC LTIC in the calendar year preceding termination of employment (as determined in good faith by the PEC Directors' Compensation- Nominating Committee). "Computed Award" shall mean Computed Award as defined in the PEC STIC. "Constructive Discharge" shall mean a good faith determination by the Executive that there has been any (i) material change by the Company of the Executive's functions, duties or responsibilities which change would cause the Executive's position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Executive of duties and responsibilities inconsistent with his position, (ii) assignment or reassignment by the Company of the Executive, without the Executive's consent, to another place of employment more than fifty (50) miles from the Executive's current place of employment, (iii) liquidation, dissolution, consolidation or merger of PEC, or transfer of all or substantially all of its assets, other than a transaction or series of transactions in which the resulting or surviving transferee entity has, in the aggregate, a net worth at least equal to that of PEC immediately before such transaction and such resulting or surviving transferee entity expressly assumes this Agreement and all obligations and undertakings hereunder, or (iv) reduction, which is more than de minimis, in the Executive's total compensation (Compensation, perquisites and benefits). It is understood and agreed by all parties hereto that a reduction in (a) the amount the Executive receives under PEC STIC, (b) the awards received by the Executive under the PEC LTIC, or (c) the prerequisites or benefits of the Executive shall not be deemed a reduction if such amount received under the PEC STIC, awards received under the PEC LTIC, or such prerequisites or benefits are the same as received by the Company's similarly situated officers. An event shall not be considered Constructive Discharge unless the Executive provides written notice to PEC specifying the event relied upon for Constructive Discharge within six months after the occurrence of such event. Within thirty days of receiving such written notice from the Executive, the Company may cure or cause to be cured the event upon which the Executive claims a Constructive Discharge and no Constructive Discharge shall have been considered to have occurred with respect to such event. PEC and the Executive, upon mutual written agreement, may waive any of the foregoing provisions which would otherwise constitute a Constructive Discharge. "Coverage Period" shall mean the period commencing with the month in which termination of employment as described in paragraph 3.a. of this Agreement shall have occurred, and ending thirty-six (36) months thereafter. "Effective Date" shall mean December 4, 1996. "PEC" shall mean Peoples Energy Corporation, an Illinois corporation. "PEC Directors' Compensation-Nominating Committee" shall mean the Peoples Energy Corporation Board of Directors' Compensation-Nominating Committee. "PEC LTIC" shall mean the Peoples Energy Corporation Long Term Incentive Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC Retirement Plan" shall mean the Peoples Energy Corporation Retirement Plan as in effect on the Effective Date, as amended from time to time, or any successor plan. "PEC SRB" shall mean the Peoples Energy Corporation Supplemental Retirement Benefit Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC STIC" shall mean the Peoples Energy Corporation Short Term Incentive Compensation Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC TAP" shall mean the Peoples Energy Corporation Termination Allowance Plan as in effect on the Effective Date, as amended from time to time and as enhanced as described in that certain PEC brochure for nonunion employees titled, "Career Transition Opportunities", dated November 1996. "Plan Year" shall mean the Plan Year as defined under the PEC STIC. "Present Value Amount" shall mean the amount calculated by the PEC Directors' Compensation-Nominating Committee as of the date of the termination of the Executive's employment as described in paragraph 3.a., using as a mortality basis the mortality basis used by the PEC Retirement Plan for determining benefits, or if such mortality basis is not available, a mortality basis determined by the PEC Retirement Plan's consulting actuaries, and assuming a discount rate equal to the average of the yield on Thirty (30) year United States Treasury Bonds for the second calendar month preceding the Executive's termination of employment as described in paragraph 3.a. "Rule of Eighty-Five" shall mean the Rule of Eighty-Five as defined under the PEC Retirement Plan. "SARs" shall mean SARs as defined under the PEC LTIC. "Stock Options" shall mean Options as defined under the PEC LTIC. "Term" shall mean the term of this Agreement as set forth in paragraph 2. "Trust" shall mean the Trust under Peoples Energy Corporation Executive Deferred Compensation Plan and Supplemental Retirement Benefit Plan, Part A and Part B, dated September 22, 1995, as amended July 1, 1996, in effect on the Effective Date, as amended from time to time. 2. Term. This Agreement shall be effective as of the Effective Date and shall continue thereafter until the later of: (i) thirty-six (36) full calendar months following the date on which occurs any of the events described in subparagraphs (i), (ii) or (iv) of the definition of Change in Control in paragraph 1; or (ii) twenty-four (24) full calendar months following the date on which the transaction that was the subject of shareholder approval pursuant to subparagraph (iii) of the definition of Change in Control in paragraph 1 has been completed. 3. Severance Benefit. a. If, during the period commencing on the date of a Change in Control and ending on the last day of the Term, the Executive's employment hereunder is terminated by the Company for any reason, other than Cause, death, or disability, or is terminated by the Executive in the event of a Constructive Discharge, then, within five (5) business days after such termination, PEC shall pay to the Executive (if the Executive has died before receiving all payments to which he has become entitled hereunder to the beneficiary or estate of the Executive as described in paragraph 14) the sum of (i) accrued but unpaid salary and accrued but unused paid time off under the Company's "Paid Time Off Bank" policy for all employees, effective January 1, 1997, or any successor plan, (ii) severance pay in a lump sum cash amount equal to three (3) years of the Executive's Compensation, and (iii) the amount determined pursuant to paragraph 3.e. The Executive (if the Executive has died before receiving all payment to which he becomes entitled hereunder, the beneficiary or the estate of the Executive as described in paragraph 14) will be paid in cash within ten (10) business days after termination as described in paragraph 3.a., the Present Value Amount of the benefits accrued by the Executive under the PEC SRB, Part A and Part B on the date of termination of employment as described in this paragraph 3.a., determined as if the Executive had received credit for an additional three (3) years of Benefit Service. For purposes of determining the Executive's accrued benefits under the preceding sentence, such benefits shall be determined as full benefits, without actuarial reduction, as if the Executive qualified for the Rule of Eighty-Five under the PEC Retirement Plan and PEC SRB (regardless of whether the Executive so qualifies). All non-vested Options and SARs awarded to the Executive under the PEC LTIC shall be deemed vested as of the earlier of the date of a Change in Control as defined in this Agreement or Change in Control as defined in the PEC LTIC. The Company shall treat the Executive as employed by the Company for purposes of exercising Stock Options and SARs during the Coverage Period. All non-vested restricted stock awarded to the Executive under the PEC LTIC shall be deemed vested and owned by the Executive as of the earlier of the date of a Change in Control as defined in this Agreement or a Change in Control as defined in the PEC LTIC and such stock shall be delivered to the Executive within five (5) business days after the date of such Change in Control. The Executive's termination of employment with the Company to become an employee of a corporation which directly or indirectly owns one hundred percent (100%) of or which is owned one hundred percent (100%) by the Company shall not be considered a termination of employment for purposes of this Agreement. The subsequent termination of the Executive's employment from such corporation, without employment at a company that is wholly-owned by such corporation, shall be considered a termination of employment for purposes of this Agreement. b. During the longer of: (i) the Coverage Period or (ii) the period commencing with the date of the Executive's termination of employment as described in paragraph 3a and ending on the last day of the first month in which the Executive may retire under the PEC Retirement Plan and be eligible to receive a retirement annuity thereunder without actuarial reduction, the Executive shall be entitled to all benefits under the Company's welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), as if the Executive were still employed during such period, at the same level of benefits and at the same dollar cost to the Executive as is available to all of the Company's executives generally and if and to the extent that equivalent benefits shall not be payable or provided under any such plans, the Company shall pay or provide equivalent benefits on an individual basis; provided, however, that PEC's obligations under this paragraph 3.b. shall cease upon the date following the termination of the Executive's employment as described in paragraph 3.a. that the Executive is eligible to receive benefits under welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) provided by an employer of the Executive other than the Company. c. (i) If Independent Tax Counsel shall determine that the aggregate payments made to the Executive pursuant to this Agreement and any other payments to the Executive from the Company which constitute "parachute payments" as defined in Section 280G of the Code (or any successor provision thereto) ("Parachute Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount calculated at the highest marginal tax rate applicable to the Executive for the tax year in which such payments were paid to the Executive (determined by Independent Tax Counsel) such that after payment by the Executive of all federal, state and other taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the payments. For purposes of this paragraph 3.c., "Independent Tax Counsel" shall mean a lawyer, a certified public accountant with a nationally recognized accounting firm, or a compensation consultant with a nationally recognized actuarial and benefits consulting firm, with expertise in the area of executive compensation tax law, who shall be selected by the Executive and shall be reasonably acceptable to PEC, and whose fees and disbursements shall be paid by PEC. (ii) If Independent Tax Counsel shall determine that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that the Executive has substantial authority not to report any Excise Tax on the Executive's Federal income tax return. If the Executive is subsequently required to make a payment of any Excise Tax, then the Independent Tax Counsel shall determine in the same manner as a Gross-up Payment the amount (the amount of such additional payments are referred herein as "Gross-Up Underpayment") of such payment and any such Gross-Up Underpayment shall be promptly paid by PEC to or for the benefit of the Executive. The fees and disbursements of the Independent Tax Counsel shall be paid by PEC. (iii) The Executive shall notify PEC in writing within 15 days of any claim by the Internal Revenue Service that, if successful, would require the payment by PEC of a Gross-Up Payment. If PEC notifies the Executive in writing that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this subparagraph (iii) of paragraph 3.c., the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (C) cooperate with the Company in good faith in order to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, for any Excise Tax or federal and state income tax or other taxes, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. The Company shall control all proceedings taken in connection with such contest; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, PEC shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, from any Excise Tax or federal and state income tax or other taxes, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. (iv) If, after the receipt by the Executive of an amount advanced by PEC pursuant to subparagraph (iii) of paragraph 3.c., the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall within 10 days pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). d. In the event of any termination of the Executive's employment as described in paragraph 3.a., the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment. e. The Executive shall be paid the following described amounts pursuant to subparagraph (iii) of paragraph 3.a. If the Executive has not received an award under the STIC for the Plan Year in which his employment is terminated the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount equal to a prorated award for the portion of the Plan Year that the Executive was employed by the Company. If the Executive has not yet received payment of his award amount under the STIC for the Plan Year preceding the Executive's termination, the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount under the STIC for such Plan Year. 4. Source of Payments. All payments provided for in paragraph 3 shall be paid in cash from the general funds of PEC; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established or utilized by PEC to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company such right shall be no greater than the right of an unsecured creditor of the Company. 5. Litigation Expenses: Arbitration. a. PEC's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except as set forth in paragraph 7. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. PEC agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the Federal long-term rate in effect under Section 1274(d) of the Code, compounded monthly. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. The obligation of the Company under this paragraph 5. shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). b. In the event of any dispute or difference between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Executive may, in his sole discretion by written notice to PEC, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the Executive had notified PEC of his desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Illinois upon the application of the Executive. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal of further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Illinois, and shall be conducted in accordance with the Rules of the AAA. 6. Tax Withholding. The Company may withhold from any payments made under this Agreement all federal, state or other taxes, including excise taxes as shall be required pursuant to any law or governmental regulation or ruling. 7. Waiver and Releases. a. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, the Executive hereby waives, releases and forever discharges the Company from any and all claims he has or may have against the Company arising out of or relating to the following: (a) The PEC TAP, upon receipt by the Executive of all amounts due or owing to the Executive under this Agreement; and (b) The PEC SRB, Part A and Part B, provided that the amount paid to the Executive pursuant to the second and third sentences of paragraph 3.a. exceeds the amount of the Executive's accrued benefits under the PEC SRB, Part A and Part B as of the date of the Executive's termination of employment as described in paragraph 3.a. b. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, and as a condition precedent to receiving any payments under this Agreement, the Executive agrees to execute after the date of his termination as described in paragraph 3.a., a release substantially in the form of Exhibit A attached hereto and by this reference made a part hereof. 8. Amendment of Trust and Deposit of Assets. On or before December 31, 1996, PEC shall amend the Trust to provide that within ten (10) business days after the date of a Change in Control, PEC shall deposit cash into the Trust, in an amount equal to the following: (a) the payment obligations of PEC under the Peoples Energy Corporation's Executive Deferred Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan, and (b) the accrued benefits of the participants, as of the date of the Change in Control, under the PEC SRB, Part A and Part B. 9. Outplacement Services. Unless PEC offers outplacement services to the Executive during the Coverage Period, PEC shall reimburse the Executive for the costs of outplacement services incurred by the Executive up to a maximum amount of Seven Thousand Dollars ($7,000). 10. Entire Understanding. This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter hereof and supersedes any prior severance agreement between the Company and the Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of any kind elsewhere provided and not expressly provided for in this Agreement. 11. Severability. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. 12 Consolidation, Merger, or Sale of Assets. If PEC consolidates or merges into or with, or transfers all or substantially all of its assets to, another corporation the term "the Company" as used herein shall include such other corporation and this Agreement shall continue in full force and effect. 13. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class with return receipt as follows: a. to PEC: Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 Attention: E. P. Cassidy, Secretary b. to the Executive: Michael S. Reeves Executive Vice President Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 or to such other address as either party shall have previously specified in writing to the other. 14. No attachment. Except as required by law and as expressly provided in his paragraph 14, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. Notwithstanding the preceding sentence, the Executive may, by giving notice to PEC during the Executive's lifetime, designate a beneficiary or beneficiaries to whom the severance benefits described in paragraph 3.a. shall be transferred in the event of the Executive's death. Any such designation may be revoked or changed by the Executive at any time and from time to time by similar notice. If there is no such designated beneficiary living upon the death of the Executive or if all such designated beneficiaries die prior to the receipt by the Executive of the referenced severance benefits, such severance benefits shall be transferred to the Executive's surviving spouse or, if none, then such severance benefits will be transferred to the estate or personal representative of the Executive. If the Company, after reasonable inquiry, is unable to determine within twelve months after the Executive's death whether any designated beneficiary of the Executive did in fact survive the Executive, such beneficiary shall be conclusively presumed to have died prior to the Executive's death. 15. Binding Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns. 16. Modification and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 17. Headings of No Effect. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 18. Governing Law. This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Illinois without giving effect to the choice of law provisions in effect in such State. IN WITNESS WHEREOF, PEC has caused this Agreement to be executed by its officers thereunto duly authorized, and the Executive has signed this Agreement, all effective as of the date first above written. PEOPLES ENERGY CORPORATION By: /s/ HOMER J. LIVINGSTON, JR. --------------------------------------- Director and Chairman of the Compensation-Nominating Committee of the Board of Directors By: /s/ MICHAEL S. REEVES --------------------------------- Michael S. Reeves Executive Vice President EXHIBIT A TO SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND EXECUTIVE, DATED DECEMBER 4, 1996 RELEASE AGREEMENT This Agreement is entered into on this ____ day of _______________, between Michael S. Reeves, Executive Vice President ("Executive") and Peoples Energy Corporation on behalf of Peoples Energy Corporation and any affiliate and successor or successors to Peoples Energy Corporation. 1. In consideration of the benefits to be paid and provided to the Executive under that certain Severance Agreement between Peoples Energy Corporation ("PEC") and the Executive, dated as of December 4, 1996, ("Severance Agreement") Executive waives, releases and forever discharges PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) from all claims which he may have against PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) arising out of the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Illinois Human Rights Act, or any other federal, state or local statute, regulation, ordinance, or doctrine of common law prohibiting discrimination on the basis of disability or age or race or gender or on any other substantially similar basis. 2. The Executive acknowledges that, prior to his execution of this Agreement, he was encouraged to review it with counsel or anyone else of his choosing. Executive states that he understands its meaning and that he knowingly, freely and voluntarily executes it. The Company encourages the Executive to consult with an attorney regarding this Agreement. If after review, the Executive wishes to accept, he should sign the document and return it to the Secretary of Peoples Energy Corporation. This Release will not become effective until seven days thereafter, and if the Executive changes his mind within that period, he may revoke this Release by notifying the Secretary of Peoples Energy Corporation. The Executive understands and agrees that no benefits will be paid or provided to the Executive under the Severance Agreement prior to the receipt by PEC of this release executed by the Executive. PEOPLES ENERGY CORPORATION: By: ___________________________________ _______________________ Date By: ___________________________________ ________________________ Michael S. Reeves Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.D <SEQUENCE>5 <DESCRIPTION>EXHIBIT 10(D) <TEXT> SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND JAMES HINCHLIFF Senior Vice President and General Counsel THIS AGREEMENT, effective as of December 4, 1996, by and between Peoples Energy Corporation, an Illinois corporation and James Hinchliff, Senior Vice President and General Counsel (the "Executive"). WITNESSETH WHEREAS, the Executive is a valuable employee of the Company and an integral part of the management of the Company; and WHEREAS, the Company wishes to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control; and WHEREAS, the Board of Directors of PEC, at its meeting on December 4, 1996, determined that it would be in the best interests of the Company and its shareholders to assure continuity in the management of the Company's administration and operations in the event of a Change in Control by entering into this Agreement with the Executive; NOW THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. Definitions. "AAA" shall have the meaning set forth in paragraph 5 of this Agreement. "Affiliate" shall mean the subsidiaries of PEC and other entities controlled by such subsidiaries. "Agreement" shall mean this Severance Agreement. "Benefit Service" shall mean the Benefit Service as defined in the PEC Retirement Plan. "Board" shall mean the Board of Directors of PEC. "Cause" shall mean the Executive's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company as determined in good faith by a vote of at least two-thirds of the non-employee directors of PEC at a meeting of the Board at which the Executive is provided an opportunity to be heard. "Change in Control" shall mean: (i) either (A) receipt by PEC of a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission ("SEC") pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC, or (B) actual knowledge by PEC of facts, on the basis of which any Person is required to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13 (d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC; (ii) purchase by any Person, other than PEC or a wholly-owned subsidiary of the Company, of shares pursuant to a tender or exchange offer to acquire any stock of PEC (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of PEC (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of PEC of (a) any consolidation or merger of PEC in which PEC is not the continuing or surviving corporation or pursuant to which shares of stock of PEC would be converted into cash, securities or other property, other than a consolidation or merger of PEC in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which PEC is the continuing or surviving corporation, but in which the common shareholders of PEC immediately prior to the consolidation or merger do not hold at least ninety (90) percent of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least ninety (90) percent of the common stock of the corporation which owns all of the common stock of PEC), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of PEC (Transfer Transaction), (except where (A) PEC owns all of the outstanding stock of the transferee entity or (B) the holders of PEC's common stock immediately prior to the Transfer Transaction own at least ninety (90) percent of the outstanding stock of the transferee entity, immediately after the Transfer Transaction), or (d) any consolidation or merger of PEC where, after the consolidation or merger, one Person owns one hundred (100) percent of the shares of stock of PEC (except where the holders of PEC's common stock immediately prior to such merger or consolidation own at least ninety (90) percent of the outstanding stock of such Person immediately after such consolidation or merger); or (iv) a change in the majority of the members of the Board within a twenty-four (24) month period, unless the election or nomination for election by PEC's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the twenty-four (24) month period. "Code" shall mean the United States Internal Revenue Code of 1986, as amended, or any successor thereto. "Company" shall mean PEC and include any Affiliate and successor or successors to PEC. "Compensation" shall mean the sum of (i) the Executive's annual rate of salary on the last day the Executive was an employee of the Company, including any elective contributions made by the Company on behalf of the Executive that are not includable in the gross income of the Executive under Section 125 or 402(a)(8) of the Code or any successor provision thereto, and including any amount of salary that has been deferred by the Executive, (ii) an award equal to the average of the amounts awarded to the Executive under the PEC STIC during the three years preceding termination of employment, and (iii) the economic equivalent value of any awards received by Executive under the PEC LTIC in the calendar year preceding termination of employment (as determined in good faith by the PEC Directors' Compensation- Nominating Committee). "Computed Award" shall mean Computed Award as defined in the PEC STIC. "Constructive Discharge" shall mean a good faith determination by the Executive that there has been any (i) material change by the Company of the Executive's functions, duties or responsibilities which change would cause the Executive's position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Executive of duties and responsibilities inconsistent with his position, (ii) assignment or reassignment by the Company of the Executive, without the Executive's consent, to another place of employment more than fifty (50) miles from the Executive's current place of employment, (iii) liquidation, dissolution, consolidation or merger of PEC, or transfer of all or substantially all of its assets, other than a transaction or series of transactions in which the resulting or surviving transferee entity has, in the aggregate, a net worth at least equal to that of PEC immediately before such transaction and such resulting or surviving transferee entity expressly assumes this Agreement and all obligations and undertakings hereunder, or (iv) reduction, which is more than de minimis, in the Executive's total compensation (Compensation, perquisites and benefits). It is understood and agreed by all parties hereto that a reduction in (a) the amount the Executive receives under PEC STIC, (b) the awards received by the Executive under the PEC LTIC, or (c) the prerequisites or benefits of the Executive shall not be deemed a reduction if such amount received under the PEC STIC, awards received under the PEC LTIC, or such prerequisites or benefits are the same as received by the Company's similarly situated officers. An event shall not be considered Constructive Discharge unless the Executive provides written notice to PEC specifying the event relied upon for Constructive Discharge within six months after the occurrence of such event. Within thirty days of receiving such written notice from the Executive, the Company may cure or cause to be cured the event upon which the Executive claims a Constructive Discharge and no Constructive Discharge shall have been considered to have occurred with respect to such event. PEC and the Executive, upon mutual written agreement, may waive any of the foregoing provisions which would otherwise constitute a Constructive Discharge. "Coverage Period" shall mean the period commencing with the month in which termination of employment as described in paragraph 3.a. of this Agreement shall have occurred, and ending thirty-six (36) months thereafter. "Effective Date" shall mean December 4, 1996. "PEC" shall mean Peoples Energy Corporation, an Illinois corporation. "PEC Directors' Compensation-Nominating Committee" shall mean the Peoples Energy Corporation Board of Directors' Compensation-Nominating Committee. "PEC LTIC" shall mean the Peoples Energy Corporation Long Term Incentive Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC Retirement Plan" shall mean the Peoples Energy Corporation Retirement Plan as in effect on the Effective Date, as amended from time to time, or any successor plan. "PEC SRB" shall mean the Peoples Energy Corporation Supplemental Retirement Benefit Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC STIC" shall mean the Peoples Energy Corporation Short Term Incentive Compensation Plan, as in effect on the Effective Date, as amended from time to time or any successor plan. "PEC TAP" shall mean the Peoples Energy Corporation Termination Allowance Plan as in effect on the Effective Date, as amended from time to time and as enhanced as described in that certain PEC brochure for nonunion employees titled, "Career Transition Opportunities", dated November 1996. "Plan Year" shall mean the Plan Year as defined under the PEC STIC. "Present Value Amount" shall mean the amount calculated by the PEC Directors' Compensation-Nominating Committee as of the date of the termination of the Executive's employment as described in paragraph 3.a., using as a mortality basis the mortality basis used by the PEC Retirement Plan for determining benefits, or if such mortality basis is not available, a mortality basis determined by the PEC Retirement Plan's consulting actuaries, and assuming a discount rate equal to the average of the yield on Thirty (30) year United States Treasury Bonds for the second calendar month preceding the Executive's termination of employment as described in paragraph 3.a. "Rule of Eighty-Five" shall mean the Rule of Eighty-Five as defined under the PEC Retirement Plan. "SARs" shall mean SARs as defined under the PEC LTIC. "Stock Options" shall mean Options as defined under the PEC LTIC. "Term" shall mean the term of this Agreement as set forth in paragraph 2. "Trust" shall mean the Trust under Peoples Energy Corporation Executive Deferred Compensation Plan and Supplemental Retirement Benefit Plan, Part A and Part B, dated September 22, 1995, as amended July 1, 1996, in effect on the Effective Date, as amended from time to time. 2. Term. This Agreement shall be effective as of the Effective Date and shall continue thereafter until the later of: (i) thirty-six (36) full calendar months following the date on which occurs any of the events described in subparagraphs (i), (ii) or (iv) of the definition of Change in Control in paragraph 1; or (ii) twenty-four (24) full calendar months following the date on which the transaction that was the subject of shareholder approval pursuant to subparagraph (iii) of the definition of Change in Control in paragraph 1 has been completed. 3. Severance Benefit. a. If, during the period commencing on the date of a Change in Control and ending on the last day of the Term, the Executive's employment hereunder is terminated by the Company for any reason, other than Cause, death, or disability, or is terminated by the Executive in the event of a Constructive Discharge, then, within five (5) business days after such termination, PEC shall pay to the Executive (if the Executive has died before receiving all payments to which he has become entitled hereunder to the beneficiary or estate of the Executive as described in paragraph 14) the sum of (i) accrued but unpaid salary and accrued but unused paid time off under the Company's "Paid Time Off Bank" policy for all employees, effective January 1, 1997, or any successor plan, (ii) severance pay in a lump sum cash amount equal to three (3) years of the Executive's Compensation, and (iii) the amount determined pursuant to paragraph 3.e. The Executive (if the Executive has died before receiving all payment to which he becomes entitled hereunder, the beneficiary or the estate of the Executive as described in paragraph 14) will be paid in cash within ten (10) business days after termination as described in paragraph 3.a., the Present Value Amount of the benefits accrued by the Executive under the PEC SRB, Part A and Part B on the date of termination of employment as described in this paragraph 3.a., determined as if the Executive had received credit for an additional three (3) years of Benefit Service. For purposes of determining the Executive's accrued benefits under the preceding sentence, such benefits shall be determined as full benefits, without actuarial reduction, as if the Executive qualified for the Rule of Eighty-Five under the PEC Retirement Plan and PEC SRB (regardless of whether the Executive so qualifies). All non-vested Options and SARs awarded to the Executive under the PEC LTIC shall be deemed vested as of the earlier of the date of a Change in Control as defined in this Agreement or Change in Control as defined in the PEC LTIC. The Company shall treat the Executive as employed by the Company for purposes of exercising Stock Options and SARs during the Coverage Period. All non-vested restricted stock awarded to the Executive under the PEC LTIC shall be deemed vested and owned by the Executive as of the earlier of the date of a Change in Control as defined in this Agreement or a Change in Control as defined in the PEC LTIC and such stock shall be delivered to the Executive within five (5) business days after the date of such Change in Control. The Executive's termination of employment with the Company to become an employee of a corporation which directly or indirectly owns one hundred percent (100%) of or which is owned one hundred percent (100%) by the Company shall not be considered a termination of employment for purposes of this Agreement. The subsequent termination of the Executive's employment from such corporation, without employment at a company that is wholly-owned by such corporation, shall be considered a termination of employment for purposes of this Agreement. b. During the longer of: (i) the Coverage Period or (ii) the period commencing with the date of the Executive's termination of employment as described in paragraph 3a and ending on the last day of the first month in which the Executive may retire under the PEC Retirement Plan and be eligible to receive a retirement annuity thereunder without actuarial reduction, the Executive shall be entitled to all benefits under the Company's welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), as if the Executive were still employed during such period, at the same level of benefits and at the same dollar cost to the Executive as is available to all of the Company's executives generally and if and to the extent that equivalent benefits shall not be payable or provided under any such plans, the Company shall pay or provide equivalent benefits on an individual basis; provided, however, that PEC's obligations under this paragraph 3.b. shall cease upon the date following the termination of the Executive's employment as described in paragraph 3.a. that the Executive is eligible to receive benefits under welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) provided by an employer of the Executive other than the Company. c. (i) If Independent Tax Counsel shall determine that the aggregate payments made to the Executive pursuant to this Agreement and any other payments to the Executive from the Company which constitute "parachute payments" as defined in Section 280G of the Code (or any successor provision thereto) ("Parachute Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount calculated at the highest marginal tax rate applicable to the Executive for the tax year in which such payments were paid to the Executive (determined by Independent Tax Counsel) such that after payment by the Executive of all federal, state and other taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the payments. For purposes of this paragraph 3.c., "Independent Tax Counsel" shall mean a lawyer, a certified public accountant with a nationally recognized accounting firm, or a compensation consultant with a nationally recognized actuarial and benefits consulting firm, with expertise in the area of executive compensation tax law, who shall be selected by the Executive and shall be reasonably acceptable to PEC, and whose fees and disbursements shall be paid by PEC. (ii) If Independent Tax Counsel shall determine that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that the Executive has substantial authority not to report any Excise Tax on the Executive's Federal income tax return. If the Executive is subsequently required to make a payment of any Excise Tax, then the Independent Tax Counsel shall determine in the same manner as a Gross-up Payment the amount (the amount of such additional payments are referred herein as "Gross-Up Underpayment") of such payment and any such Gross-Up Underpayment shall be promptly paid by PEC to or for the benefit of the Executive. The fees and disbursements of the Independent Tax Counsel shall be paid by PEC. (iii) The Executive shall notify PEC in writing within 15 days of any claim by the Internal Revenue Service that, if successful, would require the payment by PEC of a Gross-Up Payment. If PEC notifies the Executive in writing that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this subparagraph (iii) of paragraph 3.c., the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (C) cooperate with the Company in good faith in order to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, for any Excise Tax or federal and state income tax or other taxes, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. The Company shall control all proceedings taken in connection with such contest; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, PEC shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis calculated at the highest marginal tax rate applicable to the Executive, from any Excise Tax or federal and state income tax or other taxes, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. (iv) If, after the receipt by the Executive of an amount advanced by PEC pursuant to subparagraph (iii) of paragraph 3.c., the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall within 10 days pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). d. In the event of any termination of the Executive's employment as described in paragraph 3.a., the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment. e. The Executive shall be paid the following described amounts pursuant to subparagraph (iii) of paragraph 3.a. If the Executive has not received an award under the STIC for the Plan Year in which his employment is terminated the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount equal to a prorated award for the portion of the Plan Year that the Executive was employed by the Company. If the Executive has not yet received payment of his award amount under the STIC for the Plan Year preceding the Executive's termination, the PEC Directors' Compensation-Nominating Committee shall determine in good faith, specifically considering the Executive's Computed Award under the STIC for such Plan Year, an award amount under the STIC for such Plan Year. 4. Source of Payments. All payments provided for in paragraph 3 shall be paid in cash from the general funds of PEC; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established or utilized by PEC to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company such right shall be no greater than the right of an unsecured creditor of the Company. 5. Litigation Expenses: Arbitration. a. PEC's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except as set forth in paragraph 7. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. PEC agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case interest at the Federal long-term rate in effect under Section 1274(d) of the Code, compounded monthly. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. The obligation of the Company under this paragraph 5. shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). b. In the event of any dispute or difference between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Executive may, in his sole discretion by written notice to PEC, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the Executive had notified PEC of his desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Illinois upon the application of the Executive. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal of further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Illinois, and shall be conducted in accordance with the Rules of the AAA. 6. Tax Withholding. The Company may withhold from any payments made under this Agreement all federal, state or other taxes, including excise taxes as shall be required pursuant to any law or governmental regulation or ruling. 7. Waiver and Releases. a. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, the Executive hereby waives, releases and forever discharges the Company from any and all claims he has or may have against the Company arising out of or relating to the following: (a) The PEC TAP, upon receipt by the Executive of all amounts due or owing to the Executive under this Agreement; and (b) The PEC SRB, Part A and Part B, provided that the amount paid to the Executive pursuant to the second and third sentences of paragraph 3.a. exceeds the amount of the Executive's accrued benefits under the PEC SRB, Part A and Part B as of the date of the Executive's termination of employment as described in paragraph 3.a. b. In consideration of the covenants under this Agreement, including, but not limited to, paragraphs 3 and 5, and as a condition precedent to receiving any payments under this Agreement, the Executive agrees to execute after the date of his termination as described in paragraph 3.a., a release substantially in the form of Exhibit A attached hereto and by this reference made a part hereof. 8. Amendment of Trust and Deposit of Assets. On or before December 31, 1996, PEC shall amend the Trust to provide that within ten (10) business days after the date of a Change in Control, PEC shall deposit cash into the Trust, in an amount equal to the following: (a) the payment obligations of PEC under the Peoples Energy Corporation's Executive Deferred Compensation Plan as in effect on the Effective Date, as amended from time to time or any successor plan, and (b) the accrued benefits of the participants, as of the date of the Change in Control, under the PEC SRB, Part A and Part B. 9. Outplacement Services. Unless PEC offers outplacement services to the Executive during the Coverage Period, PEC shall reimburse the Executive for the costs of outplacement services incurred by the Executive up to a maximum amount of Seven Thousand Dollars ($7,000). 10. Entire Understanding. This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter hereof and supersedes any prior severance agreement between the Company and the Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of any kind elsewhere provided and not expressly provided for in this Agreement. 11. Severability. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. 12 Consolidation, Merger, or Sale of Assets. If PEC consolidates or merges into or with, or transfers all or substantially all of its assets to, another corporation the term "the Company" as used herein shall include such other corporation and this Agreement shall continue in full force and effect. 13. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class with return receipt as follows: a. to PEC: Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 Attention: E. P. Cassidy, Secretary b. to the Executive: James Hinchliff Senior Vice President and General Counsel Peoples Energy Corporation 130 East Randolph Drive Chicago, Illinois 60601 or to such other address as either party shall have previously specified in writing to the other. 14. No attachment. Except as required by law and as expressly provided in his paragraph 14, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. Notwithstanding the preceding sentence, the Executive may, by giving notice to PEC during the Executive's lifetime, designate a beneficiary or beneficiaries to whom the severance benefits described in paragraph 3.a. shall be transferred in the event of the Executive's death. Any such designation may be revoked or changed by the Executive at any time and from time to time by similar notice. If there is no such designated beneficiary living upon the death of the Executive or if all such designated beneficiaries die prior to the receipt by the Executive of the referenced severance benefits, such severance benefits shall be transferred to the Executive's surviving spouse or, if none, then such severance benefits will be transferred to the estate or personal representative of the Executive. If the Company, after reasonable inquiry, is unable to determine within twelve months after the Executive's death whether any designated beneficiary of the Executive did in fact survive the Executive, such beneficiary shall be conclusively presumed to have died prior to the Executive's death. 15. Binding Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns. 16. Modification and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 17. Headings of No Effect. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 18. Governing Law. This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Illinois without giving effect to the choice of law provisions in effect in such State. IN WITNESS WHEREOF, PEC has caused this Agreement to be executed by its officers thereunto duly authorized, and the Executive has signed this Agreement, all effective as of the date first above written. PEOPLES ENERGY CORPORATION By: /s/ HOMER J. LIVINGSTON, JR. -------------------------------------- Director and Chairman of the Compensation-Nominating Committee of the Board of Directors By: /s/ JAMES HINCHLIFF ---------------------------------------------- James Hinchliff Senior Vice President and General Counsel EXHIBIT A TO SEVERANCE AGREEMENT BETWEEN PEOPLES ENERGY CORPORATION AND EXECUTIVE, DATED DECEMBER 4, 1996 RELEASE AGREEMENT This Agreement is entered into on this ____ day of _______________, between James Hinchliff, Senior Vice President and General Counsel ("Executive") and Peoples Energy Corporation on behalf of Peoples Energy Corporation and any affiliate and successor or successors to Peoples Energy Corporation. 1. In consideration of the benefits to be paid and provided to the Executive under that certain Severance Agreement between Peoples Energy Corporation ("PEC") and the Executive, dated as of December 4, 1996, ("Severance Agreement") Executive waives, releases and forever discharges PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) from all claims which he may have against PEC (including its current and former affiliated companies, and their current and former officers, directors, employees and agents) arising out of the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Illinois Human Rights Act, or any other federal, state or local statute, regulation, ordinance, or doctrine of common law prohibiting discrimination on the basis of disability or age or race or gender or on any other substantially similar basis. 2. The Executive acknowledges that, prior to his execution of this Agreement, he was encouraged to review it with counsel or anyone else of his choosing. Executive states that he understands its meaning and that he knowingly, freely and voluntarily executes it. The Company encourages the Executive to consult with an attorney regarding this Agreement. If after review, the Executive wishes to accept, he should sign the document and return it to the Secretary of Peoples Energy Corporation. This Release will not become effective until seven days thereafter, and if the Executive changes his mind within that period, he may revoke this Release by notifying the Secretary of Peoples Energy Corporation. The Executive understands and agrees that no benefits will be paid or provided to the Executive under the Severance Agreement prior to the receipt by PEC of this release executed by the Executive. PEOPLES ENERGY CORPORATION: By: ___________________________________ _______________________ Date By: ___________________________________ ________________________ James Hinchliff Date </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>6 <TEXT> <TABLE> <S> <C> <ARTICLE> UT <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1997 <PERIOD-START> OCT-01-1996 <PERIOD-END> DEC-31-1996 <BOOK-VALUE> PER-BOOK <TOTAL-NET-UTILITY-PLANT> 1,380,030 <OTHER-PROPERTY-AND-INVEST> 13,794 <TOTAL-CURRENT-ASSETS> 434,873 <TOTAL-DEFERRED-CHARGES> 18,108 <OTHER-ASSETS> 81,931 <TOTAL-ASSETS> 1,928,736 <COMMON> 278,282 <CAPITAL-SURPLUS-PAID-IN> 0 <RETAINED-EARNINGS> 424,704 <TOTAL-COMMON-STOCKHOLDERS-EQ> 702,986 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <LONG-TERM-DEBT-NET> 527,039 <SHORT-TERM-NOTES> 700 <LONG-TERM-NOTES-PAYABLE> 0 <COMMERCIAL-PAPER-OBLIGATIONS> 28,325 <LONG-TERM-DEBT-CURRENT-PORT> 0 <PREFERRED-STOCK-CURRENT> 0 <CAPITAL-LEASE-OBLIGATIONS> 0 <LEASES-CURRENT> 0 <OTHER-ITEMS-CAPITAL-AND-LIAB> 669,686 <TOT-CAPITALIZATION-AND-LIAB> 1,928,736 <GROSS-OPERATING-REVENUE> 387,148 <INCOME-TAX-EXPENSE> 23,344 <OTHER-OPERATING-EXPENSES> 317,052 <TOTAL-OPERATING-EXPENSES> 340,396 <OPERATING-INCOME-LOSS> 46,752 <OTHER-INCOME-NET> 580 <INCOME-BEFORE-INTEREST-EXPEN> 47,332 <TOTAL-INTEREST-EXPENSE> 9,842 <NET-INCOME> 37,490 <PREFERRED-STOCK-DIVIDENDS> 0 <EARNINGS-AVAILABLE-FOR-COMM> 37,490 <COMMON-STOCK-DIVIDENDS> 16,082 <TOTAL-INTEREST-ON-BONDS> 8,927 <CASH-FLOW-OPERATIONS> (5,336) <EPS-PRIMARY> 1.07 <EPS-DILUTED> 1.07 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

PH

https://www.sec.gov/Archives/edgar/data/76334/0000076334-97-000006.txt

-----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, PS2/9sn41LNDQDnbP0TacCo1KniYEQ+ne0bNxlEv4eBoZ7q7QTT239r9J9YZEeRq va7XJl6BmeK6gK63OS3vnw== <SEC-DOCUMENT>0000076334-97-000006.txt : 19970222 <SEC-HEADER>0000076334-97-000006.hdr.sgml : 19970222 ACCESSION NUMBER: 0000076334-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARKER HANNIFIN CORP CENTRAL INDEX KEY: 0000076334 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 340451060 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04982 FILM NUMBER: 97528818 BUSINESS ADDRESS: STREET 1: 17325 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44112 BUSINESS PHONE: 2165313000 FORMER COMPANY: FORMER CONFORMED NAME: PARKER APPLIANCE CO DATE OF NAME CHANGE: 19670907 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 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 1-4982 PARKER-HANNIFIN CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-0451060 (State or other (IRS Employer jurisdiction of Identification No.) incorporation) 17325 Euclid Avenue, Cleveland, Ohio 44112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 531-3000 Indicate by check mark whether 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Number of Common Shares outstanding at December 31, 1996 74,410,445 <PAGE> PARKER-HANNIFIN CORPORATION INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income - Three Months and Six Months Ended December 31, 1996 and 1995 3 Consolidated Balance Sheet - December 31, 1996 and June 30, 1996 4 Consolidated Statement of Cash Flows - Six Months Ended December 31, 1996 and 1995 5 Business Segment Information by Industry - Three Months and Six Months Ended December 31, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 EXHIBIT 11* - Computation of Earnings per Common Share 13 EXHIBIT 27* - Financial Data Schedule 14 *Numbered in accordance with Item 601 of Regulation S-K. - 2 - <PAGE> PART I - FINANCIAL INFORMATION <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, _____________________ _________________________ 1996 1995 1996 1995 _________ _________ ___________ ___________ <S> <C> <C> <C> <C> Net sales $ 969,587 $ 824,376 $ 1,928,915 $ 1,663,430 Cost of sales 761,323 641,481 1,515,821 1,287,090 _________ _________ ___________ ___________ Gross profit 208,264 182,895 413,094 376,340 Selling, general and administrative expenses 119,543 101,189 233,987 198,908 _________ _________ ___________ ___________ Income from operations 88,721 81,706 179,107 177,432 Other income (deductions): Interest expense (11,942) (7,241) (24,256) (15,229) Interest and other income, net 5,351 2,355 7,131 5,688 _________ _________ ___________ ___________ (6,591) (4,886) (17,125) (9,541) _________ _________ ___________ ___________ Income before income taxes 82,130 76,820 161,982 167,891 Income taxes 29,566 28,424 58,313 62,120 _________ _________ ___________ ___________ Net income $ 52,564 $ 48,396 $ 103,669 $ 105,771 ========= ========= =========== =========== Earnings per share $ .70 $ .66 $ 1.39 $ 1.43 Cash dividends per common share $ .18 $ .18 $ .36 $ .36 See accompanying notes to consolidated financial statements. </TABLE> - 3 - <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands) (Unaudited) December 31, June 30, 1996 1996 <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 42,732 $ 63,953 Accounts receivable, net 526,867 538,645 Inventories: Finished products 343,797 332,213 Work in process 263,904 269,934 Raw materials 107,143 105,078 ___________ ___________ 714,844 707,225 Prepaid expenses 14,176 16,031 Deferred income taxes 83,974 76,270 ___________ ___________ Total current assets 1,382,593 1,402,124 Plant and equipment 2,112,068 2,048,293 Less accumulated depreciation 1,119,619 1,056,516 ___________ ___________ 992,449 991,777 Excess cost of investments over net assets acquired 312,819 320,152 Investments and other assets 199,761 173,071 ___________ ___________ Total assets $ 2,887,622 $ 2,887,124 =========== =========== LIABILITIES Current liabilities: Notes payable $ 145,811 $ 173,789 Accounts payable, trade 192,351 236,871 Accrued liabilities 309,012 306,504 Accrued domestic and foreign taxes 44,185 49,718 ___________ ___________ Total current liabilities 691,359 766,882 Long-term debt 429,534 439,797 Pensions and other postretirement benefits 258,323 253,616 Deferred income taxes 25,558 24,683 Other liabilities 21,524 18,188 ___________ ___________ Total liabilities 1,426,298 1,503,166 SHAREHOLDERS' EQUITY Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued -- -- Common stock, $.50 par value; authorized 300,000,000 shares; issued 74,410,445 shares at December 31 and 74,291,917 shares at June 30 37,205 37,146 Additional capital 166,680 165,259 Retained earnings 1,237,731 1,160,828 Currency translation adjustment 19,708 20,725 ___________ ___________ Total shareholders' equity 1,461,324 1,383,958 ___________ ___________ Total liabilities and shareholders' equity $ 2,887,622 $ 2,887,124 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> - 4 - <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited) Six Months Ended December 31, _____________________ 1996 1995 _________ _________ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 103,669 $ 105,771 Adjustments to reconcile net income to net cash provided by operations: Depreciation 75,807 63,969 Amortization 12,195 4,731 Deferred income taxes (10,401) (8,615) Foreign currency transaction loss 918 751 Gain on sale of plant and equipment (10,877) (33) Changes in assets and liabilities: Accounts receivable 34,538 37,897 Inventories 589 (28,384) Prepaid expenses 2,314 1,094 Other assets (8,784) (7,292) Accounts payable, trade (45,762) (41,819) Accrued liabilities (2,597) (15,213) Accrued domestic and foreign taxes (5,308) 2,894 Pensions and other postretirement benefits 5,820 (5,489) Other liabilities 3,412 479 _________ _________ Net cash provided by operating activities 155,533 110,741 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions (excluding cash of $697 in 1996 and $68 in 1995) (17,926) (13,030) Capital expenditures (83,051) (100,625) Proceeds from sale of plant and equipment 8,419 7,649 Other (14,566) (3,468) _________ _________ Net cash used in investing activities (107,124) (109,474) CASH FLOWS FROM FINANCING ACTIVITIES (Payments) proceeds from common share activity (2,618) 28 (Payments) proceeds from notes payable, net (27,827) 39,766 Proceeds from long-term borrowings 171 1,016 Payments of long-term borrowings (11,532) (5,011) Dividends (26,766) (26,677) _________ _________ Net cash (used in) provided by financing activities (68,572) 9,122 Effect of exchange rate changes on cash (1,058) (442) _________ _________ Net (decrease) increase in cash and cash equivalents (21,221) 9,947 Cash and cash equivalents at beginning of year 63,953 63,830 _________ _________ Cash and cash equivalents at end of period $ 42,732 $ 73,777 ========= ========= See accompanying notes to consolidated financial statements. </TABLE> - 5 - <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION BUSINESS SEGMENT INFORMATION BY INDUSTRY (Dollars in thousands) (Unaudited) Parker operates in two industry segments: Industrial and Aerospace. The Industrial Segment is the largest and includes the International operations. Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, and agricultural and military machinery and equipment. Sales are direct to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket. Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, military and general-aviation aircraft, missile and spacecraft markets. The Aerospace Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications. Results by Business Segment: Three Months Ended Six Months Ended December 31, December 31, _____________________ _________________________ 1996 1995 1996 1995 _________ _________ ___________ ___________ <S> <C> <C> <C> <C> Net sales, including intersegment sales Industrial: North America $ 498,975 $ 462,576 $ 1,002,725 $ 936,649 International 264,603 227,405 524,363 457,168 Aerospace 206,257 134,563 402,193 269,894 Intersegment sales (248) (168) (366) (281) _________ _________ ___________ ___________ Total $ 969,587 $ 824,376 $ 1,928,915 $ 1,663,430 ========= ========= =========== =========== Income from operations before corporate general and administrative expenses Industrial: North America $ 66,422 $ 59,848 $ 135,025 $ 126,410 International 9,190 16,549 22,119 38,733 Aerospace 25,315 17,073 46,239 35,452 _________ _________ ___________ ___________ Total 100,927 93,470 203,383 200,595 Corporate general and administrative expenses 12,206 11,764 24,276 23,163 _________ _________ ___________ ___________ Income from operations $ 88,721 $ 81,706 $ 179,107 $ 177,432 ========= ========= =========== =========== See accompanying notes to consolidated financial statements. </TABLE> - 6 - <PAGE> PARKER-HANNIFIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in thousands, except per share amounts _______________________ 1. Management Representation In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of December 31, 1996, the results of operations for the three and six months ended December 31, 1996 and 1995 and cash flows for the six months then ended. 2. Earnings per share Primary earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share are not presented because such dilution is not material. The Board of Directors has reaffirmed the repurchase, from time to time, of up to 2.8 million shares of the Company's common stock on the open market, at prevailing prices. The repurchase will be funded from operating cash flows and the shares will initially be held as treasury stock. The Company purchased 102,000 shares of its common stock at an average price of $37.48 during the three-month period ended September 30, 1996. No further purchases occurred during the three-month period ended December 31, 1996. 3. Acquisitions On February 3, 1997, following receipt of Mexican government approval, the Company purchased Hydroflex S.A. de C.V, a leading Mexican manufacturer of hydraulic hose, fittings and adapters located in Toluca, Mexico for approximately $9.2 million cash. Annual sales for this operation for the most recent year prior to acquisition were approximately $11 million. On September 5, 1996 the Company purchased the assets of the industrial hydraulic product line of Hydraulik-Ring AG, of Nurtingen, Germany, for approximately $17 million cash. Annual sales for this operation for the most recent year prior to acquisition were approximately $31 million. Both acquisitions are being accounted for by the purchase method. 4. Contingencies In November 1996 a jury verdict was rendered against the Company in connection with the termination of ASI Marine Industrial as a Company distributor. The verdict against the Company included $1.6 million in compensatory damages and $6.0 million in punitive damages. The Company intends to seek a new trial on all issues and believes that substantial grounds exist for the punitive damages, at a minimum, to be reversed on appeal. In the opinion of management, the ultimate liability with respect to this litigation, will not have a material adverse effect on the results of operations, cash flows or financial position of the Company. - 7 - <PAGE> PARKER-HANNIFIN CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND COMPARABLE PERIODS ENDED DECEMBER 31, 1995 CONSOLIDATED STATEMENT OF INCOME Net sales increased 17.6 percent for the second quarter and 16.0 percent for the six-month period ended December 31, 1996. Without the effect of acquisitions the increases would have been 5.7 percent and 5.0 percent, respectively. Revenue growth is occurring in all segments of the business, with the Aerospace operations achieving significant gains. Income from operations was $88.7 million for the current second quarter and $179.1 million for the current six months, an increase of 8.6 percent for the quarter and .9 percent for the six months. As a percent of sales, Income from operations decreased to 9.2 percent from 9.9 percent for the quarter and 9.3 percent from 10.7 percent for the six months. Cost of sales as a percent of sales increased to 78.5 percent from 77.8 percent for the quarter and 78.6 percent from 77.4 percent for the six- month period. The decline in gross profit is partially due to lower margins achieved by newly acquired operations, but is also the result of lower volume, and therefore lower absorption of fixed costs, within certain businesses in Europe. Selling, general and administrative expenses, as a percent of sales, remained steady for both the three and six month periods. Interest expense increased $4.7 million for the quarter and $9.0 million for the six months ended December 31, 1996, compared to the same periods ended December 31, 1995, due to the increased borrowings incurred to complete recent acquisitions. Interest and other income for the quarter ended December 31, 1996 includes $17.1 million income from the sale of real estate in California. This income was substantially offset by $13.3 million accrued for exit costs and charges for impaired assets related to the relocation of the corporate headquarters. Net income increased 8.6 percent for the quarter, but decreased 2.0 percent for the half, as compared to the prior year. As a percent of sales, Net income decreased to 5.4 percent from 5.9 percent for the quarter and to 5.4 percent from 6.4 percent for the six months. Backlog increased to $1.4 billion at December 31, 1996 as compared to $1.0 billion the prior year and $1.3 billion at June 30, 1996. A majority of the increase in backlog over the prior year was due to acquisitions, while the remaining increase was the result of growth within the Aerospace Segment. BUSINESS SEGMENT INFORMATION BY INDUSTRY INDUSTRIAL - The Industrial Segment operations achieved the following Net sales increases in the current year when compared to the equivalent prior-year period: Period ending December 31, __________________________ Three Months Six Months ____________ __________ Industrial North America 7.9 % 7.1 % Industrial International 16.4 % 14.7 % Total Industrial 10.7 % 9.6 % - 8 - <PAGE> Without the effect of currency-rate changes, International sales would have increased over 20 percent for the quarter and 18 percent for the six months. Without the effect of acquisitions completed within the past 12 months, the fluctuations in Net sales would have been: Period ending December 31, _________________________ Three Months Six Months ____________ __________ Industrial North America 6.1 % 5.1 % Industrial International (1.3) % (0.6) % Total Industrial 3.7 % 3.2 % Operating income for the Industrial Segment was down 1.0 percent for the quarter and 4.8 percent for the six months. Industrial North American Operating income increased 11.0 percent for the quarter and 6.8 percent for the six months while Industrial International results decreased 44.5 percent for the quarter and 42.9 percent for the six months. Without the effect of acquisitions the total Industrial Segment Operating income would have remained relatively flat for the quarter and would have decreased 4.2 percent for the six months. As a percent of sales, Industrial North American Operating income increased to 13.3 percent from 12.9 percent for the quarter and remained at 13.5 percent for the six months. Industrial International Operating income decreased to 3.5 percent from 7.3 percent for the quarter, and 4.2 percent from 8.5 percent for the six months. On balance, North American Industrial markets remain healthy. Demand for products from industries such as factory automation, agricultural and construction equipment, and for electromagnetic interference-prevention products offset slowness in sales of components to large-truck and semiconductor manufacturers. International earnings were affected by continued weak demand in Europe, resulting in lower capacity utilization and reduced operating margins. The International operations experienced lower-than-anticipated results from several European operations, including VOAC, an acquisition within the industrial hydraulics business. VOAC was faced with a sharp decline in demand for some of its products, due to recessionary conditions in the forest and pulp and paper industries. Sales volume within the Asia Pacific and Latin American operations remains encouraging. Total Industrial Segment backlog increased 9.7 percent compared to December 31, 1995 and 5.5 percent since June 30, 1996. The increase from the prior year is primarily the result of acquisitions, while the growth since June 30 is internal to the North American operations. Management expects continuing favorable economic conditions in North America and Asia Pacific, a gradual recovery in Europe and a continuation of recent improvement in selective countries in Latin America during the second half of the fiscal year. AEROSPACE - Aerospace Segment Net sales were up 53.3 percent for the quarter and 49.0 percent for the six months. Without the effect of the Abex acquisition the increases would have been 16.0 percent and 12.6 percent, respectively. The spares, repair and overhaul business and commercial original equipment manufacturer market continue to contribute to increased growth and profitability within Aerospace. Operating income for the Aerospace Segment increased 48.3 percent for the quarter and 30.4 percent for the six-month period. As a percent of sales Operating income declined to 12.3 percent from 12.7 percent for the quarter and to 11.5 percent from 13.1 percent for the six-month period. The decrease in margins was primarily the result of lower margins contributed by the Abex acquisition. Plans have been announced to consolidate these operations to strive for more cost-effective manufacturing and administrative functions. The Aerospace markets are expected to continue to grow through the second half of the fiscal year. Backlog for the Aerospace Segment increased 56.3 percent from December 31, 1995, primarily as a result of the Abex acquisition, and increased 4.1 percent since June 30, 1996. - 9 - <PAGE> CONSOLIDATED BALANCE SHEET Working capital increased to $691.2 million at December 31, 1996 from $635.2 million at June 30, 1996 with the ratio of current assets to current liabilities increasing slightly to 2.0 to 1. The increase was primarily due to decreases in Accounts payable, trade and Notes payable, partially offset by decreases in Cash and Accounts receivable, net. Accounts receivable were lower on December 31, 1996 than on June 30, 1996 primarily due to the lower level of sales in the month of December as a result of the holidays. The December 31, 1996 Accounts receivable balance also includes a noncash receivable of $21.5 million related to a transaction the Company entered into in December 1996 to sell real estate in California. The proceeds from the sale will be used in a Section 1031 tax-free exchange for the new corporate headquarters. Accounts payable, trade decreased $44.5 million since June 30, 1996 with the reduction occurring consistently throughout the operations. A portion of the decrease was the result of lower production in the month of December. The debt to debt-equity ratio decreased to 28.2 percent at December 31, 1996 from 30.7 percent at June 30, 1996 as a result of decreases in both Notes payable and Long-term debt. CONSOLIDATED STATEMENT OF CASH FLOWS Net cash provided by operating activities was $155.5 million for the six months ended December 31, 1996, as compared to $110.7 million for the same six months in 1995. Net income for fiscal 1997 included noncash Depreciation and Amortization expenses of $88.0 million as compared to $68.7 million in fiscal 1996. Net income for fiscal 1997 also included a net gain on sale of plant and equipment of $10.9 million compared to a gain of less than $.1 million in fiscal 1996. The principal working capital items - Accounts receivable, Inventories, and Accounts payable, trade - used cash of $10.6 million in fiscal 1997 compared to $32.3 million in fiscal 1996. An increase in Other accrued liabilities provided cash of $18.1 million in fiscal 1997 as compared to $5.7 in fiscal 1996. Pensions and other postretirement benefits provided cash of $5.8 million in fiscal 1997 compared to using cash of $5.4 million in the same period for fiscal 1996. Net cash used in investing activities was relatively the same for the six months ended December 31, 1996 and 1995. Capital expenditures were $17.6 million lower in fiscal 1997, but this decrease was partially offset by an increase in cash used for Other investing activities. This increase is due to cash placed in an escrow account pending Mexican government approval of an acquisition. Financing activities used cash of $68.6 million for the six months ended December 31, 1996 compared to providing cash of $9.1 million for the same period in 1995. Payments of Notes payable were $27.8 million in fiscal 1997 while proceeds from Notes payable were $39.8 million in fiscal 1996. - 10 - <PAGE> PARKER-HANNIFIN CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The following documents are furnished as exhibits and numbered pursuant to Item 601 of Regulation S-K: Exhibit 11 - Statement regarding computation of per share earnings. Exhibit 27 - Financial Data Schedule (b) The Registrant filed a report on Form 8-K on February 4, 1997, as amended February 5, 1997, with respect to the declaration by the Board of Directors of a dividend of rights under a Shareholder Protection Rights Agreement. SIGNATURE 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. PARKER-HANNIFIN CORPORATION (Registrant) Michael J. Hiemstra Michael J. Hiemstra Vice President - Finance and Administration and Chief Financial Officer Date: February 13, 1997 - 11 - <PAGE> EXHIBIT INDEX Sequential Exhibit No. Description of Exhibit Page 11 Computation of Earnings Per Common Share 13 27 Financial Data Schedule 14 - 12 - <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> EXHIBIT 11 <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION FORM 10-Q COMPUTATION OF EARNINGS PER COMMON SHARE (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, _______________________ _______________________ 1996 1995 1996 1995 __________ __________ __________ __________ <S> <C> <C> <C> <C> Net income applicable to common shares $ 52,564 $ 48,396 $ 103,669 $ 105,771 Weighted average common shares outstanding for the period 74,384,515 74,157,805 74,343,790 74,114,333 Increase in weighted average from dilutive effect of exercise of stock options 558,260 488,250 569,743 649,986 __________ __________ __________ __________ Weighted average common shares, assuming issuance of the above securities 74,942,775 74,646,055 74,913,533 74,764,319 ========== ========== ========== ========== Earnings per common share: Primary $ .70 $ .66 $ 1.39 $ 1.43 Fully diluted (A) $ .70 $ .64 $ 1.38 $ 1.41 <FN> (A) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required for income statement presentation because it results in dilution of less than 3 percent. </FN> </TABLE> - 13 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-Q FOR ITS QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. <MULTIPLIER> 1,000 <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1997 <PERIOD-END> DEC-31-1996 <CASH> 42,732 <SECURITIES> 0 <RECEIVABLES> 456,508 <ALLOWANCES> 6,781 <INVENTORY> 714,844 <CURRENT-ASSETS> 1,382,593 <PP&E> 2,112,068 <DEPRECIATION> 1,119,619 <TOTAL-ASSETS> 2,887,622 <CURRENT-LIABILITIES> 691,359 <BONDS> 437,953 <COMMON> 37,205 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,424,119 <TOTAL-LIABILITY-AND-EQUITY> 2,887,622 <SALES> 1,928,915 <TOTAL-REVENUES> 1,928,915 <CGS> 1,515,821 <TOTAL-COSTS> 1,515,821 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 877 <INTEREST-EXPENSE> 24,256 <INCOME-PRETAX> 161,982 <INCOME-TAX> 58,313 <INCOME-CONTINUING> 103,669 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 103,669 <EPS-PRIMARY> 1.39 <EPS-DILUTED> 1.38 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

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https://www.sec.gov/Archives/edgar/data/84129/0000893220-97-000019.txt

-----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, JVkJu2UH6bcAJo8NnwdEVeQfEf1v/+WuJC6MklkOyKrxxIRxPJJfMktf9fyFavrb w7ObpJj1Aj5SWuiOUrOhgg== <SEC-DOCUMENT>0000893220-97-000019.txt : 19970110 <SEC-HEADER>0000893220-97-000019.hdr.sgml : 19970110 ACCESSION NUMBER: 0000893220-97-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970109 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RITE AID CORP CENTRAL INDEX KEY: 0000084129 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 231614034 STATE OF INCORPORATION: DE FISCAL YEAR END: 0304 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05742 FILM NUMBER: 97503028 BUSINESS ADDRESS: STREET 1: 30 HUNTER LANE CITY: CAMP HILL OWN STATE: PA ZIP: 17011 BUSINESS PHONE: 7177612633 MAIL ADDRESS: STREET 1: PO BOX 3165 CITY: HARRISBURG STATE: PA ZIP: 17105 FORMER COMPANY: FORMER CONFORMED NAME: LEHRMAN LOUIS & CO DATE OF NAME CHANGE: 19680510 FORMER COMPANY: FORMER CONFORMED NAME: RACK RITE DISTRIBUTORS DATE OF NAME CHANGE: 19680510 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>RITE AID FORM 10-Q DATED NOVEMBER 30, 1996 <TEXT> <PAGE> 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended NOVEMBER 30, 1996 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 1-5742 RITE AID CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 23-1614034 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Hunter Lane 17011 Camp Hill, Pennsylvania (Zip Code) (Address of principal executive offices) (717) 761-2633 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <CAPTION> OUTSTANDING AT CLASS OF COMMON STOCK NOVEMBER 30, 1996 ---------------------- ------------------- <S> <C> $1.00 PAR VALUE 83,929,950 SHARES </TABLE> Total number of sequentially numbered pages in this filing, including exhibits thereto: 20. <PAGE> 2 1 RITE AID CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of November 30, 1996 and March 2, 1996 2 Condensed Consolidated Statements of Income Thirty-Nine Weeks Ended November 30, 1996 and December 2, 1995. 4 Condensed Consolidated Statements of Income Thirteen Weeks Ended November 30, 1996 and December 2, 1995 5 Condensed Consolidated Statements of Cash Flows Thirty-Nine Weeks Ended November 30, 1996 and December 2, 1995 6 Notes to Condensed Consolidated Financial Statements 7 Independent Auditors' Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 <PAGE> 3 2 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 PART I. FINANCIAL INFORMATION Item 1. Financial Statements: RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> ASSETS NOVEMBER 30, 1996 MARCH 2, 1996 - ------ ----------------- ------------- (UNAUDITED) <S> <C> <C> Current Assets Cash $ 8,714 $ 3,131 Accounts Receivable, Net 261,817 246,966 Inventories 1,345,119 1,170,747 Prepaid Expenses and Other Current Assets 41,044 44,204 ----------------- ------------- Total Current Assets 1,656,694 1,465,048 ----------------- ------------- Property, Plant and Equipment 1,966,647 1,677,510 Less: Accumulated Depreciation and Amortization 752,579 697,961 ----------------- ------------- Total Property, Plant & Equipment, Net 1,214,068 979,549 ----------------- ------------- Intangible Assets Excess of Cost Over Underlying Equity in Subsidiaries (less accumulated amortiza- tion of $12,539 and $9,619) 152,791 141,266 Lease Acquisition Costs and Other Intangible Assets (less accumulated amortization of $131,341 and $115,430) 224,100 197,129 ----------------- ------------- Total Intangible Assets 376,891 338,395 ----------------- ------------- Other Assets 99,242 59,003 ----------------- ------------- Total Assets $3,346,895 $2,841,995 ========== ========== </TABLE> See accompanying independent auditors' report and notes to condensed consolidated financial statements. <PAGE> 4 3 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> LIABILITIES NOVEMBER 30, 1996 MARCH 2, 1996 - ------ ----------------- ------------- (UNAUDITED) <S> <C> <C> Current Liabilities Short-Term Debt and Current Maturities of Long- Term Debt $ 64,980 $ 232,811 Accounts Payable 310,329 271,782 Income Taxes 83,768 42,463 Sales and Other Taxes Payable 11,311 13,913 Accrued Expenses 62,795 69,030 ----------------- ------------- Total Current Liabilities 533,183 629,999 ----------------- ------------- Long-Term Debt, Less Current Maturities 1,536,839 994,321 ----------------- ------------- Deferred Income Taxes 113,807 114,056 ----------------- ------------- Total Liabilities 2,183,829 1,738,376 ----------------- ------------- Stockholders' Equity Common Stock 90,462 90,380 Additional Paid-In Capital 63,247 62,623 Retained Earnings 1,114,536 1,055,795 Cumulative Pension Liability Adjustments (433) (433) Treasury Stock, At Cost (104,746) (104,746) ----------------- ------------- Total Stockholders' Equity 1,163,066 1,103,619 ----------------- ------------- Total Liabilities and Stockholders' Equity $3,346,895 $2,841,995 ========== ========== </TABLE> See accompanying independent auditors' report and notes to condensed consolidated financial statements. <PAGE> 5 4 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars In Thousands Except Per Share Amounts) (UNAUDITED) <TABLE> <CAPTION> THIRTY-NINE THIRTY-NINE WEEKS ENDED WEEKS ENDED NOVEMBER 30, 1996 DECEMBER 2, 1995 ----------------- ---------------- <S> <C> <C> NET SALES $4,313,019 $4,015,036 COSTS AND EXPENSES Cost of Goods Sold Including Occupancy Costs 3,185,468 2,960,998 Selling, General and Administrative Expenses 883,148 837,629 Interest Expense 57,902 49,546 Nonrecurring Charge Related to Revco D.S., Inc. Acquisition Costs 16,057 - ----------------- ---------------- 4,142,575 3,848,173 ----------------- ---------------- Income Before Income Taxes 170,444 166,863 Income Taxes 65,110 64,910 ----------------- ---------------- NET INCOME $ 105,334 $ 101,953 ========== ========== EARNINGS PER SHARE $1.26 $1.22 ==== ==== CASH DIVIDENDS PER COMMON SHARE $.555 $.51 ==== ==== AVERAGE SHARES OUTSTANDING 83,891,000 83,816,000 </TABLE> See accompanying independent auditors' report and notes to condensed consolidated financial statements. <PAGE> 6 5 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars In Thousands Except Per Share Amounts) (UNAUDITED) <TABLE> <CAPTION> THIRTEEN THIRTEEN WEEKS ENDED WEEKS ENDED NOVEMBER 30, 1996 DECEMBER 2, 1995 ----------------- ---------------- <S> <C> <C> NET SALES $1,484,641 $1,331,796 COSTS AND EXPENSES Cost of Goods Sold Including Occupancy Costs 1,100,706 985,454 Selling, General and Administrative Expenses 302,697 276,374 Interest Expense 20,703 16,515 ----------------- ---------------- 1,424,106 1,278,343 ----------------- ---------------- Income Before Income Taxes 60,535 53,453 Income Taxes 23,126 20,793 ----------------- ---------------- NET INCOME $ 37,409 $ 32,660 ========== ========== EARNINGS PER SHARE $.45 $.39 ==== ==== CASH DIVIDENDS PER COMMON SHARE $.185 $.17 ===== ==== AVERAGE SHARES OUTSTANDING 83,919,000 83,758,000 </TABLE> See accompanying independent auditors' report and notes to condensed consolidated financial statements. <PAGE> 7 6 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (UNAUDITED) <TABLE> <CAPTION> THIRTY-NINE THIRTY-NINE WEEKS ENDED WEEKS ENDED NOVEMBER 30, 1996 DECEMBER 2, 1995 ----------------- ---------------- <S> <C> <C> Operating Activities Income from Continuing Operations Before Income Taxes $ 170,444 $ 166,863 Depreciation and Amortization 110,662 87,369 Accreted Interest on Long-Term Debt 12,672 9,499 Changes in Operating Assets and Liabilities, Net of Effects from Acquisitions (147,375) (231,726) -------------- ------------ 146,403 32,005 Discontinued Operations Income from Operations Before Income Taxes - 190 Depreciation and Amortization - 700 ------------- ------------ - 890 Income Taxes Paid (23,965) (29,822) ------------- ------------ Net Cash Provided by Operations 122,438 3,073 ------------- ------------ Investing Activities Purchase of Property, Plant and Equipment (336,619) (206,916) Purchase of Businesses, Net of Cash Acquired (35,087) (95,374) Intangible Assets Acquired (20,677) (21,183) Investments and Advances in Affiliate (30,714) - Proceeds from Dispositions - 136,928 Other (9,486) (11,248) ------------- ------------ Net Cash Used by Investing Activities (432,583) (197,793) ------------- ------------ Financing Activities Proceeds from Long-Term Debt 76,785 197,702 Proceeds (Payments) of Commercial Paper 299,435 114,368 Payments of Long-Term Debt (14,605) (44,980) Cash Dividends Paid (46,593) (42,746) Redemption of Stock Rights (839) - Acquisition of Stock for Treasury - (8,969) Proceeds from the Sale of Stock 1,545 470 ------------- ----------- Net Cash Provided by Financing Activities 315,728 215,845 ------------- ----------- Increase in Cash $ 5,583 $ 21,125 ========= ========= </TABLE> See accompanying independent auditors' report and notes to condensed consolidated financial statements. <PAGE> 8 7 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 ITEM 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The financial information included herein is unaudited. In addition, the financial information does not include all disclosures required under generally accepted accounting principles because certain note information included in the Company's annual report has been omitted; however, such information reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. The report of KPMG Peat Marwick LLP, independent auditors, commenting upon their review accompanies the condensed consolidated financial statements included in Item 1 of Part I. The results of operations for the thirty-nine weeks and thirteen weeks ended November 30, 1996 and December 2, 1995 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - EARNINGS PER SHARE Earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. NOTE 3 - NONRECURRING CHARGE On April 17, 1996, the Federal Trade Commission ("FTC") voted to deny approval of Rite Aid's proposed acquisition of Revco D.S., Inc. As a result of the FTC's action, Rite Aid charged approximately $16,057,000 against earnings for costs related to the proposed acquisition in the first quarter of the current fiscal year. The charge had the effect of reducing net income approximately $.12 per share for the thirty-nine week period ended November 30, 1996. NOTE 4 - INVESTMENTS AND ADVANCES IN AFFILIATES On October 28, 1996, the company executed a limited liability company agreement with Diversified Pharmaceutical Services, Inc., a Minnesota corporation, to form Diversified Prescription Delivery L.L.C ("DPD"). Each company owns 50 percent of DPD, a joint venture for the purpose, among other things, to dispense brand name or generic medications and associated medical products to patients for outpatient usage in the United States through the use of mail delivery systems. As of November 30, 1996, the company had investments and advances of $30,714,000 in the joint venture. The company accounts for the joint venture using the equity method of accounting which is included with other assets on the balance sheet. <PAGE> 9 8 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 ITEM 1. Financial Statements: (Continued) RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 - COMMITMENTS AND CONTINGENCIES The company had standby letters of credit of $33,900,000 and $33,188,000 at November 30, 1996 and March 2, 1996, respectively. The company is the defendant in claims and lawsuits arising in the ordinary course of business. In the opinion of management, these matters are covered adequately by insurance, or if not so covered, are of such nature or involve such amounts as would not have a material effect on the financial statements of the company if decided adversely. NOTE 6 - SUBSEQUENT EVENT On December 12, 1996, in separate meetings, shareholders of both Rite Aid Corporation and Thrifty PayLess Holdings, Inc. ("TPHI") voted to approve the merger of Thrifty PayLess into Rite Aid. It was approved by holders of 81.3 percent of Rite Aid Corporation stock and by the holders of 77.1 percent of Thrifty PayLess stock. As a result, the company issued approximately 38.7 million shares of common stock in the transaction. The Merger will be accounted for under the purchase method of accounting. Thrifty PayLess is the largest drugstore chain in the western United States, operating over 1,000 drugstores in 10 states with annual revenues of over $4.4 billion. The following represents the unaudited pro forma results of operations as if the merger of TPHI had occurred at the beginning of the fiscal period shown below: <TABLE> <CAPTION> - ------------------------------------------------------------------------ Unaudited Pro Forma - ------------------------------------------------------------------------ In thousands of dollars except 39 Weeks Ended per share amounts November 30, 1996 - ------------------------------------------------------------------------ <S> <C> Revenues $7,804,800 Income from continuing operations $ 125,700 Earnings per share from continuing operations $ 1.03 - ------------------------------------------------------------------------ </TABLE> The pro forma results include adjustments to reflect additional amortization expenses associated with the assignment of goodwill and other intangible assets. Interest expense and financing costs related to the additional debt to finance the merger were also recorded. The pro forma results are not necessarily indicative of what would have occurred had the merger of TPHI taken place on the dates indicated or what may be obtained in the future. <PAGE> 10 9 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 1. Financial Statements: (Continued) INDEPENDENT AUDITORS' REPORT The Board of Directors Rite Aid Corporation Camp Hill, Pennsylvania We have reviewed the condensed consolidated balance sheet of Rite Aid Corporation and subsidiaries as of November 30, 1996, and the related condensed consolidated statements of income for the thirty-nine and thirteen week periods ended November 30, 1996 and December 2, 1995, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 30, 1996 and December 2, 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Rite Aid Corporation and subsidiaries as of March 2, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated April 24, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 2, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG PEAT MARWICK LLP Harrisburg, Pennsylvania January 7, 1997 <PAGE> 11 10 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Net sales for the thirteen week and thirty-nine week periods ended November 30, 1996 were $1,484,641,000 and $4,313,019,000, respectively, representing increases of 11.5% and 7.4% over the same periods from the previous year. Same-store sales increased 7.8% for the thirteen-weeks and 7.2% year to date compared to 6.6% and 7.0% for the comparable periods last year. Pharmacy same-store sales led the 13-week gain at 10.7%. During the quarter, the company added 51 drugstores, closed or sold 59 smaller outlets, and enlarged or relocated 64 locations. Since the beginning of the fiscal year, the company has added 118 stores, closed or sold 89 smaller outlets, and enlarged or relocated 150 units. As of November 30, 1996, the company operated 2,788 drugstores. Cost of goods sold including occupancy costs, as a percentage of sales, were 74.1% for the quarter and 73.9% for the year-to-date period compared to 74.0% and 73.7% for the respective periods a year earlier. The company continues to experience a greater percentage of prescription sales that are paid for by third-party plans. These third-party sales typically provide a lower gross margin than other pharmacy sales. Third-party reimbursed prescription sales, as a percent of pharmacy sales, were 80.4% for the thirteen weeks and 79.4% for the thirty-nine weeks ended November 30, 1996, compared to 75.7% for the quarter and 74.6% for the thirty-nine week period a year ago. The company was able to offset the effect of greater third-party sales somewhat through a favorable front-end sales mix, increasing sales of generic versus brand drugs, and stabilizing margins in third-party plans. Selling, general and administrative expenses for fiscal 1997 were $302,697,000 for the quarter and $883,148,000 year to date or 20.4% and 20.5% of sales, respectively. In the prior year, the operating expense to sales ratio was 20.8% for the thirteen weeks and 20.9% for the thirty-nine weeks. The current fiscal year benefited from leveraging operating expenses against strong same-store sales increases and continued cost control efforts at all levels of the company. Interest expense was $20,703,000 for the thirteen week period and $57,902,000 for the thirty-nine week period ended November 30, 1996, compared to $16,515,000 and $49,546,000 for the respective periods last year. The higher expense resulted from increased debt used to support store construction, expansions and relocations; fund inventory for the larger prototype stores being built; and purchase independent drugstores and smaller drugstore chains. In addition, the company entered into a joint venture arrangement with Diversified Pharmaceutical Services, Inc. to form Diversified Prescription Delivery L.L.C. ("DPD"), a mailorder pharmacy business. As of November 30, 1996, the company's investment in DPD was $30,714,000. The impact of the higher indebtedness was partially offset by lower weighted average rates on the company's commercial paper, which were 5.4% for the quarter and 5.5% for the year-to-date periods compared to 6.0% for the quarter and 6.1% for the thirty-nine week period in the prior year. <PAGE> 12 11 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: (Continued) At fiscal year end 1996 the company entered into a sale and leaseback transaction of certain leasehold improvements that was accounted for as a financing. In the third quarter of fiscal year 1997 the company received $76,785,000 in proceeds from this transaction which were used to retire a portion of the company's outstanding commercial paper. The lease obligation accrues interest at a rate of 7.3%. Repayment of this obligation extends through February 28, 2002. In the first quarter of fiscal 1997, the company recorded a nonrecurring, pre-tax charge of $16,057,000 to write off the costs associated with the attempted acquisition of Revco D. S., Inc. The charge reflected legal fees incurred in conjunction with settling federal and state issues regarding the proposed merger, professional fees to prepare economic analyses for the Federal Trade Commission, costs incurred to arrange financing for the merger, and consulting fees for information system integration to provide compatibility between systems and accommodate the increased volume of activity. The reserve for restructuring and other charges remains adequate to cover the unsettled leases of the 200 drugstores closed during fiscal 1995. The company continues to negotiate with landlords of the remaining stores with leases which have not been terminated. Where favorable terms cannot be agreed upon, the company will endeavor to sublet the locations until the leases expire. Working capital was $1,123,511,000 at November 30, 1996 compared to $847,332,000 at December 2, 1995, and the current ratios were 3.1:1 and 2.2:1, respectively. Cash from operations is used to support current operations, fund dividend distributions to shareholders and contribute to investing activities including store expansions and acquisitions. For the thirty-nine week period ended November 30, 1996, cash from operations and working capital were impacted primarily by increased inventories. The rise in inventories was due in part by the nonrenewal of a wholesaler contract to carry and supply pharmaceuticals to stores in the Michigan market. As a result, the company is now carrying increased stock levels at its distribution centers to service the Michigan stores which had previously been serviced by that wholesaler. Additionally, increases in inventory occurred as a result of providing additional merchandise to stock the larger prototype store size. On October 13, 1996, the company executed a Merger Agreement with Thrifty PayLess Holdings, Inc. The Merger Agreement provides for the merger of Thrifty PayLess into Rite Aid as a result of which, among other things, each share of Class A Common Stock and Class B Common Stock of Thrifty PayLess will be converted into the right to receive 0.65 shares of Rite Aid Common Stock. <PAGE> 13 12 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: (Continued) Subsequently, on December 12, 1996, in separate meetings, shareholders of both companies voted to approve the merger. It was approved by holders of 81.3 percent of Rite Aid Corporation stock and by the holders of 77.1 percent of Thrifty PayLess stock. As a result, the company issued approximately 38.7 million shares of common stock in the transaction. The Merger will be accounted for under the purchase method of accounting. In connection with the Thrifty PayLess merger plan, the company entered into an additional 364 day revolving credit facility with a syndicate of commercial banks that provides for loans in an aggregate amount of up to $1.0 billion. This new credit facility is a revolving credit facility that converts in December 1997 to a term loan that will mature in December 1998. Combined with the company's five year $1 billion revolving credit facility entered into in July 1996, the company now has $2 billion in revolving credit commitments. The credit facilities have per annum facility fees of .07% and .085%, respectively, and will be used for general corporate purposes including support of the company's commercial paper program. Revolving loans under the credit facilities bear interest at a floating rate based, at the company's option, on LIBOR, Money Market, CD rates or the lenders' Base Rate. No amounts were outstanding under the credit facilities as of November 30, 1996. The funds for the repayment of Thrifty PayLess' outstanding obligations under its secured bank facility of approximately $718.1 million, the conversion of outstanding Thrifty PayLess stock options into cash upon consummation of the Thrifty PayLess Merger of approximately $46.3 million, and the payment of certain fees and expenses relating to the Thrifty PayLess Merger of approximately $30.0 million were provided through the issuance of commercial paper on December 13, 1996. Then on December 20, 1996, the company issued certain unsecured notes and debentures (the "Securities") with an aggregate principal amount of $1.0 billion that pay interest semiannually. These Securities are not redeemable prior to maturity and are not subject to any sinking fund. A description of the Securities issued follows: <TABLE> <CAPTION> Principal Interest Amount Rate Security Maturity Date Payable - ------------ ----- ---------- ------------------ ------------ <S> <C> <C> <C> <C> $350,000,000 6.70% Notes December 15, 2001 Jun./Dec. 15th $350,000,000 7.125% Notes January 15, 2007 Jul./Jan. 15th $300,000,000 7.70% Debentures February 15, 2027 Aug./Feb. 15th </TABLE> <PAGE> 14 13 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: (Continued) The net proceeds of $991.6 million, after deducting expenses, were used to repay commercial paper issued by the company in connection with the extinguishment of the Thrifty PayLess secured bank facility and to refinance other commercial paper previously issued by the company. The company's commercial paper repaid had a weighted average interest rate of approximately 5.5% per annum. As a result of the Thrifty PayLess Merger, the company is obligated to offer to purchase all of Thrifty PayLess' outstanding 12 1/4% Senior Subordinated Notes due 2004 aggregating $195.0 million principal amount, at 101% of the principal amount thereof. On December 23, 1996, the company began its tender offer to purchase these securities and solicited consents that would eliminate substantially all covenants governing this debt. The company expects proceeds of approximately $200 million from the sale of its North Carolina and South Carolina stores to Thrift Drug. In addition, $100 million in proceeds is anticipated in conjunction with a sale and leaseback transaction of 55 owned locations during the fourth quarter of this year. The company also plans to divest the 55 Bi-Mart stores acquired through the Thrifty acquisition and expects to receive proceeds of approximately $60-$80 million. Management believes that the company remains financially strong and has adequate liquidity to continue its store acquisition, expansion, remodeling and relocation programs. <PAGE> 15 14 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 PART II Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits Item 11. - Statement regarding computation of per share earnings Item 15. - Copy of letter from independent accountants' regarding unaudited interim financial information Item 27. - Financial Data Schedule (EDGAR Filing Only) <PAGE> 16 15 RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 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. RITE AID CORPORATION (Registrant) Date: January 8, 1997 /S/ FRANK BERGONZI ----------------- ----------------------------- Frank Bergonzi Executive Vice President, Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>STATEMENT RE COMPUTATION OF PER SHARE EARNINGS <TEXT> <PAGE> 1 EXHIBIT 11 RITE AID CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996 AND DECEMBER 2, 1995 (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> 1996 1995 ---- ---- Earnings Per Common Share-Assuming No Dilution - - ---------------------------------------------- <S> <C> <C> Net Income $105,334 $101,953 ======== ======== Weighted average number of common shares outstanding 83,891 83,816 ======== ======== Primary earnings per common share $1.26 $1.22 ==== ==== Earnings Per Common Share-Assuming Full Dilution - - ---------------------------------------------- Earnings Net Income $105,334 $101,953 Add after tax interest expense applicable to 6 3/4% convertible notes (a) 6,102 5,845 -------- -------- Net income as adjusted $111,436 $107,798 ======== ======== Shares Weighted average number of common shares outstanding 83,891 83,816 Assuming conversion of 6 3/4% convertible notes 5,953 6,395 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 933 747 -------- -------- Weighted average number of common shares outstanding as adjusted 90,777 90,958 ======== ======== Earnings per common share assuming full dilution $1.23(b) $1.19(b) ==== ==== </TABLE> (a) Shown net of income taxes which were calculated at the company's effective tax rate. (b) This calculation is submitted in accordance with Regulation S-K item 601 (b)(11) although not required by APB Opinion No. 15 since dilution is less than 3%. <PAGE> 2 EXHIBIT 11 RITE AID CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 AND DECEMBER 2, 1995 (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Earnings Per Common Share-Assuming No Dilution - - ---------------------------------------------- Net Income $ 37,409 $ 32,660 ======== ======== Weighted average number of common shares outstanding 83,919 83,758 ======== ======== Primary earnings per common share $.45 $.39 ==== ==== Earnings Per Common Share-Assuming Full Dilution - - ------------------------------------------------ Earnings Net Income $ 37,409 $ 32,660 Add after tax interest expense applicable to 6 3/4% convertible notes (a) 2,092 1,954 -------- -------- Net income as adjusted $ 39,501 $ 34,614 ======== ======== Shares Weighted average number of common shares outstanding 83,919 83,758 Assuming conversion of 6 3/4% convertible notes 5,953 6,395 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 933 747 -------- -------- Weighted average number of common shares outstanding as adjusted 90,805 90,900 ======== ======== Earnings per common share assuming full dilution $.44(b) $.38(b) ==== ==== </TABLE> (a) Shown net of income taxes which were calculated at the company's effective tax rate. (b) This calculation is submitted in accordance with Regulation S-K item 601 (b)(11) although not required by APB Opinion No. 15 since dilution is less than 3%. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>3 <DESCRIPTION>KPMG PEAT MARWICK LLP LETTER <TEXT> <PAGE> 1 Exhibit 15 (KPMG PEAT MARWICK LLP LETTERHEAD) Rite Aid Corporation Camp Hill, Pennsylvania Gentlemen: Re: Registration Statement No. 2-87981; No. 333-16431; and No. 333-8071 With respect to the subject registration statements, we acknowledge our awareness of the incorporation by reference therein of our report dated January 7, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. Very truly yours, KPMG PEAT MARWICK LLP Harrisburg, Pennsylvania January 7, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Rite Aid Corporation and Subsidiaries Article 5 Financial Data Schedules from 10-Q and is qualified in its entirety by reference to such third quarter ended November 30, 1996 </LEGEND> <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-01-1997 <PERIOD-END> NOV-30-1996 <CASH> 8,714 <SECURITIES> 0 <RECEIVABLES> 267,859 <ALLOWANCES> 6,042 <INVENTORY> 1,345,119 <CURRENT-ASSETS> 1,656,694 <PP&E> 1,966,647 <DEPRECIATION> 752,579 <TOTAL-ASSETS> 3,346,895 <CURRENT-LIABILITIES> 533,183 <BONDS> 1,536,839 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 90,462 <OTHER-SE> 1,072,604 <TOTAL-LIABILITY-AND-EQUITY> 3,346,895 <SALES> 4,313,019 <TOTAL-REVENUES> 4,313,019 <CGS> 3,185,468 <TOTAL-COSTS> 3,185,468 <OTHER-EXPENSES> 899,205 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 57,902 <INCOME-PRETAX> 170,444 <INCOME-TAX> 65,110 <INCOME-CONTINUING> 105,334 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 105,334 <EPS-PRIMARY> 1.26 <EPS-DILUTED> 1.23 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

ROK

https://www.sec.gov/Archives/edgar/data/1024478/0000950128-97-000525.txt

-----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, Sg2ye8iHQVOOZ9nYS5vcE6gUL8JuLiQsT1hxZwntiKTLuv9vrRzoB02K+xriRH9p ZphRy4zFv/lzcw/ceVeLpw== <SEC-DOCUMENT>0000950128-97-000525.txt : 19970401 <SEC-HEADER>0000950128-97-000525.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950128-97-000525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKWELL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001024478 STANDARD INDUSTRIAL CLASSIFICATION: 3670 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12383 FILM NUMBER: 97527237 BUSINESS ADDRESS: STREET 1: 625 LIBERTY AVE CITY: PITTSBURGH STATE: PA ZIP: 15222-3123 BUSINESS PHONE: 4125654090 MAIL ADDRESS: STREET 1: 2201 SEAL BEACH BLVD CITY: SEAL BEACH STATE: CA ZIP: 90740-8250 FORMER COMPANY: FORMER CONFORMED NAME: NEW ROCKWELL INTERNATIONAL CORP DATE OF NAME CHANGE: 19961009 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1996 ------------------------------ Commission file number 1-12383 ------------------------ Rockwell International Corporation - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 25-1797617 - - ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2201 Seal Beach Boulevard, Seal Beach, California 90740-8250 - - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (412) 565-4090 - - ------------------------------------------------------------------------------ (Office of the Corporate Secretary) 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 _____ 189,643,864 shares of registrant's Common Stock, $1.00 par value, and 27,061,080 shares of registrant's Class A Common Stock, $1.00 par value, were outstanding on January 31, 1997. <PAGE> 2 ROCKWELL INTERNATIONAL CORPORATION INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: <TABLE> <CAPTION> Page No. <S> <C> Condensed Consolidated Balance Sheet-- December 31, 1996 and September 30, 1996.......... 2 Statement of Consolidated Income--Three Months Ended December 31, 1996 and 1995................... 3 Statement of Consolidated Cash Flows-- Three Months Ended December 31, 1996 and 1995...... 4 Notes to Financial Statements...................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 Other Financial Information...................... 11 Exhibit 11 - Computation of Earnings Per Share.............. 12 PART II. OTHER INFORMATION: Item 1. Legal Proceedings............................... 13 Item 4. Submission of Matters to a Vote of Security Holders................................ 13 Item 5. Other Information............................... 14 Item 6. Exhibits and Reports on Form 8-K................ 14 </TABLE> <PAGE> 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKWELL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ ASSETS (In millions) <S> <C> <C> Current assets: Cash......................................... $ 853 $ 715 Receivables (less allowance for doubtful accounts: December 31, 1996, $110; September 30, 1996, $98)................... 1,633 1,661 Inventories.................................. 1,795 1,780 Deferred income taxes........................ 325 306 Other current assets......................... 360 336 Net assets of Graphic Systems................ - 560 ------- ------- Total current assets................. 4,966 5,358 Net property.................................... 2,638 2,662 Intangible assets............................... 1,803 1,809 Other assets.................................... 268 236 ------- ------- TOTAL.................. $ 9,675 $10,065 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt.............................. $ 104 $ 350 Accounts payable............................. 1,027 1,220 Accrued compensation and benefits............ 450 508 Accrued income taxes......................... 233 154 Other current liabilities.................... 835 740 Net liabilities of A&D Business.............. - 1,309 ------- ------- Total current liabilities............ 2,649 4,281 Long-term debt.................................. 163 161 Accrued retirement benefits..................... 1,104 1,096 Other liabilities............................... 282 271 ------- ------- Total liabilities........... 4,198 5,809 ------- ------- Shareowners' equity: Common Stock (shares issued: December 31, 1996, 191.8; September 30, 1996, 209.5)............... 192 210 Class A Common Stock (shares issued: December 31, 1996, 27.2; September 30, 1996, 27.9)................. 27 28 Additional paid-in capital................... 855 199 Retained earnings............................ 4,564 4,466 Currency translation adjustments............. (101) (103) Common Stock in treasury, at cost (shares held: December 31, 1996, 1.0; September 30, 1996, 18.9)................. (60) (544) ------- ------- Total shareowners' equity... 5,477 4,256 ------- ------- TOTAL.................. $ 9,675 $10,065 ======= ======= </TABLE> See Notes to Financial Statements. -2- <PAGE> 4 ROCKWELL INTERNATIONAL CORPORATION STATEMENT OF CONSOLIDATED INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31 ------------------- 1996 1995 ------- ------- (In millions) <S> <C> <C> Revenues: Sales.............................................. $ 2,608 $ 2,385 Other income....................................... 20 29 ------- ------- Total revenues................................... 2,628 2,414 ------- ------- Costs and expenses: Cost of sales...................................... 1,943 1,810 Selling, general, and administrative............... 390 350 Interest........................................... 5 6 ------- ------ Total costs and expenses......................... 2,338 2,166 ------- ------ Income from continuing operations before income taxes................................ 290 248 Provision for income taxes....................... 111 96 ------- ------- INCOME FROM CONTINUING OPERATIONS.................... 179 152 Income from discontinued operations.............. - 40 ------- ------- NET INCOME........................................... $ 179 $ 192 ======= ======= (In dollars) Earnings per share: Continuing operations........................... $ .82 $ .70 Discontinued operations......................... - .19 ------- ------- Net income...................................... $ .82 $ .89 ======= ======= (In millions) Average outstanding shares........................... 218.7 217.0 ======= ======= </TABLE> See Notes to Financial Statements. -3- <PAGE> 5 ROCKWELL INTERNATIONAL CORPORATION STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31 ------------------ 1996 1995 ------ ------ (In millions) <S> <C> <C> Continuing Operations: Operating Activities Income from continuing operations....................... $ 179 $ 152 Adjustments to income from continuing operations to arrive at cash provided by operating activities: Depreciation........................................ 120 89 Amortization of intangible assets................... 22 26 Deferred income taxes............................... 16 25 Pension expense, net of contributions............... 22 28 Changes in assets and liabilities, excluding effects of acquisitions, divestitures and foreign currency adjustments: Receivables..................................... 24 (2) Inventories..................................... (17) (67) Accounts payable................................ (181) (162) Accrued Income taxes............................ 54 83 Other assets and liabilities.................... (18) (135) ------- ------- Cash Provided by Operating Activities 221 37 ------- ------- Investing Activities Property additions...................................... (113) (126) Acquisition of businesses (net of cash acquired)........ (14) - Proceeds from disposition of property and businesses.... 559 8 ------- ------- Cash Provided by (Used for) Investing Activities................................. 432 (118) ------- ------- Financing Activities (Decrease) increase in short-term borrowings............ (242) 41 Increase in long-term debt.............................. 2 - Payments of long-term debt.............................. (1) (2) ------- ------- Net (decrease) increase in debt......................... (241) 39 Purchase of treasury stock.............................. (61) (18) Dividends............................................... (63) (63) Reissuance of common stock.............................. 14 9 ------- ------- Cash Used for Financing Activities........... (351) (33) ------- ------- CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS....... 302 (114) ------- ------- Discontinued Operations: Operating activities............................. (107) (32) Investing activities............................. (9) (7) Financing activities............................. (48) 21 ------- ------- Cash Used for Discontinued Operations........ (164) (18) ------- ------- INCREASE (DECREASE) IN CASH............................. 138 (132) CASH AT BEGINNING OF PERIOD............................. 715 686 ------- ------- CASH AT END OF PERIOD................................... $ 853 $ 554 ======= ======= </TABLE> Income tax payments were $28 million and $25 million in the three months ended December 31, 1996 and 1995, respectively. See Notes to Financial Statements. -4- <PAGE> 6 ROCKWELL INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of the company the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. These statements should be read in conjunction with the company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. The results of operations for the three-month period ended December 31, 1996 are not necessarily indicative of the results for the full year. It is the company's practice at the end of each interim reporting period to make an estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used in providing for income taxes on a year-to-date basis. 2. On December 6, 1996, the company completed the merger of its Aerospace and Defense businesses (A&D Business) with The Boeing Company (Boeing) in a tax-free transaction valued at approximately $3.2 billion, including the assumption by Boeing of approximately $2.3 billion of liabilities, principally debt. Boeing issued approximately $860 million of its stock in exchange for the company's shareowners' interest in the A&D Business. Immediately prior to the merger, the company transferred its Automation, Avionics & Communications, Semiconductor Systems, and Automotive businesses to a new company (New Rockwell), which has retained the Rockwell name, and is reflected in the financial statements as the continuing operations of Rockwell for all periods presented. On the effective date of the transaction, shares of New Rockwell were distributed to the company's shareowners on a one-for-one basis, all shares of Common Stock held in treasury were canceled, and the net liabilities of the A&D Business of approximately $1.1 billion were recorded as an increase to shareowners' equity. The revenues of the A&D Business for the first two months of fiscal year 1997 were $535 million and revenues for the first quarter of fiscal year 1996 were $677 million. The earnings of the A&D Business for 1997 were entirely offset by expenses related to the completion of the transaction. In October 1996, the company completed the sale of its Graphic Systems business to Stonington Partners, Inc. for approximately $600 million. The revenues of the Graphic Systems business were $115 million for the three months ended December 31, 1995. -5- <PAGE> 7 ROCKWELL INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 3. Inventories are summarized as follows (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> Finished goods............................. $ 498 $ 491 Work in process............................ 875 880 Raw materials, parts, and supplies......... 483 466 ------- ------- Total.................................... 1,856 1,837 Less allowance to adjust the carrying value of certain inventories to a last-in, first-out (LIFO) basis................... 61 57 ------- ------- Inventories................................ $ 1,795 $ 1,780 ======= ======= </TABLE> 4. Intangible assets are summarized as follows (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> Goodwill.................................. $ 1,304 $ 1,289 Trademarks, patents, product technology, and other intangibles................... 499 520 ------- ------- Intangible assets....................... $ 1,803 $ 1,809 ======= ======= </TABLE> 5. Short-term debt consisted of the following (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> Commercial paper......................... $ - $ 210 Short-term foreign bank borrowings,...... 88 123 Current portion of long-term debt........ 16 17 ------- ------- Short-term debt......................... $ 104 $ 350 ======= ======= </TABLE> 6. Other current liabilities are summarized as follows (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> Accrued product warranties................. $ 200 $ 215 Contract reserves and advance payments..... 143 131 Accrued taxes other than income taxes...... 65 73 Other...................................... 427 321 ------- ------- Other current liabilities................ $ 835 $ 740 ======= ======= </TABLE> -6- <PAGE> 8 ROCKWELL INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 7. Long-term debt consisted of the following (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> 6.8% notes, payable in 2003............... $ 139 $ 139 Other obligations, principally foreign.... 40 39 ------- ------- Total................................... 179 178 Less current portion..................... 16 17 ------- ------- Long-term debt......................... $ 163 $ 161 ======= ======= </TABLE> 8. The company's financial instruments include cash, short- and long-term debt, and foreign currency forward exchange contracts. At December 31, 1996, the carrying values of the company's financial instruments approximated their fair values based on current market prices and rates. It is the policy of the company not to enter into derivative financial instruments for speculative purposes. The company does enter into foreign currency forward exchange contracts to protect itself from adverse currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. These commitments are generally for terms of less than one year. The foreign currency forward exchange contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. The notional amount of outstanding foreign currency forward exchange contracts aggregated $496 million at December 31, 1996 and $919 million at September 30, 1996. The contracts outstanding at September 30, 1996 included contracts relating to the A&D and Graphic Systems businesses. The company does not anticipate any material adverse effect on its results of operations or financial position relating to these foreign currency forward exchange contracts. 9. Accrued retirement benefits consisted of the following (in millions): <TABLE> <CAPTION> December 31 September 30 1996 1996 ----------- ------------ <S> <C> <C> Accrued retirement medical costs......... $1,009 $1,008 Accrued pension costs.................... 172 165 ------ ------ Total.................................. 1,181 1,173 Amount classified as current liability... 77 77 ------ ------ Accrued retirement benefits............ $1,104 $1,096 ====== ====== </TABLE> -7- <PAGE> 9 ROCKWELL INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 10. Claims have been asserted against the company for utilizing the intellectual property rights of others in certain of the company's products. The resolution of these matters may result in the negotiation of a license agreement, a settlement or the legal resolution of such claims. The company accrues the estimated cost of disposition of these matters. Management believes that the resolution of these matters will not have a material adverse effect on the company's financial statements. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company relating to the conduct of its business, including those pertaining to product liability, safety and health, environmental, employment and government contract matters. The company has agreed to indemnify Boeing and the A&D Business for certain government contract and environmental matters related to operations of the A&D Business for periods prior to the merger. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters which are pending or asserted will not have a material adverse effect on the company's financial statements. -8- <PAGE> 10 ROCKWELL INTERNATIONAL CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS 1997 First Quarter Compared to 1996 First Quarter The contributions to sales and earnings by business segment for the continuing operations of the company for the first quarter of fiscal 1997 and 1996 are presented below (in millions). <TABLE> <CAPTION> Three Months Ended December 31 ------------------- 1996 1995 ------ ------ <S> <C> <C> Sales Electronics Automation $ 1,061 $ 980 Avionics & Communications 374 339 Semiconductor Systems 418 311 ------- ------- Total Electronics 1,853 1,630 ------- ------- Automotive Heavy Vehicle Systems 412 431 Light Vehicle Systems 343 324 ------- ------- Total Automotive 755 755 ------- ------- Total $ 2,608 $ 2,385 ======= ======= Operating Earnings Electronics Automation $ 131 $ 111 Avionics & Communications 59 41 Semiconductor Systems 81 80 ------- ------- Total Electronics 271 232 Automotive 41 38 ------- ------- Operating earnings 312 270 General corporate - net (17) (16) Interest expense (5) (6) Provision for income taxes (111) (96) ------- ------- Income from continuing operations $ 179 $ 152 ======= ======= </TABLE> -9- <PAGE> 11 ROCKWELL INTERNATIONAL CORPORATION RESULTS OF OPERATIONS (CONTINUED) Sales for the 1997 first quarter were up nine percent from 1996's first quarter. Current year first quarter increases were achieved by Automation, Avionics & Communications, Semiconductor Systems, and Light Vehicle Systems; while lower sales were recorded in the Heavy Vehicle Systems business. With the sale of the A&D Business and the Graphic Systems business, Rockwell has emerged as primarily a commercial electronics firm, with its Automation, Semiconductor Systems and Avionics & Communications businesses accounting for 71% of sales. Sales from Automotive account for the other 29%. International sales account for approximately 43% of total sales. Income from continuing operations for 1997's first quarter increased 18% over 1996's. Each of the four businesses posted first quarter earnings increases with significant advances achieved by Automation and Avionics & Communications. Electronics: Electronics accounted for 87% of operating earnings in the first quarter of 1997. Avionics & Communications earnings increased 44% over last year's first quarter as a result of higher sales, improved cost performance in defense avionics, and the decision to exit several non-strategic product lines during the prior year. Avionics & Communications margin increased from 12.1% in the first quarter of 1996 to 15.8%, which the Company's management believes better characterizes the earning power of this business. Automation earnings were up 18% over 1996's first quarter due to an eight percent increase in sales which consisted primarily of higher margin products. Automation's first quarter earnings as a percent of sales were 12.4% compared to 11.3% in last year's first quarter. Semiconductor Systems profits were slightly ahead of last year's first quarter with earnings on higher sales offsetting large investments in new product development, particularly in new high-speed 56 kilobits-per-second modem, wireless communications, and internet access products. Semiconductor Systems earnings as a percent of sales were 19.4% compared to 25.7% in last year's first quarter reflecting lower pricing for modem products and higher costs related to new product development. Automotive: Automotive's earnings for the first quarter of 1997 were eight percent higher than 1996's first quarter principally as a result of cost reduction programs in the Heavy Vehicle Systems business and higher sales in the Light Vehicle Systems business. FINANCIAL CONDITION The major source of cash for the first quarter of 1997 was from the sale of the Graphic Systems business for approximately $600 million, consisting of $553 million in cash and $47 million in preferred stock. These proceeds are being used to reduce short-term debt, fund the company's working capital needs and repurchase Common Stock. Following completion of the divestiture of the A&D Business, the company initiated a $1 billion Common Stock repurchase program which is expected to be substantially completed by the end of this fiscal year. Since the program was announced, the company has purchased approximately one million shares of Common Stock for approximately $60 million. -10- <PAGE> 12 ROCKWELL INTERNATIONAL CORPORATION FINANCIAL CONDITION (CONTINUED) Information with respect to the effect on the company and its manufacturing operations of compliance with environmental protection requirements and resolution of environmental claims is contained under the caption Environmental Issues in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of the company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. Management believes that at December 31, 1996 there has been no material change to this information. See also Item 1. of Part II of this Quarterly Report on Form 10-Q. Other Financial Information (a) The composition of the company's sales by customer is as follows (in millions): <TABLE> <CAPTION> Three Months Ended December 31 --------------------------- 1996 1995 ------ ------ <S> <C> <C> U.S. Commercial $1,349 $1,237 International 1,124 1,018 U.S. Government 135 130 ------ ------ Total $2,608 $2,385 ====== ====== </TABLE> -11- <PAGE> 13 EXHIBIT 11 ROCKWELL INTERNATIONAL CORPORATION COMPUTATION OF EARNINGS PER SHARE <TABLE> <CAPTION> Three Months Ended December 31 -------------------- 1996 1995 -------- -------- (In millions, except per share amounts) <S> <C> <C> Primary earnings per share: Income from continuing operations................... $178.9 $152.0 Deduct dividend requirements on preferred stock..... - .1 ------ ------ Total primary earnings from continuing operations... $178.9 $151.9 ====== ====== Average number of common shares outstanding during the period................................. 218.7 217.0 ====== ====== Primary earnings per share from continuing operations............................. $ .82 $ .70 Primary earnings per share from discontinued operations........................... - .19 ------ ------ Net primary earnings per share ..................... $ .82 $ .89 ====== ====== Fully diluted earnings per share: Income from continuing operations................... $178.9 $152.0 ====== ====== Average number of common shares outstanding during the period assuming full dilution: Common stock................................... 218.7 217.0 Assumed issuance of stock under award plans and conversion of preferred stock............ 3.2 3.3 ------ ------ Total fully diluted shares.......................... 221.9 220.3 ====== ====== Fully diluted earnings from continuing operations... $ .81 $ .69 Fully diluted earnings per share from discontinued operations...................... - .18 ------ ------ Net fully diluted earnings per share................ $ .81 $ .87 ====== ====== </TABLE> -12- <PAGE> 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings On September 27, 1995, Celeritas Technologies, Ltd. filed a suit against the company in the United States District Court, Central District of California, for patent infringement, misappropriation of trade secrets and breach of contract relating to cellular telephone data transmission technology utilized in certain modem products produced by Rockwell Semiconductor Systems in 1995 and 1996. On December 20, 1996, a jury verdict was entered against the company for $57 million on the plaintiff's claims. On January 27, 1997, the court ruled that Rockwell's infringement was willful, awarded Celeritas enhanced damages of $57 million and entered judgment against the company for $115 million plus attorneys' fees. The company believes that the verdict and judgment are in error and has filed a notice of appeal. On August 7, 1996, the shareowner derivative suit filed on February 2, 1996 in the Superior Court of California for the County of Los Angeles and disclosed in the company's quarterly report on Form 10-Q for the period ended March 31, 1996 was dismissed voluntarily by the plaintiffs. On August 22, 1996, a First Amended Consolidated Complaint was filed in the shareowner derivative suit pending in the Superior Court of California for the County of Orange and disclosed in the company's quarterly report on Form 10-Q for the period ended December 31, 1995, adding the plaintiffs from the dismissed Los Angeles County suit as party plaintiffs to the Orange County suit. The company and the director defendants are defending the consolidated action, and the parties are proceeding with discovery. Item 4. Submission of Matters to a Vote of Security Holders (a) A special meeting of shareowners of the former Rockwell International Corporation ("Oldco") was held on December 4, 1996. The Registrant is the successor to Oldco as the result of a tax-free reorganization completed on December 6, 1996. (b) At the special meeting, the shareowners: (i) voted upon a proposal to approve (1) the contribution of Oldco's Automation, Avionics & Communications, Semiconductor Systems and Automotive businesses to Registrant or to one or more wholly-owned subsidiaries of Oldco that became wholly-owned operating subsidiaries of Registrant and (2) the distribution of all outstanding shares of Registrant on a share-for-share basis to holders of record of Oldco shares at the close of business on December 6, 1996, pursuant to an Agreement and Plan of Distribution described in Registrant's Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") dated October 29, 1996 filed as part of Registrant's Registration Statement on Form S-4 (Registration No. 333-14969). The proposal was approved by a vote of the shareowners as follows: -13- <PAGE> 15 PART II. OTHER INFORMATION (CONTINUED) Item 4. Submission of Matters to a Vote of Security Holders (Continued) Affirmative Votes 326,322,985 Negative Votes 6,530,698 Abstentions 3,099,691 (ii) voted upon a proposal to approve and adopt the Agreement and Plan of Merger dated as of July 31, 1996 described in the Proxy Statement-Prospectus, pursuant to which The Boeing Company acquired Oldco's A&D Business. The proposal was approved by a vote of the shareowners as follows: Affirmative Votes 327,248,839 Negative Votes 6,076,362 Abstentions 2,628,173 Item 5. Other Information Government Contracts For information on the company's United States government contracting business, certain risks of that business and claims related thereto, see the information set forth under the caption "Government Contracts" in Item 1, Business, on pages 4-5 of the company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, which is incorporated herein by reference. Cautionary Statement This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in political and economic conditions; domestic and foreign government spending, budgetary and trade policies; demand for and market acceptance of new and existing products; successful development of advanced technologies; and competitive product and pricing pressures, as well as other risks and uncertainties, including but not limited to those detailed from time to time in the company's Securities and Exchange Commission filings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 10a - Agreement and Plan of Merger dated as of July 31, 1996 among Rockwell International Corporation (now named Boeing North American, Inc.), The Boeing Company and Boeing NA, Inc., included as Appendix III to the Registrant's Proxy Statement - Prospectus, dated October 29, 1996, filed as part of Registrant's registration statement on Form S-4 (Registration No. 333-14969), is hereby incorporated by reference. -14- <PAGE> 16 PART II. OTHER INFORMATION (CONTINUED) Item 6. Exhibits and Reports on Form 8-K (Continued) Exhibit 10b - Agreement and Plan of Distribution dated as of December 6, 1996, among Rockwell International Corporation(now named Boeing North American, Inc.), the Registrant (formerly named New Rockwell International Corporation), Allen-Bradley Company, Inc., Rockwell Collins, Inc., Rockwell Semiconductor Systems, Inc., Rockwell Light Vehicle Systems, Inc. and Rockwell Heavy Vehicle Systems, Inc. Exhibit 10c - Post-Closing Covenants Agreement dated as of December 6, 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), The Boeing Company, Boeing NA, Inc. and the Registrant (formerly named New Rockwell International Corporation). Exhibit 10d - Tax Allocation Agreement dated as of December 6, 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), the Registrant (formerly named New Rockwell International Corporation) and The Boeing Company. Exhibit 10e - Form of Restricted Stock Agreement under the Company's 1995 Long-Term Incentives Plan. Exhibit 10f - Forms of Restricted Stock Agreement under the Company's Directors Stock Plan. Exhibit 11 - Computation of Earnings Per Share Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for the Three Months Ended December 31, 1996. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K dated December 9, 1996 in respect of the completion on December 6, 1996 of the divestiture of its former A&D Business and the related reorganization pursuant to which the Registrant succeeded to the remaining businesses of its predecessor corporation. -15- <PAGE> 17 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. ROCKWELL INTERNATIONAL CORPORATION ---------------------------------- (Registrant) Date February 12, 1997 By L. J. Komatz ------------------------ ------------------------------ L. J. Komatz Vice President and Controller (Principal Accounting Officer) Date February 12, 1997 By W. J. Calise, Jr. ------------------------ ------------------------------ W. J. Calise, Jr. Senior Vice President, General Counsel and Secretary -16- <PAGE> 18 ROCKWELL INTERNATIONAL CORPORATION INDEX OF EXHIBITS TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 <TABLE> <CAPTION> Page ---- <S> <C> <C> Exhibit 10b - Agreement and Plan of Distribution dated as of December 6, 18 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), the Registrant (formerly named New Rockwell International Corporation), Allen-Bradley Company, Inc., Rockwell Collins, Inc., Rockwell Semiconductor Systems, Inc., Rockwell Light Vehicle Systems, Inc. and Rockwell Heavy Vehicle Systems, Inc. Exhibit 10c - Post-Closing Covenants Agreement dated as of December 6, 84 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), The Boeing Company, Boeing NA, Inc. and the Registrant (formerly named New Rockwell International Corporation). Exhibit 10d - Tax Allocation Agreement dated as of December 6, 1996, 113 among Rockwell International Corporation (now named Boeing North American, Inc.), the Registrant (formerly named New Rockwell International Corporation) and The Boeing Company. Exhibit 10e - Form of Restricted Stock Agreement under the Company's 1995 154 Long-Term Incentives Plan. Exhibit 10f - Forms of Restricted Stock Agreement under the Company's 159 Directors Stock Plan. Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for the 167 Three Months Ended December 31, 1996 </TABLE> -17- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.B <SEQUENCE>2 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 10(b) CONFORMED COPY - - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF DISTRIBUTION dated as of December 6, 1996 among ROCKWELL INTERNATIONAL CORPORATION, NEW ROCKWELL INTERNATIONAL CORPORATION ALLEN-BRADLEY COMPANY, INC., ROCKWELL COLLINS, INC., ROCKWELL SEMICONDUCTOR SYSTEMS, INC., ROCKWELL LIGHT VEHICLE SYSTEMS, INC. and ROCKWELL HEAVY VEHICLE SYSTEMS, INC. - - ------------------------------------------------------------------------------- <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> <C> ARTICLE I DEFINITIONS.......................... 2 1.1. Definitions.......................... 2 ARTICLE II CONTRIBUTION AND ASSUMPTION.......... 13 2.1. Contribution......................... 13 2.2. Assumption of Liabilities............ 17 2.3. Transfer and Assumption Documentation..................... 20 2.4. Nonassignable Contracts.............. 20 2.5. Intercompany Arrangements............ 21 ARTICLE III RECAPITALIZATION OF NEWCO; MECHANICS OF DISTRIBUTION...................... 22 3.1. Newco Capitalization................. 22 3.2. Recapitalization of Newco............ 22 3.3. Mechanics of Distribution............ 22 3.4. Timing of Distribution............... 23 ARTICLE IV OTHER AGREEMENTS..................... 23 4.1. Employment........................... 23 4.2. Cross-License of Intellectual Property.......................... 25 4.3. Use of Names, Trademarks, etc........ 26 4.4. Further Assurances................... 29 4.5. Cooperation.......................... 29 ARTICLE V TAX MATTERS.......................... 30 5.1. Tax Allocation....................... 30 5.2. Tax Matters ......................... 30 5.3. Transfer Taxes....................... 30 ARTICLE VI MUTUAL RELEASE....................... 30 6.1. Mutual Release, etc.................. 30 </TABLE> i <PAGE> 3 <TABLE> <CAPTION> Page ---- <S> <C> <C> ARTICLE VII ACCESS TO INFORMATION....................... 32 7.1. Provision of Corporate Records....... 32 7.2. Access to Information................ 32 7.3. Production of Witnesses.............. 34 7.4. Retention of Records................. 35 7.5. Confidentiality...................... 35 ARTICLE VIII EMPLOYEE BENEFIT PLANS...................... 36 8.1. Employee Benefits Generally.......... 36 8.2. Retirement Plans..................... 36 8.3. Savings Plans........................ 43 8.4. Deferred Compensation Plans and Nonqualified Retirement and Savings Plans..................... 44 8.5. Employee Stock Options............... 46 8.6. Long-Term Incentive Plan............. 46 8.7. Welfare Benefit Plans................ 47 8.8. Retiree Medical and Life Insurance... 49 8.9. Retention and Severance Obligations....................... 50 8.10. Free-Standing Plans ................ 51 8.11. Employment, Consulting and Severance Agreements ...................... 51 8.12. Welfare Plan Funding................ 52 8.13. Indemnification..................... 54 8.14. Cooperation ........................ 55 8.15. Amendment, Modification or Termination of Benefits Plan..... 55 ARTICLE IX CONDITIONS.................................. 55 9.1. Conditions to Obligations of the Company........................... 55 ARTICLE X MISCELLANEOUS AND GENERAL................... 56 10.1. Modification or Amendment........... 56 10.2. Waiver; Remedies.................... 56 10.3. Counterparts........................ 57 10.4. Governing Law....................... 57 10.5. Notices............................. 57 10.6. Entire Agreement.................... 58 10.7. Certain Obligations................. 58 </TABLE> ii <PAGE> 4 <TABLE> <CAPTION> Page ---- <S> <C> <C> 10.8. Assignment........................... 58 10.9. Captions............................. 59 10.10. Specific Performance................. 59 10.11. Severability......................... 59 10.12. Third Party Beneficiaries............ 59 10.13. Schedules............................ 60 10.14. Consent to Jurisdiction.............. 60 </TABLE> iii <PAGE> 5 1 AGREEMENT AND PLAN OF DISTRIBUTION, dated as of December 6, 1996 (this "Agreement"), among ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), NEW ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation ("Newco"), ALLEN-BRADLEY COMPANY, INC., a Wisconsin corporation ("A-B"), ROCKWELL COLLINS, INC., a Delaware corporation ("Collins"), ROCKWELL SEMICONDUCTOR SYSTEMS, INC., a Delaware corporation ("RSS"), ROCKWELL LIGHT VEHICLE SYSTEMS, INC., a Delaware corporation ("LVS"), and ROCKWELL HEAVY VEHICLE SYSTEMS, INC., a Delaware corporation ("HVS"; and together with A-B, Collins, RSS and LVS, the "Operating Subsidiaries"). W I T N E S S E T H : WHEREAS, the Company, The Boeing Company, a Delaware corporation ("Acquiror"), and Boeing NA, Inc., a Delaware corporation and a wholly-owned subsidiary of Acquiror ("Sub"), have entered into an Agreement and Plan of Merger dated as of July 31, 1996 (the "Merger Agreement"), providing for the Merger (as defined in the Merger Agreement) of Sub with and into the Company; WHEREAS, immediately prior to the Conversion (as defined in the recitals to the Merger Agreement), the Company's Board of Directors, subject to the approval of the Company's stockholders, expects to distribute to the holders of Common Stock, par value $1.00 per share, of the Company ("Company Common Stock") and Class A Common Stock, par value $1.00 per share, of the Company ("Company Class A Common Stock"), other than shares held in the treasury of the Company, on a pro rata basis all of the issued and outstanding shares of Common Stock, par value $1.00 per share, of Newco ("Newco Common Stock") and Class A Common Stock, par value $1.00 per share, of Newco ("Newco Class A Common Stock"), in each case with the associated Rights (as defined in Section 1.1) (the "Distribution"); WHEREAS, immediately prior to the Distribution, the Company's Board of Directors, subject to the approval of the Company's stockholders, expects to cause (i) the Company to contribute certain assets to the Operating Subsidiaries as a capital contribution or in exchange for shares of their stock, (ii) the Company to contribute the stock of the Operating Subsidiaries and certain other assets to Newco as a capital contribution and (iii) Newco and the Operating Subsidiaries to assume certain liabilities of the Company, <PAGE> 6 2 all as more specifically provided herein (the transactions described in clauses (i), (ii) and (iii) are referred to collectively as the "Contribution"); WHEREAS, the purpose of the Distribution is to make possible the Merger by divesting the Company of the businesses and operations to be conducted by Newco and the Operating Subsidiaries, which Acquiror is unwilling to acquire; WHEREAS, it is the intention of the parties to this Agreement that the Contribution and Distribution will qualify as transactions described in Sections 351 and Section 355 of the Internal Revenue Code of 1986, as amended (the "Code") and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code; and WHEREAS, this Agreement sets forth or provides for certain agreements by and among the Company, Newco and the Operating Subsidiaries in consideration of the separation of the ownership of the Company and Newco; NOW, THEREFORE, in consideration of the premises, and of the respective covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to such terms in the Merger Agreement. As used in this Agreement, the following terms shall have the following respective meanings: "A-B Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting automation products and systems, including, without limitation, programmable controllers, human/machine interface devices, communications networks, programming and application software, AC/DC drives and drive systems, sensing and motion control devices, machine vision products, computer numeric control systems, data acquisition products, standard and engineered motors, mechanical power <PAGE> 7 3 transmission equipment, and support services for all of the foregoing, and activities related thereto, and shall include any former or discontinued operations primarily related to the A-B Business as previously conducted. "Accrued Interest" shall mean all accrued and unpaid interest on the Company Debt to the Closing Date other than accretion on commercial paper to the extent such accretion is included in Company Debt. "Additional Retained Facilities" shall mean the Company's Seal Beach, California world headquarters, the Company's Systems Development Center, the Company's Information Systems Center and the Company's Government Affairs, Marketing and International Offices located in Washington, D.C. (Arlington, VA) and related international and field offices listed on Schedule 2.1(b)(i)(D). "Aerospace Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting spacecraft, liquid-fueled rocket engines, military and civilian aircraft, tactical weapons, unmanned missiles, applied energy technologies (including, without limitation, solar, kinetic and laser), and parts, components and materials for the foregoing, contract work for the National Aeronautics and Space Administration and the Company's interest in United Space Alliance, LLC, and activities related thereto, and shall include any former or discontinued operations primarily related to the Aerospace Business as previously conducted, including, without limitation, the former or discontinued operations listed on Schedule 1.1(a)(i); provided, however, that Aerospace Business does not include any part of the Collins Business, any Contributed A&D Assets or any Divested Business of the Aerospace Business, including, without limitation, the Divested Businesses listed on Schedule 1.1(a)(ii). "Affiliate" shall mean, with respect to any specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person; provided, however, that for purposes of this Agreement and the Post-Closing Covenants Agreement, from and after the Time of Contribution, no member of either Group shall be deemed to be an Affiliate of any member of the other Group. <PAGE> 8 4 "Assets" shall mean any and all assets, properties and rights, whether tangible or intangible, whether real, personal or mixed, whether fixed, contingent or otherwise, and wherever located, including, without limitation, the following: (i) real property interests (including leases), land, plants, buildings and improvements; (ii) machinery, equipment, tooling, vehicles, furniture and fixtures, leasehold improvements, repair parts, tools, plant, laboratory and office equipment and other tangible personal property, together with any rights or claims arising out of the breach of any express or implied warranty by the manufacturers or sellers of any of such assets or any component part thereof; (iii) inventories, including raw materials, work- in-process, finished goods, parts, accessories and supplies; (iv) cash, bank accounts, notes, loans and accounts receivable (whether current or not current), interests as beneficiary under letters of credit, advances and performance and surety bonds; (v) certificates of deposit, banker's acceptances, shares of stock, bonds, debentures, evidences of indebtedness, certificates of interest or participation in profit-sharing agreements, collateral-trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting-trust certificates, puts, calls, straddles, options, swaps, collars, caps and other securities or hedging arrangements of any kind; (vi) financial, accounting and operating data and records including, without limitation, books, records, notes, sales and sales promotional data, advertising materials, credit information, cost and pricing information, customer and supplier lists, reference catalogs, payroll and personnel records, minute books, stock ledgers, stock transfer records and other similar property, rights and information; (vii) patents, patent applications, trademarks, trademark applications and registrations, trade names, <PAGE> 9 5 service marks, service names, copyrights and copyright applications and registrations, commercial and technical information including engineering, production and other designs, drawings, specifications, formulae, technology, computer and electronic data processing programs and software, inventions, processes, trade secrets, know-how, confidential information and other proprietary property, rights and interests; (viii) agreements, leases, contracts, sale orders, purchase orders, open bids and other commitments and all rights therein; (ix) prepaid expenses, deposits and retentions held by third parties; (x) claims, causes of action, choses in action, rights under insurance policies, rights under express or implied warranties, rights of recovery, rights of set-off, rights of subrogation and all other rights of any kind; (xi) licenses, franchises, permits, authorizations and approvals; and (xii) goodwill and going concern value. "Collins Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting avionics, communication and navigation products and systems and parts, components and materials for the foregoing, including without limitation: electronic equipment for flight control, cockpit display, navigation, voice and data communication, cockpit management, radar, global positioning and other systems for airlines, corporate aircraft, government and military applications; call center products and systems; mobile communication and information systems to the land transportation market (including the Company's Automatic Vehicle Locating System and Vision Sensor Initiatives Programs) and flat panel displays and other optical components, and activities related thereto, and shall include the Collins Avionics and Communications Division, Collins Commercial Avionics, the Communication Systems Division and any former or discontinued operations primarily related to the Collins Business as previously conducted; <PAGE> 10 6 provided, however, that Collins Business does not include Collins International Service Company located at 3200 East Renner Road, Richardson, Texas, Rockwell Australia Limited and its Subsidiaries or any business thereof (which shall constitute part of the Defense Business); provided, further, however, that the Collins Business shall include the Tullamarine Service Center. "Communication Systems Division" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting information message handling and communication systems and products that support command, control and communications for land, sea and air applications, including without limitation: integrated command and control systems for military and civilian agencies; fixed and airborne VLF communications; multispectrum tactical HF through satellite communications for fixed and transportable applications; satellite communications through the EHF band; airborne communication systems including platform integration; avionics and special mission systems integration and aircraft modification; medical information systems; global private networks; satellite-based air traffic management and worldwide service and support for operations and maintenance, construction and EF&I (engineer, furnish and install), and activities related thereto, and shall include any former or discontinued operations primarily related to the Communication Systems Division as previously conducted; provided, however, that the Communication Systems Division does not include Collins International Service Company located at 3200 East Renner Road, Richardson, Texas, Rockwell Australia Limited and its Subsidiaries or any business thereof (which shall constitute part of the Defense Business). "Company Debt" shall mean indebtedness of the Company in an aggregate principal amount of $2,165,000,000, consisting of: (i) Old Company Notes in the aggregate principal amount of $1,600,000,000, as the same may be amended pursuant to the Consent Solicitation; (ii) commercial paper or other short-term borrowings in the aggregate principal amount of $565,000,000 (with respect to commercial paper issued at a discount, the accreted value at the Closing Date <PAGE> 11 7 shall be deemed to be the principal amount thereof), less the aggregate principal amount of any outstanding Rockwell Australia Debt (as defined below), or any indebtedness issued in replacement thereof or in exchange therefor; and (iii) bank borrowings of Rockwell Australia Limited in the aggregate principal amount of not more than a United States dollar equivalent of $30,000,000 (the "Rockwell Australia Debt") (it being understood that it is the current intention of the Company to repay the Rockwell Australia Debt prior to the Time of Contribution); provided that no short-term debt other than commercial paper shall constitute "Company Debt" unless it is prepayable in full at any time without premium or penalty and no commercial paper shall constitute "Company Debt" unless it matures or is payable or prepayable in full within 60 days after the Effective Time without premium or penalty. For purposes of calculating the United States dollar equivalent of any Rockwell Australia Debt, the New York foreign exchange selling rate applicable to Australian dollars as published in The Wall Street Journal, Eastern Edition, for the second business day preceding the Closing Date shall be used. "Company Group" shall mean the Company and its Subsidiaries, other than Newco and its Subsidiaries (determined after giving effect to the transfers contemplated by Article II of this Agreement). "Contributed A&D Assets" shall have the meaning set forth in Section 2.1(a)(vii). "DOE" shall mean the United States Department of Energy or any predecessor Governmental Entity. "Defense Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries (including, without limitation, Collins International Service Company and Rockwell Australia Limited but excluding the Tullamarine Service Center) and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting the following for defense markets: aircraft electronic upgrades and modifications, tactical weapons, space defense <PAGE> 12 8 sensors and electronics, navigation and guidance systems for strategic missiles, tactical weapons, ships and submarines, naval combat systems for ships and submarines, proprietary programs, and parts, components and materials for the foregoing, and activities related thereto, and shall include any former or discontinued operations primarily related to the Defense Business as previously conducted, including, without limitation, the former or discontinued operations listed on Schedule 1.1(b)(i); provided, however, that the Defense Business does not include any part of the Collins Business (including the Company's Automatic Vehicle Locating System and Vision Sensor Initiatives Programs heretofore conducted by the Autonetics & Missile Systems Division of the Company), any Contributed A&D Assets or any Divested Business of the Defense Business, including, without limitation, the Divested Businesses listed on Schedule 1.1(b)(ii). "Divested Business" shall mean any corporation, division or other business unit (including any Assets and Liabilities comprising the same) that has been sold, conveyed, assigned, transferred or otherwise divested, in whole or in part, by the Company or any of its Subsidiaries to any third party prior to the Time of Contribution, but shall not include any corporation, division, other business unit, product line or contract the operations or production of which has been discontinued, completed or otherwise terminated by the Company or any of its Subsidiaries, but not sold, conveyed, assigned, transferred or otherwise divested to a third party. "Environmental Law" shall mean any Federal, state, local or foreign statute, law, regulation, rule or common law of, or any judgment, injunction, order or decree of or settlement agreement with, any Governmental Entity, relating to (x) the protection of the environment or (y) the use, storage, treatment, generation, transportation, processing, handling, release or disposal of Hazardous Substances, in each case as in effect on the date hereof or in the future. "Environmental Liabilities" shall mean all Liabilities relating to or arising out of any Environmental Law or contract or agreement relating to environmental, health or safety matters (including removal, remediation or cleanup costs, investigatory costs, governmental response costs and administrative oversight costs, environmental monitoring costs, natural resources damages, property damages, personal injury damages, costs of medical <PAGE> 13 9 monitoring, costs of compliance with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) irrespective of whether such Liabilities are asserted, in the first instance, to be the responsibility of a Governmental Entity or any other Person. "Group" shall mean the Company Group or the Newco Group. "HVS Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting drivetrain components and systems for heavy- and medium-duty commercial trucks, trailers, buses, off-highway commercial vehicles and government heavy-duty wheeled vehicles, and activities related thereto, and shall include any former or discontinued operations primarily related to the HVS Business as previously conducted. "Information" shall mean all records, books, contracts, instruments, computer data and other data and information. "Liabilities" shall mean any and all debts, liabilities, commitments and obligations, whether fixed, contingent or absolute, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, whenever or however arising and whether or not the same would be required by generally accepted accounting principles to be reflected in financial statements or disclosed in the notes thereto. "Litigation Matters" shall mean actual, threatened or future litigations, investigations, proceedings (including arbitration proceedings), claims or other legal matters that have been or may be asserted by or against, or otherwise affect, the Company and/or Newco (or members of either Group). "LVS Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting sunroof, door access control and seat adjusting systems, suspensions and wheels, anti-squeeze windows, electronic controls and automobile global positioning <PAGE> 14 10 systems for passenger car and light truck industries, and activities related thereto, and shall include any former or discontinued operations primarily related to the LVS Business as previously conducted. "Newco Group" shall mean Newco and its Subsidiaries, including the Operating Subsidiaries (determined after giving effect to the transfers contemplated by Article II of this Agreement). "Paydown Amount" shall be the excess, if any, of $2.165 billion over the aggregate principal amount of the Company Debt at the Effective Time (calculated as set forth in the definition of Company Debt). "Person" shall mean an individual, a partnership, a joint venture, a corporation, a limited liability entity, a trust, an unincorporated organization or other entity or a government or any department or agency thereof. "Preexisting Environmental Conditions" shall mean conditions of the environment (including ambient air, the ocean, natural resources (including flora and fauna), soil, surface water, groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata or as otherwise defined in any Environmental Law) existing at the Time of Contribution relating to or arising from the presence, use, treatment, or Release or threatened Release of any Hazardous Substance but does not include any Special Liabilities. For purposes of the definition of the term "Preexisting Environmental Condition", the term "Hazardous Substance" shall include any waste, substance, material, pollutant or contaminant now, or in the future, listed, defined, designated or classified as hazardous, toxic or radioactive, or otherwise regulated, now or in the future, under any Environmental Law, and any waste, material or substance contaminated by, or alleged to be contaminated by, any Hazardous Substance. "Privileged Information" shall mean, with respect to either Group, Information regarding a member of such Group, or any of its operations, employees, Assets or Liabilities (whether in documents or stored in any other form or known to its employees or agents) that is or may be protected from disclosure pursuant to the attorney-client privilege, the work product doctrine or other applicable privileges, that a member of the other Group may come into <PAGE> 15 11 possession of or obtain access to pursuant to this Agreement or otherwise. "Release" shall have the same meaning given such term in the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. ss. 9601(22). "Representatives" shall mean directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives. "Retained Facilities" shall mean the Company's facilities identified on Schedule 2.1(b)(i)(A) and all buildings, improvements and fixtures at such facilities. "Right" shall mean a preferred share purchase right issued pursuant to the Rights Agreement dated as of November 30, 1996 between Newco and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. "Science Center" shall mean the Company's Science Center located at 1049 Camino Dos Rios, Thousand Oaks, California and other related facilities located at Suite 400, 444 High Street, Palo Alto, California and Building 241, 3370 Miraloma Avenue, Anaheim, California. "Semiconductor Systems Business" shall mean the business heretofore and currently engaged in by the Company and its Subsidiaries and their respective predecessors of designing, building, selling, installing, modifying, repairing, servicing and supporting semiconductors for fax, voice and data modems for fax machines, personal computers and other uses, chipsets for cellular and cordless phones, wireless modem devices for laptop computers and modules for global positioning system receivers, and activities related thereto, and shall include any former or discontinued operations primarily related to the Semiconductor Systems Business as previously conducted. "Special Liabilities" shall mean any Liabilities of the Company or any of its Subsidiaries (including any Environmental Liability) arising out of or relating to (i) the Rocky Flats Plant, Golden, Colorado, (ii) the Hanford Nuclear Reservation, Hanford, Washington, (iii) the INEL complex in Idaho, (iv) the Company's or any of its Subsidiaries decontamination and decommissioning work at various atomic or nuclear facilities throughout the United <PAGE> 16 12 States (excluding, for purposes of the definition of Special Liabilities only, Santa Susana and Canoga Park, California) and (v) the Company's work relating to Interatom (Internationale Atomreaktorbau GmbH), and any Liabilities of the Company or any of its Subsidiaries (including any Environmental Liabilities), arising out of or relating to any products manufactured or any services provided by the Company or any of its Subsidiaries which involved the use, storage, treatment, generation, transportation, processing, handling, release or disposal of radioactive, fissionable or fusionable materials or any waste products or by-products of any process involving radioactive, fissionable or fusionable materials (other than activities of the Company and its Subsidiaries at Santa Susana and Canoga Park, California). "Tax" or "Taxes" shall have the meaning assigned to such term in the Tax Allocation Agreement. "Time of Contribution" shall mean the time immediately prior to the Time of Distribution as of which the Contribution is effective. "Time of Distribution" shall mean the time as of which the Distribution is effective. "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C., P.O. Box 444, Pittsburgh, Pennsylvania 15230-0444 or 120 Broadway, 33rd Floor, New York, New York 10271, telephone (800) 204-7800, the transfer agent for the Company Common Stock and Company Class A Common Stock. ARTICLE II CONTRIBUTION AND ASSUMPTION 2.1. Contribution. (a) Subject to Section 2.1(b) and effective as of the Time of Contribution, the Company hereby contributes, grants, conveys, assigns, transfers and delivers to Newco and the Operating Subsidiaries all the Company's right, title and interest in and to any and all Assets of the <PAGE> 17 13 Company (collectively, the "Contributed Assets"), allocated as follows or as Newco shall otherwise direct: (i) all Assets of the Company that are used primarily or that are held primarily for use in the A-B Business (other than the capital stock of A-B) and all of the issued and outstanding shares of capital stock of Reliance Electric Company, a Delaware corporation, are contributed to A-B as a capital contribution; (ii) all Assets of the Company that are used primarily or that are held primarily for use in the Collins Business are contributed to Collins in exchange for 1,000 shares of the Common Stock, par value $1.00 per share, of Collins, constituting all of the outstanding shares of Collins; (iii) all Assets of the Company that are used primarily or that are held primarily for use in the Semiconductor Systems Business and all of the issued and outstanding shares of capital stock of Brooktree Corporation, a California corporation, are contributed to RSS in exchange for 1,000 shares of the Common Stock, par value $1.00 per share, of RSS, constituting all of the outstanding shares of RSS; (iv) all Assets of the Company that are used primarily or that are held primarily for use in the LVS Business are contributed to LVS in exchange for 1,000 shares of the Common Stock, par value $1.00 per share, of LVS, constituting all of the outstanding shares of LVS; (v) all Assets of the Company that are used primarily or that are held primarily for use in the HVS Business are contributed to HVS in exchange for 1,000 shares of the Common Stock, par value $1.00 per share, of HVS, constituting all of the outstanding shares of HVS; (vi) [intentionally omitted]; (vii) the Company's properties at El Segundo, California, Lakewood, California, and Building 37 at Canoga Park, California more specifically identified on Schedule 2.1(a)(vii) (collectively, the "Contributed A&D Assets") are contributed to A-B as a capital contribution; <PAGE> 18 14 (viii) the Science Center (other than physical assets related to extrinsic silicon detectors and MEMS gyros located at Building 241, 3370 Miraloma Avenue, Anaheim, California, which shall constitute Retained Assets) is contributed to Newco as a capital contribution; (ix) all issued and outstanding shares of Atomics International, Inc., Narland Corporation and Rockwell Aerospace & Electronics, Inc. are contributed to Newco as a capital contribution; (x) the Health Care Claims (as defined in the Post-Closing Covenants Agreement) are contributed to Newco as a capital contribution; and (xi) immediately following the contributions referred to in clauses (i) through (x) above, all of the issued and outstanding shares of Common Stock of A-B, Collins, RSS, LVS, HVS and all other Assets of the Company (other than the Retained Assets) not otherwise specifically contributed to an Operating Subsidiary pursuant to this Section 2.1(a), including (x) all cash and cash equivalents of the Company and its Subsidiaries (other than as listed on Schedule 2.1(b)(i)(C) and other than cash (including for this purpose cash held by Rockwell Australia Limited in an amount not to exceed the aggregate outstanding principal amount of the Rockwell Australia Debt) in an amount equal to the excess, if any, of (A) the sum of (1) $4,320,000 and (2) the Accrued Interest over (B) the Paydown Amount), and (y) the Company's rights under Article II of the Merger Agreement, the last sentence of Section 3.1 of the Merger Agreement, Section 4.2(j) of the Merger Agreement, Section 4.2(d)(iii) of the Merger Agreement, the second sentence of Section 5.9(a) of the Merger Agreement, Section 5.13(a) of the Merger Agreement, Section 5.18 of the Merger Agreement and Section 8.17 of the Merger Agreement, are contributed to Newco as a capital contribution. If any Assets that are used primarily or that are held primarily for use in the A-B Business, the Collins Business, the Semiconductor Systems Business, the LVS Business or the HVS Business are held in a Subsidiary of the Company that would not be owned directly or indirectly by A-B, Collins, RSS, LVS or HVS, respectively, as a result of <PAGE> 19 15 the foregoing allocation, then, notwithstanding the foregoing allocation, the Company shall cause each such Subsidiary to contribute such Assets to the appropriate Operating Subsidiary or a Subsidiary thereof or as Newco otherwise directs. (b) Notwithstanding Section 2.1(a), the Company hereby retains and does not contribute to Newco or the Operating Subsidiaries all the Company's right, title and interest in and to the following Assets (collectively, the "Retained Assets"): (i) all the Company's right, title and interest (including minority interests) in and to (A) all Assets of the Company or any of its Subsidiaries that are used primarily in or that are held primarily for use in or that are otherwise necessary for the operation, as presently conducted, of (1) the Aerospace Business and the Defense Business, including, without limitation, in the Company's Autonetics and Missile Systems Division, the Company's North American Aircraft Division, the Company's North American Aircraft Modification Division, the Company's Rocketdyne Division, the Company's Space Systems Division and the Company's Airborne Laser Program (excluding the Communication Systems Division, but including Collins International Service Company and Rockwell Australia Limited), and including, without limitation, the Retained Facilities, and (2) the Additional Retained Facilities (other than miscellaneous furnishings, artwork, computers and other equipment and personal property used by Company employees who will become Newco Group Continuing Employees following the Time of Contribution), (B) an undivided one-half interest in the helicopters and corporate jet aircraft included on Schedule 2.1(b)(i)(B), and (C) whether or not included within the Assets set forth in clause (A) above, all Assets (including, without limitation, capital stock and partnership interests) reflected on the June 30 Balance Sheet, as such Assets may have been added to, sold in the ordinary course of business or otherwise changed since such date; provided, however, that cash or cash equivalents (other than as listed on Schedule 2.1(b)(i)(C) and cash (including for this purpose cash held by Rockwell Australia Limited in an amount not to exceed the aggregate outstanding principal amount of the Rockwell Australia Debt) in an amount equal to the excess, if any, of (D) the sum of <PAGE> 20 16 (1)$4,320,000 and (2) the Accrued Interest over (E) the Paydown Amount), the Contributed A&D Assets, the assets associated with services to be provided by Newco pursuant to Schedule 3.4 of the Post-Closing Covenants Agreement and the assets associated with the headquarters functions described in the Retained Business Audited Financial Statements shall not constitute Retained Assets; (ii) all issued and outstanding shares of capital stock of the Subsidiaries of the Company identified on Schedule 2.1(b)(ii) (the "Retained Subsidiaries"); (iii) all rights in and use of the names "Autonetics", "North American Aviation" and "Rocketdyne" and all derivatives thereof; (iv) all rights of the Company under the Reorganization Agreements (including the Merger Agreement), except as otherwise specifically provided therein and except that the Company's rights under Section 2.1(a)(xi)(y) of this Agreement shall not constitute Retained Assets; and (v) the Environmental Coverage Claims. If any Assets that are used primarily or that are held primarily for use in or that are otherwise necessary for the operation, as presently conducted, of the Aerospace Business, the Defense Business or the Additional Retained Facilities (other than miscellaneous furnishings, artwork, computers and other equipment and personal property used by Company employees who will become Newco Group Continuing Employees following the Time of Contribution and other than the assets excluded from the definition of Retained Assets by the proviso to Section 2.1(b)(i)) are held in a Subsidiary of the Company that is not a Retained Subsidiary, then the Company shall cause each such Subsidiary to contribute such Assets to the appropriate Retained Subsidiary. 2.2. Assumption of Liabilities. (a) Subject to Section 2.2(b) and effective as of the Time of Contribution, Newco and the Operating Subsidiaries, in partial consideration for the Contribution, hereby unconditionally assume and undertake to pay, satisfy and discharge when due in accordance with their terms the <PAGE> 21 17 following Liabilities of the Company and any of its Subsidiaries (collectively, the "Assumed Liabilities"), allocated as follows or as Newco shall otherwise direct: (i) all Liabilities relating primarily to or arising primarily from the A-B Business are assumed by A-B and Newco; (ii) all Liabilities relating primarily to or arising primarily from the Collins Business are assumed by Collins and Newco; (iii) all Liabilities relating primarily to or arising primarily from the Semiconductor Systems Business are assumed by RSS and Newco; (iv) all Liabilities relating primarily to or arising primarily from the LVS Business are assumed by LVS and Newco; (v) all Liabilities relating primarily to or arising primarily from the HVS Business are assumed by HVS and Newco; (vi) [intentionally omitted]; (vii) all Special Liabilities are assumed by Newco; (viii) all Liabilities (including without limitation indemnification obligations) relating primarily to or arising primarily from (A) the reports, registration statements and other documents filed by the Company with the SEC prior to the Time of Contribution (including the Company's consolidated financial statements for periods prior to the Time of Contribution included or incorporated by reference therein) and (B) any breach or alleged breach by any director of the Company of his fiduciary duties to the Company and its stockholders occurring at or prior to the Time of Contribution, in each case referred to in the foregoing clauses (A) and (B) notwithstanding the fact that such Liabilities may relate primarily to or arise primarily from the Aerospace Business, the Defense Business or the Additional Retained Facilities, are assumed by Newco, but excluding any matter for which the Company would be required to provide indemnification pursuant to Section 2.2(ii) of the Post-Closing Covenants Agreement; <PAGE> 22 18 (ix) all Liabilities relating primarily to or arising primarily from any Divested Business of the Aerospace Business or the Defense Business, including, without limitation, the Divested Businesses listed on Schedules 1.1(a)(ii) and 1.1(b)(ii), are assumed by Newco; (x) all Liabilities relating primarily to or arising primarily from Atomics International, Inc., Narland Corporation and Rockwell Aerospace & Electronics, Inc. are assumed by Newco; (xi) all Liabilities relating to the Contributed A&D Assets are assumed by Newco; (xii) all Liabilities in respect of indebtedness for borrowed money (including any guarantees in respect of indebtedness for borrowed money of any third party of the Company and any of its Subsidiaries) other than the Company Debt are assumed by Newco; (xiii) all Liabilities that are contemplated by the Reorganization Agreements as Liabilities to be retained by any member of the Newco Group, and any agreements, obligations and Liabilities of the Newco Group under the Reorganization Agreements (including any Liabilities of the Company described in Sections 4.1(p) and 5.13 of the Merger Agreement) are assumed by Newco; and (xiv) all other Liabilities, other than the Retained Liabilities, are assumed by Newco. The Liabilities referred to in clauses (i) - (xiii) above are referred to collectively as the "Newco Liabilities". If any Liabilities relating primarily to or arising primarily from the A-B Business, the Collins Business, the Semiconductor Systems Business, the LVS Business or the HVS Business are obligations of a Subsidiary of the Company other than A-B, Collins, RSS, LVS or HVS, or a direct or indirect Subsidiary thereof, as a result of the allocation of Assets of the Company set forth in Section 2.1, then, notwithstanding the foregoing allocation or the allocation of Assets of the Company set forth in Section 2.1, the appropriate Operating Subsidiary or a Subsidiary thereof shall assume each such Liability. <PAGE> 23 19 (b) Notwithstanding Section 2.2(a), the Company hereby retains, and Newco and the Operating Subsidiaries do not assume and will have no liability with respect to, the following Liabilities (collectively, the "Retained Liabilities"): (i) the Company Debt, together with the Accrued Interest; (ii) all Liabilities (A) relating primarily to or arising primarily from the Aerospace Business or the Defense Business as conducted at any time prior to, on or after the Time of Contribution or any other Retained Assets or (B) associated with the current and former operations of the Additional Retained Facilities; provided, however, that the Retained Liabilities shall not include any Newco Liabilities; and (iii) all Liabilities that are contemplated by the Reorganization Agreements (including the Schedules thereto) (other than the Merger Agreement) as Liabilities to be retained by any member of the Company Group, and any agreements, obligations and Liabilities of the Company Group under the Reorganization Agreements (other than the Merger Agreement), except as otherwise specifically provided herein or therein and except for obligations which are required or contemplated to be performed prior to the Effective Time. If any Liabilities relating primarily to or arising primarily from the Aerospace Business, the Defense Business or the Additional Retained Facilities are obligations of a Subsidiary of the Company other than a Retained Subsidiary as a result of the allocation of Assets of the Company set forth in Section 2.1, then, notwithstanding the foregoing allocation or the allocation of Assets of the Company set forth in Section 2.1, the Company shall, or shall cause the appropriate Retained Subsidiary to, assume each such Liability. 2.3. Transfer and Assumption Documentation. In furtherance of the contribution, grant, conveyance, assignment, transfer and delivery of the Contributed Assets and the assumption of the Assumed Liabilities set forth in this Article II, at the Time of Contribution or as promptly as practicable thereafter (i) the Company shall execute and deliver, and cause its Subsidiaries to execute and deliver, <PAGE> 24 20 such deeds, bills of sale, stock powers, certificates of title, assignments of leases and contracts and other instruments of contribution, grant, conveyance, assignment, transfer and delivery necessary to evidence such contribution, grant, conveyance, assignment, transfer and delivery and (ii) Newco or the appropriate member of the Newco Group shall execute and deliver such instruments of assumption as and to the extent necessary to evidence such assumption. 2.4 Nonassignable Contracts. Anything contained herein to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any lease, license agreement, contract, agreement, sales order, purchase order, open bid or other commitment or Asset if an assignment or attempted assignment of the same without the consent of the other party or parties thereto would constitute a breach thereof or in any way impair the rights of the Newco Group or the Company Group thereunder. The Company shall, prior to the Time of Contribution, use reasonable best efforts (it being understood that such efforts shall not include any requirement of the Company Group to expend money or offer or grant any financial accommodation) as requested by Newco, and Newco shall cooperate in all reasonable respects with the Company, to obtain all consents and waivers and to resolve all impracticalities of assignments or transfers necessary to convey to Newco and the Operating Subsidiaries the Contributed Assets. If any such consent is not obtained or if an attempted assignment would be ineffective or would impair either Group's rights under any such lease, license agreement, contract, agreement, sales order, purchase order, open bid or other commitment or Asset so that Newco or the Operating Subsidiaries would not receive all such rights, then (x) the Company shall use reasonable best efforts (it being understood that such efforts shall not include any requirement of the Company Group to expend money or offer or grant any financial accommodation) to provide or cause to be provided to Newco or the appropriate Operating Subsidiary, to the extent permitted by law, the benefits of any such lease, license agreement, contract, agreement, sales order, purchase order, open bid or other commitment or Asset and the Company shall promptly pay or cause to be paid to Newco or the appropriate Operating Subsidiary when received all moneys received by the Company Group with respect to any such lease, license agreement, contract, agreement, sales order, purchase order, open bid or other commitment or Asset and (y) in consideration thereof Newco or the appropriate Operating Subsidiary shall pay, perform and discharge on <PAGE> 25 21 behalf of the Company Group all of the Company Group's debts, liabilities, obligations and commitments thereunder in a timely manner and in accordance with the terms thereof. In addition, the Company shall take such other actions (at Newco's expense) as may reasonably be requested by Newco in order to place Newco, insofar as reasonably possible, in the same position as if such lease, license agreement, contract, agreement, sales order, purchase order, open bid or other commitment or Asset had been transferred as contemplated hereby and so all the benefits and burdens relating thereto, including possession, use, risk of loss, potential for gain and dominion, control and command, shall inure to the Newco Group. If and when such consents and approvals are obtained, the transfer of the applicable Asset shall be effected in accordance with the terms of this Agreement. 2.5. Intercompany Arrangements. All agreements, contracts, arrangements and commitments between the Retained Business or any operating unit thereof, on the one hand, and the Company or any operating unit thereof (other than the Retained Business or any operating unit thereof), on the other hand, entered into prior to the Closing Date for the purchase or sale of goods or services ("Intercompany Arrangements") including, without limitation, Rockwell Internal Customer Agreements, shall remain in effect on and after the Closing Date (subject to amendment as provided in the Transition Agreement). All amounts under such Intercompany Arrangements which are unbilled and have not been charged to the related prime contract as of the Closing Date shall be billed and payable on and after the Closing Date in accordance with the terms thereof. At or before the Closing, the Company shall cause all intercompany indebtedness (which shall include payables and receivables but which shall not include unbilled amounts under Intercompany Arrangements) between the Retained Business or any operating unit thereof, on the one hand, and the Company or any operating unit thereof (other than the Retained Business or any operating unit thereof), on the other hand, to be settled or otherwise eliminated. ARTICLE III RECAPITALIZATION OF NEWCO; MECHANICS OF DISTRIBUTION 3.1. Newco Capitalization. The current equity capitalization of Newco consists of 1,000 issued and outstanding shares of Newco Common Stock (the "Existing <PAGE> 26 22 Newco Common Stock"), all of which is outstanding and owned beneficially and of record by the Company. 3.2. Recapitalization of Newco. Immediately prior to the Time of Distribution, the Company shall cause Newco to amend its Certificate of Incorporation to, among other things, (i) increase the authorized number of shares of capital stock of Newco to 1,125,000,000 shares, consisting of 25,000,000 shares of Preferred Stock, without par value, 1,000,000,000 shares of Newco Common Stock and 100,000,000 shares of Newco Class A Common Stock, and (ii) exchange the Existing Newco Common Stock owned by the Company for a total number of shares of Newco Common Stock and Newco Class A Common Stock, in each case with the associated Rights, equal to the total number of shares of Company Common Stock and Company Class A Common Stock, respectively (other than Company Common Stock and Company Class A Common Stock held in the treasury of the Company), outstanding as of the Record Date (as defined below). 3.3. Mechanics of Distribution. The Distribution shall be effected by the distribution to each holder of record of Company Common Stock and Company Class A Common Stock, as of the record date designated for the Distribution by or pursuant to the authorization of the Board of Directors of the Company (the "Record Date"), of certificates representing one share of Newco Common Stock and one associated Right for each share of Company Common Stock and one share of Newco Class A Common Stock and one associated Right for each share of Company Class A Common Stock held by such holder. 3.4. Timing of Distribution. The Board of Directors of the Company shall formally declare the Distribution and shall authorize the Company to pay it immediately prior to the Effective Time, subject to the satisfaction or waiver of the conditions set forth in Article IX, by delivery of certificates for Newco Common Stock and Newco Class A Common Stock to the Transfer Agent for delivery to the holders entitled thereto. The Distribution shall be deemed to be effective upon notification by the Company to the Transfer Agent that the Distribution has been declared and that the Transfer Agent is authorized to proceed with the distribution of Newco Common Stock and Newco Class A Common Stock. <PAGE> 27 23 ARTICLE IV OTHER AGREEMENTS 4.1. Employment. Newco or one of its Subsidiaries shall offer employment or continued employment from the Time of Contribution (or such later time as Newco Inactive Employees (as defined herein) first become eligible to return to employment, it being understood that each Newco Inactive Employee will continue to be eligible to receive from the Newco Group the same compensation and benefits payable during the period prior to such Newco Inactive Employee's return to employment that such Newco Inactive Employee is entitled to receive during such Newco Inactive Employee's absence from employment immediately prior to the Time of Contribution) to all employees of the Company and its Subsidiaries (including employees not actively at work at the Time of Contribution due to leave of absence, disability leave, military leave or layoff with recall rights ("Newco Inactive Employees")), except those to whom Acquiror or the Company Group has an obligation to offer employment or continued employment pursuant to Section 5.12(a) of the Merger Agreement (collectively "Company Group Continuing Employees"), on terms that are substantially the same as the terms on which they were employed by the Company or a Subsidiary of the Company immediately prior to the Time of Contribution; provided, however, that nothing contained in this Section 4.1 is intended to confer upon any employee who so continues to be employed or who accepts such an offer of employment by Newco or any of its Subsidiaries ("Newco Group Continuing Employees") any right to continued employment after the Time of Contribution. The Company hereby consents to Newco or one of its Subsidiaries making such offers. Newco shall recognize the service with the Company and its Subsidiaries through the Time of Contribution of each Newco Group Continuing Employee and, where applicable, each former employee of the businesses which, at the Time of Contribution, comprise the Newco Group (a "Newco Group Former Employee"), and shall credit, as of the Time of Contribution, such service with Newco (i) for all plan purposes under any employee benefit plan, arrangement or policy of the Newco Group in effect as of the Time of Contribution in which they are then participating and (ii) for eligibility and vesting purposes only under any employee benefit plan, arrangement or policy for which they become eligible on or following the Time of Contribution; provided, however, that, except as otherwise required by law or by the terms of any collective bargaining agreement, <PAGE> 28 24 service will be recognized under clause (i) or (ii) only to the extent such service was recognized under the Company's comparable plan or program prior to the Time of Contribution. Newco shall, or shall cause the applicable member of the Newco Group to, assume or maintain (as applicable) as of the Time of Contribution and perform the obligations of each of the Company and its Subsidiaries under the collective bargaining agreements relating to Newco Group Continuing Employees and Newco Group Former Employees and any and all collateral agreements related thereto, including those affecting all terms and conditions of employment, and to be bound by such agreements. The Company shall, or shall cause the applicable member of the Company Group to, assume or maintain (as applicable) as of the Time of Contribution and perform the obligations of each of the Company and its Subsidiaries under the collective bargaining agreements relating to Company Group Continuing Employees and former employees of the businesses which, at the Time of Contribution, comprise the Company Group ("Company Group Former Employees"), and any and all collateral agreements related thereto, including those affecting all terms and conditions of employment, and to be bound by such agreements. 4.2. Cross-License of Intellectual Property. (a) Effective as of the Time of Distribution, the Company on behalf of itself and its Subsidiaries, in consideration for the rights granted by Newco and its Subsidiaries pursuant to Section 4.2(b), hereby grants to the Newco Group a royalty-free, world-wide, irrevocable, non-exclusive license, under all intellectual property rights (including, without limitation, patents, patent applications, trade secrets, copyrights or other similar industrial property rights, except for trademarks, trade names, service marks, trade dress or any other form of trade identity) which are owned by the Company Group as Retained Assets immediately after the Time of Contribution or under which the Company Group has a right to license as Retained Assets immediately after the Time of Contribution, and which are used in the conduct of the businesses of the Company other than the Aerospace Business or the Defense Business (whether or not such rights are also used in the conduct of the Aerospace Business or the Defense Business) at the Time of Contribution to make, have made, use, import, sell or otherwise dispose of products, or to practice any process in connection therewith, in the businesses of the Newco Group as conducted by the Company at the Time of Contribution; said non-exclusive license being transferable only in <PAGE> 29 25 connection with the sale of all or any part of the Newco Group's business to which such intellectual property rights relate. To the extent that the Newco Group does not have copies of any information or materials relating to such intellectual property rights, the Company shall upon reasonable request supply to the Newco Group copies of any such information or materials relating to such intellectual property rights. The Company makes no representations or warranties of any kind with respect to the validity, scope or enforceability of any such intellectual property rights licensed hereunder and the Company has no obligation to file or prosecute any patent applications or maintain any patents in force in connection therewith. The Company will, at no cost to Newco, promptly execute or cause a member of the Company Group promptly to execute such further documents as Newco may reasonably request as necessary or desirable to carry out the terms of this Section 4.2(a). (b) Effective as of the Time of Distribution, Newco on behalf of itself and its Subsidiaries, in consideration for the rights granted by the Company and its Subsidiaries pursuant to Section 4.2(a), hereby grants to the Company Group a royalty-free, world-wide, irrevocable, non-exclusive license, under all intellectual property rights (including, without limitation, patents, patent applications, trade secrets, copyrights or other similar industrial property rights, except for trademarks, trade names, service marks, trade dress or any other form of trade identity), which are owned by the Newco Group as Contributed Assets immediately after the Time of Contribution or under which the Newco Group has a right to license as Contributed Assets immediately after the Time of Contribution, and which are used in the conduct of the Aerospace Business or the Defense Business (whether or not such rights are also used in the conduct of the other businesses of the Company) at the Time of Contribution to make, have made, use, import, sell or otherwise dispose of products, or to practice any process in connection therewith, in the Aerospace Business and the Defense Business as conducted by the Company at the Time of Contribution; said non-exclusive license being transferable only in connection with the sale of all or any part of the Company Group's business to which such intellectual property rights relate. To the extent that the Company Group does not have copies of any information or materials relating to such intellectual property rights, Newco shall upon reasonable request supply to the Company Group copies of any such information or materials relating to such intellectual property rights. Newco makes no <PAGE> 30 26 representations or warranties of any kind with respect to the validity, scope or enforceability of any such intellectual property rights licensed hereunder and Newco has no obligation to file or prosecute any patent applications or maintain any patents in force in connection therewith. Newco will, at no cost to the Company, promptly execute or cause a member of the Newco Group promptly to execute such further documents as the Company may reasonably request as necessary or desirable to carry out the terms of this Section 4.2(b). (c) No provision in the Reorganization Agreements shall be construed to permit any transfer of intellectual property relating to the Airborne Laser Program from any member of the Company Group to Acquiror or any other Subsidiary of Acquiror prior to award of a Government Contract for the Airborne Laser Program. 4.3. Use of Names, Trademarks, etc. (a) From and after the Effective Time, Newco shall have all rights in and, except as provided in Section 4.3(b), use of the names "Rockwell", "Rockwell International", and "Collins" and all other names, marks, scripts, type fonts, forms, styles, logos, designs, devices, trade dress, symbols and other forms of trade identity constituting Contributed Assets, and all derivatives thereof. From and after the Effective Time, the Company shall have all rights in and, except as provided in Section 4.3(c), use of the names "Autonetics", "North American Aviation" and "Rocketdyne" and all other names, marks, scripts, type fonts, forms, styles, logos, designs, devices, trade dress, symbols and other forms of trade identity constituting Retained Assets, and all derivatives thereof. Prior to or promptly after the Effective Time, the Company shall change the name of any Subsidiary or other Person under its control to eliminate therefrom the names "Rockwell", "Rockwell International" and "Collins" and all derivatives thereof, and Newco shall change the name of any Subsidiary or other Person under its control to eliminate therefrom the names "Autonetics", "North American Aviation" and "Rocketdyne" and all derivatives thereof. (b) From and after the Effective Time, except as permitted in this Section 4.3(b), the Company Group shall not use or have any rights to the names "Rockwell", "Rockwell International" and "Collins" or any derivatives thereof or any trademark, trade name, service mark or logo of the Newco Group constituting a Contributed Asset, including the trademarks, trade names and service marks <PAGE> 31 27 "Rockwell", "Rockwell International" and "Collins", or any corporate symbol related thereto or any thereof or any name or mark which includes the words "Rockwell", "Rockwell International" or "Collins" or any other Contributed Asset or any derivative thereof or name or mark confusingly similar thereto or special script, type font, form, style, logo, design, device, trade dress, or symbol used or possessed by the Company before the Effective Time or Newco after the Effective Time which contains the trademark, trade name or service mark "Rockwell", "Rockwell International" or "Collins" or any other Contributed Asset or any derivative thereof or name or mark confusingly similar thereto and the Company Group will not hold itself out as having any affiliation with the Newco Group. However, the Company Group may utilize without obligation to pay royalties to Newco the trademarks or trade names "Rockwell", "Rockwell International" or "Collins" or any corporate symbol related thereto or any thereof in connection with stationery, supplies, labels, catalogs, vehicles, signs, finished goods inventory and work-in-process constituting Retained Assets as of the Time of Contribution, subject to the terms and conditions of this Section 4.3: (i) All documents constituting Retained Assets as of the Time of Contribution within the following categories may be used for the duration of the periods following the Effective Time indicated below or until the supply is exhausted, whichever is the first to occur: Maximum Period of Permitted Use Following the Category of Documents Effective Time --------------------- ----------------- A. Stationery 4 months B. Invoices, purchase orders, debit and credit memos and other similar documents of a transactional nature 4 months C. Business cards 3 months D. Other outside forms such as packing lists, labels, packing materials and cartons, etc. 4 months E. Forms for internal use only 12 months F. Product literature 12 months; <PAGE> 32 28 provided, however, that no document within any of the above categories A, B or F may be used by the Company Group for any purpose within the stated period unless such document clearly and prominently displays a statement, the form of which is approved by Newco, to the effect that the Aerospace Business or the Defense Business, as the case may be, is no longer affiliated with Newco. (ii) All vehicles constituting Retained Assets as of the Time of Contribution may continue to be used without re-marking (except as to legally required permit numbers, license numbers, etc.) for a period not to exceed six months following the Effective Time or the date of disposition of the vehicle, whichever is the first to occur. The Company shall cause all markings on such vehicles to be removed or permanently obscured prior to disposition of such vehicles. (iii) Within three months following the Effective Time, the Company shall cause to be removed from display at all facilities constituting Retained Assets as of the Time of Contribution all demountable displays which contain the trademarks or trade names "Rockwell", "Rockwell International" or "Collins" or any corporate symbol related thereto or any thereof constituting Contributed Assets and the Company shall remove, or shall cause the removal of all signs displaying any such trademark, trade name or corporate symbol constituting Contributed Assets at all such facilities no later than six months following the Effective Time. (iv) Products in finished goods inventory and work-in-process constituting Retained Assets as of the Time of Contribution may be disposed of by the Company Group following the Effective Time without re-marking. (c) From and after the Effective Time, the Newco Group will not hold itself out as having an affiliation with the Company Group. However, the Newco Group shall have rights to use trademarks or trade names or corporate symbols related thereto or any thereof constituting Retained Assets of the Company Group in connection with stationery, supplies, labels, catalogs, vehicles, signs and finished goods inventory constituting Contributed Assets as of the <PAGE> 33 29 Time of Contribution on the same terms and subject to the same conditions as are set forth in Section 4.3(b). 4.4. Further Assurances. Each of the parties hereto, at its own cost and expense, promptly shall execute such documents and other instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and to consummate the transactions contemplated hereby. 4.5. Cooperation. The parties shall cooperate with each other in all reasonable respects to ensure the transfer to Newco or to one of the Operating Subsidiaries of the Contributed Assets, the Assumed Liabilities and the businesses related thereto, and the retention by the Company of the Retained Business, including, without limitation, (i) allocating rights and obligations under contracts, agreements and other arrangements, if any, of the Company that relate to both the Retained Business and the businesses contributed to Newco or the Operating Subsidiaries and (ii) determining whether to enter into any service or other sharing agreements on a mutually acceptable arms-length basis that may be necessary to assure a smooth and orderly transition. ARTICLE V TAX MATTERS 5.1. Tax Allocation. Prior to the Time of Distribution, Newco, Acquiror and the Company shall enter into a Tax Allocation Agreement in substantially the form attached as Annex B to the Merger Agreement. 5.2. Tax Matters. Notwithstanding anything to the contrary in this Agreement, liabilities of the parties for Taxes are subject to the terms of the Tax Allocation Agreement. All obligations of Newco under the Tax Allocation Agreement shall be treated as Assumed Liabilities and not as Retained Liabilities under this Agreement and all obligations of the Company under the Tax Allocation Agreement shall be treated as Retained Liabilities and not as Assumed Liabilities under this Agreement. The Contribution and Distribution are intended to qualify as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code and the Merger is intended <PAGE> 34 30 to qualify as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code. 5.3. Transfer Taxes. Newco (or, if actually paid prior to the Effective Time, the Company) shall pay or cause to be paid any Transfer Taxes (as defined in the Tax Allocation Agreement) imposed in connection with or as a result of the Contribution or the Distribution. ARTICLE VI MUTUAL RELEASE 6.1. Mutual Release, etc. Effective as of the Time of Distribution and except as otherwise specifically set forth in the Reorganization Agreements or the Transition Agreement, each of Newco, on the one hand, and the Company, on the other hand, on its own behalf and on behalf of each of its respective Subsidiaries, releases and forever discharges the other and its Subsidiaries, and its and their respective officers, directors, agents, Affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and Representatives (in their respective capacities as such) and their respective heirs, executors, administrators, successors and assigns, of and from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, claims and Liabilities whatsoever of every name and nature, both in law and in equity, which the releasing party has or ever had, which arise out of or relate to events, circumstances or actions taken by such other party occurring or failing to occur or any conditions existing on or prior to the Time of Distribution; provided, however, that the foregoing general release shall not apply to (i) any Liabilities (including Liabilities with respect to indemnification) under the Transition Agreement or assumed, transferred, assigned, allocated or arising under any of the Reorganization Agreements and shall not affect any party's right to enforce the Reorganization Agreements or the Transition Agreement in accordance with their terms, (ii) any Liability arising from or relating to Intercompany Arrangements to the extent such Liabilities are not required pursuant to Section 2.5 to be settled or otherwise eliminated at or before the Closing, (iii) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 6.1 (provided that the parties agree not to <PAGE> 35 31 bring suit or permit any of their Subsidiaries to bring suit against any Person with respect to any Liability to the extent such Person would be released with respect to such Liabilities by this Section 6.1 but for the proviso to this clause (iii)) or (iv) any matter set forth on Schedule 6.1. Each party understands and agrees that, except as otherwise specifically provided in the Reorganization Agreements, neither Group is, in the Reorganization Agreements or otherwise, representing or warranting in any way as to the Assets, business or Liabilities transferred, assumed or retained as contemplated hereby or as to any consents or approvals required in connection with the consummation of the transactions contemplated by the Reorganization Agreements, it being agreed and understood that each party shall take or keep all of its Assets "as is" and that it shall bear the economic and legal risk that conveyance of such Assets shall prove to be insufficient or that the title to any Assets shall be other than good and marketable and free from encumbrances of any nature whatsoever. ARTICLE VII ACCESS TO INFORMATION 7.1. Provision of Corporate Records. Prior to or as promptly as practicable after the Time of Contribution the Company shall deliver to Newco all minute books and other records of meetings of the Board of Directors, committees of the Board of Directors, stockholders and security owners of the Company and its predecessors, all stockholder and security owner records of the Company and its predecessors, all corporate books and records of the Newco Group in its possession and the relevant portions (or copies thereof) of all corporate books and records of the Company Group relating directly and primarily to the Contributed Assets or the Assumed Liabilities, including, in each case, all active agreements, active litigation files and government filings. From and after the Time of Contribution, all such books, records and copies shall be the property of Newco. Prior to or as promptly as practicable after the Time of Contribution, Newco shall deliver to the Company all corporate books and records of the Retained Subsidiaries in Newco's possession and the relevant portions (or copies thereof) of all corporate books and records of the Newco Group relating directly and primarily to the Retained Assets, the Aerospace Business, the Defense Business, the Additional Retained Facilities <PAGE> 36 32 (except to the extent relating primarily to the business of the Newco Companies) or the Retained Liabilities, including, in each case, all active agreements, active litigation files and government filings. From and after the Time of Contribution, all such books, records and copies shall be the property of the Company. 7.2. Access to Information. From and after the Time of Contribution, each of the Company and Newco shall afford to the other and to the other's Representatives reasonable access and duplicating rights (at the requesting party's expense) during normal business hours and upon reasonable advance notice to all Information within the possession or control of any member of the Company Group or the Newco Group, as the case may be, relating to the business, Assets or Liabilities as they existed prior to the Time of Contribution or relating to or arising in connection with the relationship between the constituent elements of the Groups on or prior to the Time of Contribution, insofar as such access is reasonably required for a reasonable purpose, subject to the provisions below regarding Privileged Information. Without limiting the foregoing, Information may be requested under this Section 7.2 for audit, accounting, claims, litigation and Tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations. In furtherance of the foregoing: (a) Each party hereto acknowledges that (i) each of the Company and Newco (and the members of the Company Group and the Newco Group, respectively) has or may obtain Privileged Information; (ii) there are a number of Litigation Matters affecting each or all of the Company, Newco and the Operating Subsidiaries; (iii) the Company, Newco and the Operating Subsidiaries have a common legal interest in Litigation Matters, in the Privileged Information, and in the preservation of the confidential status of the Privileged Information, in each case relating to the business of the Company Group or the Newco Group as it existed prior to the Time of Contribution or relating to or arising in connection with the relationship between the constituent elements of the Groups on or prior to the Time of Contribution; and (iv) both the Company and Newco intend that the transactions contemplated by the Reorganization Agreements and any transfer of Privileged Information in connection therewith shall not operate as a waiver of any potentially applicable privilege. <PAGE> 37 33 (b) Each of the Company and Newco agrees, on behalf of itself and each member of the Group of which it is a member, not to disclose or otherwise waive any privilege attaching to any Privileged Information relating to the business of the Newco Group or the Company Group as it existed prior to the Time of Contribution, respectively, or relating to or arising in connection with the relationship between the Groups on or prior to the Time of Contribution, without providing prompt written notice to and obtaining the prior written consent of the other, which consent shall not be unreasonably withheld and shall not be withheld if the other party certifies that such disclosure is to be made in response to a likely threat of suspension or debarment or similar action; provided, however, that the Company and Newco may make such disclosure or waiver with respect to Privileged Information if such Privileged Information relates solely to the business of the Company Group as it existed prior to the Time of Contribution in the case of the Company or the business of the Newco Group as it existed prior to the Time of Contribution in the case of Newco. In the event of a disagreement between any member of the Company Group and any member of the Newco Group concerning the reasonableness of withholding such consent, no disclosure shall be made prior to a final, nonappealable resolution of such disagreement by a court of competent jurisdiction. (c) Upon any member of the Company Group or any member of the Newco Group receiving any subpoena or other compulsory disclosure notice from a court, other governmental agency or otherwise which requests disclosure of Privileged Information, in each case relating to the business of the Newco Group or the Company Group, respectively, as it existed prior to the Time of Contribution or relating to or arising in connection with the relationship between the constituent elements of the Groups on or prior to the Time of Contribution, the recipient of the notice shall promptly provide to the other Group (following the notice provisions set forth herein) a copy of such notice, the intended response, and all materials or information relating to the other Group that might be disclosed. In the event of a disagreement as to the intended response or disclosure, unless and until the disagreement is resolved as provided in subsection (b), the parties shall cooperate to assert all defenses to <PAGE> 38 34 disclosure claimed by either Group, at the cost and expense of the Group claiming such defense to disclosure, and shall not disclose any disputed documents or information until all legal defenses and claims of privilege have been finally determined. 7.3. Production of Witnesses. Subject to Section 7.2, after the Time of Contribution, each of the Company and Newco shall, and shall cause each member of the Company Group and the Newco Group, respectively, to, make available to Newco or any member of the Newco Group or to the Company or any member of the Company Group, as the case may be, upon written request, such Group's directors, officers, employees and agents as witnesses to the extent that any such Person may reasonably be required in connection with any Litigation Matters, administrative or other proceedings in which the requesting party may from time to time be involved and relating to the business of the Newco Group or the Company Group as it existed prior to the Time of Contribution or relating to or in connection with the relationship between the constituent elements of the Groups on or prior to the Time of Contribution, provided that the same shall not unreasonably interfere with the conduct of business by the Group of which the request is made. The Group requesting such assistance shall reimburse the other Group for all reasonable out-of-pocket expenses incurred by the other Group in complying with any such request. 7.4. Retention of Records. Except as provided in the Reorganization Agreements or as otherwise agreed in writing, if any Information relating to the business, Assets or Liabilities of a member of a Group as they existed prior to the Time of Contribution is retained by a member of the other Group, each of the Company and Newco shall, and shall cause the members of the Group of which it is a member to, retain all such Information in such Group's possession or under its control until such Information is at least ten years old except that if, prior to the expiration of such period, any member of either Group wishes to destroy or dispose of any such Information that is at least three years old, prior to destroying or disposing of any of such Information, (1) Newco or the Company, on behalf of the member of its Group that is proposing to dispose of or destroy any such Information, shall provide no less than 30 days' prior written notice to the other party, specifying the Information proposed to be destroyed or disposed of, and (2) if, prior to the scheduled date for such destruction or disposal, the other party requests in writing that any of <PAGE> 39 35 the Information proposed to be destroyed or disposed of be delivered to such other party, the party whose Group is proposing to dispose of or destroy such Information promptly shall arrange for the delivery of the requested Information to a location specified by, and at the expense of, the requesting party. 7.5. Confidentiality. Subject to Section 7.2, which shall govern Privileged Information, from and after the Time of Contribution, each of the Company and Newco shall hold, and shall use reasonable efforts to cause its Affiliates and Representatives to hold, in strict confidence all Information concerning the other party's Group obtained by it prior to the Time of Contribution or furnished to it by such other party's Group pursuant to the Reorganization Agreements and shall not release or disclose such Information to any other Person, except its Affiliates and Representatives, who shall be bound by the provisions of this Section 7.5, and each party shall be responsible for a breach of this Section 7.5 by any of its Affiliates or Representatives; provided, however, that any member of the Company Group or the Newco Group may disclose such Information to the extent that (a) disclosure is compelled by judicial or administrative process or, in the opinion of such Person's counsel, by other requirements of law, or (b) such Person can show that such Information was (i) available to such Person on a nonconfidential basis (other than from a member of the other party's Group) prior to its disclosure by such Person, (ii) in the public domain through no fault of such Person or (iii) lawfully acquired by such Person from another source after the time that it was furnished to such Person by the other party's Group, and not acquired from such source subject to any confidentiality obligation on the part of such source, or on the part of the acquiror, known to the acquiror. Notwithstanding the foregoing, each of the Company and Newco shall be deemed to have satisfied its obligations under this Section 7.5 with respect to any Information (other than Privileged Information) if it exercises the same care with regard to such Information as it takes to preserve confidentiality for its own similar Information. <PAGE> 40 36 ARTICLE VIII EMPLOYEE BENEFIT PLANS 8.1. Employee Benefits Generally. All obligations of the Newco Group under this Article VIII with respect to employee benefit plans, arrangements or policies for the benefit of employees and former employees (and their beneficiaries) of the Company and its Subsidiaries in place immediately prior to the Time of Contribution shall be treated as Assumed Liabilities and not as Retained Liabilities under this Agreement. All obligations of the Company Group under this Article VIII with respect to the employee benefit plans, arrangements or policies for the benefit of employees and former employees (and their beneficiaries) of the Company and its Subsidiaries in place immediately prior to the Time of Contribution shall be treated as Retained Liabilities and not as Assumed Liabilities under this Agreement. 8.2. Retirement Plans. (a) Rockwell Retirement Plan for Eligible Employees. (i) Prior to the Time of Contribution, the Company shall have established a new group trust under the Rockwell Retirement Plan, which shall be exempt from taxation under Section 501(a) of the Code (the "Newco Group Trust") and the purpose of which shall be to hold, as provided below, certain assets of the Rockwell Retirement Plan and assets attributable to the liabilities under the defined benefit pension plans set forth in Schedule 8.2(b) hereto (the "Reliance Retirement Plans"). Prior to the Time of Contribution, an amount of assets equal to the sum of (A) the accumulated benefit obligation ("ABO") (as determined in the following sentence) of the current and former employees of the Company and its Subsidiaries who are expected to be, as of the Time of the Contribution, Newco Group Transferred Participants (as defined in Section 8.2(a)(ii) hereof) and (B) $200,000,000 shall have been transferred from the Rockwell Group Trust to the Newco Group Trust in the amounts, form and manner described in Section 8.2(c) below. Such ABO shall have been determined as of December 31, 1995 in accordance with the Statement of Financial Accounting Standards No. 87 ("FAS 87") utilizing a discount rate of 7% and <PAGE> 41 37 actuarial assumptions (other than such discount rate) specified in the actuarial valuation for the Rockwell Retirement Plan prepared as of January 1, 1996 (the "January 1, 1996 Actuarial Valuation"). Such ABO shall have been determined by an enrolled actuary appointed by Newco (the "Newco Actuary") and shall be binding and conclusive upon Newco, the Company and Acquiror other than as provided in Sections 8.2(a)(iv) and 8.2(a)(v) hereof. (ii) Prior to the Time of Contribution, the Company or Newco shall have established a defined benefit pension plan which shall be qualified under Section 401(a) of the Code (the "Newco Retirement Plan") effective as of the Time of Contribution covering (A) Newco Group Continuing Employees and (B) former employees of the Company and its Subsidiaries who terminated employment on or after January 1, 1996 (other than Company Group Former Employees) (such Newco Group Continuing Employees and such former employees are hereinafter referred to as "Newco Group Transferred Participants"). The Newco Retirement Plan shall contain provisions comparable in all material respects to and no less favorable in the aggregate than those of the Rockwell Retirement Plan immediately prior to the time of adoption of the Newco Retirement Plan. As soon as practicable following the establishment of the Newco Retirement Plan, but in no event later than 30 days prior to the Time of Contribution, the Company and Newco shall have filed with the IRS proper notice on IRS Forms 5310-A regarding the transfer of assets and liabilities from the Rockwell Retirement Plan to the Newco Retirement Plan. (iii) Effective as of the Time of Contribution, Newco shall sponsor the Newco Retirement Plan and assume the Newco Group Trust. Effective as of the Time of Contribution, the Company shall continue to sponsor the Rockwell Retirement Plan and Rockwell Group Trust, and shall change the name of the Rockwell Retirement Plan and Rockwell Group Trust to eliminate any reference to "Rockwell". The Company and Newco shall take such further actions as may be necessary or appropriate to (A) establish Newco as the sponsor of the Newco Retirement Plan and provide for the assumption of the Newco Group Trust by Newco and (B) provide for the continued sponsorship of the <PAGE> 42 38 Rockwell Retirement Plan and the Rockwell Group Trust by the Company. As soon as practicable following the latest of (A) the Time of Contribution, (B) the expiration of the applicable waiting period without receiving an adverse response from the appropriate government agencies and (C) receipt by the Company of an opinion of Newco's counsel, in a form reasonably satisfactory to the Company, that the form of the Newco Retirement Plan meets the requirements of Section 401(a) of the Code, the Rockwell Retirement Plan shall transfer to the Newco Retirement Plan (1) all accrued benefits and other liabilities attributable to Newco Group Transferred Participants (collectively, the "Transferred Benefits") and (2) the assets attributable thereto (the "Transferred Amount") in the amounts, form and manner described in this Section 8.2(a) and Section 8.2(c) below. Following the transfers of the Transferred Amount and the Transferred Benefits from the Rockwell Retirement Plan and Rockwell Group Trust to the Newco Retirement Plan and Newco Group Trust as provided herein, the Company Group shall have no further liability whatsoever (either under this Agreement or otherwise) with respect to the Newco Group Transferred Participants for benefits under the Rockwell Retirement Plan and, except as otherwise provided in Section 8.2(a)(vi), the Newco Group shall have no further liability whatsoever (either under this Agreement or otherwise) with respect to the participants under the Rockwell Retirement Plan. The Rockwell Retirement Plan shall retain liability for the Newco Group Former Employees who were participants in the Rockwell Retirement Plan and who terminated employment with the Company or any of its Subsidiaries prior to January 1, 1996. (iv) Within 150 days following the Time of Contribution, Newco shall cause the Newco Actuary to prepare and deliver to Newco an actuarial valuation (the "Actuarial Valuation") which shall: (A) certify the ABO for Newco Group Transferred Participants and the ABO for all other participants in the Rockwell Retirement Plan and the Newco Retirement Plan as of the Time of Contribution, each of which ABO shall be determined in accordance with FAS 87, utilizing a discount rate of 8% and actuarial assumptions (other than such discount rate) specified in the January 1, 1996 Actuarial Valuation; (B) set forth the fair market value of the assets for the Rockwell Retirement Plan <PAGE> 43 39 and the Newco Retirement Plan as of the Time of Contribution and (C) set forth the calculation of the Transferred Amount (equal to the product of (A) multiplied by (B) as defined in Section 8.2(a)(v)), which amount shall be calculated in accordance with Section 414(l) of the Code, the Treasury Regulations thereunder and this Section 8.2(a)(iv). Newco shall deliver to the Company the Actuarial Valuation. Within 60 days of receipt of the Actuarial Valuation, the Company shall (A) cause an enrolled actuary selected by the Company (the "Company Actuary") to confirm the accuracy (based upon the assumptions referred to in clause (A) of this Section 8.2(a)(iv)) of the Actuarial Valuation (including the underlying data used by the Newco Actuary to prepare such Actuarial Valuation) and (B) provide to Newco a written statement of whether the Company Actuary has confirmed the accuracy of such Actuarial Valuation. In the event that the Company Actuary disputes the accuracy of the Actuarial Valuation within such 60-day period, Newco and the Company shall, within 30 days following the end of the 60-day period described in the preceding sentence, make all reasonable efforts to cause the Newco Actuary and the Company Actuary to resolve the dispute or, if such dispute cannot be resolved, select an actuarial firm of national repute (the "Third Actuary") to determine the amounts referred to in clauses (A), (B) and (C) of the first sentence of this Section 8.2(a)(iv), which determination shall be final and binding upon Newco, the Company and the Acquiror. In the event that Newco and the Company are unable to select a Third Actuary within such 30-day period, an arbitrator shall appoint such Third Actuary, which determination shall be final and binding upon Newco, the Company and the Acquiror. Such arbitrator shall be appointed in accordance with the rules of the New York, New York office of the American Arbitration Association. The Company shall pay the cost of the Company Actuary, Newco shall pay the cost of the Newco Actuary and, to the extent necessary, the cost of the Third Actuary and arbitrator shall be shared equally by the Company and Newco. The use of a Third Actuary and arbitrator and the allocation of the costs thereof shall be referred to as the "Actuarial Dispute Resolution Process". (v) As soon as practicable following the satisfaction of the conditions set forth in Section 8.2(a)(iv), an amount determined in accordance with <PAGE> 44 40 this Section 8.2(a)(v) shall be transferred from the Rockwell Retirement Plan to the Newco Retirement Plan (or from the Newco Retirement Plan to the Rockwell Retirement Plan, as the case may be). For purposes of this Section 8.2(a)(v), (A) is the fraction, the numerator of which is the ABO for the Newco Group Transferred Participants as of the Time of Contribution, and the denominator of which is the total ABO for all participants covered under the Rockwell Retirement Plan and Newco Retirement Plan as of the Time of Contribution, (B) is the total combined fair market value of the assets of the Rockwell Retirement Plan and Newco Retirement Plan as of the Time of Contribution, (C) is the fair market value of the assets in the Newco Retirement Plan as of the Time of Contribution and (D) is an amount equal to the product of (A) multiplied by (B). For all purposes of this Section 8.2(a)(v), the amount of ABO shall be determined in accordance with Section 8.2(a)(iv). If (D) is greater than (C), then an amount equal to the excess of (D) over (C) shall be transferred from the Rockwell Retirement Plan to the Newco Retirement Plan. If (D) is less than (C), then an amount equal to the excess of (C) over (D) shall be transferred from the Newco Retirement Plan to the Rockwell Retirement Plan. Any amount to be transferred pursuant to this Section 8.2(a)(v) shall bear interest from the Time of Contribution to the date of payment (calculated based on actual days elapsed in a 365-day year) at a rate of 8% per annum and, to the extent applicable, shall be decreased by the amount of any benefit payments and normal expenses of administration not attributable to participants in the plan from which the amount is transferable. (vi) Newco shall reimburse the Company, on an annual plan-year basis, for any additional amounts paid to or in respect of Newco Group Former Employees who are not Newco Group Transferred Participants and their beneficiaries under the Rockwell Retirement Plan as a result of any increase in the benefits provided to such Newco Group Former Employees and their beneficiaries over the benefits payable to such persons at the Time of Contribution which increase is implemented by the Company upon the written request of Newco. Such increase for each year shall be the aggregate amount actually paid under the Rockwell Retirement Plan to or in respect of the Newco Group Former Employees who are <PAGE> 45 41 not Newco Group Transferred Participants and their beneficiaries during such plan year over the aggregate amount payable to such persons under the Rockwell Retirement Plan as in effect at the Time of Contribution. The determination of the amount to be reimbursed to the Company by Newco shall be made by the Company Actuary and shall be subject to review by the Newco Actuary. If the Company Actuary and the Newco Actuary shall disagree as to the amount to be reimbursed, the Company and Newco shall use the Actuarial Dispute Resolution Process to determine the amount of reimbursement. (b) Reliance Retirement Plans. (i) Prior to the Time of Contribution, the assets attributable to the liabilities under the Reliance Retirement Plans shall have been transferred from the Rockwell Group Trust to the Newco Group Trust. The assets transferred from the Rockwell Group Trust to the Newco Group Trust to fund the liabilities under the Reliance Retirement Plans shall have been determined in the manner set forth in Section 8.2(c). (ii) Effective as of the Time of Contribution, Newco shall cause the appropriate member or members of the Newco Group to continue sponsorship of the Reliance Retirement Plans. Prior to, on and after the Time of Contribution, the Company and Newco and the appropriate member of the Newco Group each shall have taken and shall take such actions as may be necessary or appropriate to establish the appropriate member of the Newco Group to continue the sponsorship of the Reliance Retirement Plans. (c) Selection of Assets. (i) The assets that shall have been transferred from the Rockwell Group Trust to the Newco Group Trust pursuant to Sections 8.2(a)(i) and 8.2(b) shall have been selected as hereinafter set forth in this Section 8.2(c)(i). First, assets invested in insurance and annuity contracts that were attributable specifically to the subplans and groups of Newco Group Transferred Participants or participants in the Reliance Retirement Plans (the "Earmarked Investments") shall have been transferred to the Newco Group Trust. Second, the remaining assets transferred from the <PAGE> 46 42 Rockwell Group Trust to the Newco Group Trust shall have been comprised of assets invested by each such investment manager set forth on Schedule 8.2(c) (each, an "Investment Manager"). The amount of assets managed by each Investment Manager that shall have been allocated to the Newco Group Trust from the Rockwell Group Trust shall be an amount equal to the product of (A) multiplied by (B), where (A) equals a fraction, the numerator of which is the fair market value of the assets managed by such individual Investment Manager as of the close of business on the day immediately preceding the date of transfer and the denominator of which is the aggregate fair market value of the assets as of the close of business on the day immediately preceding the date of transfer managed by all of the Investment Managers, and where (B) equals the amount of assets transferred to the Newco Group Trust pursuant to Section 8.2(a)(i) and 8.2(b) minus the amount of Earmarked Assets. The selection of specific assets managed by each Investment Manager transferred to the Newco Group Trust or liquidated to fund such transfer, in the amount determined in accordance with the immediately preceding sentence, shall have been made on a pro rata basis among the assets managed by such Investment Manager. Notwithstanding the foregoing, if the total fair market value of the assets managed by the Investment Managers as of the close of business on the day immediately preceding the date of the transfer was less than the amount set forth in clause (B) of the preceding sentence, then the remaining assets that shall have been transferred to the Newco Group Trust shall have been determined on a basis mutually agreed upon by the Company and Newco. (ii) The assets to be transferred from the Rockwell Group Trust to the Newco Group Trust or from the Newco Group Trust to the Rockwell Group Trust, as the case may be, pursuant to Section 8.2(a)(v) shall be in cash and marketable securities as mutually agreed upon by the Company and Newco. (d) The Company and Newco shall use and shall have used their reasonable best efforts to effectuate the actions contemplated under this Section 8.2 on a timely basis as provided herein. <PAGE> 47 43 8.3. Savings Plans. (a) Rockwell International Corporation Savings Plan. Effective as of the Time of Contribution, Newco shall assume sponsorship of the Rockwell International Corporation Savings Plan (the "Rockwell Savings Plan") and trust related thereto and shall cause each Company Group Continuing Employee to have a fully nonforfeitable right to such Continuing Employee's account balances, if any, under the Rockwell Savings Plan. The account balances of each Company Group Continuing Employee shall be maintained under the Rockwell Savings Plan until distributed in accordance with the terms of the Rockwell Savings Plan and applicable law. (b) Rockwell Hourly Savings Plans. Effective as of the Time of Contribution, Newco shall, or shall cause one or more of its Subsidiaries to, assume sponsorship of the Rockwell Retirement Savings Plan for Certain Employees (the "Rockwell Hourly Savings Plan") and the trust related thereto and shall cause each Company Group Continuing Employee to have a fully nonforfeitable right to such Company Group Continuing Employee's account balances, if any, under the Rockwell Hourly Savings Plan. The account balances of each Company Group Continuing Employee shall be maintained under the Rockwell Hourly Savings Plan until distributed in accordance with the terms of the Rockwell Hourly Savings Plan and applicable law. (c) Plant Savings Plans. Effective as of the Time of Contribution, Newco shall, or shall cause one or more of its Subsidiaries to, assume sponsorship of the Asheville Employees Retirement Savings Plan Truck Axle Division, the Rockwell International Corporation Gordonsville, Tennessee Employees Savings Plan, the Rockwell International Corporation Retirement Plan for Hourly Employees, Gordonsville, Tennessee and the York Employees Retirement Savings Plan Truck Axle Division and the respective trusts related thereto. (d) Rockwell Savings Plan for Certain Eligible Employees. If the Rockwell Savings Plan for Certain Eligible Employees has not been merged into and with the Rockwell International Corporation Savings Plan as of the Time of Contribution, then effective as of the Time of Contribution, the Company shall, or shall cause a member of the Company Group to, assume sponsorship of the Rockwell Savings Plan for Certain Eligible Employees and the trust related thereto and shall cause each Newco Group Continuing <PAGE> 48 44 Employee to have a fully nonforfeitable right to such Newco Group Continuing Employee's account balances, if any, under the Rockwell Savings Plan for Certain Eligible Employees. The account balances of each Newco Group Continuing Employee shall be maintained under the Rockwell Savings Plan for Certain Eligible Employees until distributed in accordance with the terms thereof and applicable law. 8.4. Deferred Compensation Plans and Nonqualified Retirement and Savings Plans. (a) Deferred Compensation Plans. Effective as of the Time of Contribution, Newco shall assume liability for and shall pay when due all benefits accrued as of the Time of Contribution (including, in the case of Company Group Continuing Employees and, if any, Company Group Former Employees, such individuals' vested and nonvested benefits which are accrued as of the Time of Contribution) by, and attributable to, all employees and former employees of the Company and its Subsidiaries and all present and former non-employee directors of the Company under the Rockwell International Corporation Deferred Compensation Plan as amended and restated effective July 1, 1995, the Rockwell International Corporation Annual Incentive Compensation Plan for Senior Executive Officers effective as of October 1, 1995 and the Rockwell International Corporation Deferred Compensation Policy for Non-Employee Directors (the "Deferred Compensation Plans"), and shall perform, pay and discharge fully all of the Company's and its Subsidiaries' duties, liabilities or obligations thereunder with respect to such employees, former employees and present and former non-employee directors of the Company and its Subsidiaries. Effective as of the Time of Contribution, Newco shall cause each Company Group Continuing Employee and Company Group Former Employee to have a fully nonforfeitable right to such individual's entire account balance, if any, under the Deferred Compensation Plans. (b) Nonqualified Retirement Plans. Effective as of the Time of Contribution, Newco shall assume liability for and shall pay when due all benefits accrued as of the Time of Contribution by, and attributable to, employees and former employees of the Company and its Subsidiaries (other than Company Group Continuing Employees and Company Group Former Employees) under the Rockwell International Corporation Supplemental Retirement Plan for Highly Compensated Employees, the Rockwell International Corporation Excess Benefit Retirement Plan and the Rockwell <PAGE> 49 45 International Corporation Excess Benefit Plan (the "Nonqualified Retirement Plans"), and shall perform, pay and discharge fully all of the Company's and its Subsidiaries' duties, liabilities or obligations thereunder with respect to such employees and former employees. Effective as of the Time of Contribution, the Company shall assume liability for and shall pay when due all benefits accrued as of the Time of Contribution by, and attributable to, Company Group Continuing Employees and Company Group Former Employees (including such individual's vested and nonvested benefits which are accrued as of the Time of Contribution) under the Nonqualified Retirement Plans and shall perform, pay and discharge fully all of the Company's and its Subsidiaries' duties, liabilities or obligations with respect thereto. (c) Nonqualified Savings Plans. Effective as of the Time of Contribution, Newco shall assume liability for and shall pay when due all benefits accrued as of the Time of Contribution (including, in the case of Company Group Continuing Employees and, if any, Company Group Former Employees, such individuals' vested and nonvested benefits which are accrued as of the Time of Contribution) by, and attributable to, all employees and former employees of the Company and its Subsidiaries under the Rockwell International Corporation Supplemental Savings Plan for Highly Compensated Employees and the Rockwell International Corporation Excess Benefit Savings Plan (the "Nonqualified Savings Plans"), and shall perform, pay and discharge fully all of the Company's and its Subsidiaries' duties, liabilities or obligations thereunder with respect thereto. Effective as of the Time of Contribution, Newco shall cause each Company Group Continuing Employee and Company Group Former Employee to have a fully nonforfeitable right to such individual's entire account balance, if any, under the Nonqualified Savings Plans. 8.5. Employee Stock Options. Effective as of the Time of Contribution, Newco shall assume the Company Stock Plans. The Board of Directors of the Company shall amend the Company Stock Plans, make adjustments and take actions (and Newco shall take such actions as are reasonably required to implement the same) with respect to options to acquire shares of Company Common Stock or Company Class A Common Stock, as the case may be, pursuant to any Company Stock Plan ("Company Options") which are outstanding immediately prior to the Time of Distribution to provide that, pursuant to the equitable adjustment provisions of the <PAGE> 50 46 applicable Company Stock Plan under which such Company Options were granted, effective as of the Time of Distribution such Company Options will be converted into and represent the right to acquire shares of Newco Common Stock and Newco Class A Common Stock, in each case with the associated Rights, with such other amendments and adjustments as are reasonable and appropriate, including such amendments as are reasonable and appropriate to ensure that any optionholder who becomes a Company Group Continuing Employee or a Company Group Former Employee as of the Time of Contribution will not forfeit any such converted options on such date under the termination of employment provisions of such plans as a result of not becoming a Newco Group Continuing Employee or a Newco Group Former Employee, and will be entitled to vesting and exercisability rights comparable to those that such optionholder has immediately prior to the Time of Contribution to the extent that such optionholder remains in continuous employment with any member of the Company Group. 8.6. Long-Term Incentive Plan. Effective as of the Time of Contribution, (i) the Company shall retain liability for all amounts due under the Rockwell International Business Unit Long-Term Incentive Plan (the "LTIP") with respect to the Company Group Continuing Employees and Company Group Former Employees and (ii) Newco shall assume liability for all amounts due under the LTIP with respect to the Newco Group Continuing Employees and Newco Group Former Employees. The amounts payable under clause (i) of the preceding sentence shall be determined by the Company on the basis that (x) the target award for each uncompleted cycle will be prorated to reflect the portion of such cycle completed as of the Time of Contribution and (y) where payment is based, in whole or in part, on the trading price of the Company Common Stock, such price shall be the average closing price per share of Company Common Stock reported on the NYSE for each full trading day during the months of August and September immediately preceding the Time of Contribution. The amount due each participant under the LTIP who is a Company Group Continuing Employee shall be paid by the Company within 90 days following the Time of Contribution. Newco shall promptly reimburse the Company, upon written request from the Company therefor, for any amount paid by the Company under the LTIP as a result of this Section 8.6 the expense of which is not reimbursed by the United States of America under applicable Government Contracts, provided, however, that Newco shall have the opportunity to participate in any negotiations with the <PAGE> 51 47 applicable Governmental Entity with respect to such reimbursement or to designate counsel or a representative reasonably satisfactory to the Company to so participate on Newco's behalf unless such participation by Newco (or its counsel or representative) is barred by such agency, in which case, the Company shall consult with Newco and keep Newco apprised of any developments with respect to such negotiations. The Company shall not establish, or cause to be established, any new performance cycles under the LTIP with respect to Company Group Continuing Employees and Company Group Former Employees prior to the Time of Contribution. 8.7. Welfare Benefit Plans. (a) Effective as of the Time of Contribution, the Company shall, or shall cause a member of the Company Group to, maintain each "employee welfare benefit plan", as defined in Section 3(1) of ERISA, and each other employee welfare benefit or fringe benefit arrangement (collectively, "Company Group Welfare Benefit Plans") sponsored or maintained by the Company or any of its Subsidiaries immediately prior to the Time of Contribution for the benefit of Company Group Continuing Employees and Company Group Former Employees (including but not limited to those plans set forth on Schedule 8.7(a)). The Company shall credit the dollar amount of all expenses incurred by Company Group Continuing Employees and Company Group Former Employees and their respective eligible dependents during the applicable plan year in which occurs the Time of Contribution for purposes of satisfying such plan year's deductible and co-payment limitations and shall credit service with the Company and its Subsidiaries earned prior to the Time of Contribution under the relevant welfare benefit plans of the Company Group. The Company shall credit each Company Group Continuing Employee with the unused vacation days and any personal and sickness days accrued in accordance with the vacation and personnel policies and labor agreements of the Company and its Subsidiaries applicable to such employees in effect as of the Time of Contribution. (b) Effective as of the Time of Contribution, Newco shall, or shall cause a member of the Newco Group to, establish or maintain "employee welfare benefit plans", as defined in Section 3(1) of ERISA, and other employee welfare benefit or fringe benefit arrangements (collectively, "Newco Group Welfare Benefit Plans") which are comparable in the <PAGE> 52 48 aggregate to the "employee welfare benefit plans" and other employee benefit welfare or fringe benefit arrangements which had been maintained by the Company and its Subsidiaries immediately prior to the Time of Contribution for the benefit of Newco Group Continuing Employees and Newco Group Former Employees. Newco shall credit the dollar amount of all expenses incurred by Newco Group Continuing Employees and Newco Group Former Employees and their respective eligible dependents during the applicable plan year in which occurs the Time of Contribution for purposes of satisfying such plan year's deductible and co-payment limitations and shall credit service with the Company and its Subsidiaries earned prior to the Time of Contribution under the relevant welfare benefit plans of the Newco Group. Newco shall credit each Newco Group Continuing Employee with the unused vacation days and any personal and sickness days accrued in accordance with the vacation and personnel policies and labor agreements of the Company and its Subsidiaries applicable to such employees in effect as of the Time of Contribution. (c) As of the Time of Contribution, the Company shall retain and continue to be responsible for all welfare benefit programs (including, but not limited to, medical, dental, life, travel accident, short- and long-term disability, hospitalization and other insurance benefits) under which claims have been incurred for expenses prior to the Time of Contribution by Company Group Continuing Employees, Company Group Former Employees and their dependents and such reimbursement for such medical and dental expenses associated with such claims (including claims submitted on behalf of disabled employees and their dependents) shall be determined in accordance with the terms of the welfare benefit programs of the Company Group as in effect immediately prior to the Time of Contribution. As of the Time of Contribution, Newco shall assume and be responsible for all welfare benefit programs (including, but not limited to, medical, dental, life, travel accident, short- and long-term disability, hospitalization and other insurance benefits) under which claims have been incurred for expenses incurred prior to the Time of Contribution by Newco Group Continuing Employees, Newco Group Former Employees and their dependents and such reimbursement for such medical and dental expenses associated with such claims (including claims submitted on behalf of disabled employees and their dependents) shall be determined in accordance with the terms of the welfare benefit programs of the Company <PAGE> 53 49 Group as in effect immediately prior to the Time of Contribution. 8.8. Retiree Health and Life Insurance. (a) The Company and the Company Group, or where appropriate, the Company Group Welfare Benefit Plans, shall retain liability for all retiree health benefits and retiree life insurance which were payable prior to the Time of Contribution and/or are payable on or after the Time of Contribution to (i) all eligible Company Group Continuing Employees (and their beneficiaries) and (ii) all eligible Company Group Former Employees (and their beneficiaries). The Company shall credit the dollar amount of all expenses incurred by Company Group Continuing Employees and Company Group Former Employees and their respective eligible dependents during the applicable plan year in which occurs the Time of Contribution for purposes of satisfying such plan year's deductible and co-payment limitations and shall credit service with the Company and its Subsidiaries earned prior to the Time of Contribution under the relevant retiree welfare benefit plans of the Company Group. (b) Newco and the Newco Group, or where appropriate, the Newco Group Welfare Benefit Plans, shall assume liability for all retiree health benefits and retiree life insurance benefits which were payable prior to the Time of Contribution and/or are payable on or after the Time of Contribution to (i) all eligible Newco Group Continuing Employees (and their beneficiaries) and (ii) all eligible Newco Group Former Employees (and their beneficiaries). Newco shall credit the dollar amount of all expenses incurred by Newco Group Continuing Employees and Newco Group Former Employees and their respective eligible dependents during the applicable plan year in which occurs the Time of Contribution for purposes of satisfying such plan year's deductible and co-payment limitations and shall credit service with the Company and its Subsidiaries earned prior to the Time of Contribution under the relevant retiree welfare benefit plans of the Newco Group. (c) As of the Time of Contribution, the Company shall retain and continue to be responsible for all retiree welfare benefit programs (including, but not limited to, medical, dental, life, travel accident, short- and long-term disability, hospitalization and other insurance benefits) under which claims have been incurred for expenses prior to the Time of Contribution by Company Group Continuing <PAGE> 54 50 Employees, Company Group Former Employees and their dependents and such reimbursement for such medical and dental expenses associated with such claims (including claims submitted on behalf of disabled employees and their dependents) shall be determined in accordance with the terms of the welfare benefit programs of the Company and its Subsidiaries as in effect immediately prior to the Time of Contribution. As of the Time of Contribution, Newco shall assume and be responsible for all retiree welfare benefit programs (including, but not limited to, medical, dental, life, travel accident, short- and long-term disability, hospitalization and other insurance benefits) under which claims have been incurred for expenses incurred prior to the Time of Contribution by Newco Group Continuing Employees, Newco Group Former Employees and their dependents and such reimbursement for such medical and dental expenses associated with such claims (including claims submitted on behalf of disabled employees and their dependents) shall be determined in accordance with the term of the retiree welfare benefit programs of the Company and its Subsidiaries as in effect immediately prior to the Time of Contribution. 8.9. Retention and Severance Obligations. The Company and Newco agree that the transactions contemplated by this Agreement shall not constitute a severance of employment of any Company Group Continuing Employee and Newco Group Continuing Employee prior to or as a result of the consummation of the transactions contemplated hereby, and that such employees will have continuous and uninterrupted employment with the Company Group or Newco Group, as applicable, before and immediately after the Time of Contribution. Without limiting the generality of Section 8.9, effective as of the Time of Contribution, the Company shall retain liability for and shall pay when due all amounts which may become payable under the Rockwell Retention and Severance Arrangement. 8.10. Free-Standing Plans. Effective as of the Time of Contribution, Newco shall assume, or shall cause the Newco Group to assume, all liabilities and obligations under each employee benefit plan, arrangement or policy which, prior to the Time of Contribution, is exclusively for the benefit of Newco Group Continuing Employees, Newco Group Former Employees, and their eligible beneficiaries (the "Newco Group Free-Standing Plans"). Effective as of the Time of Contribution, the Company shall retain, or shall cause the Company Group to retain, all liabilities and obligations under each employee benefit plan, arrangement or <PAGE> 55 51 policy which, prior to the Time of Contribution, is exclusively for the benefit of Company Group Continuing Employees, Company Group Former Employees, and their eligible beneficiaries (the "Company Group Free-Standing Plans"). The Company and Newco shall take, or cause to be taken, all such action as may be necessary or appropriate to establish the Newco Group as successor to the Company or its Subsidiaries as to all rights, assets, duties, liabilities and obligations under, or with respect to, the Newco Group Free-Standing Plans and to establish the Company Group as successor to the Company or its Subsidiaries as to all rights, assets, duties, liabilities and obligations with respect to the Company Group Free-Standing Plans. 8.11. Employment, Consulting and Severance Agreements. Effective as of the Time of Contribution, Newco shall assume, or cause the Newco Group to assume, all liabilities and obligations attributable to Newco Group Continuing Employees and Newco Group Former Employees under their respective employment, consulting and severance agreements with the Company or its Subsidiaries, as the same are in effect immediately prior to the Time of Contribution. Effective as of the Time of Contribution, the Company shall retain, or cause the Company Group to retain, all liabilities and obligations attributable to Company Group Continuing Employees and Company Group Former Employees under their respective employment, consulting and severance agreements with the Company or its Subsidiaries, as the same are in effect immediately prior to the Time of Contribution. 8.12. Welfare Plan Funding. (a) Non-Collectively Bargained Voluntary Employees' Beneficiary Association. Prior to the Time of Contribution, Newco shall have established a voluntary employees' beneficiary association (the "Newco VEBA") under Section 501(c)(9) of the Code covering Newco Group Continuing Employees and Newco Group Former Employees who are covered under the Trust for Employee Welfare Benefit Programs of Rockwell International Corporation (the "Rockwell VEBA"). The Newco VEBA shall contain provisions comparable in all material respects to and no less favorable in the aggregate to its participants than those of the Rockwell VEBA. Prior to the Time of Contribution, the Rockwell VEBA shall have transferred to the Newco VEBA assets attributable to the Newco Group Continuing Employees and Newco Group Former Employees covered under the Rockwell VEBA. The amount of assets transferred from the Rockwell <PAGE> 56 52 VEBA to the Newco VEBA pursuant to this Section 8.12(a) shall have been based upon the value of the assets in the applicable employee group insurance plan as of the date of the transfer multiplied by the ratio that the costs allocated for the Newco Group Continuing Employees and Newco Group Former Employees bear to the total costs allocated under the Rockwell VEBA for the Company's government accounting fiscal year in which such transfer occurs to the date of the transfer. The Company and Newco agree to adjust the initial asset allocation set forth in the preceding sentence, based upon actual claims cost experience at such time as the actual experience is known pursuant to the Company's practices existing on the date hereof. Effective as of the Time of Contribution, Newco shall continue to sponsor the Newco VEBA. Effective as of the Time of Contribution, the Company shall continue to sponsor the Rockwell VEBA and shall change the name of the Rockwell VEBA to eliminate any reference to "Rockwell". (b) Collectively Bargained Voluntary Employees' Beneficiary Association. Prior to the Time of Contribution, Newco shall have established a voluntary employees' beneficiary association (the "Newco Collectively Bargained VEBA") under Section 501(c)(9) covering Newco Group Continuing Employees and Newco Group Former Employees who are covered under the Agreement of Trust for Certain Collectively Bargained Welfare Benefit Plans of Rockwell International Corporation (the "Rockwell Collectively Bargained VEBA"). The Newco Collectively Bargained VEBA shall contain provisions comparable in all material respects to and no less favorable in the aggregate to its participants than those of the Rockwell Collectively Bargained VEBA. Prior to the Time of Contribution, the Rockwell Collectively Bargained VEBA shall have transferred to the Newco Collectively Bargained VEBA assets attributable to the Newco Group Continuing Employees and Newco Group Former Employees covered under the Rockwell Collectively Bargained VEBA. The amount of assets transferred from the Rockwell Collectively Bargained VEBA to the Newco Collectively Bargained VEBA pursuant to this Section 8.12(b) shall have been based upon the value of the assets in the Rockwell Collectively Bargained VEBA as of the date of the transfer multiplied by the ratio that the costs allocated for the Newco Group Continuing Employees and Newco Group Former Employees bear to the total costs allocated under the applicable employee group insurance plan for the Company's government accounting fiscal year in which such transfer occurs to the date of the transfer. Effective as of the <PAGE> 57 53 Time of Contribution, Newco shall continue to sponsor the Newco Collectively Bargained VEBA. Effective as of the Time of Contribution, the Company shall continue to sponsor the Rockwell Collectively Bargained VEBA and shall change the name of the Rockwell Collectively Bargained VEBA to eliminate any reference to "Rockwell". (c) Continued Life Insurance Reserve Fund. Prior to the Time of Contribution, Newco shall have established a continued life insurance reserve fund (the "Newco CLIR Fund") covering Newco Group Continuing Employees and Newco Group Former Employees who are covered under the Continued Life Insurance Reserve Fund (the "Rockwell CLIR Fund"). The Newco CLIR Fund shall contain provisions comparable in all material respects to and no less favorable in the aggregate to its participants than those of the Rockwell CLIR Fund. Prior to the Time of Contribution, the Rockwell CLIR Fund shall have transferred to the Newco CLIR Fund assets attributable to the Newco Group Continuing Employees and Newco Group Former Employees covered under the Rockwell CLIR Fund. The amount of assets transferred from the Rockwell CLIR Fund to the Newco CLIR Fund pursuant to this Section 8.12(c) shall have been based upon the proportionate values of the assets in the Rockwell CLIR Fund attributable to Newco Group Continuing Employees and Newco Group Former Employees as of the most recent actuarial valuation for the Rockwell CLIR Fund prepared by the Newco Actuary, subject to review by the Company Actuary. In the event of a dispute between the Newco Actuary and the Company Actuary, the Actuarial Dispute Resolution Process shall be used to determine the amount of assets to be transferred. Effective as of the Time of Contribution, Newco shall continue to sponsor the Newco CLIR Fund. Effective as of the Time of Contribution, the Company shall continue to sponsor the Rockwell CLIR Fund and shall change the name of the Rockwell CLIR Fund to eliminate any reference to "Rockwell". (d) Additional Action. Prior to, on and after the Time of Contribution, the Company and Newco each shall take and shall have taken such further actions as may be necessary or appropriate to (i) establish Newco as the sponsor of the Newco VEBA, Newco Collectively Bargained VEBA and Newco CLIR Fund, (ii) provide for the continued sponsorship by the Company of the Rockwell VEBA, Rockwell Collectively Bargained VEBA and Rockwell CLIR Fund and (iii) cause the transfers described in this Section 8.12 to be made in accordance with applicable law and the terms of any applicable collective bargaining agreement. <PAGE> 58 54 8.13. Indemnification. Except as otherwise provided in this Article VIII, Newco shall indemnify, defend and hold harmless the Company Group from and against, and pay or reimburse the Company Group for, any claims made by any Newco Group Continuing Employee or Newco Group Former Employee for severance or other separation benefits, any claims based on breach of contract and any other claims arising out of or in connection with the employment or the failure to offer employment to, or the termination of employment of, any Newco Group Continuing Employee or Newco Group Former Employee. The Company shall indemnify, defend and hold harmless the Newco Group from and against, and pay or reimburse the Newco Group for, any claims made by any Company Group Continuing Employee or Company Group Former Employee for severance or other separation benefits, any claims based on breach of contract and any other claims arising out of or in connection with the employment or the failure to offer employment to, or the termination of employment of, any Company Group Continuing Employee or Company Group Former Employee. Newco shall indemnify, defend and hold harmless the Company Group from and against, and pay or reimburse the Company Group for, all liabilities resulting from any failure to file a determination letter request with the IRS within the remedial amendment period prescribed under Section 401(b) of the Code with respect to compliance with the Tax Reform Act of 1986 for any Company Pension Plan that is intended to be tax-qualified under Section 401(a) of the Code. 8.14. Cooperation. Without limiting the generality of Article VII hereof, the Company Group and Newco Group agree to promptly furnish each other with such information concerning employees and employee benefit plans, arrangements or policies as is necessary and appropriate to effect the transactions contemplated by this Article VIII. 8.15. Amendment, Modification or Termination of Benefit Plans. From and after the Time of Contribution, (i) the Company Group expressly reserves the right, in accordance with applicable law and the terms of any applicable collective bargaining agreement, to amend, modify or terminate any Benefit Plan it sponsors or maintains for Company Group Continuing Employees and Company Group Former Employees and (ii) the Newco Group expressly reserves the right, in accordance with applicable law and the terms of any applicable collective bargaining agreement, to amend, modify or terminate any Benefit Plan it sponsors or <PAGE> 59 55 maintains for Newco Group Continuing Employees or Newco Group Former Employees. ARTICLE IX CONDITIONS 9.1. Conditions to Obligations of the Company. The obligations of the Company to consummate the Distribution hereunder shall be subject to the fulfillment of each of the following conditions: (a) All of the transactions contemplated by Article II shall have been consummated. (b) The recapitalization of Newco in accordance with Section 3.2 shall have been consummated. (c) Each condition to the Closing of the Merger Agreement set forth in Article VI thereof, other than (i) the condition set forth in Sections 6.1(f) thereof as to the consummation of the Contribution and the Distribution and (ii) the condition to the Acquiror's obligations set forth in Section 6.3(d) thereof as to the satisfaction of conditions contained in this Agreement, shall have been fulfilled or waived by the party for whose benefit such condition exists. (d) The Board of Directors of the Company shall be reasonably satisfied that, after giving effect to the Contribution, (i) the Company will not be insolvent and will not have unreasonably small capital with which to engage in its businesses and (ii) the Company's surplus would be sufficient to permit, without violation of Section 170 of the DGCL, the Distribution. (e) Acquiror, the Company and Newco shall each have received, in form and substance reasonably satisfactory to each, the advance agreements and approvals of Governmental Entities concerning the matters described on Schedule 9.1(e). <PAGE> 60 56 ARTICLE X MISCELLANEOUS AND GENERAL 10.1. Modification or Amendment. The parties hereto may modify or amend this Agreement only by written agreement executed and delivered by duly authorized officers of the respective parties. 10.2. Waiver; Remedies. The conditions to the Company's obligation to consummate the Distribution are for the sole benefit of the Company and may be waived in writing by the Company in whole or in part to the extent permitted by applicable law. No delay on the part of any party hereto in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor will any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Unless otherwise provided, the rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the parties may otherwise have at law or in equity. 10.3. Counterparts. For the convenience of the parties, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 10.4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. 10.5. Notices. Any notice, request, instruction or other communication to be given hereunder by any party to any other party shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other nationally reputable next-day courier service, or (iii) on the third business day following the date of mailing if delivered by registered or certified <PAGE> 61 57 mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) If to Newco or the Operating Subsidiaries: New Rockwell International Corporation 2201 Seal Beach Boulevard Seal Beach, California 90740-8250 Attention: William J. Calise, Jr., Esq. Senior Vice President, General Counsel and Secretary Telecopy: (310) 797-5687 with copies to: Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Peter R. Kolyer, Esq. Telecopy: (212) 541-5369 and Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Eric S. Robinson, Esq. Telecopy: (212) 403-2000 (b) If to the Company: Boeing NA, Inc. c/o The Boeing Company P.O. Box 3707 M/S 13-08 Seattle, Washington 98124-2207 Attention: Theodore J. Collins, Esq. Vice President & General Counsel Telecopy: (206) 544-4900 and <PAGE> 62 58 Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, New York 10019 Attention: Allen Finkelson, Esq. Telecopy: (212) 474-3700 10.6. Entire Agreement. The Reorganization Agreements (including the Annexes and Schedules thereto), the Transition Agreement and the Confidentiality Agreement constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, among the parties, with respect to the subject matter hereof and thereof. 10.7. Certain Obligations. Whenever this Agreement requires any of the Subsidiaries of any party to take any action, this Agreement will be deemed to include an undertaking on the part of such party to cause such Subsidiary to take such action. 10.8. Assignment. No party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of the other parties hereto in their sole and absolute discretion, except that any party hereto may assign any of its rights hereunder to a successor to all or any part of its business. Except as aforesaid, any such conveyance, assignment or transfer without the express written consent of the other parties shall be void ab initio. No assignment of this Agreement shall relieve the assigning party of its obligations hereunder. 10.9. Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 10.10. Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the party or parties who are or are to be thereby aggrieved shall have the right of specific performance and injunctive relief giving effect to its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and <PAGE> 63 59 remedies shall be cumulative. The parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. 10.11. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon any such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties. 10.12. Third Party Beneficiaries. Acquiror shall be a third party beneficiary of this Agreement. Nothing contained in this Agreement is intended to confer upon any Person or entity other than the parties hereto and their respective successors and permitted assigns (other than Acquiror), any benefit, right or remedies under or by reason of this Agreement, except that the provisions of Sections 6.1 and 8.13 hereof shall inure to the benefit of the persons referred to therein. 10.13. Schedules. All Schedules attached hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Matters reflected on the Schedules are not necessarily limited to matters required by this Agreement to be reflected on such Schedules. Such additional matters are set forth for informational purposes only and do not necessarily include other matters of a similar nature. Capitalized terms used in any Schedule but not otherwise defined therein shall have the respective meanings assigned to such terms in this Agreement. 10.14. Consent to Jurisdiction. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of (i) the Superior Court of the State of <PAGE> 64 60 California, San Francisco County and (ii) the United States District Court for the Northern District of California for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby (and agrees not to commence any action, suit or proceeding relating hereto except in such courts). Each of the parties hereto further agrees that service of any process, summons, notice or document hand delivered or sent by registered mail to such party's respective address set forth in Section 10.5 will be effective service of process for any action, suit or proceeding in California with respect to any matters to which it has submitted to jurisdiction as set forth in the immediately preceding sentence. Each of the parties hereto irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the Superior Court of the State of California, San Francisco County or (ii) the United States District Court for the Northern District of California, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. <PAGE> 65 61 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first hereinabove written. ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Senior Vice President NEW ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Senior Vice President ALLEN-BRADLEY COMPANY, INC. By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Vice President ROCKWELL COLLINS, INC. By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Vice President ROCKWELL SEMICONDUCTOR SYSTEMS, INC. By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Vice President <PAGE> 66 62 ROCKWELL LIGHT VEHICLE SYSTEMS, INC. By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Vice President ROCKWELL HEAVY VEHICLE SYSTEMS, INC. By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.C <SEQUENCE>3 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 10(c) CONFORMED COPY - - ------------------------------------------------------------------------------- POST-CLOSING COVENANTS AGREEMENT dated as of December 6, 1996, among ROCKWELL INTERNATIONAL CORPORATION, THE BOEING COMPANY BOEING NA, INC. and NEW ROCKWELL INTERNATIONAL CORPORATION - - ------------------------------------------------------------------------------- <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I DEFINITIONS 1.1. Definitions ......................................... 2 ARTICLE II INDEMNIFICATION 2.1. Indemnification by Newco ........................... 3 2.2. Indemnification by the Company ..................... 6 2.3. Procedures Relating to Indemnification ............. 7 2.4. Certain Limitations ................................ 12 2.5. Limitation on Newco's Indemnification Obligation under Section 2.1(a)(iv) ................ 13 2.6. Exclusivity of Tax Allocation Agreement ............ 14 ARTICLE III OTHER AGREEMENTS 3.1. Transfer Taxes ..................................... 15 3.2. Conduct of Environmental Insurance Coverage Claims ......................................... 15 3.3. Agreements with Respect to Acquiror Common Stock Received by Newco Savings Plans ........... 17 3.4. Transitional Arrangements .......................... 18 3.5. Insurance .......................................... 18 3.6. DOE Contracts ...................................... 19 3.7. Reorganization Expenses ............................ 19 3.8. Conduct of Health Care Claims Audit ................ 19 3.9. Guaranty of Acquiror ............................... 21 3.10. Payments Adjustments to Contribution ............... 21 </TABLE> i <PAGE> 3 ARTICLE IV MISCELLANEOUS AND GENERAL 4.1. Modification or Amendment .......................... 22 4.2. Waiver; Remedies ................................... 22 4.3. Counterparts ....................................... 22 4.4. Governing Law ...................................... 22 4.5. Notices ............................................ 22 4.6. Entire Agreement ................................... 23 4.7. Certain Obligations ................................ 23 4.8. Assignment ......................................... 23 4.9. Captions ............................................ 24 4.10. Severability ....................................... 24 4.11. No Third Party Beneficiaries ....................... 24 4.12. Consent to Jurisdiction ............................ 24 ii <PAGE> 4 1 POST-CLOSING COVENANTS AGREEMENT dated as of December 6, 1996 (this "Agreement"), among ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), THE BOEING COMPANY, a Delaware corporation ("Acquiror"), BOEING NA, INC., a Delaware corporation and a wholly-owned subsidiary of Acquiror ("Sub"), and NEW ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation ("Newco"). W I T N E S S E T H : WHEREAS, the Company, Acquiror and Sub have entered into an Agreement and Plan of Merger dated as of July 31, 1996 (the "Merger Agreement"), providing for the Merger (as defined in the Merger Agreement) of Sub with and into the Company; WHEREAS, the Board of Directors of the Company has approved an agreement and plan of distribution in the form attached as Annex A to the Merger Agreement (the "Distribution Agreement"), which will be entered into prior to the Effective Time (as defined in the Merger Agreement), pursuant to which (a) all the assets of the Company, other than the Retained Assets (as defined in the Distribution Agreement), will be contributed to Newco and/or to one or more of the Operating Subsidiaries (as defined in the Distribution Agreement) and all of the liabilities of the Company, other than the Retained Liabilities (as defined in the Distribution Agreement), will be assumed by Newco and/or by one or more of the Operating Subsidiaries, all as provided in the Distribution Agreement (the "Contribution"), and (b) all of the issued and outstanding shares of Common Stock, par value $1.00 per share, of Newco ("Newco Common Stock") and Class A Common Stock, par value $1.00 per share, of Newco ("Newco Class A Common Stock"), in each case with the associated Rights, will be distributed on a pro rata basis to the Company's stockholders as provided in the Distribution Agreement (the "Distribution"); WHEREAS, the execution and delivery of this Agreement by the parties hereto is a condition to the obligations of the parties to the Merger Agreement to consummate the Merger; WHEREAS, the execution and delivery of this Agreement by the parties hereto is a condition to the <PAGE> 5 2 obligations of the parties to the Distribution Agreement to consummate the Distribution; and WHEREAS, the parties to this Agreement have determined that it is necessary and desirable to set forth certain agreements that will govern certain matters that may arise following the Contribution, the Distribution and the Merger. NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to such terms in the Merger Agreement or the Distribution Agreement, as the case may be. As used in this Agreement, the following terms shall have the following respective meanings: "Acquiror Indemnitees" shall mean Acquiror, each Affiliate of Acquiror, including any of its direct or indirect Subsidiaries (including, after the Effective Time, the Retained Companies), and each of their respective Representatives and each of the heirs, executors, successors and assigns of any of the foregoing. "Environmental Law" shall have the meaning ascribed thereto in the Distribution Agreement. "Environmental Proceeding" means any judicial, administrative or regulatory proceeding (including, without limitation, any investigation or inquiry) by or before any Governmental Entity that has been instituted or commenced against an Acquiror Indemnitee by a party other than an Acquiror Indemnitee based on a violation of, or to enforce compliance with, any Environmental Law. "Filings" shall mean the Registration Statements, the Proxy Statement-Prospectus, the Form 8-A and any other document filed or required to be filed with the SEC in connection with the transactions contemplated by the <PAGE> 6 3 Reorganization Agreements, or any preliminary or final form thereof or any amendment or supplement thereto. "Indemnifiable Losses" shall mean, subject to Section 2.4, all losses, liabilities, damages, deficiencies, obligations, fines, expenses, claims, demands, actions, suits, proceedings, judgments or settlements, whether or not resulting from Third Party Claims (as defined in Section 2.3(a)), including interest and penalties recovered by a third party with respect thereto and out-of-pocket expenses and reasonable attorneys' and accountants' fees and expenses incurred in the investigation or defense of any of the same or in asserting, preserving or enforcing any of the Indemnitee's rights hereunder, suffered by an Indemnitee. "Indemnitee" shall mean any of the Acquiror Indemnitees or the Newco Indemnitees who or which may seek indemnification under this Agreement. "Newco Indemnitees" shall mean Newco, each Affiliate of Newco, including any of its direct or indirect Subsidiaries, and each of their respective Representatives and each of the heirs, executors, successors and assigns of any of the foregoing. ARTICLE II INDEMNIFICATION 2.1. Indemnification by Newco. (a) Except as otherwise specifically provided in any Reorganization Agreement and subject to the provisions of this Article II, Newco shall indemnify, defend and hold harmless the Acquiror Indemnitees from and against, and pay or reimburse the Acquiror Indemnitees for, all Indemnifiable Losses, as incurred: (i) relating to or arising from the Contributed Assets or the Assumed Liabilities, including without limitation the Special Liabilities (including the failure by Newco or any member of the Newco Group to pay, perform or otherwise discharge such Assumed Liabilities in accordance with their terms), whether such Indemnifiable Losses relate to or arise from events, occurrences, actions, omissions, facts or circumstances occurring, existing or asserted before, at or after the Effective Time; <PAGE> 7 4 (ii) arising from or based upon any untrue statement or alleged untrue statement of a material fact contained in any of the Filings or in the Consent Statement, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; but only in each case with respect to information provided by the Company relating to the Newco Group or the Company contained in or omitted from the Filings or the Consent Statement; (iii) relating to or arising from the breach by any member of the Newco Group of any agreement or covenant contained in a Reorganization Agreement which does not by its express terms expire at the Effective Time or which is not by its express terms required to be performed prior to the Effective Time; (iv) relating to or arising from any breach of or inaccuracy in any representation or warranty of the Company contained in the Merger Agreement; (v) relating to or arising from any Preexisting Environmental Condition relating to the Aerospace Business, the Defense Business or the Additional Retained Facilities; (vi) relating to or arising from any actual or alleged criminal violation of any law, rule or regulation of any Governmental Entity by the Company or any of its Subsidiaries or any director, officer, employee or agent of the Company or any of its Subsidiaries ("Criminal Matters") occurring or alleged to have occurred prior to the Time of Contribution; (vii) relating to or arising from any breach of any covenant or agreement of the Company contained in the Merger Agreement assumed by Newco pursuant to the Distribution Agreement; (viii) relating to or arising from any claim that the execution, delivery or performance by the Company of each Reorganization Agreement to which it is or will be a party or the consummation of the transactions contemplated thereby results in a violation or breach of, or constitutes a default or impermissible transfer under, or gives rise to any <PAGE> 8 5 right of termination, first refusal or consent under or gives rise to any right of amendment, cancellation or acceleration of any material benefit under, any Designated Contract listed on Schedule 2.1(a)(viii); (ix) relating to or arising from fines and penalties and reasonable attorneys' and accountants' fees and expenses in connection with any of the alleged safety violations or alleged improper storage and/or disposal of hazardous waste claims referred to in item 5(a) of Section 4.1(n) of the Company Disclosure Schedule pertaining to the explosion at Santa Susana, California in 1994; or (x) incurred in connection with the enforcement by the Acquiror Indemnitees of their rights to be indemnified, defended and held harmless under this Agreement. (b) RAN Contract. The Retained Assets include a Contract (Contract R1000) (the "RAN Contract") between Rockwell Australia Limited and the Australian Submarine Corporation. Newco shall indemnify, defend and hold harmless the Acquiror Indemnitees for 80% of any decrease in the profit before tax realized by Rockwell Australia Limited on the RAN Contract below 40.0 million Australian dollars (A$40,000,000) as well as 80% of any loss in respect of the RAN Contract. Likewise, the Company shall pay to Newco 80% of any increase in the profit before tax realized by Rockwell Australia Limited on the RAN Contract above 40.0 million Australian dollars (A$40,000,000). The determination of profit before tax or loss for purposes of this Section 2.1(b) shall be based upon the next quarterly Estimate at Completion ("EAC") for the RAN Contract prepared after expiration of three (3) years from the Effective Time. The determination of Rockwell Australia Limited's profit before tax or loss shall be determined by the Company using the same accounting methods, policies, practices, procedures, classifications, judgments, estimation methodologies and accounting standards as were utilized in the preparation of the Retained Business Audited Financial Statements. All payments made pursuant to this Section 2.1(b) shall be computed on a tax-effected basis to take into account the benefit of any reduction, or detriment of any increase, in Taxes payable by Rockwell Australia Limited attributable to the decrease in the profit before tax (including any loss) or increase in the profit before tax realized by Rockwell Australia Limited below or above <PAGE> 9 6 A$40,000,000. All determinations of the amount (and timing) of any such benefit or detriment shall be determined using principles analogous to those contained in Section 6.6 of the Tax Allocation Agreement, and all payments made pursuant to this Section 2.1(b) shall be governed by Section 2.3 of this Agreement and by Section 6.6(a) of the Tax Allocation Agreement. The obligations of Newco and the Company to pay the amounts set forth in this Section 2.1(b) shall be determined without regard to the acts or omissions of the Company or any Subsidiary with respect to performance of the RAN Contract prior to, at or after the Effective Time. The Company will provide Newco with copies of all quarterly EAC's in respect of the RAN Contract and access to such books and records (including but not limited to accountants' work papers) and personnel familiar with the RAN Contract and the accounting therefor as Newco shall reasonably request. To the extent Newco disputes the EAC, the designees of the chief financial officers of Acquiror and Newco shall attempt a good faith resolution of such dispute. To the extent not so resolved within 90 days following Newco's receipt of the determination of such profit or loss, such dispute will be referred for resolution to the chief financial officers of Acquiror and Newco, and failing their resolution of such dispute within 90 days after such referral, to the chief executive officers of Acquiror and Newco. To the extent the dispute is not so resolved within 90 days following such referral, Acquiror and Newco will submit such dispute to mediation using the procedures of the Center for Public Resources, before commencing litigation to resolve such dispute. 2.2. Indemnification by the Company. Except as otherwise specifically provided in any Reorganization Agreement and subject to the provisions of this Article II, the Company shall indemnify, defend and hold harmless the Newco Indemnitees from and against, and pay or reimburse the Newco Indemnitees for, all Indemnifiable Losses, as incurred: (i) relating to or arising from the Retained Assets or the Retained Liabilities (including the failure by the Company or any member of the Company Group to pay, perform or otherwise discharge such Retained Liabilities in accordance with their terms), whether such Indemnifiable Losses relate to or arise from events, occurrences, actions, omissions, facts or circumstances occurring, existing or asserted before, at or after the Effective Time; <PAGE> 10 7 (ii) arising from or based upon any untrue statement or alleged untrue statement of a material fact contained in any of the Filings or in the Consent Statement, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; but only in each case with respect to information provided by Acquiror relating to Acquiror or any of its Subsidiaries other than the Company Group contained in or omitted from the Filings or the Consent Statement; (iii) relating to or arising from the breach by Acquiror or any member of the Company Group of any agreement or covenant contained in a Reorganization Agreement (other than, in the case of the Company Group, an agreement or covenant contained in the Merger Agreement assumed by Newco pursuant to the Distribution Agreement) which does not by its express terms expire at the Effective Time or which is not by its express terms required to be performed prior to the Effective Time; or (iv) incurred in connection with the enforcement by the Newco Indemnitees of their rights to be indemnified, defended and held harmless under this Agreement. 2.3. Procedures Relating to Indemnification. (a) In order for an Indemnitee to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a claim made by any Person who is not an Indemnitee against the Indemnitee (a "Third Party Claim"), such Indemnitee must notify the party who may become obligated to provide indemnification hereunder (the "indemnifying party") in writing, and in reasonable detail, of the Third Party Claim reasonably promptly, and in any event within 20 business days after receipt by such Indemnitee of written notice of the Third Party Claim; provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure (except that the indemnifying party shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice); and provided further, however, that with respect to any matter for which Newco is the indemnifying <PAGE> 11 8 party, Newco shall be deemed to have received notice with respect to all matters by or against any member of the Company Group that were concluded or initiated prior to, or otherwise pending at, the Time of Contribution. After any required notification (if applicable), the Indemnitee shall deliver to the indemnifying party, promptly after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. (b) If a Third Party Claim is made against an Indemnitee, the indemnifying party will be entitled to participate in the defense thereof and, if it so chooses, to assume the defense thereof (at the expense of the indemnifying party) with counsel selected by the indemnifying party and reasonably satisfactory to the Indemnitee; provided, however, that in case of a claim made by any person against an Indemnitee relating to a Special Liability (a "Special Liability Claim"), Newco (at Newco's expense) shall assume the defense thereof with counsel selected by Newco. Should the indemnifying party so elect (or, in the case of a Special Liability Claim, be obligated) to assume the defense of a Third Party Claim, the indemnifying party will not be liable to the Indemnitee for any legal expenses subsequently incurred (or, in the case of a Special Liability Claim, incurred) by the Indemnitee in connection with the defense thereof (unless, in case of a Special Liability Claim, Newco breaches its obligation to assume the defense thereof). If the indemnifying party assumes (or, in the case of a Special Liability Claim, is obligated to assume) such defense, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the indemnifying party, it being understood that the indemnifying party shall control such defense. The indemnifying party shall be liable for the fees and expenses of counsel employed by the Indemnitee for any period during which the indemnifying party has not assumed (or, in the case of a Special Liability Claim, is in breach of its obligation to assume) the defense thereof (other than during any period in which the Indemnitee shall have failed to give notice of the Third Party Claim as provided above). If the indemnifying party chooses (or, in the case of a Special Liability Claim, is obligated) to defend or prosecute a Third Party Claim, all the parties hereto shall cooperate in the defense or prosecution thereof, which cooperation shall include the retention in accordance with the Distribution Agreement and (upon the <PAGE> 12 9 indemnifying party's request) the provision to the indemnifying party of records and information which are reasonably relevant to such Third Party Claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. If the indemnifying party chooses (or, in the case of a Special Liability Claim, is obligated) to defend or prosecute any Third Party Claim, the Indemnitee will agree to any settlement, compromise or discharge of such Third Party Claim which the indemnifying party may recommend and which by its terms obligates the indemnifying party to pay the full amount of liability in connection with such Third Party Claim; provided, however, that, without the Indemnitee's consent, the indemnifying party shall not consent to entry of any judgment or enter into any settlement (w) that provides for injunctive or other nonmonetary relief affecting the Indemnitee, (x) that does not include as an unconditional term thereof the giving by each claimant or plaintiff to such Indemnitee of a release from all liability with respect to such claim, (y) in the case of a Criminal Matter or (z) that involves an allegation of conduct which could result in the suspension or debarment of the Indemnitee from contracting with the United States Government. Whether or not the indemnifying party shall have assumed the defense of a Third Party Claim, the Indemnitee shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the indemnifying party's prior written consent (which consent shall not be unreasonably withheld). Notwithstanding the foregoing, Newco shall be solely responsible for, and shall pay directly, the fees and expenses of its counsel in connection with any Special Liability Claim and shall reimburse the Company on a monthly basis for any support or other services provided at Newco's request in respect of any Special Liability Claim in an amount equal to the Company's costs thereof determined in accordance with the cost accounting standards applicable to Government Contracts. (c) In order for an Indemnitee to be entitled to any indemnification provided for under this Agreement in respect of a claim that does not involve a Third Party Claim, the Indemnitee shall deliver notice of such claim with reasonable promptness to the indemnifying party. The failure by any Indemnitee so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to such Indemnitee under this Agreement, except to the extent that the indemnifying party <PAGE> 13 10 shall have been actually prejudiced by such failure. Any notice pursuant to this Section 2.3(c) shall contain a statement, in prominent and conspicuous type, that if the indemnifying party does not dispute its liability to the Indemnitee with respect to the claim made in such notice by notice to the Indemnitee prior to the expiration of a 30-calendar-day period following the indemnifying party's receipt of the second notice of such claim, the claim shall be conclusively deemed a liability of the indemnifying party. If the Indemnitee has provided the indemnifying party two such notices not less than 30 days apart and the indemnifying party does not notify the Indemnitee prior to the expiration of a 30-calendar-day period following its receipt of the second such notice that the indemnifying party disputes its liability to the Indemnitee under this Agreement, such claim specified by the Indemnitee in such notice shall be conclusively deemed a liability of the indemnifying party under this Agreement and the indemnifying party shall pay the amount of such liability to the Indemnitee on demand or, in the case of any notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of such claim (or such portion thereof) becomes finally determined. If the indemnifying party has timely disputed its liability with respect to such claim, as provided above, the indemnifying party and the Indemnitee shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be resolved by litigation in an appropriate court of competent jurisdiction. (d) Unless the Company or the appropriate Retained Subsidiary shall have made a good faith determination that a particular Indemnifiable Loss relating to or arising from a Preexisting Environmental Condition is not eligible for treatment as an allowable overhead cost or other allowable cost (in which case, the Company or the appropriate Retained Subsidiary may request Newco to indemnify, defend and hold it harmless without complying with the following additional procedures), Newco shall have no obligation to indemnify, defend or hold harmless any Acquiror Indemnitee hereunder in respect of an Indemnifiable Loss arising from or relating to a Preexisting Environmental Condition unless (i) the Company or the appropriate Retained Subsidiary has submitted a claim for such Indemnifiable Loss as an allowable overhead cost or other allowable cost in connection with relevant Government Contracts and used its reasonable best efforts to obtain a favorable determination <PAGE> 14 11 of such claim, (ii) such claim has been disallowed based on an act or omission by the Company or any of its Subsidiaries prior to the Effective Time, (iii) the Company or the appropriate Retained Subsidiary has given Newco timely notice of such disallowance and (iv) Newco has been permitted, at its own expense, to direct and control the appeal of such disallowance until finally determined pursuant to one or more final and nonappealable orders, decrees or judgments or by one or more settlement agreements approved by Newco and the Company, such approval not to be unreasonably withheld by the Company. Notwithstanding anything in this Agreement to the contrary, Indemnifiable Losses relating to or arising from Preexisting Environmental Conditions shall be limited to costs and expenses of containing, removing, responding to, remediating, cleaning-up and abating Preexisting Environmental Conditions, natural resource damage claims, penalties and fines, and any administrative oversight costs incurred by any Governmental Entity actually paid by an Acquiror Indemnitee following the Time of Contribution relating to or arising from the presence, use, treatment, Release or threatened Release of any Hazardous Substance on or originating from a facility of the Retained Business prior to the Time of Contribution, provided that any such containment, removal, response, remediation, clean-up or abatement shall be (i) required by an enforcement order or decree entered by a Governmental Entity as a result of an Environmental Proceeding; (ii) necessary to comply with an Environmental Law in response to an Environmental Proceeding or threatened Environmental Proceeding; or (iii) in response to a condition which in the Company's reasonable judgment is likely to result in an Environmental Proceeding if no responsive action is taken. The costs and expenses for which Newco shall be obligated to indemnify, defend and hold harmless the Acquiror Indemnitees shall be limited to those costs and expenses which are necessary to achieve compliance with the minimum requirements of Environmental Law based upon a reasonable low cost approach under the circumstances. Without prejudice to the rights and obligations of the parties under Section 2.3(a), (b) or (c), the Company shall provide Newco with all information reasonably requested by Newco to allow Newco to evaluate all proposed responsive actions in connection with any Preexisting Environmental Condition. Newco shall have no obligation to indemnify, defend or hold harmless an Acquiror Indemnitee in respect of any Preexisting Environmental Condition for (i) any cost or expense incurred in connection with the normal, day-to-day <PAGE> 15 12 operation, including maintenance, of the facilities of the Retained Business (except for groundwater monitoring costs or other maintenance expenses related to any investigation or remediation), and including any discharges pursuant to, and any closure or post-closure obligations under any permit or authorization granted by a Governmental Entity unless such post-closure obligation is related to or gives rise to an obligation to investigate, monitor or remediate under Environmental Law, or (ii) any cost or expense relating to or arising from any change in use of a facility of the Retained Business or acts or omissions of any Acquiror Indemnitee or other person who is not a member of the Newco Group after the Time of Contribution which increase the scope of any required containment, removal, response, remediation, clean-up or abatement or otherwise increase the liability of Newco hereunder. (e) Unless the Company or the appropriate Retained Subsidiary shall have made a good faith determination that a particular Indemnifiable Loss relating to or arising from a Criminal Matter is not eligible for treatment as an allowable overhead cost or other allowable cost (in which case, the Company or the appropriate Retained Subsidiary may request Newco to indemnify, defend and hold it harmless without complying with the following additional procedures), Newco shall have no obligation to indemnify, defend or hold harmless any Acquiror Indemnitee hereunder in respect of an Indemnifiable Loss arising from or relating to a Criminal Matter unless (i) the Company or the appropriate Retained Subsidiary has submitted a claim for such Indemnifiable Loss as an allowable overhead cost or other allowable cost in connection with relevant Government Contracts and used its reasonable best efforts to obtain a favorable determination of such claim, (ii) such claim has been disallowed based on an act or omission by the Company or its Subsidiaries prior to the Effective Time, (iii) the Company or the appropriate Retained Subsidiary has given Newco prompt notice of such disallowance and (iv) Newco has been permitted, at its own expense, to direct and control the appeal of such disallowance until finally determined pursuant to one or more final and nonappealable orders, decrees or judgments or by one or more settlement agreements approved by Newco and the Company, such approval not to be unreasonably withheld by the Company. Newco's obligation to indemnify Acquiror Indemnitees for Criminal Matters pursuant to Section 2.1(a)(vi) shall be limited to amounts paid for fines or penalties and reasonable attorneys' and accountants' fees and expenses that are not allowable or <PAGE> 16 13 that are not allowed as an overhead cost or other allowable cost in connection with a Government Contract. Any Criminal Matter for which indemnification may be sought pursuant to Section 2.1(a)(vi) shall be a Third Party Claim for purposes of this Agreement. 2.4. Certain Limitations. (a) The amount of any Indemnifiable Losses or other liability for which indemnification is provided under this Agreement shall be net of any amounts actually recovered by the Indemnitee from third parties (including, without limitation, amounts actually recovered under insurance policies) with respect to such Indemnifiable Losses or other liability. Any indemnifying party hereunder shall be subrogated to the rights of the Indemnitee upon payment in full of the amount of the relevant Indemnifiable Loss. An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto. If any Indemnitee recovers an amount from a third party in respect of an Indemnifiable Loss for which indemnification is provided in this Agreement after the full amount of such Indemnifiable Loss has been paid by an indemnifying party or after an indemnifying party has made a partial payment of such Indemnifiable Loss and the amount received from the third party exceeds the remaining unpaid balance of such Indemnifiable Loss, then the Indemnitee shall promptly remit to the indemnifying party the excess (if any) of (A) the sum of the amount theretofore paid by the indemnifying party in respect of such Indemnifiable Loss plus the amount received from the third party in respect thereof, less (B) the full amount of such Indemnifiable Loss or other liability. (b) The amount of any Indemnifiable Losses or other Liability for which indemnification is provided under this Agreement or any other amounts payable or reimbursable by one party to another under this Agreement shall be increased or decreased to take account of any net Tax (as defined in the Tax Allocation Agreement) cost or any net Tax benefit in a manner analogous to that described in Section 6.6 of the Tax Allocation Agreement. 2.5. Limitation on Newco's Indemnification Obligation under Section 2.1(a)(iv). (a) Newco shall not have any liability under Section 2.1(a)(iv) unless the aggregate of all Indemnifiable Losses for which Newco would, but for this Section 2.5, be liable under Section 2.1(a)(iv) <PAGE> 17 14 exceeds on a cumulative pre-tax basis an amount equal to $20,000,000 (the "Basket Amount"); provided, however, that (i) if Indemnifiable Losses for which Newco would, but for this Section 2.5, be liable under Section 2.1(a)(iv) as a result of the breach of or the inaccuracy in any representation or warranty which arises from a particular state of facts or event exceed $5,000,000 on a pre-tax basis, Newco shall be liable under Section 2.1(a)(iv) for the entire amount of such Indemnifiable Losses, and such Indemnifiable Losses shall not be taken into account in calculating whether Newco's cumulative liability under Section 2.1(a)(iv) had exceeded the Basket Amount or the Threshold Amount (as defined below), and (ii) if the aggregate of all Indemnifiable Losses for which Newco would, but for this Section 2.5, be liable under Section 2.1(a)(iv) exceeds on a cumulative pre-tax basis the Basket Amount, Newco's liability under Section 2.1(a)(iv) shall be equal to $10,000,000 (the "Threshold Amount") plus any Indemnifiable Losses under Section 2.1(a)(iv) in excess of $20,000,000. (b) Newco shall not have any liability under Section 2.1(a)(iv) with respect to the breach of or inaccuracy in any representation or warranty which arises from a particular state of facts or event if the Indemnifiable Losses resulting therefrom are less than $250,000 on a pre-tax basis, and such Indemnifiable Losses shall not be taken into account in calculating whether Newco's cumulative liability under Section 2.1(a)(iv) had exceeded the Basket Amount or the Threshold Amount. (c) No Indemnifiable Losses actually paid by Newco pursuant to any provision other than Section 2.1(a)(iv) and no Indemnifiable Losses relating to or arising from a Preexisting Environmental Condition or a Criminal Matter for which Newco is not yet obligated to provide indemnity pursuant to Section 2.1(a)(v) or Section 2.1(a)(vi) shall be deemed to be an Indemnifiable Loss relating to or arising from a breach of or inaccuracy in a representation or warranty of the Company contained in the Merger Agreement for purposes of determining whether the aggregate amount of Indemnifiable Losses relating to or arising from breaches of or inaccuracies in such representations or warranties exceeds the Basket Amount or the Threshold Amount. Newco shall not have any liability under Section 2.1(a)(iv) with respect to the breach of or inaccuracy in any representation or warranty unless notice of any such breach or inaccuracy is given pursuant to Section 2.3 prior to the expiration of the survival period <PAGE> 18 15 provided in the Merger Agreement for the relevant representation or warranty. 2.6 Exclusivity of Tax Allocation Agreement. Notwithstanding anything in this Agreement to the contrary, the Tax Allocation Agreement shall be the exclusive agreement among the parties with respect to all Tax matters, including indemnification in respect of Tax matters. ARTICLE III OTHER AGREEMENTS 3.1. Transfer Taxes. Newco and Acquiror shall comply with Section 2.2(h) of the Merger Agreement. 3.2. Conduct of Environmental Insurance Coverage Claims. (a) Pursuant to the Distribution Agreement, the Company will retain as part of the Retained Assets the Environmental Coverage Claims (as defined below) to the extent that they have not been resolved prior to the time of Contribution. As used herein, "Environmental Coverage Claims" shall mean all existing and future claims, as the same may be amended from time to time, by the Company against any and all insurance companies that have provided (or that the Company or Newco alleges have provided) to the Company, its predecessors or its or their affiliates, insurance coverage in respect of environmental matters as the same may relate to the businesses of the Company, its predecessors or its or their affiliates as now or previously owned or operated (including without limitation any discontinued or divested operations, including Divested Businesses) at any time prior to the Effective Time, including without limitation the claims asserted in the action against Aetna Casualty et al. filed in the Superior Court of California for Los Angeles County and any other claims that may be asserted by or on behalf of the Company against any provider or alleged provider of insurance coverage for such environmental matters for any period prior to the Effective Time. The Company agrees to use diligent efforts to prosecute the Environmental Coverage Claims in accordance with this Section 3.2 until the same are finally determined pursuant to one or more final and nonappealable orders, decrees or judgments by a court of competent jurisdiction or by one or more settlement agreements approved by Newco in its sole discretion. The Company agrees (i) that Newco and such legal counsel as Newco may <PAGE> 19 16 from time to time designate shall have the exclusive right to control and to direct the prosecution of all Environmental Coverage Claims (it being understood and agreed that in connection with the prosecution or settlement of any Environmental Coverage Claims, Newco may in its sole discretion agree on behalf of the Company to surrender, cancel or otherwise limit any related insurance policies or coverages thereunder in whole or in part or as to any particular business, property, period or event), (ii) to make available such personnel, records and other resources in its possession or reasonably accessible to it as shall be reasonably required by Newco or its counsel to support the prosecution of the Environmental Coverage Claims, and (iii) except as may otherwise be required by law or judicial process, not to make any admission in respect of the Environmental Coverage Claims or take any action in respect thereof without the prior written consent of Newco. The Company shall pay to Newco any and all amounts received by it in respect of the Environmental Coverage Claims as and when the same are received, provided that the Company shall be entitled to retain that portion of the amount, if any, received in respect of the Environmental Coverage Claims as the Company shall be required to pay and/or credit to the United States Government in accordance with the agreement to be entered into between the Company and the appropriate United States Government contracting officer referred to in Section 3.2(b). (b) If, at the Time of Contribution, the Company has reached an agreement with the appropriate government contracting officer on the amount required to be paid to the United States Government in respect of the Environmental Coverage Claims but such amount has not been paid and/or credited in full by the Company, then Newco shall remit the unpaid balance to the Company on or before the date that payment is required to be made and/or credited by the Company to the United States Government. The Company agrees that if, at the Time of Contribution, the Company has not entered into such an agreement with the appropriate government contracting officer, Newco and such legal counsel as Newco may from time to time designate shall have the exclusive right to control and to direct the negotiation of such agreement. The Company shall enter into any such agreement with the appropriate United States Government contracting officer which Newco may recommend, provided that Newco pays to the Company on or before the date that payment is required to be made and/or credited by the Company to the United States Government an amount equal to the excess, if <PAGE> 20 17 any, of the amount that the Company is required to pay and/or credit to the United States Government over the amount received by the Company after the Effective Time in respect of the Environmental Coverage Claims that has not previously been remitted to Newco. (c) Newco shall be solely responsible for and shall pay directly the fees and expenses (including legal fees and expenses) of pursuing the Environmental Coverage Claims and shall reimburse the Company periodically for any support or other services provided at Newco's request in respect of the Environmental Coverage Claims in an amount equal to the Company's costs thereof determined in accordance with cost accounting standards applicable to Government Contracts. (d) Taxes on amounts received and Tax benefits and Tax costs in respect of amounts paid and/or credited with respect to the Environmental Coverage Claims and the related agreement with the United States Government shall be allocated between the Company and Newco in the manner set forth in Section 5.5 of the Tax Allocation Agreement. 3.3. Agreements with Respect to Acquiror Common Stock Received by Newco Savings Plans. (a) Acquiror and the Newco Savings Plan and any other savings plan sponsored or maintained by Newco or any of its Affiliates (the "Savings Plans") shall cooperate with each other in supplying such information as may be necessary for any of such parties to complete and file any information reporting forms presently or hereafter required by the SEC or any commissioner or other authority administering the "blue sky" or securities laws of any jurisdiction where the shares of Acquiror Common Stock received by the Savings Plans in the Merger (the "Shares") are proposed to be sold which are required to be filed as a condition to the availability of an exemption from registration or qualification of an offer or sale of the Shares under the Securities Act, or any such "blue sky" or securities laws. (b) Until the earlier of two years from the Effective Time or the sale by the Savings Plans of all Shares, Acquiror shall file in a timely manner all reports contemplated by Rule 144 (c)(1) under the Securities Act as satisfying the condition that adequate public information with respect to Acquiror is available. <PAGE> 21 18 (c) The provisions of this Section 3.3 shall not be applicable if Newco or the Company has obtained a "No-Action" letter or other written advice from the staff of the SEC that the Savings Plans may sell the Shares publicly at any time after the Effective Time without limitation in terms of the volume of Shares that may be sold, the manner in which the Shares may be sold and the information that must be publicly available with respect to Acquiror in order to permit such sale and without any requirement that the Savings Plans file any notice of sale of Shares or intention to sell Shares with the SEC other than any filings required pursuant to Section 13(d) of the Exchange Act in respect of the beneficial ownership by the Savings Plans of Acquiror Common Stock. Newco agrees to use its reasonable best efforts to obtain such "No-Action" letter or other written advice. 3.4. Transitional Arrangements. Concurrently herewith Newco, the Company and Acquiror will enter into an agreement with respect to certain transitional arrangements (the "Transition Agreement") in conformity with the Outline of Terms set forth as Schedule 3.4 and such other transitional arrangements as shall be mutually agreed upon. 3.5. Insurance. (a) Except as otherwise specifically provided in any Reorganization Agreement or the Transition Agreement, with respect to any loss, liability or damage with respect to the Retained Assets arising out of events occurring prior to the Time of Contribution (other than any loss, liability or damage arising out of or relating to any Environmental Coverage Claims) for which Newco or any of its Subsidiaries would be entitled to assert a claim for recovery under any third-party "occurrence basis" policy of insurance maintained prior to the Time of Contribution ("Occurrence Basis Insurance") in accordance with the terms thereof, at the request of Acquiror, Newco will use reasonable efforts in asserting, or to assist Acquiror in asserting, claims under such Occurrence Basis Insurance with respect to such loss, liability or damage; provided that (i) all of Newco's costs and expenses incurred in connection with the foregoing are promptly paid by Acquiror, (ii) Newco and its Subsidiaries may, at any time, without liability or obligation to Acquiror, amend, buy-out, extinguish liability under or otherwise modify any Occurrence Basis Insurance (and such claims shall be subject to any such amendments, buy-outs, extinguishments and modifications) and (iii) such claims shall be subject to (and recovery thereon shall be reduced by the amount of) any <PAGE> 22 19 applicable deductibles, retentions, self-insurance provisions or any payment or reimbursement obligations of Newco or any of its Subsidiaries or Affiliates in respect thereof. (b) Except as otherwise specifically provided in any Reorganization Agreement or the Transition Agreement, with respect to any loss, liability or damage with respect to the Contributed Assets arising out of events occurring prior to the Time of Contribution (other than any loss, liability or damage arising out of or relating to any Environmental Coverage Claims) for which the Company or any of the Retained Subsidiaries would be entitled to assert a claim for recovery under any Occurrence Basis Insurance in accordance with the terms thereof, at the request of Newco, Acquiror will use reasonable efforts in asserting, or to assist Newco in asserting, claims under such Occurrence Basis Insurance with respect to such loss, liability or damage; provided that (i) all of Acquiror's costs and expenses incurred in connection with the foregoing are promptly paid by Newco, (ii) Acquiror and its Subsidiaries may, at any time, without liability or obligation to Newco, amend, buy-out, extinguish liability under or otherwise modify any Occurrence Basis Insurance (and such claims shall be subject to any such amendments, buy-outs, extinguishments and modifications) and (iii) such claims shall be subject to (and recovery thereon shall be reduced by the amount of) any applicable deductibles, retentions, self-insurance provisions or any payment or reimbursement obligations of Acquiror or any of its Subsidiaries or Affiliates in respect thereof. 3.6. DOE Contracts. As soon as practicable following the Effective Time, Newco and the Company shall take such actions as shall be consistent with the advance agreements referred to in Section 9.1(e) of the Distribution Agreement. 3.7. Reorganization Expenses. Except as otherwise expressly provided in the Reorganization Agreements (including but not limited to the last sentence of Section 2.2(b) of the Merger Agreement and Sections 2.2(h), 4.1(p), 4.2(j) and 5.13 of the Merger Agreement and Section 5.3 of the Distribution Agreement), Acquiror and Newco (and not the Company) shall be responsible for and agree to pay all reorganization expenses of the Company directly related to the Contribution, the Distribution and the Merger in accordance with Schedule 3.7 <PAGE> 23 20 hereto, provided that the Company may, prior to the Effective Time, pay any such expenses that are otherwise the responsibility of Newco. 3.8. Conduct of Health Care Claims Audit. (a) Pursuant to the Distribution Agreement, Newco will receive as part of the Contributed Assets the Health Care Claims (as defined below). As used herein, "Health Care Claims" shall mean all existing and future claims arising out of audits of health care claims paid by the Company for any period prior to the Effective Time made by the Company (or if after the Effective Time, Newco) against any and all health care administrators ("Health Care Administrators") that have provided to the Company, its predecessors or its or their affiliates, health care administration services in respect of the employees of the Company, its predecessors or its or their affiliates as now or previously owned or operated (including without limitation any discontinued or divested operations, including Divested Businesses) at any time prior to the Effective Time, including, without limitation, the claims asserted in the pending audits of Metropolitan Insurance Company for the years 1993-1994 and Value Rx Pharmacy Program, Inc. for the years 1993-1995 and any other claims that may be asserted by or on behalf of the Company (or if after the Effective Time, Newco) against any Health Care Administrator for any period prior to the Effective Time. Newco agrees to use diligent efforts to prosecute the Health Care Claims in accordance with this Section 3.8 until the same are finally settled by Newco in its sole discretion. The Company agrees (i) that Newco shall have the exclusive right to control and to direct the audit of the Health Care Administrators and the negotiation of all settlements of the Health Care Claims, (ii) to make available such personnel, records and other resources in its possession or reasonably accessible to it as shall be reasonably required by Newco to support the prosecution of the Health Care Claims and (iii) not to make any admission or settlement in respect of the Health Care Claims or take any action in respect thereof without the prior written consent of Newco. Newco shall pay to the Company as and when the same are received by Newco an equitable allocation of the net proceeds from settlement of the Health Care Claims. (b) Newco shall be solely responsible for and shall pay directly the fees and expenses (including legal fees and expenses) of pursuing the Health Care Claims and <PAGE> 24 21 shall reimburse the Company periodically for any support or other services provided at Newco's request in respect of the Health Care Claims in an amount equal to the Company's costs thereof determined in accordance with cost accounting standards applicable to Government Contracts. (c) Taxes on amounts received and Tax benefits and Tax costs in respect of amounts paid and/or credited with respect to the Health Care Claims and the related agreement with the United States Government shall be allocated between the Company and Newco in the manner set forth in Section 5.5 of the Tax Allocation Agreement. 3.9. Guaranty of Acquiror. Acquiror, for itself and its successors in interest and assigns, hereby unconditionally and irrevocably guarantees to Newco and its successors in interest and assigns the full and faithful performance and observation by the Company under the Reorganization Agreements (other than the Merger Agreement) and the Transition Agreement of all covenants, conditions and agreements (other than any indemnification obligations of the Company in respect of Retained Assets or Retained Liabilities) in the Reorganization Agreements (other than the Merger Agreement) and the Transition Agreement to be performed and observed by the Company after the Effective Time without requiring any notice of nonpayment, nonperformance or nonobservance or proof of notice or demand whereby to charge Acquiror therefor, all of which Acquiror hereby expressly waives. This is a continuing guaranty and shall remain in effect notwithstanding any bankruptcy, reorganization or insolvency of the Company, or any successor in interest or assignee thereof, or any disaffirmance or abandonment by a trustee thereof. Acquiror hereby waives notice of acceptance of this Guaranty. Acquiror hereby agrees to indemnify, defend and hold harmless Newco for all Indemnifiable Losses, as incurred, relating to or arising from any breach or inaccuracy in the representations and warranties contained in Sections 4.2(j) and 4.2(d)(iii) of the Merger Agreement. Effective as of the Effective Time, Acquiror will execute and deliver guarantees of the Company's performance and obligations under the Designated Contracts set forth in Schedule 2.1(a)(viii) to the counterparties on such Contracts. 3.10. Payments Adjustments to Contribution. It is the intention of the parties to this Agreement that payments and asset transfers made by the parties to each <PAGE> 25 22 other after the Effective Time pursuant to the Reorganization Agreements are to be treated as relating back to the Contribution as an adjustment to the assets and liabilities contributed thereunder, and the parties shall take positions consistent with such intention with any Taxing Authority (as defined in the Tax Allocation Agreement), unless with respect to any payment any party receives an opinion of counsel to the effect that there is no substantial authority for such a position. ARTICLE IV MISCELLANEOUS AND GENERAL 4.1. Modification or Amendment. The parties hereto may modify or amend this Agreement only by written agreement executed and delivered by duly authorized officers of the respective parties. 4.2. Waiver; Remedies. No delay on the part of any party hereto in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor will any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No waiver will be effective hereunder unless it is in writing. Unless otherwise provided, the rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the parties may otherwise have at law or in equity. 4.3. Counterparts. For the convenience of the parties, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 4.4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. 4.5. Notices. Any notice, request, instruction or other communication to be given hereunder by any party to <PAGE> 26 23 any other shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other nationally reputable next-day courier service, or (iii) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) If to Newco: NEW ROCKWELL INTERNATIONAL CORPORATION 2201 Seal Beach Boulevard Seal Beach, California 90740-8250 Attention: William J. Calise, Jr., Esq. Senior Vice President, General Counsel and Secretary Telecopy: (310) 797-5687 (b) if to Acquiror, the Company or Sub: BOEING NA, INC. c/o The Boeing Company P.O. Box 3707 M/S 13-08 Seattle, WA 98124-2207 Attention: Theodore J. Collins, Esq. Vice President & General Counsel Telecopy: (206) 544-4900 4.6. Entire Agreement. The Reorganization Agreements (including the Annexes and Schedules thereto), the Transition Agreement and the Confidentiality Agreement constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, among the parties, with respect to the subject matter hereof and thereof. 4.7. Certain Obligations. Whenever this Agreement requires any of the Subsidiaries of any party to take any action, this Agreement will be deemed to include an undertaking on the part of such party to cause such Subsidiary to take such action. <PAGE> 27 24 4.8. Assignment. No party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of the other parties hereto in their sole and absolute discretion, except that any party hereto may assign any of its rights hereunder to a successor to all or any part of its business. Except as aforesaid, any such conveyance, assignment or transfer without the express written consent of the other parties shall be void ab initio. No assignment of this Agreement shall relieve the assigning party of its obligations hereunder. 4.9. Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 4.10. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon any such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties. 4.11. No Third Party Beneficiaries. Nothing contained in this Agreement is intended to confer upon any person or entity other than the parties hereto and their respective successors and permitted assigns, any benefit, right or remedies under or by reason of this Agreement, except that the provisions of Article II hereof shall inure to the benefit of Indemnitees and the provisions of Section 3.3 shall inure to the benefit of the Savings Plans. 4.12. Consent to Jurisdiction. Each of the Company, Acquiror and Newco irrevocably submits to the exclusive jurisdiction of (i) the Superior Court of the State of California, San Francisco County and (ii) the United States District Court for the Northern District of California for the purposes of any suit, action or other proceeding <PAGE> 28 25 arising out of this Agreement or any transaction contemplated hereby (and agrees not to commence any action, suit or proceeding relating hereto except in such courts). Each of the Company, Acquiror and Newco further agrees that service of any process, summons, notice or document hand delivered or sent by registered mail to such party's respective address set forth in Section 4.5 will be effective service of process for any action, suit or proceeding in California with respect to any matters to which it has submitted to jurisdiction as set forth in the immediately preceding sentence. Each of the Company, Acquiror and Newco irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the Superior Court of the State of California, San Francisco County or (ii) the United States District Court for the Northern District of California, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. <PAGE> 29 26 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first hereinabove written. ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Senior Vice President THE BOEING COMPANY By: /s/ PHILIP M. CONDIT -------------------------------- Name: Philip M. Condit Title: President and Chief Executive Officer NEW ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. -------------------------------- Name: William J. Calise, Jr. Title: Senior Vice President BOEING NA, INC. By: /s/ BOYD E. GIVAN ------------------------------- Name: Boyd E. Givan Title: Director </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.D <SEQUENCE>4 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 10(d) CONFORMED COPY - - ------------------------------------------------------------------------------- TAX ALLOCATION AGREEMENT dated as of December 6, 1996, by and among ROCKWELL INTERNATIONAL CORPORATION, NEW ROCKWELL INTERNATIONAL CORPORATION and THE BOEING COMPANY - - ------------------------------------------------------------------------------- <PAGE> 2 TABLE OF CONTENTS <TABLE> <S> <C> ARTICLE I DEFINITIONS..................................................... 2 1.1. Definitions.......................................... 2 ARTICLE II FILING OF TAX RETURNS........................................... 9 2.1. Preparation of Tax Returns........................... 9 2.2. Pre-Merger Tax Returns............................... 10 2.3. Post-Merger Tax Returns.............................. 10 ARTICLE III PAYMENT OF TAXES................................................ 11 3.1. Allocation of Tax Liabilities........................ 11 3.2. Tax Refunds, Carrybacks and California Tax Credits.............................................. 12 ARTICLE IV ALLOCATION AND CALCULATION OF TAXES............................. 13 4.1. Straddle Period Taxes................................ 13 4.2. Share of Allowable Taxes............................. 14 4.3. Calculations and Determinations...................... 14 4.4. Principles of Determination.......................... 15 4.5. Change in Law........................................ 15 ARTICLE V NEWCO OPTIONS; COMPENSATION PAYMENTS; CERTAIN CONTRACTS; GUNSHIP CLAIMS; ENVIRONMENTAL COVERAGE CLAIMS; HEALTH CARE CLAIMS; B-1B CONTRACTS; FOREIGN SUBSIDIARIES; CONSENT SOLICITATION............................................ 16 5.1. Tax Deductions Arising in Respect of Newco Options.............................................. 16 5.2. Compensation Payments................................ 18 5.3. Percentage Completion Contracts...................... 19 5.4. Gunship Claims....................................... 20 5.5. Environmental Coverage Claims and Health Care Claims.......................................... 20 5.6. B-1B Contracts....................................... 21 5.7. Research and Experimentation Credit.................. 21 5.8. Foreign Subsidiaries................................. 22 </TABLE> i <PAGE> 3 <TABLE> <S> <C> 5.9. Consent Solicitation; Repayment of Short- Term Debt........................................... 22 ARTICLE VI TAX INDEMNIFICATION; TAX CONTESTS.............................. 23 6.1. Indemnification..................................... 23 6.2. Notice of Indemnity................................. 26 6.3. Tax Contests........................................ 26 6.4. Timing Adjustments.................................. 27 6.5. Certain Post-Distribution Transactions.............. 28 6.6. Payments Net of Taxes............................... 30 ARTICLE VII COOPERATION AND EXCHANGE OF INFORMATION........................ 31 7.1. Preparation of Returns.............................. 31 7.2. Cooperation and Exchange of Information............. 31 7.3. Record Retention.................................... 32 7.4. Notification of Certain Dispositions................ 33 ARTICLE VIII MISCELLANEOUS.................................................. 33 8.1. Entire Agreement.................................... 33 8.2. Modification or Amendment........................... 33 8.3. Notices............................................. 33 8.4. No Third Party Beneficiaries........................ 34 8.5. Assignment.......................................... 35 8.6. Term................................................ 35 8.7. Captions............................................ 35 8.8. Severability........................................ 35 8.9. Specific Performance................................ 35 8.10. Counterparts........................................ 36 8.11. Governing Law....................................... 36 8.12. Agent............................................... 36 </TABLE> ii <PAGE> 4 1 TAX ALLOCATION AGREEMENT This TAX ALLOCATION AGREEMENT (this "Agreement"), dated as of December 6, 1996, among ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), NEW ROCKWELL INTERNATIONAL CORPORATION, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco"), and THE BOEING COMPANY, a Delaware corporation ("Acquiror"). W I T N E S S E T H: WHEREAS, the Company, Acquiror and Boeing NA, Inc., a wholly owned subsidiary of Acquiror ("Sub"), have entered into an Agreement and Plan of Merger dated as of July 31, 1996 (the "Merger Agreement"), providing for the Merger (as defined in the Merger Agreement) of Sub with and into the Company; WHEREAS, the Board of Directors of the Company has approved an agreement and plan of distribution in the form attached as Annex A to the Merger Agreement (the "Distribution Agreement"); WHEREAS, the execution and delivery of this Agreement by the parties hereto is a condition to the obligations of the parties to the Merger Agreement to consummate the Merger; WHEREAS, the execution and delivery of this Agreement by the parties hereto is a condition to the obligations of the parties to the Distribution Agreement to consummate the Distribution (as defined in the Distribution Agreement); WHEREAS, Acquiror and the Company, on behalf of each of them and the Company Group (as defined herein) and Newco, on behalf of itself and the Newco Group (as defined herein), wish to provide for the allocation between the Company Group and the Newco Group of all responsibilities, liabilities and benefits relating to or affecting Taxes (as hereinafter defined) paid or payable by either of them for all taxable periods, whether beginning before, on or after the Distribution Date (as hereinafter defined) and to provide for certain other matters; and <PAGE> 5 2 NOW, THEREFORE, in consideration of the premises and of the respective covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to such terms in the Merger Agreement or the Distribution Agreement, as the case may be. As used in this Agreement, the following terms shall have the following respective meanings: "Acquiror Tax Opinion" means the opinion received by Acquiror from Cravath, Swaine & Moore pursuant to Section 6.3(c) of the Merger Agreement. "Acquiror's Tax Representation Letter" means the representation letter delivered by Acquiror substantially in the form of Annex D to the Merger Agreement. "Actually Realized" or "Actually Realizes" means, for purposes of determining the timing of any Taxes (or related Tax cost or benefit) relating to any payment, transaction, occurrence or event (including any Tax Refund), the time at which the amount of Taxes payable by such person is increased above or reduced below, as the case may be, the amount of Taxes that such person would be required to pay but for such payment, transaction, occurrence or event. "Affiliated Group" means the affiliated group of which the Company is the common parent. "Allowable Tax" means any Tax of the Company Group which is an allowable cost under the Federal Acquisition Regulation, 48 C.F.R. Chapter 1, and associated regulations and agreements between the Company and any U.S. governmental entity, which agreements are described on Schedule 1. "B-1B Contracts" means the B-1B Full Scale Development Contract (No. F33657-81-C-0208) and the B-1B Production Contract (No. F33657-81-C-0201). "Business Acquisition Agreement" means the Business Acquisition Agreement dated November 22, 1996 among <PAGE> 6 3 Rockwell Australia Limited, ACN 004 471 078 Pty Ltd and New Rockwell Australia Pty Limited, as amended by Amending Agreement dated December 4, 1996. "California Tax Credits" means any California Tax credits for manufacturing and research property resulting from qualified costs paid or incurred on or before the Distribution Date by any member of the Company Group or the Newco Group. "California Tax Deficiency" means any Tax Deficiency with respect to California Taxes. "Code" means the Internal Revenue Code of 1986, as amended, and shall include corresponding provisions of any subsequently enacted Federal Tax laws. "Combined Taxes" means all Taxes due with respect to any combined, consolidated or unitary state, local or foreign corporate Tax liability for all Pre-Merger Taxable Periods and Straddle Periods with respect to Joint Tax Returns. "Company Employees and Former Employees" means individuals who were employees of the Company Group on or before the Distribution Date and who do not become employees of the Newco Group between the Distribution Date and the date of the event giving rise to a deduction in respect of any Newco Options held by such individuals or Compensation Payments made to such individuals or who become employees of the Newco Group on or after the Distribution Date but are employees of the Company Group when any such Newco Options are exercised or Compensation Payments are made. "Company Group" means, solely for purposes of this Agreement and not for purposes of any other Reorganization Agreement, the Company and its affiliates, other than Newco and its affiliates (determined after giving effect to the transfers contemplated by Article II of the Distribution Agreement) and, for Post-Tax Indemnification Periods, shall include Acquiror and its affiliates. "Company Tax Item" means a Tax Item that is attributable to the Company Group and is not a Newco Tax Item. "Company Tax Opinions" means the opinions received by the Company from Chadbourne & Parke LLP and Wachtell, <PAGE> 7 4 Lipton, Rosen & Katz pursuant to Section 6.2(c) of the Merger Agreement. "Compensation Payments" means all payments made by any member of the Newco Group under Sections 8.4 and 8.6 of the Distribution Agreement, to the extent that such payments relate to benefits accrued as of the Time of Contribution (as defined in the Distribution Agreement). "Contract Profitability" as of the Distribution Date shall mean (i) in the case of any long-term contract a portion of which is accounted for on the "percentage completion method" of accounting and a portion of which is accounted for on the "completed contract method" of accounting, in each case for Federal Income Tax purposes, the excess of (A) the aggregate amount of taxable income that would have been reportable for Federal Income Tax purposes for all Tax Indemnification Periods with respect to such contract if the contract had been accounted for in its entirety on the percentage completion method of accounting for Federal Income Tax purposes over (B) the actual amount of taxable income reportable for Federal Income Tax purposes for all Tax Indemnification Periods with respect to such contract, and (ii) in the case of any other long-term contract accounted for on the completed contract or percentage of completion method of accounting for Federal Income Tax purposes, the deferred contract profitability with respect to such contract as of the Distribution Date as calculated for financial accounting purposes. "Debt Refinancing" has the meaning set forth in Section 5.9. "Distribution Date" means the later of (i) the date on which the Distribution occurs or is deemed to occur for Federal Income Tax purposes and (ii) the date on which the Merger occurs or is deemed to occur for Federal Income Tax purposes. Solely for purposes of this Agreement, the Distribution or the Merger, as the case may be, shall be deemed effective as of the close of business on the Distribution Date. "Environmental Coverage Claims" shall have the meaning ascribed thereto in the Post-Closing Covenants Agreement. "Group" means either the Company Group or the Newco Group, as the context provides. <PAGE> 8 5 "Health Care Claims" shall have the meaning ascribed thereto in Section 3.8 of the Post-Closing Covenants Agreement. "Income Tax Benefit" means for any taxable period the excess of (i) the hypothetical Income Tax liability of the taxpayer for the taxable period calculated as if the Timing Difference or Reverse Timing Difference, as the case may be, had not occurred but with all other facts unchanged, over (ii) the actual Income Tax liability of the taxpayer for the taxable period, calculated taking into account the Timing Difference or Reverse Timing Difference, as the case may be (treating an Income Tax Refund as a negative Income Tax liability for purposes of such calculation). "Income Tax Detriment" means for any taxable period the excess of (A) the actual Income Tax liability of the taxpayer for the taxable period, calculated taking into account the Timing Difference or Reverse Timing Difference, as the case may be, over (B) the hypothetical Income Tax liability of the taxpayer for the taxable period, calculated as if the Timing Difference or Reverse Timing Difference, as the case may be, had not occurred but with all other facts unchanged (treating an Income Tax Refund as a negative Income Tax liability for purposes of such calculation). "Income Taxes" means any Tax based upon, measured by, or calculated with respect to (i) net income or profits (including, but not limited to, any capital gains, minimum Tax and any Tax on items of Tax preference, but not including sales, use, real property gains, real or personal property, gross or net receipts, transfer or similar Taxes) or (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes) if one or more of the bases upon which such Tax may be based upon, measured by, or calculated with respect to, is described in clause (i) above. "Indemnitee" has the meaning set forth in Section 6.2. "Indemnitor" has the meaning set forth in Section 6.2. "Indemnity Issue" has the meaning set forth in Section 6.2. "IRS" means the Internal Revenue Service. <PAGE> 9 6 "Joint Tax Return" means any Tax Return that includes a member of the Company Group and a member of the Newco Group. "Newco Group" means Newco and its affiliates, determined immediately after the Distribution and the Merger. "Newco Options" means those options to purchase Newco Common Stock or Newco Class A Common Stock, as the case may be, resulting from the conversion of Company Options in accordance with the Distribution Agreement. "Newco Tax Item" means a Tax Item solely attributable to the Newco Group. "Newco's Tax Representation Letter" means the representation letter delivered by Newco and the Company substantially in the form of Annex E to the Merger Agreement. "Other Individuals" means individuals other than Company Employees and Former Employees. "Other Taxes" has the meaning set forth in Section 3.1(c). "Post-Merger Taxable Period" means a taxable period beginning after the Distribution Date. "Post-Tax Indemnification Period" means any Post-Merger Taxable Period and that portion of any Straddle Period that begins on the day after the Distribution Date. "Pre-Merger Taxable Period" means a taxable period ending on or before the Distribution Date. "Prior Arrangement" means the Company's existing finance policy for allocation of Taxes (including disclosed practices) a copy of which finance policy (in effect as of the date hereof) is attached hereto as Schedule 2 and the advance agreements between the Company and any U.S. governmental entity a copy of which is attached hereto as Schedule 1. "Responsible Party" has the meaning set forth in Section 6.3. <PAGE> 10 7 "Reverse Timing Difference" means an increase in income, gain or recapture, or a decrease in deduction, loss or credit, as calculated for Income Tax purposes, of the taxpayer for the Tax Indemnification Period coupled with an increase in deduction, loss or credit, or a decrease in income, gain or recapture, of the taxpayer for any Post-Tax Indemnification Period. "Rockwell Australia" has the meaning set forth in Section 5.8(a). "Straddle Period" means a taxable period that includes but does not end on the Distribution Date. "Tax" or "Taxes" means all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, foreign, federal or other body, and without limiting the generality of the foregoing, shall include income, sales, use, ad valorem, gross receipts, license, value added, franchise, transfer, recording, withholding, payroll, wage withholding, employment, excise, occupation, unemployment insurance, social security, business license, business organization, stamp, environmental, premium and property taxes, together with any related interest (including the actual interest that would have accrued if there were no netting of Taxes), penalties and additions to any such tax, or additional amounts imposed by any Taxing Authority (domestic or foreign) upon the Company Group, the Newco Group, the Acquiror or any of their respective members or divisions or branches or affiliates. "Tax Audit Proceeding" means any audit or other examination, judicial or administrative proceeding relating to liability for or refunds or adjustments with respect to Taxes. "Tax Deficiency" means a net increase in Taxes payable as a result of a Tax Audit Proceeding or an amendment of a Tax Return or an event having a similar effect. "Tax Indemnification Period" means any Pre-Merger Taxable Period and that portion of any Straddle Period that ends on the Distribution Date. <PAGE> 11 8 "Tax Item" means any item of income, gain, loss, deduction, credit, provisions for reserves, recapture of credits or any other item which is taken into account in determining taxable income or is otherwise taken into account in determining Taxes paid or payable, including an adjustment under Section 481 of the Code resulting from a change in accounting method. "Tax Opinions" means the Acquiror Tax Opinion and the Company Tax Opinions. "Tax Records" has the meaning set forth in Section 7.3. "Tax Refund" means a refund of Taxes (including a reduction in Taxes as a result of any credit or any offset against Taxes or Tax Items) reduced (but not below zero) by any net increase in Taxes Actually Realized by the recipient (or its affiliate) thereof as a result of the receipt thereof; provided, however, that for purposes of determining any net increase in Taxes resulting from the refund of 1994 Australian Taxes of Rockwell Australia, any reduction of foreign tax credits for U.S. Tax purposes attributable to the receipt of such refund shall not be taken into account. "Tax Return" means any return, filing, questionnaire, information return or other document required to be filed, including requests for extensions of time, filings made with respect to estimated tax payments, claims for refund and amended returns that may be filed, for any period with any Taxing Authority (whether domestic or foreign) in connection with any Tax or Taxes (whether or not a payment is required to be made with respect to such filing). "Taxing Authority" means any governmental or quasi-governmental body exercising any Taxing authority or Tax regulatory authority. "Timing Difference" means an increase in income, gain or recapture, or a decrease in deduction, loss or credit, as calculated for Income Tax purposes, of the taxpayer for any Post-Tax Indemnification Period coupled with an increase in deduction, loss or credit, or a decrease in income, gain or recapture, of the taxpayer for the Tax Indemnification Period. <PAGE> 12 9 "Transfer Taxes" means all transfer, documentary, sales, use, registration, value-added and other similar Taxes (including all applicable real estate transfer Taxes and real property transfer gains Taxes) and related amounts (including any penalties, interest and additions to Tax) arising as a result of or otherwise incurred in connection with any of the transactions contemplated by the Reorganization Agreements. ARTICLE II FILING OF TAX RETURNS 2.1. Preparation of Tax Returns. (a) Consistent with Agreements. Each of the parties to this Agreement agrees to, and to cause each of its relevant affiliates to, report the Contribution and Distribution as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" under Section 368(a)(1)(D) of the Code and the Merger as a "reorganization" under Section 368(a)(1)(B) of the Code on all Tax Returns and other filings, to take no position inconsistent therewith or with the consummation of such transactions as set forth in the Merger Agreement, the Distribution Agreement, the Acquiror's Tax Representation Letter, Newco's Tax Representation Letter and the Tax Opinions (in the absence of a controlling change in law or circumstance), and to file or cause to be filed all such Tax Returns on a timely basis (including extensions). (b) Consistent with Past Practice. All Tax Returns described in Section 2.2 hereof filed after the date of this Agreement, in the absence of a controlling change in law or circumstances, shall be prepared on a basis consistent with the elections, accounting methods, conventions and principles of taxation used for the most recent taxable periods for which Tax Returns involving similar Tax Items have been filed and in a manner that does not unreasonably accelerate deductions or defer income between Tax Indemnification Periods and Post-Tax Indemnification Periods to the extent that a failure to do so would result in an increase in Tax payable by, or a reduction in Tax attributes of, a member of the Company Group in a Post-Tax Indemnification Period. Subject to the provisions of this Agreement, all decisions relating to the preparation of Tax Returns shall be made in the sole <PAGE> 13 10 discretion of the party responsible under this Agreement for such preparation. (c) Newco Obligations. Newco agrees to cooperate in good faith with the Company to determine the appropriate amount of Tax Items attributable to the Company Group to be reflected on any Tax Returns for Pre-Merger Taxable Periods or Straddle Periods to be prepared and filed by Newco in accordance with Section 2.2. Newco further agrees to provide the Company with a copy of each such Tax Return at least three weeks before it is filed and to follow the procedures in Section 4.3 relating to the calculation of Taxes and to not file any such Tax Returns without the prior written consent of the Company, which consent shall not be unreasonably withheld. If such consent is withheld, the Company shall so notify Newco at least two weeks prior to the due date for filing such Tax Returns. Newco will promptly provide the Company with copies of all such Tax Returns after filing. 2.2. Pre-Merger Tax Returns. (a) Consolidated Federal Tax Returns. The Affiliated Group consolidated Federal Tax Returns (including amendments thereto) required to be filed or actually filed for any Pre-Merger Taxable Period after the date hereof shall be prepared and filed or caused to be prepared and filed by Newco, and the Company hereby irrevocably designates, and agrees to cause each of its affiliates to so designate, Newco as its agent to take any and all actions necessary or incidental to the preparation and filing of such Tax Returns. (b) Other Pre-Merger Taxable Period and Straddle Period Tax Returns. All Tax Returns (including amendments thereto) other than those described in Section 2.2(a) which include a member of the Newco Group or the Company Group that are required to be filed or are actually filed for any Pre-Merger Taxable Period or Straddle Period shall be prepared and filed or caused to be prepared and filed by Newco. The Company hereby irrevocably designates and agrees to cause each of its affiliates to designate Newco as its agent to take any and all actions necessary or incidental to the preparation and filing of such other Tax Returns. 2.3. Post-Merger Tax Returns. All Tax Returns for all Post-Merger Taxable Periods shall be the responsibility of the Newco Group if such Tax Returns relate <PAGE> 14 11 to a member or members of the Newco Group or their respective assets or businesses, and shall be the responsibility of the Company Group if such Tax Returns relate to a member or members of the Company Group or their respective assets or businesses. ARTICLE III PAYMENT OF TAXES 3.1. Allocation of Tax Liabilities. (a) Consolidated Federal Tax Liabilities. Except as otherwise provided in this Agreement, Newco shall pay or cause to be paid, on a timely basis, all Taxes due with respect to the consolidated Federal Tax liability for all Pre-Merger Taxable Periods of the Affiliated Group. The Company and Acquiror on behalf of the Company Group hereby assume and agree to pay directly to or at the direction of Newco, at least two days prior to the date payment (including estimated payment) thereof is due, the Company Group's allocable share of those Federal Taxes which are Allowable Taxes for all Pre-Merger Taxable Periods which have not been paid on or before the Distribution Date. (b) Combined, Consolidated and Unitary Corporate Taxes. Except as otherwise provided in this Agreement, Newco or a member of the Newco Group shall pay or caused to be paid, on a timely basis, all Combined Taxes. The Company and Acquiror on behalf of the Company Group hereby assume and agree to pay directly to or at the direction of Newco, at least two days prior to the date payment (including estimated payment) thereof is due, (i) the Company Group's allocable share of those Combined Taxes which are Allowable Taxes for all Pre-Merger Taxable Periods and the portion of any Straddle Period ending on the Distribution Date which have not been paid on or before the Distribution Date and (ii) the Company Group's allocable share of those Combined Taxes for the portion of any Straddle Period commencing on the day after the Distribution Date which have not been paid on or before the Distribution Date. (c) Other Taxes. Except as otherwise provided in this Agreement, Newco shall pay or caused to be paid all Taxes of the Company Group and the Newco Group other than those described in Sections 3.1(a) and 3.1(b) ("Other Taxes") for all Pre-Merger Taxable Periods and Straddle <PAGE> 15 12 Periods. The Company and Acquiror on behalf of the Company Group hereby assume and agree to pay directly to or at the direction of Newco, at least two days prior to the date payment (including estimated payment) thereof is due, (i) the Company Group's allocable share of those Other Taxes which are Allowable Taxes for all Pre-Merger Taxable Periods and the portion of any Straddle Period ending on the Distribution Date and which have not been paid on or before the Distribution Date and (ii) the Company Group's allocable share of those Other Taxes for the portion of any Straddle Period commencing on the day after the Distribution Date which have not been paid on or before the Distribution Date. (d) Post-Merger Taxes. Except as provided otherwise in this Agreement, all Taxes for all Post-Merger Taxable Periods shall be paid or caused to be paid by the party responsible under this Agreement for filing the Tax Return pursuant to which such Taxes are due or, if no such Tax Returns are due, by the party liable for such Taxes. 3.2. Tax Refunds, Carrybacks and California Tax Credits. (a) Retention and Payment of Tax Refunds. Except as otherwise provided in this Agreement, Newco shall be entitled to retain, and to receive within ten days after Actually Realized by the Company Group, the portion of all Tax Refunds (including without limitation Tax Refunds of Australian Taxes) of Taxes for which the Newco Group is liable pursuant to Section 3.1 or Section 6.1(a), and the Company shall be entitled to retain, and to receive within ten days after Actually Realized by the Newco Group, the portion of all Tax Refunds of Taxes for which the Company Group is liable pursuant to Section 3.1 or Section 6.1(b). Notwithstanding the foregoing, all Tax Refunds (i) of Allowable Taxes or (ii) resulting from the carryback of any Company Tax Item arising in a Post-Tax Indemnification Period to a Tax Indemnification Period (determined in a manner analogous to the determination of an Income Tax Benefit) shall be for the account and benefit of the Company Group. (b) Carrybacks. Except as otherwise provided in this Agreement, any Tax Refund (other than a Refund of Allowable Taxes) resulting from the carryback of any Newco Tax Item arising in a Post-Tax Indemnification Period to a Tax Indemnification Period (determined in a manner analogous to the determination of an Income Tax Benefit) shall be for <PAGE> 16 13 the account of Newco, and the Company shall pay over to Newco any such Tax Refund within ten days after it is Actually Realized by the Company. (c) Refund Claims. Newco shall be permitted to file at Newco's sole expense, and the Company shall reasonably cooperate with Newco in connection with, any claims for Tax Refund to which Newco is entitled pursuant to this Section 3.2 or any other provision of this Agreement. Newco shall reimburse the Company for any reasonable out-of-pocket costs and expenses incurred by any member of the Company Group in connection with such cooperation. The Company shall be permitted to file at the Company's sole expense, and Newco shall reasonably cooperate with the Company in connection with, any claims for Tax Refund to which the Company is entitled pursuant to this Section 3.2 or any other provision of this Agreement. The Company shall reimburse Newco for any reasonable out-of-pocket costs and expenses incurred by any member of the Newco Group in connection with such cooperation. Any claim for a Tax Refund to which Newco is entitled under this Agreement shall be subject to the Company Group's consent (such consent not to be unreasonably withheld), to be exercised in a manner analogous to that set forth in Section 2.1(c). Any claim for a Tax Refund to which the Company Group is entitled under this Agreement shall be subject to the Newco Group's consent (such consent not to be unreasonably withheld), to be exercised in a manner analogous to that set forth in Section 2.1(c). (d) California Tax Credits. Notwithstanding anything to the contrary in this Agreement, Newco shall be entitled to receive, within ten days after Actually Realized by the Company Group, any Tax Refund attributable to any California Tax Credits. ARTICLE IV ALLOCATION AND CALCULATION OF TAXES 4.1. Straddle Period Taxes. In the case of any Straddle Period: (i) the periodic Taxes of the Company Group and the Newco Group that are not based on income or receipts (e.g., property Taxes) for the portion of any Straddle <PAGE> 17 14 Period ending on the Distribution Date shall be computed based on the ratio of the number of days in such portion of the Straddle Period and the number of days in the entire taxable period; (ii) Taxes of the Company Group and the Newco Group for the portion of any Straddle Period ending on the Distribution Date (other than Taxes described in Section 4.1(i) above) shall be computed as if such taxable period ended as of the close of business on the Distribution Date, and, in the case of any Taxes of the Company Group and the Newco Group attributable to the ownership by any member of the Company Group and the Newco Group of any equity interest in any partnership or other "flowthrough" entity, as if a taxable period of such partnership or other "flowthrough" entity ended as of the close of business on the Distribution Date; and (iii) with respect to any Joint Tax Return for a Straddle Period, the allocation of Tax liability between the Company Group, on the one hand, and the Newco Group, on the other hand, shall be determined in a manner analogous to that set forth in Treasury Regulation Section 1.1552-1(a)(2). 4.2. Share of Allowable Taxes. The Company Group's and the Newco Group's allocable share of Tax liability which is attributable to Allowable Taxes for all Pre-Merger Taxable Periods and the portion of any Straddle Period ending on the Distribution Date shall be determined in accordance with the Prior Arrangement. 4.3. Calculations and Determinations. All calculations and determinations required to be made pursuant to this Agreement shall be made in good faith by Newco on a basis consistent with prior years and in a manner that does not unreasonably accelerate deductions or defer income between Tax Indemnification Periods and Post-Tax Indemnification Periods, and such calculations and determinations shall be subject to the written approval of the Company, which approval shall not be unreasonably withheld. Whenever Newco is required to make any of the calculations or determinations referred to in the prior sentence, Newco shall provide the Company with (i) preliminary drafts of any material calculations (including calculations of the amount for which the Company Group will be liable under this Agreement) or determinations as early as practicable, and final copies of such <PAGE> 18 15 calculations (including calculations of the amount for which the Company Group will be liable under this Agreement) or determinations no later than nine weeks prior to the date on which applicable Tax Returns are to be filed, and such other information as the Company shall reasonably request and (ii) if requested by the Company, access (during reasonable business hours and upon reasonable advance notice) to copies of the relevant portions of any Tax Returns, reports or other statements. If the Company's written approval of such calculations and determinations is withheld, the Company shall so notify Newco no later than six weeks prior to the date on which the applicable Tax Returns are to be filed. 4.4. Principles of Determination. In implementing this Agreement, except as otherwise specifically provided, the parties shall make any adjustments that are necessary to ensure that, with respect to Taxes for Straddle Periods or Pre-Merger Taxable Periods, payments and reimbursements between the parties reflect the principles that the Company is to bear responsibility for Taxes for the Company Group (and any affiliates) that (i) are attributable to the portion of any Straddle Period after the Distribution Date (calculated by treating the day after the Distribution Date as the first day of a taxable period) or (ii) are Allowable Taxes for any Pre-Merger Taxable Period or for any Straddle Period, and that Newco is to bear responsibility for all other Taxes for Straddle Periods and Pre-Merger Taxable Periods. 4.5. Change in Law. Notwithstanding the agreement with respect to reporting of Tax Items attributable to Newco Options, Compensation Payments, Environmental Coverage Claims and Health Care Claims set forth in Sections 5.1(a), 5.2(a) and 5.5(a) of this Agreement, respectively, neither the Company Group nor the Newco Group shall have any obligation to report any such Tax Items as set forth in such Sections in the event that either such party determines that there is no substantial authority to support reporting such Tax Items on a Tax Return filed by such party as a result of a change in or amendment to any law or regulation, or any change in the official interpretation thereof, effective or occurring after the date of this Agreement, and such Group provides prompt notice to the other Group of any such determination. <PAGE> 19 16 ARTICLE V NEWCO OPTIONS; COMPENSATION PAYMENTS; CERTAIN CONTRACTS; GUNSHIP CLAIMS; ENVIRONMENTAL COVERAGE CLAIMS; HEALTH CARE CLAIMS; B-1B CONTRACTS; FOREIGN SUBSIDIARIES; CONSENT SOLICITATION. 5.1. Tax Deductions Arising in Respect of Newco Options. (a) Tax Deductions. Notwithstanding anything to the contrary in this Agreement, unless the IRS issues a contrary private letter ruling to the Company or Newco, or Newco and the Company otherwise agree in writing, (x) the Company Group (and not the Newco Group) shall claim the post-Distribution Date Tax deductions in respect of Newco Options held by Company Group Employees and Former Employees (e.g., due to an option cash-out, an exercise of non-incentive stock options or a disqualifying disposition) and shall pay to Newco the amount of any Tax Refund (such Tax Refund not to include, or be tax-effected for any Tax Refund of the Company's allocable share of Allowable Taxes) arising in respect of such deductions within ten days after such Tax Refund is Actually Realized by the Company Group (including the time estimated Tax payments are due), and (y) the Newco Group shall claim any post-Distribution Date Tax deductions in respect of Newco Options held by any Other Individuals. Notwithstanding anything to the contrary contained herein, to the extent that any Tax deductions of the Company Group in respect of Newco Options held by Company Group Employees and Former Employees are carried back from a Post-Tax Indemnification Period to a Tax Indemnification Period, the Company shall pay to Newco any resulting Tax Refunds to the extent required pursuant to this Section 5.1(a), but the Company shall have no obligation to pay to Newco any additional amounts under any other provision of this Agreement (other than Section 6.6(a)) with respect to such Tax Refunds. (b) Notices, Withholding, Reporting. Newco shall promptly notify the Company of any post-Distribution Date event giving rise to income to any Company Employees and Former Employees in connection with the Newco Options and, if required by law, the Company shall withhold applicable Taxes and satisfy applicable Tax reporting obligations in connection therewith. Newco shall within 10 days of demand thereof reimburse the Company for all reasonable out-of- <PAGE> 20 17 pocket expenses incurred in connection with the Newco Options, including with respect to incremental Tax reporting obligations and any incremental employment Tax obligations; provided that the Company shall use reasonable efforts to collect any such amounts required to be paid by Company Employees and Former Employees. (c) Tax Audit Adjustments. Notwithstanding the provisions of Section 5.1(a), in the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that all or a portion of the Tax deductions in respect of Newco Options held by Company Employees and Former Employees was not available to the Company Group, Newco shall pay to the Company the amount of the resulting Tax Deficiency (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) within 10 days after the Company Group has notified the Newco Group that such Tax Deficiency has been Actually Realized. In the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that all or a portion of the Tax deductions in respect of Newco Options held by Other Individuals should have been claimed by the Company Group, the Company shall claim such Tax deductions (by an amended Tax Return or otherwise) and shall pay to Newco the amount of any Tax Refund (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) arising in respect of such Tax deduction, in each case within 10 days after such Tax Refund is Actually Realized by the Company Group (including at the time estimated Tax payments are due). In the event that any Tax Audit Proceeding shall determine (by settlement or otherwise) that the Company Group realized taxable income directly or indirectly as a result of the exercise or settlement (including payment by Newco in cash or stock) of the Newco Options or the disqualifying disposition of any stock received upon exercise thereof (determined in a manner analogous to the determination of an Income Tax Detriment), Newco shall pay to the Company the amount of any resulting Tax Deficiency (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) within 10 days after the Company Group has notified the Newco Group that such Tax Deficiency has been Actually Realized. <PAGE> 21 18 (d) IRS Ruling Request. At Newco's request and sole expense, Newco and the Company shall jointly seek a private letter ruling from the IRS regarding the proper party to claim the post-Distribution Date Tax deductions in respect of Newco Options. 5.2. Compensation Payments. (a) Tax Deductions. Notwithstanding anything to the contrary in this Agreement, unless Newco and the Company otherwise agree in writing, (x) the Company Group (and not the Newco Group) shall claim the post-Distribution Date Tax deductions in respect of Compensation Payments paid to Company Group Employees and Former Employees and shall pay to Newco the amount of any Tax Refund (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) arising in respect of such Tax deductions within ten days after such Tax Refund is Actually Realized by the Company Group (including the time estimated Tax payments are due) and (y) the Newco Group shall claim any post-Distribution Date Tax deductions in respect of Compensation Payments paid to Other Individuals. Notwithstanding anything to the contrary contained herein, to the extent that any Tax deductions of the Company Group in respect of Compensation Payments are carried back from a Post-Tax Indemnification period to a Tax Indemnification Period, the Company shall pay to Newco any resulting Tax Refunds to the extent required pursuant to this Section 5.2(a), but the Company shall have no obligation to pay to Newco any additional amounts under any other provision of this Agreement (other than Section 6.6(a)) with respect to such Tax Refunds. (b) Notices, Withholding, Reporting. The Company shall withhold applicable Taxes and satisfy applicable Tax reporting obligations in connection with the Compensation Payments made to Company Group Employees and Former Employees. Newco shall within 10 days of demand thereof reimburse the Company for all reasonable out-of-pocket expenses incurred in connection with the Compensation Payments, including with respect to incremental Tax reporting obligations and any incremental employment Tax obligations resulting from such Compensation Payments; provided that the Company shall use reasonable efforts to collect any such amounts required to be paid by Company Employees and Former Employees. <PAGE> 22 19 (c) Tax Audit Adjustments. Notwithstanding the provisions of Section 5.2(a), in the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that all or a portion of the Tax deductions in respect of Compensation Payments paid to Company Employees and Former Employees was not available to the Company Group, Newco shall pay to the Company the amount of the resulting Tax Deficiency (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) within 10 days after the Company Group has notified the Newco Group that such Tax Deficiency has been Actually Realized. In the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that all or a portion of the Tax deductions in respect of Compensation Payments paid to Other Individuals should have been claimed by the Company Group, the Company shall claim such Tax deductions (by an amended Tax Return or otherwise) and shall pay to Newco the amount of any Tax Refund (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) arising in respect of such deductions, in each case within 10 days after such Tax Refund is Actually Realized by the Company Group (including at the time estimated Tax payments are due). In the event that any Tax Audit Proceeding shall determine (by settlement or otherwise) that the Company Group realized taxable income directly or indirectly as a result of the payment of any Compensation Payments (determined in a manner analogous to the determination of an Income Tax Detriment), Newco shall pay to the Company the amount of any resulting Tax Deficiency (such Tax Refund not to include, or be tax-effected for, any Tax Refund of the Company's allocable share of Allowable Taxes) within 10 days after the Company Group has notified the Newco Group that such Tax Deficiency has been Actually Realized. 5.3. Percentage Completion Contracts. (a) Adjustment to Contract Profitability. Newco and the Company shall each bear one-half of any interest cost due to, and be entitled to receive one-half of any interest refunded by, the IRS in respect of Tax Indemnification Periods resulting from adjustments required subsequent to the Distribution Date with respect to long-term contracts held by the Company pursuant to the look-back method of Treasury Regulation Section 1.460-6 or any comparable provision of State, local or foreign Tax law. <PAGE> 23 20 The Company shall pay to Newco its share of any such refunded interest within 10 days after such refund is Actually Realized by the Company, and Newco shall pay to the Company its share of any such interest due within 10 days after the Company Group has notified the Newco Group that such interest cost has been Actually Realized by the Company Group. 5.4. Gunship Claims. (a) Gunship Claims Income Tax Paid. Newco hereby represents that prior to the date hereof the Company has reflected in taxable income on its U.S. Federal Income Tax Returns $181 million of income relating to the Gunship Claims. (b) Tax Item Timing Adjustments. If the Newco Group so requests, the Company Group shall consent to Newco pursuing a claim for a Tax Refund, at Newco's sole expense, in respect of Federal Income Taxes paid by the Company prior to the date hereof with respect to income relating to the Gunship Claims. Any such refund claim shall be governed by Section 3.2. Notwithstanding any other provision in this Agreement, Newco shall pay to the Company the amount of any increase in Taxes for the Post-Tax Indemnification Period attributable to the receipt of any resulting Tax Refund within 10 days after the Company Group has notified the Newco Group that such increase has been Actually Realized. 5.5. Environmental Coverage Claims and Health Care Claims. (a) Tax Return Reporting. Newco and the Company shall each report its proportionate share of Tax Items attributable to the Environmental Coverage Claims and Health Care Claims, based on the allocation of the proceeds of the Environmental Coverage Claims and Health Care Claims (in the case of income Items), and the manner in which costs are shared (in the case of deduction Items), pursuant to Sections 3.2 and 3.8, respectively, of the Post-Closing Covenants Agreement. (b) Tax Audit Adjustments. (i) In the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that the Company Group should have reported Tax Items in respect of the Environmental Coverage Claims or the Health Care Claims that were reported by the Newco Group <PAGE> 24 21 pursuant to Section 5.5(a), Newco shall pay to the Company the amount of any resulting Tax Deficiency (and shall have the right to receive or retain any resulting Tax Refund) within ten days after the Company has notified Newco that it has Actually Realized such Tax Deficiency or after the Company Group has Actually Realized such Tax Refund, as the case may be. (ii) In the event a Tax Audit Proceeding shall determine (by settlement or otherwise), or the parties otherwise determine pursuant to Section 4.5, that the Newco Group should have reported Tax Items in respect of the Environmental Coverage Claims or the Health Care Claims that were reported by the Company Group pursuant to Section 5.5(a), the Company shall pay to the Newco Group the amount of any resulting Tax Deficiency (and shall have the right to receive or retain any resulting Tax Refund) within ten days after Newco has notified the Company that it has Actually Realized such Tax Deficiency or after the Newco Group has Actually Realized such Tax Refund, as the case may be. (c) For purposes of determining when a party has Actually Realized a Tax Deficiency under Section 5.5(b), in the event and to the extent Taxes payable by that the Company or Newco, as the case may be, are not increased as a result of including Tax Items in the nature of income attributable to the Environmental Coverage Claims or the Health Care Claims because such Tax Items are offset by losses, credits or other Tax Items of such party, such party shall be deemed to have paid Taxes with respect to such offset Tax Items at the highest applicable marginal rates. 5.6. B-1B Contracts. (a) Tax Return Reporting. The Company Group shall report on its Post-Tax Indemnification Period Income Tax Returns all Tax Items arising in respect of the B-1B Contracts that are not reflected on the Company's Income Tax Returns for any Tax Indemnification Period, shall pay all Taxes with respect to such Tax Items and shall be entitled to all Tax Refunds attributable to such Tax Items. 5.7. Research and Experimentation Credit. The Company Group hereby consents to Newco pursuing its claim for Tax Refund in respect of Tax Returns filed for the Tax Indemnification Period relating to the research and experimentation tax credit. <PAGE> 25 22 5.8. Foreign Subsidiaries. (a) Distribution of Australian Subsidiary. Prior to the Distribution, Rockwell Australia Limited ("Rockwell Australia") will be distributed to the Company in a transaction intended to qualify as a transaction pursuant to Section 355 of the Code. In the event that such transaction does not so qualify and the Company Group sells or otherwise disposes of the stock of Rockwell Australia, the Company shall pay to Newco, within 10 days after such Tax Refund is Actually Realized by the Company, the amount of any Company Group Tax Refund arising because such transaction failed to so qualify. (b) Foreign Tax Credits, Subpart F Income and PFIC Income. In the event that, during the period beginning on the Distribution Date and ending on September 30, 1997, the Company Group engages in any transaction outside of the ordinary course of business and such transaction (i) affects the foreign tax credit computation with respect to any amount taken into income by the Company Group with respect to Rockwell Australia and its subsidiaries for the Tax Indemnification Period, (ii) increases the amount includible in the Company Group's income pursuant to Section 951 et seq of the Code that is attributable to the Company's ownership interest in Rockwell Australia and its subsidiaries for the Tax Indemnification Period or (iii) increases the Company Group's Tax pursuant to Section 1291 et seq of the Code that is attributable to the Company's ownership interest in Rockwell Australia and its subsidiaries for the Tax Indemnification Period, the Company shall pay to Newco any resulting additional net Tax cost to the Newco Group for the Tax Indemnification Period within ten days after notification by Newco that the Company Group has Actually Realized such net Tax cost. (c) In connection with the transactions contemplated under the Business Acquisition Agreement, the Company Group will cooperate with Newco, provide such information as Newco reasonably requests and take all actions as reasonably requested by Newco to minimize the Taxes payable by the Company Group or the Newco Group attributable to any action taken in connection with such transactions including, but not limited to, consenting to the filing by Newco for rollover relief. 5.9. Consent Solicitation; Repayment of Short-Term Debt. <PAGE> 26 23 (a) Any net Income Tax cost attributable to cancellation of indebtedness income ("CODI"), or net Income Tax benefit attributable to bond retirement premium ("BRP") (determined in each case in a manner analogous to the determination of an Income Tax Detriment and Income Tax Benefit, respectively), recognized by the Company Group as a result of the transactions described in Sections 3.1 and 5.18 of the Merger Agreement and/or a tender offer by Acquiror for the outstanding notes of the Company (collectively, the "Debt Refinancing") shall be for the account of Acquiror. (b) The Company Group shall report any CODI or BRP resulting from the Debt Refinancing as occurring in a Post-Tax Indemnification Period in accordance with Treasury Regulation Section 1.1502-76(b)(ii)(B), unless the relevant Taxing Authority will not accept a Tax Return on such basis. ARTICLE VI TAX INDEMNIFICATION; TAX CONTESTS 6.1. Indemnification. (a) Newco Indemnification. Except as otherwise provided in Article V or Section 6.1(b), Newco and the Newco Group shall be liable for and shall indemnify, defend and hold harmless the members of the Company Group and Acquiror and each of their respective affiliates and Representatives from and against (A) all Taxes of the Company Group and the Newco Group for Pre-Merger Taxable Periods other than the Company Group's allocable share of Allowable Taxes for such Pre-Merger Taxable Periods, (B) all Taxes of the Company Group and the Newco Group for the portion of any Straddle Period ending on the Distribution Date other than the Company Group's allocable share of Allowable Taxes for such portion of any such Straddle Period, (C) all Taxes of the Newco Group for the portion of any Straddle Period beginning on the day after the Distribution Date (calculated by treating the day after the Distribution Date as the first day of a taxable period), (D) all Taxes of the Newco Group for Post-Merger Taxable Periods, (E) all liability (as a result of Treasury Regulation Section 1.1502-6(a) or otherwise) for Income Taxes of any person (other than a member of the Company Group or the Newco Group) which is or has ever been affiliated with any member of the Company Group or the Newco Group or with which any member of the <PAGE> 27 24 Company Group or the Newco Group joins or has ever joined (or is or has ever been required to join) in filing any consolidated, combined or unitary Tax Return for any Pre-Merger Taxable Period or Straddle Period, (F) the amount of any California Tax Deficiency resulting from the receipt by the Company Group of any Tax Refund attributable to any California Tax Credits, and the amount of any other net Tax cost attributable to the California Tax Credits or any refund thereof, (G) all Taxes for which Newco is liable pursuant to Article V or Section 6.5, (H) any Transfer Taxes imposed in connection with or as a result of the Contribution and/or the Distribution, and one-half of any Transfer Taxes imposed in connection with or as a result of the Merger, (I) 50% of any Income Taxes payable by the Company Group in any Post-Tax Indemnification Period with respect to any long-term contract accounted for Federal income Tax purposes pursuant to the "completed contract method" and/or the "percentage completion method" of accounting to the extent attributable to Contract Profitability with respect to such contract as of the Distribution Date, but only to the extent such Contract Profitability exceeds $22 million in the aggregate, (J) all Taxes for any taxable period (whether beginning before, on or after the Distribution Date) that would not have been payable but for the breach by any member of the Newco Group of any representation, warranty or obligation under this Agreement, (K) all Taxes for any taxable period (whether beginning before, on or after the Distribution Date) that would not have been payable but for the inaccuracy of the representations and warranties contained in clauses (ix) or (xii) of Section 4.1(l) or clause (xi) of Section 4.1(m) of the Merger Agreement or the breach of the covenant contained in Section 5.1(n) of the Merger Agreement, (L) all liability for Taxes resulting from the Contribution, Distribution and/or Merger (including the transactions described in the last sentence of each of Sections 2.1(a), 2.1(b), 2.2(a) and 2.2(b) of the Distribution Agreement), (but not including any Taxes attributable to collateral consequences of such transactions, such as a reassessment of Company property for property Tax purposes resulting from the change in control incident to the Merger), (M) all Taxes that would not have been imposed but for any reduction in the Tax attributes (including without limitation, Tax loss carryovers and Tax basis in stock) of any member of the Company Group that occurs as a result of the transactions (other than the transfer of the stock of Rockwell Australia to the Company referred to in Section 5.8(a)) contemplated under the Business Acquisition Agreement (the "Rockwell Australia <PAGE> 28 25 Reorganization") (such additional Taxes to be computed taking into account any Tax benefit resulting from the Rockwell Australia Reorganization actually realized by any member of the Company Group at or before the time such additional Taxes are imposed, provided, however, that if any Tax benefit resulting from the Rockwell Australia Reorganization is actually realized by any member of the Company Group after the time such Taxes are imposed, the Company Group shall reimburse Newco for the amount of any such reduction in Taxes as a result therefrom, but not in excess of the amount previously paid by the Newco Group pursuant to this Section 6.1(a)(M)), (N) all liability for Taxes incurred by any member of the Company Group that would not have been imposed except as a result of any action taken pursuant to Section 5.8(c), and (O) all liability for any reasonable legal, accounting, appraisal, consulting or similar fees and expenses relating to the foregoing. Notwithstanding the foregoing, Newco shall not indemnify, defend or hold harmless any member of the Company Group from any liability for Taxes, other than Taxes resulting from the failure of the Contribution or Distribution to qualify as transactions described in Sections 351 or 355 of the Code and/or as a "reorganization" under Section 368(a)(1)(D) of the Code and the Merger as a "reorganization" pursuant to Section 368(a)(1)(B) of the Code, resulting from any action taken by any member of the Company Group on the Distribution Date after the Effective Time (other than actions relating to the Debt Refinancing or in the ordinary course of business) (a "Buyer Tax Act"). For purposes of clause (I) of the second preceding sentence, Newco's indemnity obligation shall arise only at such time as the Company Group Actually Realizes a Tax cost with respect to Contract Profitability in excess of $22,000,000, which shall be deemed to occur only after the Company Group has Actually Realized income items attributable to Contract Profitability with respect to long-term contracts in existence on the Distribution Date in an aggregate amount of $22,000,000. (b) Company and Acquiror Indemnification. (i) Company Indemnification. Except as otherwise provided in Article V or Section 6.1(a), the Company shall be liable for and shall indemnify, defend and hold harmless the Newco Group from and against (A) all Taxes of the Company Group for Post-Merger Taxable Periods, (B) the Company Group's allocable share of Allowable Taxes for Pre-Merger Taxable Periods and the portion of any Straddle Period ending on the <PAGE> 29 26 Distribution Date, (C) all Taxes of the Company Group for the portion of any Straddle Period beginning on the day after the Distribution Date (calculated by treating the day after the Distribution Date as the first day of a taxable period), (D) all Taxes resulting from a Buyer Tax Act, (E) all Taxes for which the Company is liable pursuant to Article V or Section 6.5, (F) all Taxes for any taxable period (whether beginning before, on or after the Distribution Date) that would not have been paid but for the breach by any member of the Company Group of any representation, warranty or obligation under this Agreement and (G) all liability for any reasonable legal, accounting, appraisal, consulting or similar fees and expenses relating to the foregoing. (ii) Acquiror Indemnification. Acquiror shall indemnify defend and hold harmless Newco for one-half of any Transfer Taxes imposed in connection with or as a result of the Merger. (c) Payments. Subject to Section 6.6(b), any indemnity payment required to be made pursuant to this Section 6.1 shall be paid within thirty days after the indemnified party makes written demand upon the indemnifying party, but in no case earlier than five business days prior to the date on which the relevant Taxes are required to be paid (or would be required to be paid if no such Taxes are due) to the relevant Taxing Authority (including estimated Tax payments). 6.2. Notice of Indemnity. Whenever a party hereto (hereinafter an "Indemnitee") becomes aware of the existence of an issue raised by any Taxing Authority which could reasonably be expected to result in a determination that would increase the liability for any Tax of the other party hereto or any member of its Group for any Post-Tax Indemnification Period (in the case of the Company Group) or for any Tax Indemnification Period (in the case of the Newco Group) or require a payment hereunder to the other party (hereinafter an "Indemnity Issue"), the Indemnitee shall in good faith promptly give notice to such other party (hereinafter the "Indemnitor") of such Indemnity Issue. The failure of any Indemnitee to give such notice shall not relieve any Indemnitor of its obligations under this Agreement except to the extent such Indemnitor or its affiliate is actually materially prejudiced by such failure to give notice. <PAGE> 30 27 6.3. Tax Contests. The Indemnitor and its representatives, at the Indemnitor's expense, shall be entitled to participate (A) in all conferences, meetings or proceedings with any Taxing Authority, the subject matter of which is or includes an Indemnity Issue and (B) in all appearances before any court, the subject matter of which is or includes an Indemnity Issue. The party who has responsibility for filing the Tax Return under this Agreement (the "Responsible Party") with respect to which there could be an increase in liability for any Tax or with respect to which a payment could be required hereunder shall have the right to decide as between the parties hereto how such matter is to be dealt with and finally resolved with the appropriate Taxing Authority and shall control all audits and similar proceedings. If no Tax Return is or was required to be filed in respect of an Indemnity Issue, the Indemnitor shall be treated as the Responsible Party with respect thereto. The Responsible Party agrees to cooperate in the settlement of any Indemnity Issue with the other party and to take such other party's interests into account. If the Indemnitor is not the Responsible Party, such cooperation may include permitting the Indemnitor, at the Indemnitor's sole expense, to litigate or otherwise resolve any Indemnity Issue. If Newco is the Responsible Party and if either (x) the Taxes at issue in the aggregate may equal or exceed $50,000 (computed taking into account reasonably anticipated future year Tax costs on a present value basis) or (y) the Indemnity Issue relates to the qualification of the Contribution or the Distribution as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code or the Merger as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code, (i) Newco shall not settle any such Indemnity Issue without the prior written consent of the Acquiror, which consent shall not be unreasonably withheld, (ii) the Acquiror, and counsel of its own choosing, shall have the right to participate fully, at its own expense, in all aspects of the defense of such Indemnity Issue, (iii) Newco shall inform the Acquiror, reasonably promptly in advance, of the date, time and place of all administrative and judicial meetings, conferences, hearings and other proceedings relating to such Indemnity Issue, (iv) the Acquiror shall, at its own expense, be entitled to have its representatives (including counsel, accountants and consultants) attend and participate in any such administrative and judicial meetings, conferences, hearings and other proceedings relating to such Indemnity Issue, (v) Newco shall provide to the Acquiror all <PAGE> 31 28 information, document requests and responses, proposed notices of deficiency, notices of deficiency, revenue agent's reports, protests, petitions and any other documents relating to such Indemnity Issue promptly upon receipt from, or in advance of submission to (as the case may be), the relevant Taxing Authority or courts and (vi) Newco shall not file or submit any protests, briefs, responses, petitions or other documents relating to such Indemnity Issue with such relevant Taxing Authority or courts without the prior written consent of the Acquiror, which consent shall not be unreasonably withheld. Notwithstanding any other provision of this Agreement, if Newco has materially satisfied its obligations under this Agreement and if the Company fails to permit Newco to control any Indemnity Issue relating to the qualification of the Contribution and Distribution as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code or the qualification of the Merger as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code, then Newco shall not be liable for and shall not indemnify the Company Group for any Tax Deficiency resulting from an adverse determination of such Indemnity Issue. 6.4. Timing Adjustments. (a) Timing Differences. If a Tax Audit Proceeding or an amendment of a Tax Return results in a Timing Difference, and such Timing Difference results in a decrease in an indemnity obligation Newco has or would otherwise have under Section 6.1 and/or an increase in the amount of a Tax Refund to which Newco is entitled to under Section 3.2, then in each Post-Tax Indemnification Period in which the Company Group Actually Realizes an Income Tax Detriment, Newco shall pay to the Company an amount equal to such Income Tax Detriment; provided, however, that the aggregate payments which Newco shall be required to make under this Section 6.4(a) with respect to any Timing Difference shall not exceed the aggregate amount of the Income Tax Benefits realized by the Newco Group for all taxable periods and the Company Group for all Tax Indemnification Periods as a result of such Timing Difference. Newco shall make all such payments within ten days after the Company notifies Newco that the relevant Income Tax Detriment has been Actually Realized. (b) Reverse Timing Differences. If a Tax Audit proceeding or an amendment of a Tax Return results in a <PAGE> 32 29 Reverse Timing Difference, and such Reverse Timing Difference results in an increase in an indemnity obligation of Newco under Section 6.1 and/or a decrease in the amount of a Tax Refund to which Newco is or would otherwise be entitled to under Section 3.2, then in each Post-Tax Indemnification Period in which the Company Group Actually Realizes an Income Tax Benefit, the Company shall pay to Newco within ten days after the Company has Actually Realized such Income Tax Benefit an amount equal to such Income Tax Benefit; provided, however, that the aggregate payments which the Company shall be required to make under this Section 6.4(b) which respect to any Reverse Timing Difference shall not exceed the aggregate amount of the Income Tax Detriments realized by the Company Group and the Newco Group for all Tax Indemnification Periods as a result of such Reverse Timing Difference. 6.5. Certain Post-Distribution Transactions. (a) Consistent with Agreements. Newco shall, and shall cause each Newco Group member to, comply with and take no action inconsistent with Newco's Tax Representation Letter. Acquiror shall, and shall cause each member of the Company Group to, comply with and take no action inconsistent with Acquiror's Tax Representation Letter. The Newco Group, Acquiror and the Company Group shall use their respective best efforts to have the Contribution and the Distribution qualify as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code and to have the Merger qualify as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code. The parties hereto intend that the sole remedy for breach of the covenants contained in this Section 6.5(a) shall be as set forth in Section 6.5(b) hereof. (b) Tax-Free Reorganization Treatment. Acquiror and the Company agree to indemnify and hold the Newco Group harmless from and against any Taxes resulting from any Action (as hereinafter defined) which causes either the Contribution and the Distribution to fail to qualify as transactions described in Sections 351 and 355 of the Code and/or a "reorganization" within the meaning of Section 368(a)(1)(D) of the Code or the Merger to qualify as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code. An "Action" shall mean any of the actions set forth on Schedule 6.5 hereof, taken by Acquiror or the Company or any of their respective affiliates (other than <PAGE> 33 30 the members of the Newco Group) within the two-year period following the Distribution Date. Notwithstanding the foregoing, an Action shall not include any transaction or action disclosed or described in Newco's Tax Representation Letter or the Acquiror's Tax Representation Letter, or required or otherwise contemplated by any Reorganization Agreement (or any agreement or document included as an exhibit thereto), or of which the Company or Newco has actual knowledge as of the Distribution Date. An Action shall not include any action on the part of any member of the Newco Group, or any of their respective shareholders, officers, directors or agents. Newco agrees to indemnify and hold the Acquiror and the Company Group harmless from and against any Tax liability resulting from or otherwise attributable to the Contribution and Distribution failing to qualify under Sections 351 and 355 of the Code and/or a "reorganization" under Section 368(a)(1)(D) of the Code or the Merger failing to qualify as a "reorganization" under Section 368(a)(1)(B) of the Code, except to the extent such Tax liability results from an Action. For purposes of this Section 6.5(b), the amount of any Taxes resulting from an Action shall equal the difference between (i) the Taxes actually paid with respect to the Contribution, Distribution and the Merger and (ii) the greater of (x) the amount of Taxes that would have been payable with respect to the Contribution and Distribution if such transactions had qualified under Sections 351 and 355 of the Code and/or a "reorganization" under Section 368(a)(1)(D) of the Code and the Merger if such transaction had qualified as a "reorganization" under Section 368(a)(1)(B) and (y) the amount of Taxes that would have been payable with respect to the Contribution, Distribution and the Merger in the absence of such Action. 6.6. Payments Net of Taxes. (a) Gross-Up and Characterization. The amount of any payment under this Agreement or under Section 2.1(b) of the Post-Closing Covenants Agreement shall be (i) increased to take account of any net Tax cost incurred by the recipient thereof as a result of the receipt or accrual of payments hereunder (grossed-up for such increase) and (ii) reduced to take account of any net Tax benefit realized by the recipient arising from the incurrence or payment of any such payment, other than any such net Tax benefit that the recipient is specifically entitled to retain pursuant to this Agreement. In computing the amount of any such Tax cost or Tax benefit, the recipient shall be deemed to recognize all other items of income, gain, loss, deduction or credit before <PAGE> 34 31 recognizing any item arising from the receipt or accrual of any payment hereunder. Except as provided in Section 6.6(b), or unless the parties otherwise agree to an alternative method for determining the present value of any such anticipated Tax benefit or Tax cost, any payment hereunder shall initially be made without regard to this Section and shall be increased or reduced to reflect any such net Tax cost (including gross-up) or net Tax benefit only after the recipient has Actually Realized such cost or benefit. It is the intention of the parties that payments made pursuant to this Agreement are to be treated as relating back to the Contribution as an adjustment to the assets and liabilities contributed thereunder, and the parties shall not take any position inconsistent with such intention before any Taxing Authority, except to the extent that a final determination (as defined in Section 1313 of the Code) with respect to the recipient party causes any such payment not to be so treated. (b) Time for Payment. Notwithstanding any other provision of this Agreement, to simplify the administration of this Agreement, the payment of any amount less than $25,000 required to be made pursuant to this Agreement by one party hereto to another party hereto need not be made to such other party prior to thirty days following the later of (i) the close of the calendar quarter during which such payment obligation arose and (ii) the day during such calendar quarter when the aggregate amount of all such less than $25,000 payment obligations arising during such calendar quarter exceeds $150,000. Unless otherwise specified by the recipient for items exceeding $100,000, any such payment may be made on a net Tax basis (i.e., reduced to take account of any net Tax benefit to be realized by the recipient (computed at an effective Tax rate to be agreed upon from time-to-time by the parties)) to the extent such recipient is entitled to a corresponding deduction. (c) Right to Offset. Any party making a payment under this Agreement shall have the right to reduce any such payment by any amounts owed to it by the other party to this Agreement. <PAGE> 35 32 ARTICLE VII COOPERATION AND EXCHANGE OF INFORMATION 7.1. Preparation of Returns. The Company shall, and shall cause each appropriate member of the Company Group to, prepare and submit to Newco, at the Company's expense, (i) no later than 120 days prior to the due date (taking into account any extensions), but in no case earlier than 60 days after the close of the relevant taxable period, for any Affiliated Group consolidated Federal Tax Returns or any state, local or foreign combined or unitary corporate Joint Tax Returns, all information that Newco shall reasonably request, in such form as Newco shall have reasonably requested, to enable Newco to file such Tax Returns and (ii) no later than 120 days prior to the due date (taking into account any extensions), but in no case earlier than 60 days after the close of the relevant taxable period, for any other Tax Return for Pre-Merger Taxable Periods and Straddle Periods which Newco is responsible for filing, all information that Newco shall reasonably request, in such form as Newco shall have reasonably requested, to enable Newco to file such Tax Returns. 7.2. Cooperation and Exchange of Information. Each party hereto, on behalf of itself and its affiliates, agrees to provide the other party hereto with such cooperation and information as such other party shall reasonably request in connection with the preparation or filing of any Tax Return or claim for Tax Refund not inconsistent with this Agreement or in conducting any audit or other proceeding in respect to Taxes or to carry out the provisions of this Agreement. To the extent necessary to carry out the purposes of this Agreement and subject to the other provisions of this Agreement, such cooperation and information shall include without limitation the non-exclusive designation of an officer of Newco as an officer of the Company and Acquiror and each of their affiliates for the purpose of signing Tax Returns, cashing refund checks, pursuing refund claims, dealing with Taxing Authorities and defending audits as well as promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any Taxing Authority which relate to the Company Group for the Tax Indemnification Period and providing copies of all relevant Tax Returns for the Tax Indemnification Period, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by <PAGE> 36 33 Taxing Authorities, including without limitation, foreign Taxing Authorities, and records concerning the ownership and Tax basis of property, which either party may possess. Subject to the rights of the Company Group under the other provisions of this Agreement, such officer shall have the authority to execute powers of attorney (including Form 2848) on behalf of each member of the Company Group with respect to Tax Returns and Taxes for the Tax Indemnification Period. Each party to this Agreement shall make, or shall cause its affiliates to make, their employees and facilities available on a mutually convenient basis to provide an explanation of any documents or information provided hereunder. 7.3. Record Retention. The Company and Newco agree to retain all Tax Returns, related schedules and workpapers, and all material records and other documents as required under Section 6001 of the Code and the regulations promulgated thereunder relating thereto ("Tax Records") existing on the date hereof or created through the Distribution Date, for 10 years from the Distribution Date and (ii) allow the other parties to this Agreement and their Representatives (and Representatives of any of its affiliates), at times and dates reasonably acceptable to the retaining party, to inspect, review and make copies of such records, and have access to such employees, as the Company and Newco may reasonably deem necessary or appropriate from time to time, such activities to be conducted during normal business hours and without disruption to either of its businesses. At the end of the 10-year period described in clause (i), the Company or Newco, as the case may be, shall transfer such records (or cause such records to be transferred) to the other party (at such other party's sole expense), unless such other party notifies the Company or Newco, as the case may be, within 90 days prior to the expiration of the 10-year period, that such other party does not desire to receive such Tax Records, in which case the Company or Newco, as the case may be, may destroy or otherwise dispose of such undesired documents. 7.4. Notification of Certain Dispositions. Acquiror shall give Newco at least 30 days prior written notice in the event that any time prior to October 1, 2002 Rockwell Australia disposes of all or any portion of the ownership interest in, or all or a substantial portion of the assets of, A.C.N. 004 471 078 Pty. Ltd. Such notice shall describe any such disposition in sufficient detail to enable Newco (i) to comply with the requirements of <PAGE> 37 34 Section 367 of the Code and applicable regulations thereunder and (ii) to enter into a revised gain recognition agreement under Section 367 of the Code and the applicable regulations if such disposition occurs in a transaction in which no gain or loss is required to be recognized under U.S. income tax principles or gain is recognized solely by reason of Section 357(c) of the Code. ARTICLE VIII MISCELLANEOUS 8.1. Entire Agreement. This Tax Allocation Agreement constitutes the entire agreement, and supersedes all other prior agreements, understandings, representations and warranties, both written and oral, among the parties, with respect to the subject matter hereof and thereof. 8.2. Modification or Amendment. The parties hereto may modify or amend this Agreement only by written agreement executed and delivered by duly authorized officers of the respective parties. Anything in this Agreement or any other Reorganization Agreement to the contrary notwithstanding, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and any other Reorganization Agreement, the provisions of this Agreement shall control. 8.3. Notices. Any notice, request, instruction or other communication to be given hereunder by any party to any other party shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other nationally reputable next-day courier service, or (iii) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or <PAGE> 38 35 pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) If to Newco: NEW ROCKWELL INTERNATIONAL CORPORATION 2201 Seal Beach Boulevard Seal Beach, California 90740-8250 Attention: William J. Calise, Jr., Esq. Senior Vice President, General Counsel and Secretary Telecopy: (310) 797-5687 with copies to: Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Peter R. Kolyer, Esq. Telecopy: (212) 541-5369 (b) if to Acquiror or the Company: The Boeing Company P.O. Box 3707 M/S 13-08 Seattle, Washington 98124-2207 Attention: Theodore J. Collins Vice President & General Counsel Telecopy: (206) 544-4900 with copies to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, New York 10019 Attention: Allen Finkelson, Esq. Telecopy: (212) 474-3700 8.4. No Third Party Beneficiaries. Except as otherwise expressly provided herein, nothing contained in this Agreement is intended to confer upon any person or entity other than the parties hereto and their respective successors and permitted assigns, any benefit, right or remedies under or by reason of this Agreement. <PAGE> 39 36 8.5. Assignment. No party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of the other parties hereto in their sole and absolute discretion. Any such conveyance, assignment or transfer without the express written consent of the other parties shall be void ab initio. No assignment of this Agreement shall relieve the assigning party of its obligations hereunder. 8.6. Term. This Agreement shall commence on the date of execution indicated below and shall continue in effect until otherwise agreed to in writing by Newco and the Company, or their successors. 8.7. Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 8.8. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon any such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties. 8.9. Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the party or parties who are or are to be thereby aggrieved shall have the right of specific performance and injunctive relief giving effect to its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for <PAGE> 40 37 any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. 8.10. Counterparts. For the convenience of the parties, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 8.11. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. 8.12. Agent. Any consent rights of members of the Newco Group under this Agreement shall be exercised by Newco on behalf of the Newco Group, and any notices given by the Company Group to Newco shall be deemed to be given to each member of the Newco Group. Any consent rights of the Company Group under this Agreement shall be exercised by Acquiror on behalf of the Company Group, and any notices given by Newco to Acquiror shall be deemed to be given to each member of the Company Group. <PAGE> 41 38 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first hereinabove written. ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. ---------------------------------- Name: William J. Calise Title: Senior Vice President NEW ROCKWELL INTERNATIONAL CORPORATION By: /s/ WILLIAM J. CALISE, JR. ---------------------------------- Name: William J. Calise Title: Senior Vice President THE BOEING COMPANY By: /s/ PHILIP M. CONDIT ---------------------------------- Name: Philip M. Condit Title: President and Chief Executive Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.E <SEQUENCE>5 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 10(e) ROCKWELL INTERNATIONAL CORPORATION 1995 LONG-TERM INCENTIVES PLAN RESTRICTED STOCK AGREEMENT To: In accordance with Section 7 of the 1995 Long-Term Incentives Plan, as amended (the Plan), of Rockwell International Corporation (Rockwell), _______ shares (Restricted Shares) of Common Stock of Rockwell have been granted to you today as restricted stock upon the terms and conditions of this Restricted Stock Agreement, subject in all respects to the provisions of the Plan, as it may be amended. Capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings ascribed to them in the Plan. 1. Restricted Period; Earning of Restricted Shares (a) The Restricted Period applicable to the Restricted Shares shall end on the January 1 immediately following your attainment of age 62 or such later age (not more than age 67) to which the Committee shall from time to time have requested, prior to your attainment of age 62 (or such later age as to which it shall have previously requested), that you remain in service as an Employee. (b) If (i) you shall continue as an Employee throughout the Restricted Period; or (ii) you shall die or suffer a disability that shall continue for a continuous period of at least six months prior to your attainment of age 62 (or the later age prescribed pursuant to paragraph (a) of this Section); (iii) you shall retire after December 8, 1997 under a retirement plan of the Corporation at or after attaining age 62 or accumulating 85 points (or fulfilling such other criteria as may be required for an unreduced early retirement benefit) for purposes of the applicable retirement plan; or (iv) a "Change of Control" (as defined for purposes of Article III, Section 13(I)(1) of Rockwell's By-Laws) shall have occurred and the Board of Directors shall not have determined prior thereto that the restrictions on the Restricted Shares should continue notwithstanding the occurrence thereof; then you shall be deemed to have fully earned all the Restricted Shares subject to this Agreement. (c) If you cease to be an Employee prior to satisfaction of any of the conditions set forth in paragraph (b) of this Section, you shall be deemed not to have earned any of the Restricted Shares and shall have no further rights with respect to the Restricted Shares, or any Dividends (as hereinafter defined) thereon, or any other proceeds thereof. 2. Retention of Certificates for Restricted Shares and Dividends Certificates for the Restricted Shares and any dividends or distributions thereon or in respect thereof (Dividends), whether in cash or otherwise (including but not limited to additional shares of Common Stock or other securities of Rockwell or securities of another entity, any such shares or other securities being collectively referred to <PAGE> 2 2 herein as Stock Dividends), shall be delivered to and held by Rockwell, or shall be registered in book entry form subject to Rockwell's instructions, until you shall have earned the Restricted Shares in accordance with the provisions of Section 1. To facilitate implementation of the provisions of this Agreement, you undertake to sign and deposit with Rockwell's Office of the Secretary (i) a Stock Transfer Power in the form of ATTACHMENT 1 hereto with respect to the Restricted Shares and any Stock Dividends thereon; (ii) a Dividend Order in the form of ATTACHMENT 2 hereto with respect to dividends (whether payable in cash or as Stock Dividends) or other distributions on the Restricted Shares; and (iii) such other documents appropriate to effectuate the purpose and intent of this Restricted Stock Agreement as Rockwell may reasonably request from time to time. 3. Voting Rights Notwithstanding the retention by Rockwell of certificates (or the right to give instructions with respect to shares held in book entry form) for the Restricted Shares and any Stock Dividends, you shall be entitled to vote the Restricted Shares and any Stock Dividends held by Rockwell (or subject to its instructions) in accordance with Section 2, unless and until such shares have been forfeited in accordance with Section 5. 4. Delivery of Earned Restricted Shares As promptly as practicable after you shall have been deemed to have earned the Restricted Shares in accordance with Section 1, Rockwell shall deliver to you (or in the event of your death, to your estate or any person who acquires your interest in the Restricted Shares by bequest or inheritance) the Restricted Shares, together with any Dividends then held by Rockwell (or subject to its instructions) and interest on the amount of Dividends paid in cash as provided in Section 7(b) of the Plan. 5. Forfeiture of Unearned Restricted Shares and Dividends Notwithstanding any other provision of this Agreement, if at any time it shall become impossible for you to earn any of the Restricted Shares in accordance with this Agreement, all the Restricted Shares, together with any Dividends, then being held by Rockwell (or subject to its instructions) in accordance with Section 2 shall be forfeited, and you shall have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, the Restricted Shares, together with any Dividends, shall be transferred to Rockwell. 6. Adjustments If there shall be any change in or affecting Shares on account of any merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split or combination, or other distribution to holders of Shares (other than a cash dividend), there shall be made or taken such amendments to this Agreement or the Restricted Shares as the Board of Directors may deem appropriate under the circumstances. <PAGE> 3 3 7. Transferability This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Shares, and any Dividends shall be deliverable, during your lifetime, only to you. 8. Withholding Rockwell shall have the right, in connection with the delivery of the Restricted Shares and any Dividends (and interest thereon) subject to this Agreement, (i) to deduct from any payment otherwise due by Rockwell to you or any other person receiving delivery of the Restricted Shares and any Dividends (and interest thereon) an amount equal to any taxes required to be withheld by law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld or (iii) to sell such number of the Restricted Shares and any Stock Dividends as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld. 9. Applicable Law This Agreement and Rockwell's obligation to deliver Restricted Shares and any Stock Dividends hereunder shall be governed by and construed and enforced in accordance with the laws of Delaware and the Federal law of the United States. ROCKWELL INTERNATIONAL CORPORATION By ----------------------------------------- Attachment 1 - Stock Transfer Power Dated: December , 1996 Agreed to this ____ day of December, 1996 ------------------------------------- Address: Social Security No.: <PAGE> 4 ATTACHMENT 1 STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, ______________, hereby sell, assign and transfer unto Rockwell International Corporation (Rockwell) (i) the _______ shares (the Shares) of the Common Stock of Rockwell standing in my name on the books of Rockwell evidenced by book entry dated December 9, 1996, granted to me on that date as Restricted Shares pursuant to Rockwell's 1995 Long-Term Incentives Plan, as amended, and (ii) any additional shares of Rockwell's Common Stock, other securities issued by Rockwell or securities of another entity (Stock Dividends) distributed, paid or payable on or in respect of the Shares and Stock Dividends during the period the Shares and Stock Dividends are held by Rockwell pursuant to a certain Restricted Stock Agreement dated December 9, 1996, with respect to the Shares; and I do hereby irrevocably constitute and appoint ______________________________, attorney with full power of substitution in the premises to transfer the Shares on the books of Rockwell. Dated: December ___, 1996 ------------------------------ (Signature) WITNESS: ---------------------------- <PAGE> 5 ATTACHMENT 2 Send To: ----------------------------------------------------------- ----------------------------------------------------------- D I V I D E N D O R D E R Date: ------------------- Until this order shall be revoked in writing by the undersigned with the written consent of the Secretary or an Assistant Secretary of Rockwell International Corporation, please comply with the following instructions with respect to the payment of all dividends or other distributions on all shares of Common Stock of Rockwell International Corporation: REGISTERED AS FOLLOWS: --------------------------------------- c/o Office of the Secretary, Room 1402 625 Liberty Avenue Pittsburgh, PA 15222 Tax Identification No.: Account Key: DIVIDEND CHECKS and all rights, stock dividends, notices and other communications (other than proxy statements and proxies) pertaining to the above account are to be payable to and mailed as follows: Office of the Secretary, Room 1402 625 Liberty Avenue Pittsburgh, PA 15222 All proxy statements, proxies and related materials pertaining to the above account are to be mailed to the undersigned at the following address: THIS ORDER MUST BE SIGNED BY ALL REGISTERED OWNERS: - - ----------------------------- -------------------------------- SIGNATURE(S) GUARANTEED: ROCKWELL INTERNATIONAL CORPORATION By: ----------------------------------- Assistant Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.F <SEQUENCE>6 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 10(f) ROCKWELL INTERNATIONAL CORPORATION RESTRICTED STOCK AGREEMENT To: In accordance with Sections 6 and 9 of the Directors Stock Plan, as amended, of Rockwell International Corporation (the Corporation) and your election pursuant thereto dated December 5, 1996, _____ shares of Common Stock of the Corporation have been granted to you today as restricted stock in lieu of the retainer fees payable to you on January 2, 1997 in respect of your service on the Board of Directors (the Board) of the Corporation and the Board Committees on which you serve, valued at the closing price on the New York Stock Exchange -- Composite Transactions (Closing Price) on January 2, 1997 and additional such shares shall be granted to you as restricted stock as follows: (i) On February 5, 1997, ____ shares in respect of your continuing service on the Board of Directors; and (ii) On April 1, 1997, July 1, 1997, and October 1, 1997, in lieu of the retainer fees otherwise payable to you on those respective dates in respect of your service on the Board and Committees thereof on which you serve, the number of shares whose value (based on the Closing Price on those respective dates) equals the amount of retainer fees then otherwise payable to you. In this Restricted Stock Agreement, the shares granted today and to be granted on the respective future dates set forth above, are collectively called Restricted Shares. The Restricted Shares have been or will be granted to you upon the following terms and conditions: 1. Earning of Restricted Shares (a) If (i) you shall continue as a director of the Corporation until you retire from the Board of Directors (the Board) of the Corporation under the Board's retirement policy; or (ii) you shall resign from the Board or cease to be a director of the Corporation by reason of the antitrust laws, compliance with the Corporation's conflict of interest policies, death or disability, then you shall be deemed to have fully earned all the Restricted Shares subject to this Restricted Stock Agreement. (b) If you resign from the Board or cease to be a director of the Corporation for any other reason, you shall be deemed not to have earned any of the Restricted Shares and shall have no further rights with respect thereto unless the Board of Directors shall determine, in its sole discretion, that you have resigned from the Board or ceased to be a director by reason of circumstances that the Board determines not to be adverse to the best interests of the Corporation. <PAGE> 2 2 2. Retention of Certificates for Restricted Shares Certificates for the Restricted Shares and any dividends or distributions thereon or in respect thereof that may be paid in additional shares of Common Stock, other securities of the Corporation or securities of another entity (Stock Dividends) shall be delivered to and held by the Corporation, or shall be registered in book entry form subject to the Corporation's instructions, until you shall have earned the Restricted Shares in accordance with the provisions of paragraph 1. To facilitate implementation of the provisions of this Restricted Stock Agreement, you undertake to sign and deposit with the Corporation's Office of the Secretary (a) a Stock Transfer Power in the form of Attachment 1 hereto with respect to the Restricted Shares and any Stock Dividends thereon and (b) such other documents appropriate to effectuate the purpose and intent of this Restricted Stock Agreement as the Corporation may reasonably request from time to time. 3. Dividends and Voting Rights Notwithstanding the retention by the Corporation of certificates (or the right to give instructions with respect to shares held in book entry form) for the Restricted Shares and any Stock Dividends, you shall be entitled to receive any dividends that may be paid in cash on, and to vote, the Restricted Shares and any Stock Dividends held by the Corporation (or subject to its instructions) in accordance with paragraph 2, unless and until such shares have been forfeited in accordance with paragraph 5. 4. Delivery of Earned Restricted Shares As promptly as practicable after you shall have been deemed to have earned the Restricted Shares in accordance with paragraph 1, the Corporation shall deliver to you (or in the event of your death, to your estate or any person who acquires your interest in the Restricted Shares by bequest or inheritance) the Restricted Shares, together with any Stock Dividends then held by the Corporation (or subject to its instructions). 5. Forfeiture of Unearned Restricted Shares Notwithstanding any other provision of this Restricted Stock Agreement, if at any time it shall become impossible for you to earn any of the Restricted Shares in accordance with this Restricted Stock Agreement, all the Restricted Shares, together with any Stock Dividends, then being held by the Corporation (or subject to its instructions) in accordance with paragraph 2 shall be forfeited, and you shall have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, the Restricted Shares, together with any Stock Dividends, shall be transferred to Rockwell. 6. Transferability This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Shares and any Stock Dividends shall be deliverable, during your lifetime, only to you. <PAGE> 3 3 7. Investment Intent By your acceptance of this Restricted Stock Agreement, you confirm that you are acquiring the Restricted Shares for investment and not with a view to their resale in a distribution within the meaning of the Securities Act of 1933. 8. Withholding The Corporation shall have the right, in connection with the delivery of the Restricted Shares and any Stock Dividends subject to this Restricted Stock Agreement, (i) to deduct from any payment otherwise due by the Corporation to you or any other person receiving delivery of the Restricted Shares and any Stock Dividends an amount equal to any taxes required to be withheld by law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld or (iii) to sell such number of the Restricted Shares and any Stock Dividends as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld. 9. Applicable Law This Restricted Stock Agreement and the Corporation's obligation to deliver Restricted Shares and any Stock Dividends hereunder shall be governed by and construed and enforced in accordance with the laws of Delaware and the Federal law of the United States. ROCKWELL INTERNATIONAL CORPORATION By:_______________________________________ W. J. Calise, Jr. Senior Vice President, General Counsel and Secretary Attachment 1 - Stock Transfer Power Dated: January 2, 1997 Agreed to as of the 2nd day of January, 1997 -------------------------------------- Address: Social Security No.: <PAGE> 4 Attachment 1 STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, ________________________ hereby sell, assign and transfer unto Rockwell International Corporation (i) the ____ shares (the Granted Shares) of the Common Stock of Rockwell International Corporation (the Corporation) standing in my name on the books of the Corporation evidenced by book entry dated January 2, 1997, granted to me on that date as Restricted Shares pursuant to the Corporation's Directors Stock Plan, as amended; (ii) the additional shares (together with the Granted Shares, the Shares) of the Common Stock of the Corporation to be granted to me on February 5, 1997, April 1, 1997, July 1, 1997 and October 1, 1997 as Restricted Shares pursuant to the Corporation's Directors Stock Plan, as amended, and to be registered in my name on the books of the Corporation and evidenced by book entries dated those respective dates; and (iii) any additional shares of the Corporation's Common Stock, other securities issued by the Corporation or securities of another entity (Stock Dividends) distributed, paid or payable on or in respect of the Shares and Stock Dividends during the period the Shares and Stock Dividends are held by the Corporation pursuant to a certain Restricted Stock Agreement dated January 2, 1997, with respect to the Shares; and I do hereby irrevocably constitute and appoint ______________________________, attorney with full power of substitution in the premises to transfer the Shares on the books of the Corporation. Dated: January __, 1997 ------------------------------ (Signature) WITNESS: - - ---------------------------- <PAGE> 5 ROCKWELL INTERNATIONAL CORPORATION RESTRICTED STOCK AGREEMENT To: In accordance with Section 6 of the Directors Stock Plan, as amended, of Rockwell International Corporation (the Corporation) and your election pursuant thereto dated December 5, 1996, ____ shares (Restricted Shares) of Common Stock of the Corporation have been granted to you today as restricted stock in respect of your continuing service as a director of the Corporation. These Restricted Shares have been granted to you today upon the following terms and conditions: 1. Earning of Restricted Shares (a) If (i) you shall continue as a director of the Corporation until you retire from the Board of Directors (the Board) of the Corporation under the Board's retirement policy; or (ii) you shall resign from the Board or cease to be a director of the Corporation by reason of the antitrust laws, compliance with the Corporation's conflict of interest policies, death or disability, then you shall be deemed to have fully earned all the Restricted Shares subject to this Restricted Stock Agreement. (b) If you resign from the Board or cease to be a director of the Corporation for any other reason, you shall be deemed not to have earned any of the Restricted Shares and shall have no further rights with respect thereto unless the Board of Directors shall determine, in its sole discretion, that you have resigned from the Board or ceased to be a director by reason of circumstances that the Board determines not to be adverse to the best interests of the Corporation. 2. Retention of Certificates for Restricted Shares Certificates for the Restricted Shares and any dividends or distributions thereon or in respect thereof that may be paid in additional shares of Common Stock, other securities of the Corporation or securities of another entity (Stock Dividends) shall be delivered to and held by the Corporation, or shall be registered in book entry form subject to the Corporation's instructions, until you shall have earned the Restricted Shares in accordance with the provisions of paragraph 1. To facilitate implementation of the provisions of this Restricted Stock Agreement, you undertake to sign and deposit with the Corporation's Office of the Secretary (a) a Stock Transfer Power in the form of Attachment 1 hereto with respect to the Restricted Shares and any Stock Dividends thereon and (b) such other documents appropriate to effectuate the purpose and intent of this Restricted Stock Agreement as the Corporation may reasonably request from time to time. <PAGE> 6 2 3. Dividends and Voting Rights Notwithstanding the retention by the Corporation of certificates (or the right to give instructions with respect to shares held in book entry form) for the Restricted Shares and any Stock Dividends, you shall be entitled to receive any dividends that may be paid in cash on, and to vote, the Restricted Shares and any Stock Dividends held by the Corporation (or subject to its instructions) in accordance with paragraph 2, unless and until such shares have been forfeited in accordance with paragraph 5. 4. Delivery of Earned Restricted Shares As promptly as practicable after you shall have been deemed to have earned the Restricted Shares in accordance with paragraph 1, the Corporation shall deliver to you (or in the event of your death, to your estate or any person who acquires your interest in the Restricted Shares by bequest or inheritance) the Restricted Shares, together with any Stock Dividends then held by the Corporation (or subject to its instructions). 5. Forfeiture of Unearned Restricted Shares Notwithstanding any other provision of this Restricted Stock Agreement, if at any time it shall become impossible for you to earn any of the Restricted Shares in accordance with this Restricted Stock Agreement, all the Restricted Shares, together with any Stock Dividends, then being held by the Corporation (or subject to its instructions) in accordance with paragraph 2 shall be forfeited, and you shall have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, the Restricted Shares, together with any Stock Dividends, shall be transferred to Rockwell. 6. Transferability This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Shares and any Stock Dividends shall be deliverable, during your lifetime, only to you. 7. Investment Intent By your acceptance of this Restricted Stock Agreement, you confirm that you are acquiring the Restricted Shares for investment and not with a view to their resale in a distribution within the meaning of the Securities Act of 1933. 8. Withholding The Corporation shall have the right, in connection with the delivery of the Restricted Shares and any Stock Dividends subject to this Restricted Stock Agreement, (i) to deduct from any payment otherwise due by the Corporation to you or any other person receiving delivery of the Restricted Shares and any Stock Dividends an amount equal to any taxes required to be withheld by <PAGE> 7 3 law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld or (iii) to sell such number of the Restricted Shares and any Stock Dividends as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld. 9. Applicable Law This Restricted Stock Agreement and the Corporation's obligation to deliver Restricted Shares and any Stock Dividends hereunder shall be governed by and construed and enforced in accordance with the laws of Delaware and the Federal law of the United States. ROCKWELL INTERNATIONAL CORPORATION By:_______________________________________ W. J. Calise, Jr. Senior Vice President, General Counsel and Secretary Attachment 1 - Stock Transfer Power Dated: February 5, 1997 Agreed to this 5th day of February, 1997 ---------------------------------------------- Address: Social Security No.: <PAGE> 8 Attachment 1 STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I _____________________, hereby sell, assign and transfer unto Rockwell International Corporation (i) the ____ shares (the Shares) of the Common Stock of Rockwell International Corporation (the Corporation) standing in my name on the books of the Corporation evidenced by book entry dated February 5, 1997, granted to me on that date as Restricted Shares pursuant to the Corporation's Directors Stock Plan, as amended, and (ii) any additional shares of the Corporation's Common Stock, other securities issued by the Corporation or securities of another entity (Stock Dividends) distributed, paid or payable on or in respect of the Shares and Stock Dividends during the period the Shares and Stock Dividends are held by the Corporation pursuant to a certain Restricted Stock Agreement dated February 5, 1997, with respect to the Shares; and I do hereby irrevocably constitute and appoint ______________________________, attorney with full power of substitution in the premises to transfer the Shares on the books of the Corporation. Dated: February 5, 1997 ------------------------------ (Signature) WITNESS: - - ---------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>7 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <PAGE> 1 Exhibit 12 ROCKWELL INTERNATIONAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED DECEMBER 31, 1996 (In millions, except ratio) <TABLE> <S> <C> EARNINGS AVAILABLE FOR FIXED CHARGES: Income from continuing operations before income taxes....... $ 290 Adjustments: Undistributed income of affiliates....................... (3) Minority interest in loss of subsidiaries................ 3 ------ 290 ------ Add fixed charges included in earnings: Interest expense......................................... 5 Interest element of rentals.............................. 15 ------ 20 ------ Total earnings available for fixed charges.................. $ 310 ====== FIXED CHARGES: Fixed charges included in earnings.......................... $ 20 Capitalized interest........................................ 3 ------ Total fixed charges...................................... $ 23 ====== RATIO OF EARNINGS TO FIXED CHARGES (1)......................... 13 ====== </TABLE> (1) In computing the ratio of earnings to fixed charges, earnings are defined as income from continuing operations before income taxes adjusted for minority interest in income or loss of subsidiaries, undistributed earnings of affiliates, and fixed charges exclusive of capitalized interest. Fixed charges consist of interest on borrowings and that portion of rentals deemed representative of the interest factor. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>8 <DESCRIPTION>ROCKWELL INTERNATIONAL CORP. <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 CONSOLIDATED BALANCE SHEET, STATEMENT OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND NOTES TO FINANCIAL STATEMENTS AND IS QUALIFIED IN IT ENTIRETY BT REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-1996 <PERIOD-END> DEC-31-1996 <CASH> 853 <SECURITIES> 0 <RECEIVABLES> 1,633 <ALLOWANCES> 110 <INVENTORY> 1,795 <CURRENT-ASSETS> 4,966 <PP&E> 2,638 <DEPRECIATION> 0 <TOTAL-ASSETS> 9,675 <CURRENT-LIABILITIES> 2,649 <BONDS> 163 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 219 <OTHER-SE> 5,258 <TOTAL-LIABILITY-AND-EQUITY> 9,675 <SALES> 2,608 <TOTAL-REVENUES> 2,628 <CGS> 1,947 <TOTAL-COSTS> 2,338 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 5 <INCOME-PRETAX> 290 <INCOME-TAX> 111 <INCOME-CONTINUING> 179 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 179 <EPS-PRIMARY> .82 <EPS-DILUTED> .81 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

SFA

https://www.sec.gov/Archives/edgar/data/87777/0000931763-97-000096.txt

-----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, QUjnJgmDrzP819JMV0rGEZfQuGl8pmWuhgkfJzah5UwIdekntAsDo/980QvMHZSC Fe0UjeqAv48cTVpJOKj7TQ== <SEC-DOCUMENT>0000931763-97-000096.txt : 19970211 <SEC-HEADER>0000931763-97-000096.hdr.sgml : 19970211 ACCESSION NUMBER: 0000931763-97-000096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961227 FILED AS OF DATE: 19970207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC ATLANTA INC CENTRAL INDEX KEY: 0000087777 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 580612397 STATE OF INCORPORATION: GA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05517 FILM NUMBER: 97519785 BUSINESS ADDRESS: STREET 1: ONE TECHNOLOGY PKWY S CITY: NORCROSS STATE: GA ZIP: 30092-2967 BUSINESS PHONE: 7709035000 MAIL ADDRESS: STREET 1: ONE TECHNOLOGY PKWY S CITY: NORCROSS STATE: GA ZIP: 30092-2967 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC ASSOCIATES INC DATE OF NAME CHANGE: 19671024 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>QUARTERLY REPORT <TEXT> <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1996 --------------------- 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 1-5517 SCIENTIFIC-ATLANTA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) GEORGIA 58-0612397 (STATE OR OTHER (I.R.S. EMPLOYER JURISDICTION OF IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) ONE TECHNOLOGY PARKWAY, SOUTH NORCROSS, GEORGIA 30092-2967 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) 770-903-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [ ] AS OF JANUARY 24, 1997, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 77,305,019 SHARES OF COMMON STOCK. 1 <PAGE> PART I - FINANCIAL INFORMATION SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- --------------------------- December 27, December 29, December 27, December 29, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> SALES $282,184 $261,100 $543,848 $503,293 COSTS AND EXPENSES Cost of sales 196,847 193,383 379,741 374,499 Sales and administrative 37,624 33,663 73,057 66,389 Research and development 29,108 23,871 57,141 46,638 Interest expense 120 220 254 367 Interest (income) (1,112) (223) (1,651) (974) Other (income) expense, net (626) 479 (815) 658 -------- -------- -------- -------- Total costs and expenses 261,961 251,393 507,727 487,577 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 20,223 9,707 36,121 15,716 PROVISION (BENEFIT) FOR INCOME TAXES Current 9,480 4,331 (734) 4,881 Deferred (3,009) (1,225) 12,293 148 -------- -------- -------- -------- NET EARNINGS FROM CONTINUING OPERATIONS 13,752 6,601 24,562 10,687 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX -- -- -- (1,038) GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS, NET OF TAX -- -- 3,400 (12,172) -------- -------- -------- -------- NET EARNINGS (LOSS) $ 13,752 $ 6,601 $ 27,962 $ (2,523) ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE PRIMARY CONTINUING OPERATIONS $ 0.18 $ 0.09 $ 0.32 $ 0.14 DISCONTINUED OPERATIONS -- -- 0.04 (0.17) -------- -------- -------- -------- NET EARNINGS (LOSS) $ 0.18 $ 0.09 $ 0.36 $ (0.03) ======== ======== ======== ======== FULLY DILUTED $ 0.18 $ 0.09 $ 0.36 $ (0.03) ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING PRIMARY 77,907 76,379 77,788 76,699 ======== ======== ======== ======== FULLY DILUTED 77,956 76,379 77,917 76,699 ======== ======== ======== ======== DIVIDENDS PER SHARE PAID $ 0.015 $ 0.015 $ 0.03 $ 0.03 ======== ======== ======== ======== </TABLE> SEE ACCOMPANYING NOTES 2 <PAGE> SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) <TABLE> <CAPTION> In Thousands -------------------------- December 27, June 28, 1996 1996 ------------ -------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 96,021 $ 20,930 Receivables, less allowance for doubtful accounts of $3,808,000 at December 27 and $3,826,000 at June 28 226,156 252,882 Inventories 178,580 215,767 Deferred income taxes 37,155 50,979 Other current assets 10,315 22,413 -------- -------- TOTAL CURRENT ASSETS 548,227 562,971 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 20,592 18,173 Buildings and improvements 37,790 38,628 Machinery and equipment 188,120 162,073 -------- -------- 246,502 218,874 Less-Accumulated depreciation and amortization 83,942 68,275 -------- -------- 162,560 150,599 -------- -------- COST IN EXCESS OF NET ASSETS ACQUIRED 5,816 6,191 -------- -------- OTHER ASSETS 53,160 43,561 -------- -------- TOTAL ASSETS $769,763 $763,322 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ 250 $ 1,600 Accounts payable 97,629 106,542 Accrued liabilities 117,930 127,546 Income taxes currently payable 23,377 26,229 -------- -------- TOTAL CURRENT LIABILITIES 239,186 261,917 -------- -------- LONG-TERM DEBT, less current maturities 400 400 -------- -------- OTHER LIABILITIES 41,258 37,353 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; no shares issued -- -- Common stock, $0.50 par value, authorized 350,000,000 shares; issued 77,372,128 shares at December 27 and 77,255,528 shares at June 28 38,686 38,628 Additional paid-in capital 162,405 163,143 Retained earnings 289,852 264,206 Accumulated translation adjustments 770 740 -------- -------- 491,713 466,717 -------- -------- Less - Treasury stock, at cost (200,616 shares at December 27 and 265,640 shares at June 28) 2,794 3,065 -------- -------- 488,919 463,652 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $769,763 $763,322 ======== ======== </TABLE> SEE ACCOMPANYING NOTES 3 <PAGE> SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Six Months Ended ------------------------------ December 27, December 29, 1996 1995 ------------ ------------ <S> <C> <C> NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: $ 91,073 $(22,661) ------- ------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (29,626) (29,704) Proceeds from sale of discontinued operations 18,369 -- Other 1,197 (1,973) ------- ------- Net cash used by investing activities (10,060) (31,677) ------- ------- FINANCING ACTIVITIES: Net short-term borrowings (repayments) (1,350) 10,083 Principal payments on long-term debt -- (31) Dividends paid (2,316) (2,299) Issuance of common stock 717 1,487 Treasury shares acquired (2,973) (12,411) ------- ------- Net cash used by financing activities (5,922) (3,171) ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 75,091 (57,509) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,930 80,311 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $96,021 $22,802 ======= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 229 $ 306 ======= ======= Income taxes paid, net $ 5,810 $ 3,580 ======= ======= </TABLE> SEE ACCOMPANYING NOTES 4 <PAGE> NOTES: (Amounts in thousands except share data). A. The accompanying consolidated financial statements include the accounts of the company and all subsidiaries after elimination of all material intercompany accounts and transactions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 1996 Form 10-K. The financial information presented in the accompanying statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods indicated. All such adjustments are of a normal recurring nature. B. Earnings per share for the three and six months ended December 27, 1996 and December 29, 1995, were computed based on the weighted average number of shares outstanding and equivalent shares derived from dilutive stock options. See Exhibit 11. C. Inventories consist of the following: <TABLE> <CAPTION> December 27, June 28, 1996 1996 ------------ -------- <S> <C> <C> Raw materials and work-in-process.. $107,616 $131,762 Finished goods................. 70,964 84,005 -------- -------- Total inventory................ $178,580 $215,767 ======== ======== </TABLE> D. During the quarter ended September 29, 1995, the company decided to discontinue its defense-related businesses in San Diego, California, because these businesses were not aligned with the company's core business strategies. A one-time charge of $12,172, net of a tax benefit of $5,728, for the estimated loss on sale of discontinued operations was recorded in the quarter ended September 29, 1995. During the quarter ended September 27, 1996, the company completed negotiations with a prime contractor, for whom the defense-related businesses had performed work as a subcontractor, to settle issues related to the pricing of unexercised options for additional products. The company also completed the sale of its defense-related businesses to Global Associates, Ltd. (Global) for cash of $13,142 and secured and unsecured notes aggregating approximately $4,700. The net realizable value of the assets of the defense-related businesses and the settlement with the prime contractor were more favorable than the company had anticipated when it decided to exit these businesses; accordingly, the company recognized a pre-tax gain of $5,000 from these transactions in the first quarter of fiscal 1997. At December 27, 1996, the company had a reserve of approximately $7,700 for potential sales price adjustments, indemnifications provided to Global, legal, severance and other miscellaneous expenses related to the sale and the settlement with the prime contractor. 5 <PAGE> Sales and earnings (loss) from discontinued operations were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------------- ----------------------------- December 27, December 29, December 27, December 29, 1996 1995 1996 1995 ------------ ------------ ------------- ------------ <S> <C> <C> <C> <C> Sales.............................. $ -- $7,425 $1,920 $12,445 Earnings (loss) from discontinued operations, net of tax $ -- $ 259 $ (817) $ (779) Tax expense (benefit).............. $ -- $ 122 $ (385) $ (366) </TABLE> At June 28, 1996, the net assets of the discontinued operations included inventory, accounts receivable, machinery and equipment, accounts payable, and accrued expenses and were included in other current assets in the Consolidated Statement of Financial Position. E. The company purchased 225,000 shares of its common stock at an aggregate cost of $2,973 during the six months ended December 27, 1996, and 1,010,000 shares at an aggregate cost of $12,411 during the six months ended December 29, 1995, under a stock buyback program for the purchase of up to 5,000,000 shares of its common stock. The company re-issues these shares under the company's stock option plan, 401(k) plan, employee stock purchase plan and other stock-based employee compensation plans. 6 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Scientific-Atlanta had stockholders' equity of $488.9 million and cash on hand was $96.0 million at December 27, 1996. Cash increased $75.1 million during the six months ended December 27, 1996 as cash generated from earnings, accounts receivable collections, reductions in inventory levels and the sale of discontinued operations exceeded expenditures for equipment, expansion of manufacturing capacity and reductions in payables. The current ratio was 2.3:1 at December 27, 1996, compared to 2.1:1 at June 28, 1996. At December 27, 1996, total debt was $0.6 million or less than one percent of total capital invested. Short-term debt at June 28, 1996 consisted primarily of borrowings by the company's international operations to support their working capital requirements. There was no short-term debt at December 27, 1996. The company believes that funds generated from operations, existing cash balances and its available senior credit facility will be sufficient to support growth and planned expansion of manufacturing capacity. RESULTS OF OPERATIONS - --------------------- Sales for the quarter and six months ended December 27, 1996, were $282.2 million and $543.8 million, respectively, up 8 percent over the prior year. Higher sales volume of transmission products was the primary factor in the year- to-year sales increases. Sales volume of Sega game adapters declined as compared to the prior year. Increased sales of satellite systems, primarily PowerVu/TM/ digital video systems and VSAT (Very Small Aperture Terminal) data networks, also contributed to the year-to-year increases. International sales for the quarter increased by 13 percent over the prior year and accounted for 42 percent of total sales. International sales for the six months ended December 27, 1996, accounted for 38 percent of total sales, as compared to 37 percent of total sales in the prior year. Gross margins of 30.2 percent and 30.1 percent, for the three and six months ended December 27, 1996, improved 4.3 and 4.6 percentage points, respectively, over the prior year, reflecting the impact of internal programs to improve quality and reduce cost, the ramp-up of the Juarez, Mexico manufacturing facility, favorable exchange rates on Japanese yen compared to the prior year and favorable product mix. The company expects gross margins during the second half of fiscal 1997 to continue at approximately the same level as the first half of fiscal 1997. Certain material purchases are denominated in Japanese yen and, accordingly, the purchase price in U.S. dollars is subject to change based on exchange rate fluctuations. The company has forward exchange contracts to purchase yen to hedge a portion of its exposure on purchase commitments for a period of approximately twelve months. Research and development costs increased $5.2 million and $10.5 million, or 22 percent, for the three and six months ended December 27, 1996, respectively, over the comparable periods of the prior year reflecting the company's continued investment in research and development programs to support new product initiatives. The company plans to launch three major digital system categories during fiscal 1997: high speed data including cable modems, cable telephony and digital video including broadcast and interactive set-tops. The company expects to continue significant research and development investments and anticipates start-up costs as these new products are rolled out. Selling and administrative expense increased $4.0 million, or 12 percent, and $6.7 million, or 10 percent, for the three and six months ended December 27, 1996, respectively, over the comparable periods of the prior year. Increased selling expenses reflect costs associated with higher sales volumes, ongoing investments to support expansion into international markets and to support the introduction of new products and a build-up in the infrastructure to handle the growth the company is experiencing. Administrative expenses increased as higher consulting fees, administrative expenses of ATx Telecom Systems, Inc. acquired in June 1996 and other miscellaneous items more than offset cost reductions from internal processes and systems improvements. 7 <PAGE> Other (income) expense for the three and six months ended December 27, 1996 and December 29, 1995, included the results of foreign currency transactions and partnership activities and net gains from rental income and other miscellaneous items. There were no significant items in other (income) expense. The company's effective income tax rate was 32 percent, unchanged from the prior year. Net earnings from continuing operations were $13.8 million for the quarter ended December 27, 1996, up $7.2 million or 108 percent over the prior year. Net earnings from continuing operations were $24.6 million for the six months ended December 27, 1996, up $13.9 million or 130 percent over the prior year. Higher sales volume and improved gross margins were offset partially by increased research and development expenses and selling and administrative expenses. Net earnings from continuing operations were $6.6 million and $10.7 million for the three and six months ended December 29, 1995, respectively. Net earnings in the quarter and for the first half of fiscal 1996 were negatively impacted by the exchange rate for the yen, higher spending for research and development and investment in sales and marketing to support the company's international growth. The company periodically evaluates the contribution of its business units and products to the company's overall strategic direction. During the quarter ended September 29, 1995, the company decided to discontinue its defense-related businesses in San Diego, California because these businesses were not aligned with the company's core business strategy of being a provider of satellite and terrestrial based networks and applications. In October 1995, the company announced its intent to sell its defense-related businesses and recorded a one- time, after-tax charge of $13.2 million in the quarter ended September 29, 1995. During the quarter ended September 27, 1996, the company completed negotiations with a prime contractor, for whom the defense-related businesses had performed work as a subcontractor, to settle issues related to the pricing of unexercised options for additional products. The company also completed the sale of its defense-related businesses to Global Associates, Ltd. for cash of $13.1 million and secured and unsecured notes aggregating approximately $4.7 million. The net realizable value of the assets of the defense-related businesses and the settlement with the prime contractor were more favorable than the company had anticipated when it decided to exit these businesses; accordingly the company recognized a pre-tax gain of $5.0 million from these transactions in the quarter ended September 27, 1996. Net earnings for the three months ended December 27, 1996 were $13.8 million, up $7.2 million over the prior year. Net earnings for the six months ended December 27, 1996 were $28.0 million, including an after-tax gain of $3.4 million related to the sale of discontinued operations, compared to a net loss in the prior year of $2.5 million, which included an after-tax charge of $13.2 million related to discontinued operations. Any of the above statements that are not statements about historical facts are forward-looking statements. Such forward-looking statements are based upon current expectations but involve risks and uncertainties. Investors are referred to the Cautionary Statements contained in Exhibit 99 to this Form 10-Q for a description of the various risks and uncertainties that could cause the company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the company's forward- looking statements. Such Exhibit 99 is hereby incorporated by reference into Management's Discussion and Analysis of Financial Condition and Results of Operations. PowerVu is a trademark of Scientific-Atlanta, Inc. 8 <PAGE> PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- The following information is furnished with respect to matters submitted to a vote of security holders through the solicitation of proxies: (a) The matters described below were submitted to a vote of security holders at the Annual Meeting of Shareholders held on November 13, 1996. (b) Election of directors: Votes For Withhold Authority ------------ ------------------ Marion H. Antonini 64,478,877 396,535 William E. Kassling 64,484,798 390,614 Mylle Bell Mangum 64,495,256 380,156 Wilbur B. King, Alonzo L. McDonald, James F. McDonald, David J. McLaughlin, James V. Napier and Sidney Topol continue as directors. (c) (i) Selection of Arthur Andersen LLP as independent auditors Votes For Votes Against Abstain ---------- ------------- ------- 64,038,116 672,978 164,318 Item 6 Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits. Exhibit No. Description ----------- ----------- 10.1 Long-Term Incentive Plan of Scientific-Atlanta, Inc., as amended and restated by the Board on November 13, 1996 10.2 Stock Plan for Non-Employee Directors, as amended and restated by the Board on November 13, 1996 10.3 Scientific-Atlanta, Inc. 1992 Employee Stock Option Plan, as amended and restated by the Board on November 13, 1996 10.4 Amendment Number Two to the Non-Employee Directors Stock Option Plan 10.5 Deferred Compensation Plan for Non-Employee Directors of Scientific-Atlanta, Inc., as amended and restated by the Board on November 13, 1996 10.6 Non-Qualified Stock Option Agreement between Scientific-Atlanta, Inc. and James F. McDonald, incorporated by reference to the registrant's Form S-8 Registration Statement, filed on December 27, 1996, and amended by Post-Effective Amendment No. 1, filed on January 7, 1997 11 Computation of Earnings Per Share 27 Financial Data Schedule 99 Cautionary Statements (b) No reports on Form 8-K were filed during the quarter ended December 27, 1996. Date: February 7, 1997 /s/ Harvey A. Wagner ---------------- -------------------- Harvey A. Wagner Senior Vice President, Finance Chief Financial Officer and Treasurer (Principal Financial Officer and duly authorized signatory of the Registrant) 9 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>LONG TERM INCENTIVE PLAN <TEXT> <PAGE> EXHIBIT 10.1 LONG-TERM INCENTIVE PLAN OF SCIENTIFIC-ATLANTA, INC. As adopted by the Board of Directors on August 25, 1994, by the stockholders on November 11, 1994, and as amended and restated by the Board on November 8, 1995 and on November 13, 1996 <PAGE> LONG-TERM INCENTIVE PLAN OF SCIENTIFIC-ATLANTA, INC. 1. PURPOSE OF THE PLAN. This Long-Term Incentive Plan of Scientific Atlanta, Inc., as adopted on August 25, 1994, and as amended and restated on November 8, 1995 and November 13, 1996, is intended to encourage officers and key employees of the Company and its Subsidiaries to acquire or increase their ownership of common stock of the Company on reasonable terms, to provide compensation opportunities for superior financial results and outstanding personal performance, to foster in participants a strong incentive to put forth maximum effort for the continued success and growth of the Company and its Subsidiaries, and to assist in attracting and retaining the best available individuals to the Company and its Subsidiaries. 2. DEFINITIONS. When used herein, the following terms shall have the meaning set forth below: 2.1 "Affiliate" means, with respect to any specified person or entity, a person or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the person or entity specified. 2.2 "Award" means an SAR, an Option, an Option granted in tandem with an SAR, a Restricted Stock Award, a Performance Share, a Performance Unit, a Performance Award, or any or all of them. 2.3 "Award Letter" means a written letter in such form as may from time to time be hereafter approved by the Committee, which Award Letter shall set forth the terms and conditions of an Award under the Plan. 2.4 "Board" means the Board of Directors of the Company. 2.5 "Change in Control" shall mean the occurrence of any of the following events: (a) The acquisition in one or more transactions by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities (the "Voting Securities"), provided, however, that for purposes of this paragraph (a), the Voting Securities acquired directly from the Company by any Person shall be excluded from the determination of such Person's Beneficial Ownership of Voting Securities (but such Voting Securities shall be included in the calculation of the total number of Voting Securities then outstanding); or (b) The individuals who are members of the Incumbent Board cease for any reason to constitute at least two-thirds of the Board; or 1 <PAGE> (c) Approval by stockholders of the Company of (i) a merger or consolidation involving the Company if the stockholders of the Company immediately before such merger or consolidation do not own, directly or indirectly, immediately following such merger or consolidation, more than eighty percent (80%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the Voting Securities immediately before such merger or consolidation, or (ii) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding anything in this Section 2.5 to the contrary, a Change in Control shall not be deemed to occur solely because twenty percent (20%) or more of the then outstanding Voting Securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries, or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. Moreover, notwithstanding anything in this Section 2.5 to the contrary, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. 2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and reference to any specific provisions of the Code shall refer to the corresponding provisions of the Code as it may hereafter be amended or replaced. 2.7 "Committee" means the Human Resources and Compensation Committee of the Board or any other committee appointed by the Board whose members meet the requirements for eligibility to serve set forth in Section 4 of the Plan and which is vested by the Board with responsibility for the administration of the Plan; provided, however, that only those members of the committee of the Board who participate in decisions relative to Awards under this Plan shall be deemed to be part of the "Committee" for purposes of this Plan. 2.8 "Company" means Scientific-Atlanta, Inc. 2.9 "Employees" means officers (including officers who are members of the Board) and other key salaried employees of the Company or any of its Subsidiaries. 2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and reference to any specific provisions of the Exchange Act shall refer to the corresponding provisions of the Exchange Act as it may hereafter be amended or replaced. 2 <PAGE> 2.11 "Fair Market Value" means, with respect to the Shares, the closing price on the New York Stock Exchange - Composite Tape of such Shares on the date(s) in question, or, if the Shares shall not have been traded on any such date(s), the closing price on the New York Stock Exchange -Composite Tape on the first day prior thereto on which the Shares were so traded or if the Shares are not traded on the New York Stock Exchange, such other amount as may be determined by the Committee by any fair and reasonable means. Fair Market Value determined by the Committee in good faith shall be final, binding and conclusive on all parties. 2.12 "Incumbent Board" means the individuals who as of August 20, 1990 were members of the Board and any individual becoming a director subsequent to August 20, 1990 whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; provided, however, that any individual who is not a member of the Incumbent Board at the time he or she becomes a member of the Board shall become a member of the Incumbent Board upon the completion of two full years as a member of the Board; provided, further, however, that notwithstanding the foregoing, no individual shall be considered a member of the Incumbent Board if such individual initially assumed office (i) as a result of either an actual or threatened "election contest" (within the meaning of Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest"), or (ii) with the approval of the other Board members, but by reason of any agreement intended to avoid or settle a Proxy Contest. 2.13 "Incentive Stock Option" means an Option meeting the requirements and containing the limitations and restrictions set forth in Section 422 of the Code. 2.14 "Non-Qualified Stock Option" means an Option other than an Incentive Stock Option. 2.15 "Option" means the right to purchase, at a price and for a term fixed by the Committee in accordance with the Plan, and subject to such other limitations and restrictions as the Plan and the Committee impose, the number of Shares specified by the Committee. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. 2.16 "Parent" means any corporation, other than the employer corporation, in an unbroken chain of corporations ending with the Company if each of the corporations other than the employer corporation owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2.17 "Participant" means any Employee to whom a grant of an Award has been made and is outstanding under the Plan. 2.18 "Performance Award" means Performance Units, Performance Shares or either or both of them. 2.19 "Performance Objectives" means the specific targets and objectives established by the Committee under the following four factors: earnings per share of the Company's common stock, return on average stockholders' equity, return on capital, and total stockholder returns of the Company compared to a peer group of comparable companies established by the Committee. Earnings per share, return on average stockholders' equity, return on capital and total Company stockholder returns shall be determined and measured in accordance with generally accepted accounting principles as utilized by the Company in its reports filed under the Exchange Act. 3 <PAGE> 2.20 "Performance Period" means a period of time established by the Committee for which Performance Objectives have been established, of not less than one nor more than ten consecutive Company fiscal years. 2.21 "Performance Share" means a right, granted to a Participant under Section 12 of the Plan, that may be paid out as a Share. 2.22 "Performance Unit" means a right, granted to a Participant under Section 12 of the Plan, that may be paid entirely in cash, entirely in Shares, or such combination of cash and Shares as the Committee in its sole discretion shall determine. 2.23 "Plan" means this Long-Term Incentive Plan. 2.24 "Regulation T" means Part 220, Chapter II, Title 12 of the Code of Federal Regulations, issued by the Board of Governors of the Federal Reserve System pursuant to the Exchange Act, as amended from time to time, or any successor regulation which may hereafter be adopted in lieu thereof. 2.25 "Restricted Stock Award" means the right to receive Shares, but subject to forfeiture and/or other restrictions set forth in the related Award Letter and the Plan. Restricted Stock Awards may be subject to restrictions which lapse over time with or without regard to Performance Objectives as the Committee in its sole discretion shall determine. 2.26 "Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations of the Exchange Act (or any successor rule or regulation). 2.27 "SAR" means a stock appreciation right, which is a right to receive an amount in cash, or Shares, or a combination of cash and Shares, as determined or approved by the Committee in its sole discretion, no greater than the excess, if any, of (i) the Fair Market Value of a Share on the date the SAR is exercised, over (ii) the SAR Base Price. 2.28 "SAR Base Price" means the Fair Market Value of a Share on the date an SAR was granted, or if the SAR was granted in tandem with an Option (whether or not the Option was granted on a different date than the SAR), in the Committee's discretion, the option price of a Share subject to the Option. 2.29 "Securities Act" means the Securities Act of 1933, as amended from time to time, and reference to any specific provisions of the Securities Act shall refer to the corresponding provisions of the Securities Act as it may hereafter be amended or replaced. 2.30 "Share" or "Shares" means a share or shares of the Company's $0.50 par value common stock, any security of the Company issued in lieu of or in substitution of such common stock or, if by reason of the adjustment provisions contained herein any rights under an Award under the Plan pertain to any other security, such other security. 2.31 "Subsidiary" or "Subsidiaries" means any corporation other than the employer corporation in an unbroken chain of corporations beginning with the employer corporation if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent(50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 <PAGE> 2.32 "Successor" means the legal representative of the estate of a deceased Employee or the person or persons who shall acquire the right to exercise an Award by bequest or inheritance or by reason of the death of the Employee. 2.33 "Ten-Percent Stockholder" means an individual who "owns" as defined in Section 425 of the Code, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of: (i) the Company; (ii) if applicable, a Subsidiary, or (iii) if applicable, the Parent. 2.34 "Term" means the period during which a particular Award may be exercised. 3. STOCK SUBJECT TO THE PLAN. 3.1 MAXIMUM NUMBER OF SHARES TO BE AWARDED. The maximum number of Shares in respect for which Awards may be granted under the Plan in each fiscal year of the Company during any part of which the Plan is effective shall be one and one-half percent (1-1/2%) of the number of Shares of the Company outstanding as of the first day of such fiscal year; and commencing in the Company's 1995 fiscal year and in each fiscal year thereafter, subtracting from such maximum number of Shares the number of Shares subject to options, if any, granted pursuant to the Company's 1992 Employee Stock Option Plan. The maximum number of Shares available for which Awards may be granted in any particular fiscal year pursuant to the previous sentence may be increased by an amount of up to one-half of one percent (.5%) of the number of Shares outstanding as of the first day of such fiscal year, provided that the number of Shares which would otherwise be available for Awards in the next fiscal year shall be decreased by the increased number of Shares made available pursuant to this sentence. Such Shares may be in whole or in part, as the Board shall from time to time determine, authorized but unissued Shares, or issued Shares which shall have been reacquired by the Company. Notwithstanding anything to the contrary contained in this Section 3.1, in no event shall more than four million (4,000,000) Shares be cumulatively available for Awards of Incentive Stock Options under this Plan. The number of SARs payable in cash and the number of units payable in cash under the Plan shall be counted when computing the total number of Shares available for Awards under the Plan. Any unused portion of the percentage limit for any year shall be carried forward and made available for Awards in succeeding years. 3.2 CERTAIN LIMITATIONS. The maximum number of Shares with respect to which Options and SARs payable in Shares which may be granted during any fiscal year to any Employee shall not exceed 400,000. The maximum dollar value with respect to which Awards (other than Options and SARs payable in Shares) that are intended to qualify as performance-based compensation under Code Section 162(m)(4)(C) which may be paid to any Employee for any particular Performance Period shall be Four Million Dollars ($4,000,000). 3.3 SHARES UNDERLYING EXPIRED, CANCELLED OR UNEXERCISED AWARDS. Any Shares subject to issuance upon exercise of an Option or SAR, but which are not issued because of a surrender, lapse, expiration or termination of any such Option or SAR prior to issuance of the Shares, or any Shares subject to an SAR paid in cash, shall once again be available for issuance in satisfaction of Awards. Similarly, any Shares issued or issuable pursuant to a Restricted Stock Award or Performance Award which are subsequently forfeited or not issued pursuant to the terms of the grant shall once again be available for issuance in satisfaction of Awards. 4. ADMINISTRATION OF THE PLAN. The Board shall appoint the Committee, which shall consist of not less than two (2) members of the Board, each of whom is a "Non-Employee Director" as defined in Rule 16b-3. Unless the Board determines otherwise, the Committee shall be comprised solely of "outside" directors within the meaning of Section 162(m)(4)(C)(i) of the Code. Subject to the provisions of the Plan, the Committee shall have full authority, in its discretion, to determine the Employees to whom 5 <PAGE> Awards shall be granted, the number of Shares, units or SARs to be covered by each of the Awards, and the terms (including restrictions) of any such Award; to amend or cancel Awards (subject to Section 21 of the Plan); to accelerate the vesting of Awards; to require the cancellation or surrender of any options, stock appreciation rights, units or restricted stock awards (to the extent the restrictions have not yet lapsed) previously granted under this Plan or any other plans of the Company as a condition to the granting of an Award; to interpret the Plan; and to prescribe, amend, and rescind rules and regulations relating to it, and generally to interpret and determine any and all matters whatsoever relating to the administration of the Plan and the granting of Awards hereunder. The Board may, from time to time, appoint members to the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. All determinations and decisions by the Committee in the exercise of its powers shall be final, binding and conclusive. No member of the Committee shall be liable, in the absence of bad faith, for any act or omission with respect to his service on the Committee. 5. EMPLOYEES TO WHOM AWARDS MAY BE GRANTED. Awards may be granted in each year or portion thereof while the Plan is in effect to such of the Employees as the Committee, in its discretion, shall determine. In determining the Employees to whom Awards shall be granted, the amount of the Award, the number of Shares to be granted or subject to purchase under such Awards and the number of SARs to be granted, the Committee shall take into account the duties of the respective Employees, their present and potential contributions to the success of the Company and its Subsidiaries, and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. No Award shall be granted to any member of the Committee so long as his or her membership on the Committee continues or to any member of the Board who is not also an Employee. 6. STOCK OPTIONS. 6.1 TYPES OF OPTIONS. Options granted under this Plan may be (i) Incentive Stock Options, (ii) Non-Qualified Stock Options, or (iii) a combination of the foregoing. The Award Letter shall designate whether an Option is an Incentive Stock Option or a Non-Qualified Stock Option. Any Option which is designated as a Non-Qualified Stock Option shall not be treated by the Company or the Participant to whom the Option is granted as an Incentive Stock Option for federal income tax purposes. 6.2 OPTION PRICE. The option price per Share of any Option granted under the Plan shall not be less than the Fair Market Value of the Shares covered by the Option on the date the Option is granted. Notwithstanding anything herein to the contrary, in the event an Incentive Stock Option is granted to an Employee who, at the time such Incentive Stock Option is granted, is a Ten-Percent Stockholder, then the option price per Share of such Incentive Stock Option shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares covered by the Incentive Stock Option on the date the Incentive Stock Option is granted. 6.3 TERM OF OPTIONS. Options granted hereunder shall be exercisable for a Term of not more than ten (10) years from the date of grant and shall be subject to earlier termination as hereinafter provided. Each Award Letter issued hereunder shall specify the Term of the Option, which Term shall be determined by the Committee in accordance with its discretionary authority hereunder. Notwithstanding anything herein to the contrary, in the event an Incentive Stock Option is granted to an Employee who, at the time such Incentive Stock Option is granted, is a Ten-Percent Stockholder, then such Incentive Stock Option shall not be exercisable more than five (5) years from the date of grant and shall be subject to earlier termination as hereinafter provided. 7. LIMIT ON FAIR MARKET VALUE OF INCENTIVE STOCK OPTIONS. In any calendar year, no Employee may be granted an Incentive Stock Option hereunder to the extent that the aggregate fair market value (such fair market value being determined as of the date of grant of the Option in 6 <PAGE> question) of the Shares with respect to which Incentive Stock Options first become exercisable by the Employee during any calendar year (under all such plans of the Employee's employer corporation, its Parent, if any, and its Subsidiaries, if any) exceeds the sum of One Hundred Thousand Dollars ($ 100,000). For purposes of the preceding sentence, Options shall be taken into account in the order in which they were granted. Any Option granted under the Plan which is intended to be an Incentive Stock Option, but which exceeds the limitation set forth in this Section 7, shall be a Non-Qualified Stock Option to the extent that a portion of the Option exceeds this limitation. 8. STOCK APPRECIATION RIGHTS. 8.1 GRANT OF SAR. The Committee, in its discretion, may grant an Employee an SAR in tandem with an Option or may grant an Employee an SAR on a stand alone basis. The Committee, in its discretion, may grant an SAR in tandem with an Option either at the time the Option is granted or at any time after the Option is granted, so long as the grant of the SAR is made during the period in which grants of SARs may be made under the Plan. The Committee, in its discretion, may grant an SAR in tandem with an Option, which is exercisable either in lieu of, or in addition to, exercise of the related Option. 8.2 LIMITATIONS ON EXERCISE. Each SAR granted in tandem with an Option shall be exercisable to the extent, and only to the extent, the related Option is exercisable and shall be for such Term as the Committee may determine (which Term, which is not to exceed ten (10) years, may expire prior to the Term of the related Option). Each SAR granted on a stand alone basis shall be exercisable to the extent, and for such Term, as the Committee may determine. The SARs shall be subject to such other terms and conditions as the Committee, in its discretion, shall determine and which are not otherwise inconsistent with the Plan. The terms and conditions may include Committee approval of the exercise of the SAR, limitations on the time within which and the extent to which such SAR shall be exercisable, and limitations, if any, on the amount of appreciation in value which may be recognized with regard to such SAR. The Company's obligation to any Participant exercising an SAR may be paid in cash or Shares, or partly in cash or Shares, at the sole discretion of the Committee. The Committee shall have at all times final control and authority over the form of payment of any SAR. If, and to the extent that, Shares are issued in satisfaction of amounts payable on exercise of an SAR, the Shares shall be valued at their Fair Market Value on the date of exercise. 8.3 SARS IN TANDEM WITH INCENTIVE STOCK OPTIONS. With respect to SARs granted in tandem with Incentive Stock Options, the following shall apply: (a) No SAR shall be exercisable unless the Fair Market Value of the Shares on the date of exercise exceeds the option price of the related Incentive Stock Option. (b) In no event shall any amounts paid pursuant to the SAR exceed the difference between the Fair Market Value of the Shares on the date of exercise and the option price of the related Incentive Stock Option. (c) The SAR must expire no later than the last date the related Incentive Stock Option can be exercised. 8.4 SURRENDER OF OPTION OR SAR GRANTED IN TANDEM. If the Award Letter related to the grant of an SAR in tandem with an Option provides that the SAR can only be exercised in lieu of the related Option, then, upon exercise of such SAR, the related Option or portion thereof with respect to which such SAR is exercised shall be deemed surrendered and shall not thereafter be exercisable and, similarly, upon exercise of the Option, the related SAR or portion thereof with respect to which such Option is exercised shall be deemed surrendered and shall not thereafter be exercisable. If the Award Letter related to the grant of an SAR in tandem with an Option provides that 7 <PAGE> the SAR can be exercised in addition to the related Option, then, upon exercise of such SAR, the related Option or portion thereof with respect to which such SAR is exercised shall not be deemed surrendered and shall continue to be exercisable and, similarly, upon exercise of the Option, the related SAR or portion thereof with respect to which such Option is exercised shall not be deemed surrendered and shall continue to be exercisable. 9. EXERCISE OF RIGHTS UNDER OPTION OR SAR AWARDS. 9.1 NOTICE OF EXERCISE. An Employee entitled to exercise an Option or SAR may do so by delivery of a written notice to that effect specifying the number of Shares with respect to which the Option or SAR is being exercised and any other information the Committee may prescribe. Except as provided in Section 9.2 below, the notice shall be accompanied by payment in full of the purchase price of any Shares to be purchased, which payment may be made in cash or, in Shares valued at Fair Market Value at the time of exercise or, a combination thereof. No Shares shall be issued upon exercise of an Option until full payment has been made therefor. All notices or requests provided for herein shall be delivered to the Company as determined by the Committee. 9.2 CASHLESS EXERCISE PROCEDURES. The Committee, in its sole discretion, may establish procedures at the time of each grant of an Option or SAR whereby an Employee, subject to the requirements of Rule 16b-3, Regulation T, federal income tax laws, and other federal, state and local tax and securities laws, can exercise an Option or a portion thereof without making a direct payment of the option price to the Company. If the Committee so elects to establish a cashless exercise program, the Committee shall determine, in its sole discretion, and from time to time, such administrative procedures and policies as it deems appropriate and such procedures and policies shall be binding on any Employee wishing to utilize the cashless exercise program. 10. RIGHTS OF OPTION AND SAR HOLDERS. The holder of an Option or SAR shall not have any of the rights of a stockholder with respect to the Shares subject to purchase or issuance under such Award, except to the extent that one or more certificates for such Shares shall be delivered to the holder upon due exercise of the Option or SAR. 11. RESTRICTED STOCK AWARDS. Restricted Stock Awards granted under the Plan shall be subject to such terms and conditions as the Committee may, in its discretion, determine. Restricted Stock Awards issued under the Plan shall be evidenced by an Award Letter in such form as the Committee may from time to time determine. Restricted Stock Awards may be subject to restrictions which lapse over time with or without regard to Performance Objectives for a specific Performance Period. Unless the Committee decides otherwise in its sole and absolute discretion based upon the circumstances existing at the time of the grant of any Restricted Stock Award, Restricted Stock Awards which are subject solely to time-based restrictions shall vest over a period of not less than three years and Restricted Stock Awards which are subject to restrictions based on Performance Objectives shall vest over a period of not less than one year. 11.1 RECEIPT OF SHARES. Each Award Letter shall set forth the number of Shares issuable under the Restricted Stock Award evidenced thereby. Subject to the restrictions of Sections 11.2, 11.3 and 11.4 of the Plan and as set forth in the related Award Letter, the number of Shares granted under a Restricted Stock Award shall be issued to the recipient Employee thereof on the date of grant of such Restricted Stock Award or as soon as may be practicable thereafter and deposited into escrow, if applicable. If the Committee determines that a Restricted Stock Award is intended to qualify as performance-based compensation under Code Section 162(m)(4)(C), then such Restricted Stock Award shall be subject to the attainment of Performance Objectives for a Performance Period. Such specific Performance Objectives shall be established in writing no later than ninety (90) days after the commencement of the Performance Period to which the Performance Objectives relate, but in no event after twenty-five percent (25%) of the Performance Period has elapsed. In establishing the Performance 8 <PAGE> Objective or Performance Objectives, the Committee shall also establish a schedule or schedules setting forth the portion of the Award which will be earned or forfeited based on the degree of achievement of the Performance Objectives actually achieved or exceeded as determined by the Committee. The Committee may at any time adjust the Performance Objectives and any schedules and portions of payments related thereto, adjust the way Performance Objectives are measured, or shorten any Performance Period if it determines that conditions or the occurrence of events warrants such actions; provided, that this provision shall not apply to any Restricted Stock Award that is intended to qualify as performance-based compensation under Code Section 162(m)(4)(C) if and to the extent that it would prevent the Award from so qualifying. The Committee shall have the right to reduce or eliminate the Restricted Stock Award payable upon the attainment of a Performance Objective, but shall not have the discretion to increase an Award upon the attainment of a Performance Objective with respect to a Participant whose compensation for the particular year is subject to the limits on tax deductibility in Code Section 162(m). 11.2 RIGHTS OF RECIPIENT PARTICIPANTS. Shares received pursuant to Restricted Stock Awards shall be duly issued or transferred to the Participant, and a certificate or certificates for such Shares shall be issued in the Participant's name. Subject to the restrictions in Section 11.3 of the Plan and as set forth in the related Award Letter, the Participant shall thereupon be a stockholder with respect to all the Shares represented by such certificate or certificates and shall have all the rights of a stockholder with respect to such Shares, including the right to vote such Shares and to receive dividends and other distributions paid with respect to such Shares. As a condition to issuing Shares, the Committee may require a Participant to execute an escrow agreement and any other documents which the Committee may determine. In aid of such restrictions, certificates for Shares awarded hereunder, together with a suitably executed stock power signed by each recipient Participant, shall be held by the Company in its control for the account of such Participant (i) until the restrictions determined by the Committee, in its discretion, and as set forth in the related Award Letter, lapse pursuant to the Plan or the Letter Agreement, at which time a certificate for the appropriate number of Shares (free of all restrictions imposed by the Plan or the Award Letter except those established by the Committee at the time of grant of the Award) shall be delivered to the Participant, or (ii) until such Shares are forfeited to the Company and cancelled as provided by the Plan or the Award Letter. 11.3 NON-TRANSFERABILITY OF RESTRICTED STOCK AWARDS. Until such time as the restrictions determined by the Committee or otherwise set forth in the related Award Letter have lapsed, the Shares awarded to a Participant and held by the Company pursuant to Section 11.2 of the Plan, and the right to vote such Shares or receive dividends on such Shares, may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of; provided, however, that, if so provided in the Award Letter, such Shares may be transferred upon the death of the Participant to such of his legal representatives, heirs and legatees as may be entitled thereto by will or the laws of intestacy. 11.4 RESTRICTIONS. Shares received pursuant to Restricted Stock Awards shall be subject to the terms and conditions as the Committee may determine, including, without limitation, restrictions on the sale, assignment, transfer or other disposition of such Shares and the requirement that the Participant forfeit such Shares back to the Company upon termination of employment for any reason or for specified reasons. 9 <PAGE> 12. PERFORMANCE AWARDS. 12.1 PERFORMANCE PERIODS. The Committee shall establish Performance Periods applicable to Performance Awards. There shall be no limitation on the number of Performance Periods established by the Committee and more than one Performance Period may encompass the same fiscal year. 12.2 PERFORMANCE OBJECTIVES. If the Committee determines that a Performance Award is intended to qualify as performance-based compensation under Code Section 162(m)(4)(C), then such Performance Award shall be subject to the attainment of Performance Objectives for a Performance Period. Such specific Performance Objectives shall be established in writing no later than ninety (90) days after the commencement of the Performance Period to which the Performance Objectives relate, but in no event after twenty-five percent (25%) of the Performance Period has elapsed. In establishing the Performance Objective or Performance Objectives, the Committee shall also establish a schedule or schedules setting forth the portion of the Performance Award which will be earned or forfeited based on the degree of achievement of the Performance Objectives actually achieved or exceeded as determined by the Committee. The Committee may at any time adjust the Performance Objectives and any schedules and portions of payments related thereto, adjust the way Performance Objectives are measured, or shorten any Performance Period if it determines that conditions or the occurrence of events warrant such actions; provided, that this provision shall not apply to any Performance Award that is intended to qualify as performance-based compensation under Code Section 162(m)(4)(C) if and to the extent that it would prevent the Award from so qualifying. The Committee shall have the right to reduce or eliminate the compensation or Award payable upon the attainment of a Performance Objective but shall not have the discretion to increase an Award upon the attainment of a Performance Objective with respect to a Participant whose compensation for the particular year is subject to the limits on tax deductibility in Code Section 162(m). 12.3 GRANTS OF PERFORMANCE AWARDS. Performance Awards may be granted under the Plan in such form and to such Employees as the Committee may from time to time approve. Performance Awards may be granted alone, in addition to or in tandem with other Awards under the Plan. Subject to the terms of the Plan, the Committee shall determine the amount or number of Performance Awards to be granted to a Participant and the Committee may impose different terms and conditions on any particular Performance Award granted to any Participant. Each grant of a Performance Award shall be evidenced by a written instrument stating the number of Performance Shares or Performance Units granted, the Performance Period, the Performance Objective or Performance Objectives, the proportion of payments for performance between the minimum and full performance levels, if any, restrictions applicable to Shares receivable in settlement, if any, and any other terms, conditions, restrictions and rights with respect to such grant as determined by the Committee. The Committee may determine that the Participant forfeit such Performance Awards back to the Company upon termination of employment for any reason or for specified reasons. The Committee may provide, in its sole discretion, that during a Performance Period, a Participant shall be paid cash amounts, with respect to each Performance Share or Performance Unit held by such individual in the same manner, at the same time, and in the same amount paid, as a dividend on any Share. 12.4 NON-TRANSFERABILITY OF PERFORMANCE AWARDS. Until such time as the Performance Objectives as determined by the Committee have been met and until any restrictions upon the Shares issued pursuant to any Performance Awards have lapsed, Performance Awards and any rights related thereto may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of by any Participant. 12.5 PAYMENT OF AWARDS. As soon as practicable after the end of the applicable Performance Period as determined by the Committee, the Committee shall determine the extent to which 10 <PAGE> the Performance Objectives have been met and the extent to which Performance Awards are payable. Payment and settlement of a Performance Award shall be as follows: (a) In the case of Performance Shares, one or more stock certificates representing the number of Shares payable shall be delivered to the Participant, free of all restrictions except those established by the Committee at the time of the grant of the Performance Shares; and (b) In the case of Performance Units, entirely in cash, entirely in Shares, or in such combination of Shares and cash as the Committee may determine, in its discretion, at any time prior to such payment. If payment is to be made in the form of cash, the amount payable for each Performance Unit earned shall be equal to the dollar value of each Performance Unit (as determined by the Committee) times the number of earned Performance Units. 13. AWARD TERMS AND CONDITIONS. Each Award Letter setting forth an Award shall contain such other terms and conditions not inconsistent herewith as shall be approved by the Board or by the Committee. The Committee shall from time to time adopt policies and procedures applicable to Awards that will govern the lapse or non-lapse of restrictions and the rights of Participants and beneficiaries in the event of death, disability, termination of employment, or retirement of Participants or upon the occurrence of any other event determined by the Committee, in its sole discretion, to be appropriate. The Committee shall have authority to define disability and retirement and other terms, and the Committee's policies and procedures may differ with respect to Awards granted at different times. A Participant's rights in the event of death, disability, termination of employment, or retirement or such other events shall be set forth in the Award Letter that evidences an Award to the Participant. 14. NONTRANSFERABILITY OF AWARDS. No Award under the Plan and no rights and interests therein, including the right to any amounts or Shares payable, may be assigned, pledged, hypothecated or otherwise transferred by a Participant except to the extent so permitted under the terms of the Award Letter. During the lifetime of a Participant, Options and SARs are exercisable only by, and payments in settlement of Awards will be payable only to, the Participant or his or her legal representative. 15. VESTING OF AWARDS. The Committee may, in its sole discretion, grant Awards which vest over time and/or are based upon satisfaction of Performance Objectives. The Committee may, in its discretion, modify or change any Performance Objectives concerning any Award or accelerate the vesting of any Award; provided that the Committee shall not modify or change any Performance Objective or accelerate the vesting of any Award that is intended to qualify as performance-based compensation under Code Section 162(m)(4)(C) if and to the extent that such modification, change or acceleration would prevent the Award from so qualifying. 16. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes in all of the outstanding Shares by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations, or exchanges of shares, separations, reorganizations or liquidations or similar events or in the event of extraordinary cash or non-cash dividends being declared with respect to outstanding Shares or other similar transactions, the number and class of Shares available under the Plan in the aggregate, the number and class of Shares subject to Awards theretofore granted, the number of SARs therefore granted, applicable purchase prices, applicable Performance Objectives for the Performance Periods not yet completed and performance levels and portion of payments related thereto, and all other applicable provisions, shall, subject to the provisions of the Plan, be equitably adjusted by the Committee. The foregoing adjustment and the manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustment may provide for the elimination of any fractional Share which might otherwise become subject to an Award. 11 <PAGE> 17. CHANGE IN CONTROL. 17.1 EFFECT ON AWARDS. In the event of a Change in Control, then (i) all Options, SARs and Options in tandem with SARs then outstanding shall become fully exercisable as of the date of the Change in Control, whether or not then exercisable, (ii) all restrictions and conditions of all Restricted Stock Awards then outstanding shall be deemed satisfied as of the date of the Change in Control, and (iii) all Performance Shares and Performance Units shall be deemed to have been fully earned as of the date of the Change in Control. Moreover, the Committee, in its sole discretion, may at any time, and subject to the terms and conditions as it may impose: (a) grant Awards that become exercisable only in the event of a Change in Control, (b) provide for Awards to be exercised automatically and only for cash in the event of a Change in Control, and (c) provide in advance or at the time of a Change in Control for cash to be paid in settlement of any Award in the event of a Change in Control. 17.2 TERMINATION OF EMPLOYMENT. Notwithstanding anything contained in this Plan to the contrary, in the event a Change in Control takes place and a Participant's employment is terminated prior to the Change in Control and the Participant reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates the Change in Control or (ii) otherwise occurred in connection with or in anticipation of a Change in Control which actually occurs, then for all purposes of this Plan, the date of the Change in Control in respect of such Participant shall mean the date immediately prior to the date of termination of such Participant's employment. 18. FORM OF AWARDS. Nothing contained in the Plan nor any resolution adopted or to be adopted by the Board or the stockholders of the Company shall constitute the granting of any Award. An Award shall be granted hereunder at such date or dates as the Committee may determine, subject to the Plan. Whenever the Committee determines to grant an Award, the Secretary or the President of the Company, or such other person as the Committee appoints, shall send notice thereof to the Employee, in such form as the Committee approves, stating the number of Shares, units and SARs subject to the Award, its Term, and the other provisions, restrictions and conditions thereof. The notice shall be accompanied by a written Award Letter (and, in the case of a Restricted Stock Award, by a blank stock power and/or escrow agreement for execution by the Employee) which shall have been duly executed by or on behalf of the Company. If the surrender of previously issued Awards is made a condition of the grant, the notice shall set forth the pertinent details of such condition. Execution of an Award Letter by the recipient in accordance with the provisions of the Plan shall be a condition precedent to the exercise or settlement of any Award. 19. WITHHOLDING FOR TAXES. 19.1 COMPANY'S RIGHT TO PAYMENT FOR TAXES REQUIRED TO BE WITHHELD. The Company shall, before any payment is made or a certificate for any Shares is delivered or any Shares are credited to any brokerage account, deduct or withhold from any payment under the Plan any Federal, state, local or other taxes, including transfer taxes, required by law to be withheld or to require the Participant or his beneficiary or estate, as the case may be, to pay any amount, or the balance of any amount, required to be withheld. The Company may elect to deduct such taxes from any amounts payable then or any time thereafter in cash to the Employee and, in the Employee's sole discretion, the payment of such taxes may be made from Shares previously held by such Employee. If the Employee disposes of Shares acquired pursuant to an Incentive Stock Option in any transaction considered to be a disqualifying transaction under Sections 421 and 422 of the Code, the Employee must give the Company written notice of such transfer and the Company shall have the right to deduct any taxes required by law to be withheld from any amounts otherwise payable to the Employee. 19.2 EMPLOYEE ELECTION TO WITHHOLD SHARES. An Employee, in his sole discretion, may elect to satisfy his or her tax liability with respect to the exercise, vesting or settlement 12 <PAGE> of an Award, by having the Company withhold Shares otherwise issuable upon the exercise, vesting or settlement of the Award. 20. TERMINATION OF PLAN. The Plan shall terminate ten (10) years from the date hereof, and an Award shall not be granted under the Plan after that date although the terms of any Awards may be amended at any date prior to the end of its Term in accordance with the Plan. Any Awards outstanding at the time of termination of the Plan shall continue in full force and effect according to the terms and conditions of the Award and this Plan. 21. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from time to time by the Board, but no amendment without the approval of the stockholders of the Company shall be made if stockholder approval under Section 422 of the Code or Rule 16b-3 would be required. Notwithstanding the previous sentence, no amendment to the Plan shall be made without the approval of the stockholders of the Company which would change the material terms of performance goals that were previously approved by the Company's stockholders within the meaning of Proposed Treasury Regulation Section 1.162-27(e)(4)(vi) or a successor provision, unless the Board determines that such approval is not necessary to avoid loss of a deduction under Section 162(m) of the Code, such approval will not avoid such a loss of deduction or such approval is not advisable. Notwithstanding the discretionary authority granted to the Committee in Section 4 of the Plan, no amendment of the Plan or any Award granted under the Plan shall impair any of the rights of any Participant, without his or her consent, under any Award theretofore granted under the Plan. 22. GOVERNING LAW; REGULATIONS AND APPROVALS. 22.1 GOVERNING LAW. This Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance of the laws of the State of Georgia without giving effect to the conflicts of laws principles thereof, except to the extent that such laws are preempted by federal law. 22.2 DELIVERY OF SHARES. The obligation of the Company to issue, sell and deliver Shares with respect to any Awards granted under this Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. 22.3 SECURITIES ACT REQUIREMENTS. No award shall be granted and no certificates for Shares pursuant to the grant or exercise of an Award shall be delivered pursuant to this Plan if the grant or delivery would, in the opinion of counsel for the Company, violate the Securities Act or any other Federal or state statutes having similar requirements as may be in effect at that time. As a condition of the issuance of any Shares pursuant to the grant or exercise of an Award under this Plan, the Committee may require the recipient to furnish a written representation that he or she is acquiring the Shares for investment and not with a view to distribution to the public. In the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act and Rule 144 of the Securities Act or the regulations hereunder. 22.4 LISTING AND REGULATORY REQUIREMENTS. Each Award is subject to the further requirements that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the Shares subject to the Award is required by any securities exchange or under any applicable law or the rule of any regulatory body, or is necessary or desirable as a condition of, or in connection with, the granting of such Award or the issuance of Shares thereunder, such Award will not be granted or exercised and the Shares may not be issued unless and until such listing, 13 <PAGE> qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 22.5 SECTION 16. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision under the Plan or action by the Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. 22.6 PERFORMANCE-BASED COMPENSATION. The Plan is intended to give the Committee the authority, in its discretion, to grant Awards that qualify as performance-based compensation under Code Section 162(m)(4)(C). 23. DEFERRAL ELECTIONS. The Committee may, pursuant to the terms of an Award Letter, permit any Participant receiving an Award to elect to defer his or her receipt of a payment of cash or the delivery of Shares that would be otherwise due such individual by virtue of the exercise, settlement, vesting or lapse of restrictions regarding any Award made under the Plan. If any such election is permitted, the Committee shall establish rules and procedures for such payment deferrals and include such rules and procedures in the Award Letter, including the possible payment or crediting of reasonable interest on such deferred amounts credited in cash and the payment or crediting of dividend equivalents in respect of deferrals credited in Shares. 24. MISCELLANEOUS. 24.1 EMPLOYMENT RIGHTS. Neither the Plan nor any action taken hereunder shall be construed as giving any Employee the right to participate under the Plan, and a grant of an Award under the Plan shall not be construed as giving any recipient of the grant any right to be retained in the employ of the Company. 24.2 NO TRUST OR FUND CREATED. Neither the Plan nor any grant made hereunder shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and any recipient of a grant of an Award or any other person. To the extent that any person acquires a right to receive payments from the Company pursuant to a grant under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. Nothing herein shall prevent or prohibit the Company from establishing a trust or other arrangement for the purpose of providing for the payment of the benefits payable under the Plan. 24.3 FEES AND COSTS. The Company shall pay all original issue taxes on the exercise of any Award granted under the Plan and all other fees and expenses necessarily incurred by the Company in connection therewith . 24.4 AWARDS TO FOREIGN NATIONALS. Without amending the Plan, Awards may be granted to participants who are foreign nationals or who are employed outside the United States or both, on such terms and conditions different than those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purpose of the Plan. 24.5 OTHER PROVISIONS. As used in the Plan, and in Awards and other documents prepared in implementation of the Plan, references to the masculine pronoun shall be deemed to refer to the feminine or neuter, and references in the singular or the plural shall refer to the plural or the singular, as the identity of the person or persons or entity or entities being referred to may require. The captions used in the Plan and in such Awards and other documents prepared in implementation of the Plan are for convenience only and shall not affect the meaning of any provision hereof or thereof. 14 <PAGE> 25. EFFECTIVENESS OF THE PLAN. The Plan shall become effective when approved by the Board. The Plan shall thereafter be submitted to the Company's stockholders for approval and unless the Plan is approved by the affirmative votes of the holders of shares having a majority of the voting power of all shares represented at a meeting duly held in accordance with Georgia law within twelve (12) months after being approved by the Board, the Plan and all Awards made under it shall be void and of no force and effect. To record the adoption of the Plan (as amended and restated) by the Board on November 13, 1996, the Company has caused its authorized officers to affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------ Name: Brian C. Koenig -------------------------------- Title: Vice President Human Resources -------------------------------- By: /s/ William E. Eason, Jr. ------------------------------------ Name: William E. Eason, Jr. -------------------------------- Title: Secretary -------------------------------- [Seal] 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>3 <DESCRIPTION>STOCK PLAN FOR NON-EMPLOYEE DIRECTORS <TEXT> <PAGE> EXHIBIT 10.2 SCIENTIFIC-ATLANTA, INC. STOCK PLAN FOR NON-EMPLOYEE DIRECTORS As Amended on November 13, 1996 1. PURPOSES The purposes of this Plan are to aid the Company in attracting and retaining highly qualified Non-employee Directors, to provide additional compensation as an incentive for Non-employee Directors to contribute their best efforts to the Company's success, and to emphasize and enhance the Company's policy of seeking to have Non-employee Directors maintain a significant investment in the stock of the Company and thus a strong commonality of interests with the shareholders. 2. DEFINITIONS As used in this Plan: (a) The term "Annual Meeting" means the annual meeting of shareholders of the Company. (b) The term "Award" means an Elective Grant or a Stock Award awarded under this Plan. (c) The term "Board" means the Board of Directors of the Company. (d) The term "Board Approval" means approval by a majority of the directors present at a Board meeting at which a quorum is present. (e) The term "Company" means Scientific-Atlanta, Inc., a Georgia corporation. 1 <PAGE> (f) The term "Committee" shall mean the Governance and Nominations Committee of the Board or any another committee comprised of directors of the Board which is vested by the Board with responsibility to administer this Plan. (g) The term "Elective Grant" shall mean the election by a Non-employee Director pursuant to Section 3(a) hereof to receive a portion of his or her Quarterly Compensation in the form of Shares. (h) The term "Eligible Directors" shall mean those Non-employee Directors who served on the Board for the entire period from the most recent Annual Meeting before the grant of a particular Stock Award until the Annual Meeting at which a Stock Award is granted. (i) The term "Fair Market Value Per Share" means the closing sale price of a Share on the New York Stock Exchange on the date such value is determined or, if there is no trade on such Exchange on that date, then the closing sale price on the next preceding date on which there is trade of the Company's Common Stock on such Exchange. In the event that the Company's Common Stock is not listed on the New York Stock Exchange on the determination date, the Fair Market Value shall be determined as stated above but with reference to trades on the largest stock exchange or other public market on which the Company's Common Stock is then traded. (j) The term "Non-employee Director" means any person who is elected to the Board and who has not been an employee of the Company or any of its subsidiaries at any time during the twelve (12) months preceding any election by such person under Section 3 hereof or the receipt of a Stock Award by such person under Section 4 hereof. (k) The term "Plan" means this Scientific-Atlanta, Inc. Stock Plan for Non-employee Directors, as amended from time to time. (l) The term "Quarterly Compensation" means the sum of all meeting fees, annual retainer fees, and Committee and Board Chairmanship fees for service as a director earned by a Non-employee Director during a fiscal quarter. Compensation paid to Non-employee Directors for their service to the Company in any other capacity, shall be excluded from the calculation of Quarterly Compensation. (m) The term "Share" means a share of the Company's Common Stock, $.50 par value. Shares delivered to the Non-employee Directors under this Plan may be either authorized but previously unissued shares or previously issued shares reacquired by the Company. 2 <PAGE> (n) The term "Shareholder Approval" means the affirmative vote of a majority of the shares of Common Stock present or represented and entitled to vote at a meeting of the shareholders of the Company at which a quorum is present. (o) The term "Stock Award" means an award consisting of 500 Shares (subject to adjustment as herein provided) granted to an Eligible Director pursuant to Section 4(a) hereof. 3. ELECTIVE GRANTS (a) Each Non-employee Director may make an election to receive up to 100 percent (100%) of his or her Quarterly Compensation (in increments of 5%) in the form of Shares pursuant to an Elective Grant made in accordance with this Section 3(a). The election by the Non-employee Director to receive an Elective Grant of Shares must be in writing and must be delivered to the Secretary of the Company before the start of the fiscal quarter during which services are to be rendered by the Non-employee Director giving rise to the Quarterly Compensation. The election made by a Non-employee Director pursuant to this Section 3(a) shall be in effect as to Quarterly Compensation payable for services rendered during the fiscal quarter of the Company covered by the election. The Committee shall, prior to the receipt by a Non-employee Director of shares under an Elective Grant, approve the issuance of such shares by resolution; however, if the Committee fails to adopt such an approving resolution, such shares may be issued to the electing Non-employee Director, but such shares cannot be sold or otherwise transferred by such Non-employee Director prior to the date which is six (6) months after the date of such issuance of shares. (b) The number of Shares to be granted to a Non-employee Director who makes an Elective Grant shall equal (i) the amount of the Quarterly Compensation earned during the Company's fiscal quarter subject to the Elective Grant, divided by (ii) the Fair Market Value Per Share on the last day of such fiscal quarter. In no event shall the Company be required to issue fractional Shares. Any fractional Share will be rounded to the nearest whole Share. (c) As soon as practicable after each Non-employee Director's Elective Grant of Shares is determined, the Company shall cause to be issued and delivered to such Non-employee Director a stock certificate registered in the name of the Non-employee Director evidencing his or her Elective Grant, less any Shares withheld by the Company pursuant to Section 6 below. (d) No right to an Elective Grant and no interest therein may be assigned, pledged, hypothecated, or otherwise transferred by a Non-employee Director except, in the event of the death of a Non-employee Director prior to the issuance of a stock certificate evidencing an Elective Grant, to the Non- employee Director's designated beneficiary or, in the absence of such designation, by will or the laws of descent and distribution. 3 <PAGE> 4. STOCK AWARDS (a) Beginning with the 1995 Annual Meeting and at the Annual Meeting every year thereafter through and including the Annual Meeting held in 1999, every Eligible Director shall be granted a Stock Award. (b) Subject to the provisions of Sections 6 and 12 hereof, as soon as practicable after the applicable Annual Meeting, the Company shall cause to be issued and delivered to each Eligible Director receiving a Stock Award a stock certificate registered in the name of such Eligible Director evidencing the Stock Award, less any Shares withheld by the Company pursuant to Section 6 below. (c) Eligible Directors shall not be deemed for any purpose to be, or have any rights as, shareholders of the Company with respect to any Stock Award until the stock certificates are issued and then only from the date of the issuance of such stock certificates. Appropriate adjustments shall be made for dividends or distributions or other rights for which the record date is after an Annual Meeting and prior to the issuance of such stock certificates. (d) No right to a Stock Award and no interests therein may be assigned, pledged, hypothecated, or otherwise transferred by an Eligible Director except that in the event of the death of an Eligible Director after an Annual Meeting where such Eligible Director received a Stock Award and prior to the issuance of a stock certificate evidencing such Stock Award, to the Eligible Director's designated beneficiary or, in the absence of such designation, by will or by laws of descent and distribution. 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION If a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure of the Company or the Shares occurs, then the number and/or kind of shares to be awarded under the Plan shall be automatically adjusted as required in order to prevent an unfavorable effect upon the value of the Awards to be made under this Plan. 6. TAX WITHHOLDING/DEFERRAL (a) All Awards made pursuant to this Plan shall be subject to the withholding of state and federal income taxes, FICA tax or other taxes to the extent required by applicable law. The 4 <PAGE> Company shall, before delivery of a stock certificate evidencing an Award, require the recipient to make arrangements satisfactory to the Company to satisfy such withholding requirement, if any. A Non-employee Director receiving an Award may satisfy such withholding requirement by having the Company withhold Shares otherwise issuable to the director if such director makes a written election to do so, which election must be delivered to the Secretary of the Company. (b) The right to receive any Shares under this Plan, at the election of the Non-employee Director recieving an Award (without need for Committee approval), may be deferred under the provisions of the Company's Deferred Compensation Plan for Non-Employee Directors. 7. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have full authority, consistent with the Plan, to interpret the Plan and to promulgate such rules and regulations with respect to the Plan as it deems desirable for the administration of the Plan. The Committee shall have authority to determine all matters relating to the administration and granting of Awards. All decisions, determinations and interpretations of the Committee shall be binding upon all persons. 8. COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS The Plan, the Awards, and the obligation of the Company to deliver Shares under the Plan shall be subject to all applicable laws, regulations, and the requirements of the exchanges on which Shares may, at the time, be listed. In the event that the Shares to be issued under this Plan are not registered under the Securities Act of 1933 and/or any applicable state securities laws prior to the delivery of such Shares, the Company may require, as a condition to the issuance thereof, that each Eligible Director to whom such Shares are to be issued represent and warrant in writing to the Company that the Shares are being acquired by him or her for investment for his or her account and not for resale or with any intent of participating directly or indirectly in any distribution of such Shares and a legend to that effect may be placed on the stock certificates representing such Shares. 9. AMENDMENTS The Committee with Board Approval may amend this Plan or any provision thereof from time to time for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which at the time may be permitted by law, provided that no amendment, except with shareholder Approval, shall: (i) change the calculation of the 5 <PAGE> Awards so as to increase the value of the award to the Non-employee Directors; (ii) increase the frequency of the Awards, (iii) materially increase in any other way the benefits to the Non-employee Directors, (iv) materially modify the definitions of Non-employee Director or Eligible Directors as defined herein, or (v) disqualify a Non-employee Director from being a "Non-Employee Director" administrator (within the meaning of Rule 16b-3 or any successor rule of the Securities and Exchange Commission) of any stock-based plan of the Company. Notwithstanding the foregoing, in no case may the Plan provisions pertaining to the amount or determination of a Stock Award or the determination of Eligible Directors be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. 10. DISCONTINUANCE The Board may suspend or discontinue this Plan in whole or in part, but any such suspension or discontinuance shall not affect Awards granted under this Plan prior thereto. 11. GOVERNING LAW This Plan is made in accordance with and shall be governed in all respects by the laws of the State of Georgia. 12. EFFECTIVE DATE This Plan shall become effective on the date of Board Approval of the Plan; provided, however, that the Plan shall be submitted to the shareholders for Shareholder Approval and, if not approved by the shareholders within one year from the date of Board Approval, the Plan shall be of no force and effect. Awards which would otherwise be awarded hereunder before Shareholder Approval of the Plan is obtained shall be subject to such Shareholder Approval and no stock certificates for such Awards shall be issued to Eligible Directors before or until such Shareholder Approval is obtained. 6 <PAGE> 13. TERM The term of this Plan shall be for the period commencing as of the date of Board Approval and ending with the Annual Meeting held in 1999. To record the adoption of the Plan by the Board on August 24, 1995, and by the shareholders on November 8, 1995, and to record the amendment of the Plan by the Board on November 13, 1996, the Company has caused its authorized officers to execute this Plan and affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------ Name: Brian C. Koenig -------------------------------- Title: Vice President Human Resources -------------------------------- By: /s/ William E. Eason, Jr. ------------------------------------ Name: William E. Eason, Jr. -------------------------------- Title: Secretary -------------------------------- [Seal] 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>4 <DESCRIPTION>1992 STOCK OPTION PLAN <TEXT> <PAGE> EXHIBIT 10.3 SCIENTIFIC-ATLANTA, INC. 1992 EMPLOYEE STOCK OPTION PLAN As adopted by the Board of Directors on September 15, 1992 and by the stockholders on November 11, 1992, and as amended by the Board of Directors on November 13, 1996. <PAGE> SCIENTIFIC-ATLANTA, INC. ------------------------ 1992 EMPLOYEE STOCK OPTION PLAN ------------------------------- 1. PURPOSE. ------- This Plan is intended to provide incentive to key Employees of the Corporation and its Subsidiaries, to encourage proprietary interest in the Corporation by its Employees, to encourage such key Employees to remain in the employ of the Corporation and its Subsidiaries, and to attract new Employees with outstanding qualifications. 2. DEFINITIONS. ----------- Unless otherwise defined herein or the context otherwise requires, the capitalized terms used herein shall have the following meanings: (a) "Administrator" shall mean the officer of the Corporation ------------- appointed by the Committee pursuant to Section 4 hereof. (b) "Board" shall mean the Board of Directors of the Corporation. ----- (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" shall mean the Human Resources and Compensation --------- Committee, a committee appointed by the Board. (e) "Common Stock" shall mean, unless otherwise specifically provided, ------------ the common stock of the Corporation and any class of common shares of the Corporation into which such common stock may hereafter be converted, exchanged or reclassified. (f) "Corporation" shall mean Scientific-Atlanta, Inc., a Georgia ----------- corporation. (g) "Disability" shall mean the condition of an individual who is ---------- unable to engage in any substantial gainful activity by reason of any physical or mental impairment which is classified as a disability in the Corporation's Long Term Disability Plan. (h) "Employee" shall mean an individual who is employed (within the -------- meaning of Section 3401 of the Code and the regulations thereunder) by the Corporation or a Subsidiary (i.e., an individual with respect to whom ---- income taxes must be withheld from compensation). <PAGE> (i) "Exercise Price" shall mean the price per Share of Common Stock, -------------- determined by the Committee, at which an Option may be exercised. (j) "Fair Market Value" shall mean the value of one (1) Share of ----------------- Common Stock, and shall be equal to the closing sale price as reported on the New York Stock Exchange on the date of valuation or, if no sale occurred on that date, then the mean between the closing bid and asked prices on such exchange on such date. If the Common Stock ceases to be listed on the New York Stock Exchange, then the Fair Market Value on the date of valuation shall be determined in good faith by the Committee, and such determination shall be conclusive and binding on all persons. If the date of valuation is not a business day, the price on the last business day preceding the date of valuation shall be utilized. (k) "Incentive Stock Option" shall mean an option described in Section ---------------------- 422(b) of the Code. (l) "Non-Qualified Stock Option" shall mean an option not described in -------------------------- Section 422(b), 423(b) or 424(b) of the Code. (m) "Option" shall mean any stock option granted pursuant to this ------ Plan. All Options shall be granted on the date the Committee takes the necessary action to approve the grant. However, if the minutes or other action of the Committee provide that an Option is to be granted as of another date, the date of grant shall be such other date. (n) "Option Agreement" shall mean a written stock option agreement ---------------- evidencing a particular Option. (o) "Optionee" shall mean an Employee who has received an Option. -------- (p) "Plan" shall mean this Scientific-Atlanta, Inc. 1992 Employee ---- Stock Option Plan, as it may be amended from time to time. (q) "Purchase Price" shall mean the Exercise Price times the number of -------------- Shares with respect to which an Option is exercised. (r) "Retirement" shall mean the voluntary cessation of employment by ---------- an Employee after qualifying for early or normal retirement under any pension plan or profit sharing or stock bonus plan of the Corporation or any Subsidiary. If an Employee is not covered by any such plan, "Retirement" shall mean voluntary termination of employment after the Employee either has attained age sixty-five (65) or has attained age fifty- five (55) and has attained the tenth (10th) anniversary of his or her seniority date. (s) "Share" shall mean one (1) share of Common Stock, adjusted in ----- accordance with Section 10 of this Plan (if applicable). -2- <PAGE> (t) "Subsidiary" shall mean any corporation at least fifty percent ---------- (50%) of the total combined voting power of which is owned by the Corporation or by another Subsidiary. 3. EFFECTIVE DATE. -------------- This Plan was adopted by the Board effective September 15, 1992, subject to the approval of the Corporation's stockholders pursuant to Section 14 hereof. This Plan shall terminate as provided in Section 9 below. 4. ADMINISTRATION. -------------- (a) Committee. Unless otherwise determined by the Board from time to --------- time, Option grants under this Plan shall be made by the Committee. Acts of a majority of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by the unanimous consent of the members of the Committee, shall be the valid acts of the Committee. The Committee shall from time to time at its discretion select the Employees who are to be granted Options, determine the number of Shares to be optioned to each Optionee and designate such Options as Incentive Stock Options or Non-Qualified Stock Options. No member of the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any Option granted hereunder. (b) Administrator. The Committee shall appoint an officer of the ------------- Corporation as the Administrator of the Plan. The Administrator shall have full authority to construe, interpret and administer the Plan, and, except as to matters which are expressly reserved herein for determination by the Board or the Committee, the Administrator's decisions and determinations in the administration of the Plan shall be final, conclusive and binding on all persons, including, without limitation, the Corporation, the shareholders and directors of the Corporation and any persons having any interests in any Options granted under this Plan. 5. PARTICIPATION. ------------- The Optionees shall be those key Employees of the Corporation or the Subsidiaries to whom Options may be granted from time to time by the Committee. 6. STOCK. ----- The stock subject to Options granted under this Plan shall be Shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of Shares which may be issued upon exercise of Options under this Plan shall not exceed One Million Five Hundred Thousand (1,500,000). The number of Shares subject to Options outstanding at any time shall not exceed the number of Shares remaining available for issuance under this Plan. Whenever an Optionee's rights to exercise an Option as to any Shares shall cease for any reason -3- <PAGE> before he or she has exercised such Option as to such Shares, the Option shall be deemed terminated to that extent and such Shares shall again be available for issuance under this Plan. The limitations established by this Section 6 shall be subject to adjustment in the manner provided in Section 10 hereof upon the occurrence of an event specified in Section 10. 7. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- (a) Stock Option Agreements. Options shall be evidenced by written ----------------------- Option Agreements in such form as the Committee shall from time to time determine. Such Option Agreements shall comply with and be subject to the terms and conditions set forth herein. Each Option shall state whether it is an Incentive Stock Option or a Non-Qualified Stock Option. (b) Optionee's Undertaking. Each Optionee shall agree to remain in the ---------------------- employ of the Corporation or a Subsidiary and to render services for a period as shall be determined by the Committee, from the date of the granting of the Option, but such agreement shall not impose upon the Corporation or its Subsidiaries any obligation to retain the Optionee in their employ for any period. Except as otherwise provided in this Plan, Options held by an Optionee may be exercised only while the Optionee is employed by the Corporation or a Subsidiary. (c) Number of Shares. Each Option shall state the number of Shares to ---------------- which it pertains and shall provide for the adjustment thereof in accordance with the provisions of Section 10 hereof. (d) Exercise Price. Each Option shall state the Exercise Price, which -------------- shall not be less than the Fair Market Value on the date of grant. The Exercise Price shall be subject to adjustment as provided in Section 10 hereof. (e) Medium and Time of Payment. Upon the exercise of any Option, the -------------------------- Purchase Price shall be paid in full in United States dollars by certified check or other form of payment acceptable to the Administrator; provided, however, that if the applicable Option Agreement so provides, or the Committee, in its sole discretion otherwise approves thereof, the Purchase Price may be paid, (i) by the surrender of Shares, in good form for transfer, owned by the person exercising the Option and having a Fair Market Value on the date of exercise equal to the Purchase Price, or (ii) in any combination of cash and Shares, as long as the sum of the cash so paid and the Fair Market Value of the Shares so surrendered equals the Purchase Price. In the event the Corporation determines that it is required to withhold state or Federal income tax as a result of the exercise of an Option, as a condition to the exercise thereof an Optionee must make arrangements satisfactory to the Administrator to enable it to satisfy such withholding requirements. Payment of such withholding requirements may be made, at -4- <PAGE> the election of the Optionee, (i) in cash, (ii) by delivery of Shares registered in the name of Optionee, which Shares have a Fair Market Value at the time of exercise equal to the amount to be withheld, (iii) by the Corporation withholding Shares subject to the Option, which Shares have a Fair Market Value at the time of exercise equal to the amount to be withheld, or (iv) any combination of (i), (ii) and (iii) above. (f) Term and Time for Exercise. Each Option shall state the time or times -------------------------- when all or part thereof becomes exercisable. No Option shall be exercisable more than ten (10) years (or less, in the discretion of the Committee) from the date it was granted. If the Committee does not determine otherwise, any Option granted under this Plan: (1) Shall be exercisable as to not more than 25% of the total number of Shares covered by the Option immediately upon, and during the year following, the date of the grant; (2) Shall be exercisable as to not more than 50% of the total number of Shares covered by the Option on, and during the year following, the first anniversary of the date of grant; (3) Shall be exercisable as to not more than 75% of the total number of Shares covered by the Option on, and during the year following, the second anniversary of the date of grant; (4) Shall be fully exercisable on the third anniversary of the date of grant and thereafter prior to expiration of the Option. If the Committee does not determine otherwise with respect to any Option granted hereunder, in the event that the employment of the Optionee by the Corporation or any Subsidiary of the Corporation terminates for any reason whatsoever, other than death or Retirement, prior to the Option(s) held by that person becoming fully exercisable as provided above, such Option(s) shall automatically expire with respect to the unexercisable portion on the date of termination of employment without any further action or documentation. (g) Non-transferability of Options. During the lifetime of the Optionee, ------------------------------ the Option shall be exercisable only by the Optionee and shall not be assignable or transferable. In the event of the Optionee's death, the Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. Any other attempted alienation, assignment, pledge, hypothecation, attachment, execution or similar process, whether voluntary or involuntary, with respect to all or any part of any Option or right hereunder, shall be null and void and, at the Corporation's option, shall cause all of the Optionee's rights under the Option to terminate. -5- <PAGE> (h) Change in Control of the Corporation. ------------------------------------ (1) Contrary Provisions. Notwithstanding anything contained in this ------------------- Plan to the contrary, in the event of a Change in Control, the provisions of this Subsection 7(h) shall govern and supersede any inconsistent terms or provisions of this Plan. (2) Change in Control. For purposes of this Plan, a "Change in Control" ----------------- shall mean any of the following events: (a) The acquisition in one or more transactions by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")), of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding voting securities (the "Voting Securities"), provided, however, that for purposes of this -------- ------- Subsection 7(h)(2)(a), the Voting Securities acquired directly from the Corporation by any Person shall be excluded from the determination of such Person's Beneficial Ownership of Voting Securities (but such Voting Securities shall be included in the calculation of the total number of Voting Securities then outstanding); or (b) The individuals who are members of the Incumbent Board (as hereinafter defined), cease for any reason to constitute at least two- thirds of the Board for purposes of this Subsection 7(h)(2)(b). The "Incumbent Board" shall include the individuals who as of August 20, 1990 are members of the Board and any individual becoming a director subsequent to August 20, 1990 whose election, or nomination for election by the Corporation's stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; provided, however, that any individual who is not a member of -------- ------- the Incumbent Board at the time he or she becomes a member of the Board shall become a member of the Incumbent Board upon the completion of two full years as a member of the Board; provided, further, however, that -------- ------- ------- notwithstanding the foregoing, no individual shall be considered a member of the Incumbent Board if such individual initially assumed office (i) as a result of either an actual or threatened "election contest" (within the meaning of Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest"), or (ii) with the approval of the other Board members, but by reason -6- <PAGE> of any agreement intended to avoid or settle a Proxy Contest; or (c) Approval by stockholders of the Corporation of (i) a merger or consolidation involving the Corporation if the stockholders of the Corporation immediately before such merger or consolidation do not own, directly or indirectly, immediately following such merger or consolidation, more than eighty percent (80%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the Voting Securities immediately before such merger or consolidation, or (ii) a complete liquidation or dissolution of the Corporation or an agreement for the sale or other disposition of all or subsequently all of the assets of the Corporation. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because twenty percent (20%) or more of the then outstanding Voting Securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Corporation or any of its subsidiaries, or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Corporation in the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition. Moreover, notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Corporation which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided, that if a Change in -------- Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Corporation, and after such share acquisition by the Corporation, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. Notwithstanding anything contained in this Plan to the contrary, if a Change in Control takes place and an Optionee's employment is terminated prior to the completed Change in Control and the Optionee reasonably demonstrates that such -7- <PAGE> termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control or (ii) otherwise occurred in connection with or in anticipation of a Change in Control which actually occurs, then for all purposes of this Plan, the date of a Change in Control in respect of such Optionee shall mean the date immediately prior to the date of termination of such Optionee's employment. (3) Time for Exercise Upon a Change in Control. Upon a Change in ------------------------------------------ Control, all options granted under this Plan that are held by Employees at the time of such Change in Control shall become immediately exercisable in full, without regard to the years that have elapsed from the date of grant. (4) Termination of Employment Following Change in Control. If an ----------------------------------------------------- Optionee's employment terminates following a Change in Control other than for "cause" (as hereinafter defined), the applicable provisions of Subsection 7(i) of this Plan shall apply except that as of and after the date of the Change in Control, the Administrator shall not make any determination or take any action in connection with an Optionee's termination of employment which would cause any option granted under this Plan (i) to not be exercisable in full or (ii) to expire earlier than the latest date allowable under Subsection 7(i) as applicable. (5) Amendment or Termination. ------------------------ (a) Subsection 7(h) of this Plan shall not be amended or terminated at any time. (b) Any amendment or termination of this Plan prior to a Change in Control which (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, or (2) otherwise arose in connection with or in anticipation of a Change in Control, shall be null and void and shall have no effect whatsoever. (i) Cessation of Employment; etc. After an Optionee ceases to be an ---------------------------- Employee, his or her rights to exercise any unexercised Option then held by the Optionee shall be determined as provided in this Subsection 7(i). No Option may be exercised after its term expires or the Option is otherwise cancelled. (1) Retirement. If an Optionee ceases to be an Employee because of ---------- Retirement (and not on account of termination for "cause" (as hereinafter defined)), such Optionee may exercise the Option immediately with respect to (i) the Shares which he or she could have purchased at the time of Retirement, and (ii) any Shares which would -8- <PAGE> have become available for purchase under the Option if the Optionee's employment had continued for one year after the date of Retirement. To the extent unexercised, the Option shall expire two (2) years after the date of Retirement or the date of expiration of the Option as shown in the applicable Option Agreement, whichever shall occur first. (2) Death. If the Committee does not determine otherwise with respect ----- to any Option, upon the death of an Employee who at the time of his or her death holds an Option, the Option shall be exercisable immediately (by the executor or the administrator of the deceased Optionee's estate or by a person who acquired the right to exercise the option by bequest or inheritance or by reason of such death) with respect to (i) the Shares which could have been purchased by the deceased Optionee at the time of his or her death, and (ii) any Shares which would have become available for purchase under the Option if the Optionee's employment had continued for one year after the date of death. To the extent unexercised, the Option shall expire (i) one year after the date of such death, or (ii) in the event of death following termination of employment by reason of Retirement as described in Subsection 7(i)(1) immediately above, the expiration date of the Option after Retirement, whichever occurs last. Notwithstanding the foregoing, the Committee may, in a special case, permit a longer period for exercise of an Option after death of an Optionee, but in no event shall such period extend beyond the date of expiration of the Option as set forth in the Option Agreement. (3) Disability. If an Optionee ceases active service as an Employee by ---------- reason of Disability, such Optionee shall have the right to exercise the Option at any time within twelve (12) months after such cessation of employment, but except as provided in the applicable Option Agreement, only to the extent that, at the date of such cessation of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable Option Agreement and had not previously been exercised. (4) Termination for Cause. If an Optionee's employment is terminated --------------------- for "cause" (as hereinafter defined), such Optionee's Option(s) shall expire immediately upon the giving to such Optionee of the notice of such termination. "Cause," for purposes of this Subsection 7(h), shall mean dishonest or fraudulent conduct which would normally be considered as sufficient basis for discharging an employee from a management and/or a supervisory position, or negligence, inaction or misconduct which constitutes failure by the Optionee to meet such Optionee's obligations and perform such Optionee's duties of employment. (5) Other Reasons. If an Optionee ceases to be an Employee for any ------------- reason other than those mentioned above in -9- <PAGE> Subsections (1), (2), (3) or (4), the Optionee shall have the right to exercise the Option at any time within thirty (30) days following such cessation, discharge or termination, but, except as otherwise provided in the applicable Option Agreement, only to the extent that, at the date of cessation, discharge or termination, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable Option Agreement and had not previously been exercised. (6) Leave of Absence. An Optionee's employment with the Corporation ---------------- shall not be considered as having been terminated while the Optionee is on military or sick leave or other bona fide leave of absence (such as temporary employment by the Government) if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the Optionee's right to re-employment with the Corporation is guaranteed either by statute or by contract. Where the period of such leave exceeds ninety (90) days and where the Optionee's rights to re-employment is not guaranteed either by statute or by contract, the Optionee's employment will be deemed to have terminated on the ninety-first (91st) day of such leave. Notwithstanding the extended exercise periods permitted by the Plan in event of Retirement or death, an Incentive Stock Option will continue to qualify as such only if it is exercised within three (3) months after the date of Retirement or death. Any Option exercised more than three (3) months after the date of Retirement or death will be treated as a Non-Qualified Stock Option. (j) Rights as a Stockholder. No one shall have rights as a stockholder ----------------------- with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. (k) Modification, Extension and Renewal of Options. Within the limitations ---------------------------------------------- of this Plan, the Committee may modify, extend or renew outstanding Options or accept the cancellation of outstanding Options (to the extent not previously exercised) for the granting of new Options in substitution therefor. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. (l) Other Provisions. The Option Agreements authorized under this Plan may ---------------- contain such other provisions not inconsistent with the terms of this Plan as the Committee shall deem advisable (including, without limitation, restrictions upon the exercise of the Option or subjecting the Shares issued pursuant to the exercise of an Option to rights of repurchase by the Corporation). -10- <PAGE> (m) Substitution of Option. Notwithstanding any inconsistent provisions or ---------------------- limits under this Plan, in the event the Corporation acquires (whether by purchase, merger or otherwise) all or substantially all of the outstanding capital stock or assets of another corporation by any reorganization or other transaction qualifying under Section 425 of the Code, the Committee may, in accordance with the provisions of that Section, substitute options under this Plan for options under the plan of the acquired company provided (i) the excess of the aggregate Fair Market Value of the Shares subject to an Option immediately after the substitution over the aggregate Option Price of such Shares is not more than the similar excess immediately before such substitution and (ii) the new Option does not give persons additional benefits, including any extension of the exercise period. 8. LIMITATION ON ANNUAL AWARDS. --------------------------- The aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under this Plan and all other plans maintained by the Corporation and its parent and subsidiary corporations, shall not exceed $100,000. 9. TERM OF PLAN. ------------ Options may be granted pursuant to this Plan until the expiration of this Plan on September 14, 2002. 10. RECAPITALIZATIONS. ----------------- Subject to any required action by stockholders, the number of Shares covered by this Plan as provided in Section 6 hereof, the number of Shares covered by each outstanding Option and the Exercise Price thereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of a stock dividend (but only of Common Stock) or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation. Unless provisions are made for the continuance of this Plan or the assumption by, or the substitution for outstanding Options of new options covering the stock of, a successor employer corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, in the event of any merger, consolidation, reorganization, liquidation or dissolution of the Corporation, or any exchange of Shares, each outstanding Option shall automatically be deemed to pertain to the securities and other property to which a holder of the number of Shares covered by the Option would have been entitled to receive in connection with any such event, and shall no longer pertain to the Shares. A dissolution or liquidation of the Corporation shall cause each outstanding Option to terminate. -11- <PAGE> To the extent that the foregoing adjustments relate to securities of the Corporation, such adjustments shall be made by the Committee, whose determination shall be conclusive and binding on all persons. Except as expressly provided in this Section 10, the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation, and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to this Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 11. SECURITIES LAW REQUIREMENTS. --------------------------- (a) Securities Act Requirements. No Option granted pursuant to this Plan --------------------------- shall be exercisable in whole or in part, and the Corporation shall not be obligated to sell any Shares subject to any such Option, if such exercise and sale would, in the opinion of counsel for the Corporation, violate the Securities Act of 1933 (or other Federal or State statutes having similar requirements) as it may be in effect at that time. As a condition to the issuance of any Shares upon exercise of an Option under this Plan, the Administrator may require the Optionee to furnish a written representation that he is acquiring the shares for investment and not with a view to distribution to the public. Such representations shall be required in cases where, in the opinion of the Administrator, they are necessary to enable the Corporation to comply with the provisions of the Securities Act of 1933, and any shareholder who gives such representation shall be released from it at such a time as the shares to which it applies are registered pursuant to the Securities Act of 1933. (b) Listing and Regulatory Requirements. Each Option shall be subject to ----------------------------------- the further requirements that if at any time the Committee shall determine in its discretion that the listing or qualification of the shares of stock subject to such Option under any securities exchange requirements or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issue of Shares thereunder, such Option may not be exercised in whole or in part unless and until such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. -12- <PAGE> 12. AMENDMENT OF THIS PLAN. ---------------------- The Board may from time to time, with respect to any Shares at the time not subject to Options, suspend or discontinue this Plan or revise or amend it in any respect whatsoever except that, without the approval of the Corporation's stockholders, no such revision or amendment shall: (a) Materially increase the benefits accruing to participants under this Plan; (b) Increase the number of Shares which may be issued under this Plan; (c) Materially modify the designation in Section 5 hereof with respect to the classes of persons eligible to receive Options; or (d) Amend this Section 12 to defeat its purpose. 13. APPLICATION OF FUNDS. -------------------- The proceeds received by the Corporation from the sale of Common Stock pursuant to the exercise of an Option will be used for general corporate purposes. 14. APPROVAL OF STOCKHOLDERS. ------------------------ This Plan shall be subject to approval by the affirmative vote of the holders of a majority of the outstanding Shares present and entitled to vote at the first annual meeting of stockholders of the Corporation following the adoption of this Plan, and in no event later than January 1, 1993. Prior to such approval, Options may be granted but shall not be exercisable. 15. EXECUTION. --------- To record the adoption of this Plan by the Board on September 15, 1992, and the amendment of this Plan by the Board on November 13, 1996, the Corporation has caused its authorized officer to affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------ Brian C. Koenig, Vice President-Human Resources [Seal] -13- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4 <SEQUENCE>5 <DESCRIPTION>AMENDED NON-EMPLOYEE DIRECTORS STOCK PLAN <TEXT> <PAGE> EXHIBIT 10.4 AMENDMENT NUMBER TWO TO THE NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN WHEREAS, Section 10 of Scientific-Atlanta, Inc.'s (the "Corporation's") Non- Employee Directors Stock Option Plan (the "Option Plan") empowers the Board to make amendments to the Option Plan of the type set forth below; NOW, THEREFORE, Section 5(b) of the Option Plan is hereby amended to delete the last sentence thereof which sentence currently reads as follows: "Notwithstanding the foregoing, shares acquired by the exercise of an Option under this Plan may not be transferred to the Company in full or in partial payment of the option price of shares purchased upon the exercise of an Option under this Plan unless and until such previously-acquired shares have been owned by the option holder for at least 365 days." All other sections and provisions of the Option Plan shall remain in full force and effect as written, without further amendment. To record the adoption of this Amendment by the Board on November 13, 1996, the Company has caused its authorized officers to execute this Amendment and affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------ Name: Brian C. Koenig -------------------------------- Title: Vice President Human Resources -------------------------------- By: /s/ William E. Eason, Jr. ------------------------------------ Name: William E. Eason, Jr. -------------------------------- Title: Secretary -------------------------------- [Seal] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.5 <SEQUENCE>6 <DESCRIPTION>DEFERRED COMPENSATION PLAN NON-EMPLOYEE DIRECTORS <TEXT> <PAGE> EXHIBIT 10.5 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS OF SCIENTIFIC-ATLANTA, INC. --------------------------------------------------- As Amended November 13, 1996 ARTICLE I - INTRODUCTION - ------------------------ 1.1 Name of the Plan ----------------- This Plan shall be known as the Deferred Compensation Plan for Non-Employee Directors of Scientific-Atlanta, Inc. 1.2 Purpose of Plan --------------- The purpose of the Plan is to provide non-employee directors of Scientific- Atlanta, Inc. the opportunity to defer receipt of cash compensation and compensation in the form of stock payable to them for services to Scientific- Atlanta, Inc. as directors. 1.3 Restatement of Plan ------------------- This document amends and restates the Plan effective as of November 13, 1996. All deferral elections made on or after November 13, 1996, shall be governed by the terms of the Plan as amended and restated herein. In addition, deferral elections made before November 13, 1996, by an individual who is a non- employee member of the Board on November 13, 1996, shall be governed prospectively by the terms of the Plan as amended and restated herein. ARTICLE II - DEFINITIONS - ------------------------ For purposes of this Plan the following words and phrases shall have the meanings and applications set forth below: 2.1 Plan ---- This Deferred Compensation Plan for Non-Employee Directors of Scientific- Atlanta, Inc., as amended from time to time. <PAGE> 2.2 Participant ----------- A non-employee member of the Board of Directors of Scientific-Atlanta, Inc. who elects to participate in this Plan. 2.3 Plan Year --------- The period beginning on the first day of July of each calendar year and ending on and including the last day of June of the next calendar year. The first Plan Year began on July 1, 1993, and ended on June 30, 1994. 2.4 Compensation ------------ The total of a Participant's Awards granted, and a Participant's Annual Retainer, Meeting Fees, and Committee Chair Retainer payments paid to the Participant, by Scientific-Atlanta, Inc. during a Plan Year. 2.5 Annual Retainer --------------- The amount paid each year, in quarterly payments, to non-employee members of the Board of Directors of Scientific-Atlanta, Inc. 2.6 Meeting Fees ------------ The amounts paid to a non-employee member of the Board of Directors of Scientific-Atlanta, Inc. for each meeting of the Board and each meeting of a standing or special committee he or she attends. 2.7 Committee Chair Retainer ------------------------ The amount paid each year, in quarterly payments to a non-employee director who chairs a standing or special committee of the Board of Directors. 2.8 Awards ------ The right to receive shares of Scientific-Atlanta Common Stock, granted under a stock award or elective grant made pursuant to the Scientific-Atlanta, Inc. Stock Plan for Non-Employee Directors. 2.9 Election Form ------------- The form completed by a Participant in order to make one or more Compensation Deferral Elections for the next Plan Year. 2 <PAGE> 2.10 Compensation Deferral Election ------------------------------ Each election made by a Participant to defer a portion of his or her Compensation by executing and submitting an Election Form. 2.11 Deferred Benefit Account ------------------------ An account maintained pursuant to and in accordance with the terms and conditions set forth in Article V hereof by or on behalf of Scientific-Atlanta, Inc. for each Compensation Deferral Election made by a Participant under this Plan. 2.12 Deferred Benefit Commencement Date ---------------------------------- The date irrevocably designated by a Participant with respect to each Compensation Deferral Election entered on an Election Form as the date on which the payment of the Deferred Benefits that accumulate as a result of each respective election is to begin. 2.13 Beneficiary ----------- A person or entity designated in accordance with the terms and conditions of this Plan to receive benefits upon the death of a Participant. 2.14 Election Amount --------------- The compensation amount (and right to a certain number of shares of Scientific-Atlanta Common Stock, if applicable) to be deferred pursuant to a single Compensation Deferral Election. 2.15 Service Termination Date ------------------------ The last day of the month immediately preceding the date of a Participant's Retirement, termination of service, determination of Total Disability, or death, whichever is applicable. 2.16 Retirement ---------- The discontinuation of service on the Board of Directors by a Participant who is fifty-five years of age or older with at least three years of Board service. 2.17 Total Disability ---------------- A physical or mental condition which is expected to be totally and permanently disabling as determined in accordance with the terms and conditions of the long-term disability insurance plan currently or most recently maintained by Scientific-Atlanta, Inc. for the benefit of its employees claiming to be totally disabled. 3 <PAGE> 2.18 Plan Committee -------------- The Human Resources and Compensation Committee of the Board of Directors of Scientific-Atlanta, Inc. 2.19 Determination Date ------------------ The last day of each Plan Year. 2.20 Plan Interest Rate ------------------ An annual rate of interest that shall be determined by the Plan Committee prior to the start of each Plan Year and credited to a Participant's Deferred Benefit Account during the Plan Year. 2.21 Deferred Benefits ----------------- The amounts (and right to a certain number of shares of Scientific-Atlanta Common Stock, if applicable) payable to a Participant or to his or her Beneficiary or estate following the Participant's Retirement, termination of service as a non-employee member of the Board, determination of Total Disability, or death. 2.22 Scientific-Atlanta Common Stock ------------------------------- The common stock of Scientific-Atlanta, Inc. ARTICLE III - ELIGIBILITY AND PARTICIPATION - ------------------------------------------- 3.1 Eligibility ----------- Directors who are not employees of Scientific-Atlanta, Inc. and who are actively serving on the Board of Directors of Scientific-Atlanta, Inc. shall be eligible to participate in this Plan. 3.2 Participation ------------- The Plan Committee shall notify in writing each director who becomes eligible to participate in this Plan of his or her eligibility. Eligible directors may participate in this Plan by completing an Election Form on or before the end of the month immediately preceding the month in which he or she wants to begin deferring Compensation. If timely received, such election to participate shall be effective on the first day of the succeeding month. 4 <PAGE> ARTICLE IV - COMPENSATION DEFERRAL - ---------------------------------- 4.1 Compensation Deferral Election ------------------------------ A Participant shall effect a Compensation Deferral Election by executing and submitting to the Plan Committee an Election Form. Subsequently, Scientific-Atlanta, Inc. shall defer Election Amounts deferred from the Participant's Awards, Annual Retainer, Committee Chair Retainer or Meeting Fees at the time cash compensation would have been paid (or at the time the right to receive shares of Scientific-Atlanta Common Stock was granted, as applicable). Each Election Amount shall be deferred for the Deferral Period specified with respect to the particular Compensation Deferral Election in the Election Form. All Compensation Deferral Elections shall apply solely to Compensation which will be paid (or granted) to a Participant beginning with the first day of the month commencing subsequent to the month in which the Compensation Deferral Election is received. Any Compensation Deferral Election will apply only to Compensation paid (or granted) during the Plan Year in which the election becomes effective. 4.2 Election Amounts ---------------- Each Election Amount specified by a Participant on an Election Form with respect to any Plan Year shall state in percentages the amount (and, to the extent applicable, the right to receive a specific number of shares of Scientific-Atlanta Common Stock), if any, which the Participant wishes to defer. An election to defer Compensation must equal a minimum of five percent up to a maximum of one hundred percent, in increments of five percentage points, of the Annual Retainer and/or Committee Chair Retainer and/or Meeting Fees and/or Awards which the Participant may be paid during the Plan Year. As to Awards, the election must be in whole shares, with no right to receive fractional shares being deferred. 4.3 Investment Election ------------------- A Participant shall specify in his or her Compensation Deferral Election the percentage of the Election Amount to be credited to an Interest Sub-Account, a Phantom Stock Sub-Account or a Split-Dollar Insurance Sub-Account, and the number of shares to be credited to an Award Sub-Account. 4.4 Deferral Period --------------- With the exception of any amounts deposited into a Split-Dollar Insurance Sub-Account, a Participant shall irrevocably specify in his or her Compensation Deferral Election a Deferred Benefit Commencement Date for all of the Election Amount to be deferred pursuant to such Compensation Deferral Election, which date shall be (i) a set date which is no earlier than July 1 of the calendar year following the end of the Plan Year in which the Election Amount is deferred; (ii) the Participant's Retirement; or (iii) a date which is either the fifth or the tenth anniversary following the date of the Participant's Retirement. 5 <PAGE> 4.5 Deferred Benefit Commencement Date; Method of Payment and Issuance ------------------------------------------------------------------ Except as otherwise provided in Article VI hereof, the Election Amounts that accumulate in a Deferred Benefit Account as a result of a Participant's making a Compensation Deferral Election will be paid (or issued, in the case of deferred Awards) by Scientific-Atlanta, Inc. to the Participant in the manner and commencing on the Deferred Benefit Commencement Date designated with respect to the Compensation Deferral Election in an Election Form. (a) Method of Cash Payments: Except as otherwise provided in Article VI ----------------------- hereof, the Participant may elect to receive payment of the Deferred Benefits held in the form of cash, which Deferred Benefits are attributable to a Compensation Deferral Election and which are held in an Interest Sub-Account, a Phantom Stock Sub-Account or an Award Sub-Account, pursuant to one of the following methods: (1) Annual, semi-annual or quarterly installments payable over a five, ten or fifteen year period, and commencing on the respective Deferred Benefit Commencement Date; or (2) A single lump sum payment of the entire balance of the respective Deferred Benefit Account, determined as of and payable on the Deferred Benefit Commencement Date. (b) Method of Issuance of Shares: Except as otherwise provided in ---------------------------- Article VI hereof, the Participant may elect to receive issuance of the Deferred Benefits held in the form of shares of Scientific-Atlanta Common Stock, which Deferred Benefits are attributable to a Compensation Deferral Election and which are held in an Award Sub-Account, pursuant to one of the following methods: (1) Annual, semi-annual or quarterly issuance of shares of Scientific- Atlanta Common Stock from an Award Sub-Account over a five, ten or fifteen year period, and commencing on the respective Deferred Benefit Commencement Date; provided, however, that no fractional shares of -------- ------- Scientific-Atlanta Common Stock will be issued; or (2) A single issuance of all shares subject to the specific Award Sub- Account, determined as of and payable on the Deferred Benefit Commencement Date. (c) Change in Payment or Issuance Method. A Participant may change the ------------------------------------ method of payment (or issuance of shares) selected with respect to a Compensation Deferral Election by submitting a request in writing to the Plan Committee on or before the December 31 immediately preceding the Deferred Benefit Commencement Date. 6 <PAGE> 4.6 Designation of Beneficiaries ---------------------------- A Participant shall designate a Beneficiary with respect to each Compensation Deferral Election and may change the Beneficiary designation with respect to any Compensation Deferral Election at any time by submitting to the Plan Committee a revised Beneficiary designation in writing reflecting the change. ARTICLE V - DEFERRED BENEFIT ACCOUNTS - ------------------------------------- 5.1 Deferred Benefit Accounts ------------------------- Scientific-Atlanta, Inc. shall cause to be established and maintained a separate Deferred Benefit Account, and within each such Deferred Benefit Account an Interest Sub-Account, a Phantom Stock Sub-Account, a Split-Dollar Insurance Sub-Account and an Award Sub-Account with respect to each Compensation Deferral Election. Scientific-Atlanta, Inc. shall credit the Election Amount deferred pursuant to each such election to the Participant's appropriate Deferred Benefit Account, and to the Interest Sub-Account, Phantom Stock Sub-Account, a Split- Dollar Insurance Sub-Account and Award Sub-Account as specified in the Election, as of the date deferred from Participant's Compensation as provided in Section 4.1 hereof. 5.2 Interest Sub-Account -------------------- Except as otherwise provided by Section 6.2(a) hereof, interest shall accrue at the Plan Interest Rate on any amounts credited to an Interest Sub- Account from the date on which the amount is credited. 5.3 Phantom Stock Sub-Account ------------------------- If a Participant elects all or a portion of the Election Amount to be credited to the Phantom Stock Sub-Account, the amount so credited shall, solely for purposes of determining the value of the Phantom Stock Sub-Account, be deemed to be a number of shares of Scientific-Atlanta Common Stock determined as follows: (a) Conversion into Scientific-Atlanta Common Stock: The amount credited to ----------------------------------------------- the Phantom Stock Sub-Account shall be converted on the date of such credit into an equivalent number of hypothetical shares of Scientific-Atlanta Common Stock (including hypothetical fractional shares) by dividing the amount credited by the average closing price of Scientific-Atlanta Common Stock, as reported on the composite tape of New York Stock Exchange issues, for the 20 business days immediately preceding the last day of the month in which such amount is credited. (b) Deemed Reinvestment of Dividends: The number of hypothetical shares of -------------------------------- Scientific-Atlanta Common Stock credited to a Participant's Phantom Stock Sub-Account shall be increased on each date that a dividend is paid on Scientific-Atlanta Common Stock. 7 <PAGE> The number of additional hypothetical shares of Scientific-Atlanta Common Stock credited to a Participant's Phantom Stock Sub-Account as a result of such increase shall be determined, first, by multiplying the total number of hypothetical shares of Scientific-Atlanta Common Stock credited to such Sub-Account immediately before such increase by the amount of the dividend paid per share of Scientific-Atlanta Common Stock on the dividend payment date, and, then, by dividing the product so determined by the closing sale price of Scientific-Atlanta Common Stock on the composite tape of New York Stock Exchange issues on the dividend payment date (or if there was no reported sale of Scientific-Atlanta Common Stock on such date, on the next preceding day on which there was such a reported sale). (c) No Rights as Shareholder: At no time shall the hypothetical shares ------------------------ credited to a Phantom Stock Sub-Account be considered as actual shares of Scientific-Atlanta Common Stock, and a Participant shall have no rights as a shareholder of Scientific-Atlanta, Inc. by virtue of such hypothetical shares. 5.4 Award Sub-Account ----------------- If a Participant elects that an Award be deferred and credited to an Award Sub-Account, such Award will remain in such Award Sub-Account until the Deferred Benefit Commencement Date related to such Award Sub-Account occurs. No interest will accrue on the Award in such Award Sub-Account, but amounts equivalent to the dividends that would have been paid if the shares had been issued will accrue on such Awards ("Accrued Dividends"). A Participant shall not have any rights as a shareholder of Scientific- Atlanta, Inc. while an Award is held in an Award Sub-Account. 5.5 Split-Dollar Insurance Sub-Account ---------------------------------- Amounts credited to a Split-Dollar Insurance Sub-Account shall be used to pay premiums on life insurance insuring the life of the Participant, or, at the Participant's election, the lives of the Participant and his or her spouse on a joint and survivor basis, pursuant to such policies of insurance, and with such insurers, as the Plan Committee may determine from time to time. Scientific-Atlanta, Inc. shall be the owner of such insurance policy or policies, and the proceeds thereof shall be payable as provided in an Endorsement Split-Dollar Agreement to be entered into between the Participant and Scientific-Atlanta, Inc. 5.6 Determination of Account Balance -------------------------------- (a) As of each Determination Date, the current balance of a Participant's Deferred Benefit Account shall be the sum of (i) the balance credited to the Interest Sub-Account as of the immediately preceding Determination Date, plus any Compensation deferred by such Participant and credited to such Interest Sub-Account since the previous Determination Date, plus the amount of interest credited to such Interest Sub-Account since the preceding Determination Date, plus (ii) the value of the hypothetical ---- shares of Scientific-Atlanta 8 <PAGE> Common Stock, determined as set forth in Section 5.5(a) above, in the Phantom Stock Sub-Account at that time, including deferred amounts credited to that Sub-Account since the last Determination Date and deemed reinvestment, if any, of dividends since the last Determination Date, plus ---- (iii) the number of shares the Participant has the right to receive under Awards credited to the Award Sub-Account and the total Accrued Dividends credited to the Award Sub-Account, as of the immediately preceding Determination Date, plus the number of shares the Participant has the right to receive under additional Awards and additional Accrued Dividends credited to such Award Sub-Account since the previous Determination Date, minus any payments to or withdrawals by the Participant from the Deferred ----- Benefit Account since the previous Determination Date. (b) The dollar value of the hypothetical shares of Scientific-Atlanta Common Stock credited to a Participant's Phantom Stock Sub-Account on any date shall be determined by multiplying the number of hypothetical shares of Scientific-Atlanta Common Stock credited to such Sub-Account on that date by the average closing price of Scientific-Atlanta Common Stock, as reported on the composite tape of New York Stock Exchange issues for the 12 months immediately preceding that date, or for that number of whole months for which the hypothetical shares have been credited to such sub-account, if less than 12 months. (c) Effect of Recapitalization: In the event of a transaction or event -------------------------- described in this paragraph (c), the number of hypothetical shares of Scientific-Atlanta Common Stock credited to a Participant's Phantom Stock Sub-Account and the number of shares of Scientific-Atlanta Common Stock subject to Awards credited to a Participant's Award Sub-Account shall be adjusted in such a manner as the Plan Committee deems equitable. A transaction or event is described in this paragraph (c) if and only if (i) it is a dividend or other distribution (whether in the form of cash, shares, other securities, or other property), extraordinary cash dividend, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, re-purchase, or exchange of shares or other securities, the issuance of warrants or other rights to purchase shares or other securities, or other similar corporate transaction or event, and (ii) the Plan Committee determines that such transaction or event affects the shares of Scientific-Atlanta Common Stock, such that an adjustment pursuant to this paragraph (c) is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan. 5.7 Statement of Accounts --------------------- Within ninety (90) days after each Determination Date, the Plan Committee shall submit to each Participant a statement in such form as the Plan Committee shall deem desirable, setting forth a summary of the Compensation Deferral Elections made and the current balances of the Deferred Benefit Accounts and related Sub-Accounts maintained for the Participant as of the Determination Date. 9 <PAGE> ARTICLE VI - PAYMENT (AND ISSUANCE) OF DEFERRED BENEFITS - -------------------------------------------------------- 6.1 General ------- Except as otherwise provided herein, Deferred Benefits credited to the Interest Sub-Account, the Phantom Stock Sub-Account or the Award Sub-Account shall be payable (and issued, if applicable) to a Participant upon the Deferred Benefit Commencement Date and pursuant to the manner of payment (or issuance, if applicable) selected by the Participant on the applicable Compensation Deferral Election or any permitted modification thereof. If the Participant has elected to receive such Deferred Benefits in installments, the amount payable in the first year of such installments shall be an amount that will fully amortize the balance in the Participant's Deferred Benefit Account determined as of the Deferred Benefit Commencement Date over the five, ten or fifteen year period, based on assumed interest earnings at the Plan Interest Rate (to the extent applicable) in effect for such first year. Thereafter, the amount payable (or to be issued) in each succeeding year shall be adjusted to an amount that will fully amortize the remaining balance in such Deferred Benefit Account over the remaining years in the aforesaid five, ten, or fifteen year installment period based on the Plan Interest Rate (to the extent applicable) for such succeeding year. Proceeds of life insurance purchased with amounts credited to the Split- Dollar Insurance Sub-Account shall be payable as provided in the respective policy or policies and the applicable Endorsement Split-Dollar Agreement. 6.2 Service Termination ------------------- Deferred Benefits shall be paid (or issued, as appropriate) to a Participant after his or her termination, as follows: (a) Upon termination of service as a director by a Participant prior to the Participant's attaining fifty-five years of age: (1) the amounts in each of the Participant's Deferred Benefit Accounts shall cease to earn interest (to the extent applicable) and the balance of each Deferred Benefit Account shall be determined in accordance with Article V hereof, and (2) Scientific-Atlanta, Inc. shall pay (or issue, as appropriate) to the Participant the balance of each of the Participant's Deferred Benefit Accounts not according to the Participant's elections as specified in his or her Election Forms but in a lump sum, to be paid within sixty days of the termination. (b) For purposes of this Plan, termination of service as a director by a Participant who is fifty-five years or older with at least three years of Board Service will in all instances be construed to be and will be treated as Retirement by such a Participant, and Scientific-Atlanta, Inc. will pay (or issue) to such a Participant all amounts in his or her Deferred Benefit Accounts in accordance with Section 6.1 hereof. 10 <PAGE> 6.3 Total Disability ---------------- Deferred Benefits shall be paid (or issued, as appropriate) to a Participant after his or her becoming Totally Disabled, as follows: (a) Upon the determination that a Participant is Totally Disabled, no further deferrals will be made from his or her Compensation, and Scientific Atlanta, Inc. shall pay (or issue, as appropriate) to the Participant the balance in each of the Participant's Deferred Benefit Accounts as follows: (1) the date of Total Disability shall be deemed to be (i) the Deferred Benefit Commencement Date, if the Deferred Benefit Commencement Date for one or more Deferred Benefit Accounts is a set date prior to the Participant's fifty-fifth birthday and the Total Disability occurs before such date, or (ii) the Participant's Retirement, for those Deferred Benefit Accounts, if any, for which the Deferred Benefit Commencement Date is the Participant's Retirement or later; (2) following Total Disability, the amounts in his or her Interest Sub- Account shall continue to earn interest, and the hypothetical shares in the Phantom Stock Sub-Account shall continue to earn dividends, as provided in the Plan, until paid out to the Participant as provided herein; and (3) the amount (including shares of Scientific-Atlanta Common Stock) in any Deferred Benefit Account shall be payable (or issued) to the Participant on the Deferred Benefit Commencement Date which applies to such Deferred Benefit Account, taking into consideration the aforesaid deemed dates (Section 6.3(a)(1)(i) and (ii)) pursuant to the method(s) requested by the Participant in his or her Election Form. (b) For purposes of this Plan, once a Participant is determined to be Totally Disabled, he or she will continue to be deemed Totally Disabled irrespective of the Participant's ceasing to be considered Totally Disabled for purposes of any other plan maintained by Scientific-Atlanta, Inc. (c) In the event that a Totally Disabled Participant resumes service with the Board following his or her Service Termination Date, such Totally Disabled Participant may resume participation in this Plan at the discretion of the Plan Committee; provided, however, that in any event the -------- ------- Totally Disabled Participant shall continue to receive payments of Deferred Benefits pursuant to the terms of this Plan. 11 <PAGE> 6.4 Death ----- Deferred Benefits shall be paid (or issued, as appropriate) after the death of a Participant, as follows: (a) After the death of a Participant, Scientific-Atlanta, Inc. shall pay the amounts (or issue shares of Scientific-Atlanta Common Stock, if applicable) in each of the Participant's Deferred Benefit Accounts to the Beneficiary designated by the Participant with respect to each Compensation Deferral Election in each of his or her respective Election Forms, or, if the Participant fails to so designate a Beneficiary, to his or her estate. (b) If the Participant dies prior to Retirement, Scientific-Atlanta, Inc. shall pay to each respective Beneficiary or to the Participant's estate, as the case may be, the amounts in each of the Participant's respective Deferred Benefit Accounts (or issue the shares held in the Award Sub- Account), in the same manner as set forth in Section 6.3(a). (c) If the Participant dies following Retirement or being determined to be Totally Disabled but prior to his or her receiving the full payment of all Deferred Benefits payable to him or her, Scientific-Atlanta, Inc. shall pay (or issue, if appropriate) to the respective Beneficiaries or to the Participant's estate, as the case may be, the same Deferred Benefits in the same manner as it otherwise would have paid (or issued) to the Participant as if the Participant had not died, unless the Participant has specified in his or her Election Form a different manner of payment to a Beneficiary. (d) Notwithstanding the other provisions of Section 6.4, a Beneficiary may request a different payment schedule than what has been elected by the Participant, if such change does not further defer the scheduled payout, by submitting a request in writing to the Plan Committee. The granting of any such request shall be within the discretion of the Plan Committee. (e) If a Beneficiary who is receiving Deferred Benefits pursuant to this Plan dies, the remainder of the Deferred Benefits to which such Beneficiary was entitled at the time of his or her death shall continue to be payable to the Beneficiary or to beneficiaries designated by such Beneficiary in writing to the Plan Committee (or to the Beneficiary's estate or heirs if he or she fails to designate a beneficiary or beneficiaries). ARTICLE VII - PLAN ADMINISTRATION - --------------------------------- 7.1 Plan Committee -------------- This Plan and all matters related to it shall be administered by the Plan Committee. The Plan Committee shall have the authority to interpret the provisions of this Plan and to determine all questions arising in the administration, interpretation and application of this Plan. The Plan 12 <PAGE> Committee may, in its sole discretion, delegate any or all of its responsibilities relative to administration of this Plan to such officers of Scientific-Atlanta, Inc. as it designates. ARTICLE VIII - PARTICIPANT'S RIGHTS - ----------------------------------- 8.1 Ineligibility to Participate in Plan ------------------------------------ In the event that the Plan Committee determines that a Participant has become ineligible to continue to participate in this Plan, the Plan Committee may terminate Participant's participation in this Plan upon ten (10) days' prior written notice to the Participant. In such event, the Participant will not be entitled to make further Compensation Deferral Elections, but all current Compensation Deferral Elections shall continue in effect. All Deferred Benefit Accounts shall be payable as otherwise provided in Article VI hereof. 8.2 Termination of Plan ------------------- The Board of Directors of Scientific-Atlanta, Inc. may terminate this Plan at any time, and termination of this Plan shall be effective upon ten (10) days' written notice to all Participants in the Plan. Upon such termination of this Plan, Scientific-Atlanta, Inc. shall pay all active Participants their Deferred Benefits as provided in Section 6.1 as if each such Participant had actually reached the Deferred Benefit Commencement Date for all of his or her Deferred Benefit Accounts. 8.3 Participant's Rights -------------------- The right of a Participant or his or her Beneficiary or estate to receive any benefits under this Plan shall be solely that of an unsecured creditor of Scientific-Atlanta, Inc. Any asset acquired or held by Scientific-Atlanta, Inc. or funds allocated by Scientific-Atlanta, Inc. in connection with the liabilities assumed by Scientific-Atlanta, Inc. pursuant to this Plan shall not be deemed to be held under any trust for the benefit of any Participant or of any of Participant's Beneficiaries or to be security for the performance of Scientific Atlanta, Inc.'s obligations hereunder but shall be and remain a general asset of Scientific-Atlanta, Inc. 8.4 Spendthrift Provision --------------------- Neither a Participant nor any person claiming through a Participant shall have the right to commute, sell, assign, transfer, pledge, mortgage or otherwise encumber, transfer, hypothecate or convey any Deferred Benefit payable hereunder or any part thereof in advance of its actually having been received by a Participant or other appropriate recipient under this Plan, and the right to receive all such Deferred Benefits is expressly declared to be non-assignable and non-transferable. Prior to the actual payment (or issuance, if appropriate) thereof, no part of the Deferred Benefits payable hereunder shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any person claiming through a Participant 13 <PAGE> or be transferable by operation of law in the event of a Participant's or any such other person's bankruptcy or insolvency. 8.5 Cooperation ----------- Each Participant will cooperate with Scientific-Atlanta, Inc. by furnishing any and all information reasonably requested by Scientific-Atlanta, Inc. in order to facilitate the payment of Deferred Benefits hereunder and by taking any such other actions as Scientific-Atlanta, Inc. or the Plan Committee may reasonably request. ARTICLE IX - MISCELLANEOUS - -------------------------- 9.1 Amendments and Modifications ---------------------------- The Board of Directors of Scientific-Atlanta, Inc. may amend this Plan in any respect at any time. In addition, the Plan Committee may authorize the following types of amendments to the Plan without Board approval: (a) amendments required by law; (b) amendments that relate to the administration of the Plan and that do not materially increase the cost of the Plan; and (c) amendments that are designed to resolve possible ambiguities, inconsistencies or omissions in the Plan and that do not materially increase the cost of the Plan. All authorized amendments shall be effective upon ten (10) days' written notice to the Participants. If any such amendment affects a Participant's Deferred Benefits, such affected Participant may, within ninety (90) days after the effective date of such amendment, elect to terminate his or her participation in the Plan pursuant to this Section 9.1, in which event the date of such election shall be deemed to be such Participant's Deferred Benefit Commencement Date. 9.2 Inurement --------- This Plan shall be binding upon and shall inure to the benefit of Scientific-Atlanta, Inc. and each Participant hereto, and their respective beneficiaries, heirs, executors, administrators, successors and assigns. 9.3 Governing Law ------------- This Plan is made in accordance with and shall be governed in all respects by the laws of the state of Georgia. 9.4 Tax Withholding --------------- All payments (and issuances of shares) made pursuant to this Plan shall be subject to the withholding of state and federal income taxes, FICA tax or other taxes to the extent required by applicable law. The Plan Committee shall, before delivery of a cash payment or a stock certificate, require the Participant to make arrangements satisfactory to the Plan Committee to satisfy such 14 <PAGE> withholding requirements. A Participant receiving shares of Scientific-Atlanta, Inc. Common Stock may elect to satisfy such withholding requirements by having the Plan Committee withhold shares otherwise issuable to the Participant, with the Participant's election being made by delivering to the Plan Committee a written election stating his or her desire to so satisfy such withholding requirements. To record the adoption of the Plan (as amended and restated) by the Board on November 13, 1996, the Company has caused its authorized officers to execute this Plan and affix the corporate name and seal hereto. SCIENTIFIC-ATLANTA, INC. By: /s/ Brian C. Koenig ------------------------------------ Name: Brian C. Koenig -------------------------------- Title: Vice President Human Resources -------------------------------- By: /s/ William E. Eason, Jr. ------------------------------------ Name: William E. Eason, Jr. -------------------------------- Title: Secretary -------------------------------- [Seal] 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>7 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> Exhibit 11 SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------------- -------------------------- December 27, December 29, December 27, December 29, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 77,205 76,379 77,166 76,699 Add - Additional shares of common stock assumed issued upon exercise of options using the "treasury stock" method as it applies to the computation of primary earnings per share 702 969 622 1,297 ------- ------- ------- ------- NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 77,907 77,348 77,788 77,996 Add - Additional shares of common stock assumed issued upon exercise of options using the "treasury stock" method as it applies to the computation of fully diluted earnings per share 49 50 129 20 ------- ------- ------- ------- NUMBER OF SHARES OUTSTANDING ASSUMING FULL DILUTION 77,956 77,398 77,917 78,016 ======= ======= ======= ======= NET EARNINGS (LOSS) FOR PRIMARY AND FULLY DILUTED COMPUTATION Continuing Operations $13,752 $ 6,601 $24,562 $10,687 ======= ======= ======= ======= Discontinued Operations -- -- 3,400 (13,210) ======= ======= ======= ======= Net Earnings (Loss) $13,752 $ 6,601 $27,962 $(2,523) ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE PRIMARY Continuing Operations $ 0.18 $ 0.09 $ 0.32 $ 0.14 Discontinued Operations -- -- 0.04 (0.17) ------- ------- ------- ------- Net Earnings (Loss) $ 0.18 $ 0.09 $ 0.36 $ (0.03) ======= ======= ======= ======= FULLY DILUTED Continuing Operations $ 0.18 $ 0.09 $ 0.32 $ 0.14 Discontinued Operations -- -- 0.04 (0.17) ------- ------- ------- ------- Net Earnings (Loss) $ 0.18 $ 0.09 $ 0.36 $ (0.03) ======= ======= ======= ======= </TABLE> Note: In the three and six months ended December 29, 1995 the dilutive effect of equivalent shares derived from stock options was less than 3 percent and therefore, the equivalent shares were not included in the computation of earnings per share. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>8 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED DECEMBER 27, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-27-1997 <PERIOD-START> JUN-29-1996 <PERIOD-END> DEC-27-1996 <CASH> 96,021 <SECURITIES> 0 <RECEIVABLES> 229,964 <ALLOWANCES> 3,808 <INVENTORY> 178,580 <CURRENT-ASSETS> 548,227 <PP&E> 246,502 <DEPRECIATION> 83,942 <TOTAL-ASSETS> 769,763 <CURRENT-LIABILITIES> 239,186 <BONDS> 400 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 38,686 <OTHER-SE> 450,233 <TOTAL-LIABILITY-AND-EQUITY> 769,763 <SALES> 543,848 <TOTAL-REVENUES> 543,848 <CGS> 379,741 <TOTAL-COSTS> 379,741 <OTHER-EXPENSES> 57,141 <LOSS-PROVISION> 153 <INTEREST-EXPENSE> 254 <INCOME-PRETAX> 36,121 <INCOME-TAX> 11,559 <INCOME-CONTINUING> 24,562 <DISCONTINUED> 3,400 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 27,962 <EPS-PRIMARY> 0.36 <EPS-DILUTED> 0.36 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>9 <DESCRIPTION>CAUTIONARY STATEMENTS <TEXT> <PAGE> Exhibit 99 CAUTIONARY STATEMENTS From time to time, the company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. In fact, this Form 10-Q (or any other periodic reporting documents required by the 1934 Act) may contain forward-looking statements reflecting the current views of the company concerning potential future events or developments. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements. These Cautionary Statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. In order to comply with the terms of the "safe harbor," the company cautions investors that any forward- looking statements made by the company are not guarantees of future performance and that a variety of factors could cause the company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the company's forward-looking statements. The risks and uncertainties which may affect the operations, performance, development and results of the company's business include, but are not limited to, the following: uncertainties relating to the development and ownership of intellectual property; uncertainties relating to the ability of the company and other companies to enforce their intellectual property rights; uncertainties relating to economic conditions; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; the company's dependence on the cable television industry and cable television spending; signal security; the pricing and availability of equipment, materials and inventories; technological developments; performance issues with key suppliers and subcontractors; governmental export and import policies; global trade policies; worldwide political stability and economic growth; regulatory uncertainties; delays in testing of new products; rapid technology changes; the highly competitive environment in which the company operates; the entry of new, well-capitalized competitors into the company's markets; changes in the financial markets relating to the company's capital structure and cost of capital; and uncertainties inherent in international operations and foreign currency fluctuations. The words "believe," "expect," "anticipate," "project," "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

SVU

https://www.sec.gov/Archives/edgar/data/95521/0000950131-97-000177.txt

-----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, IdYXcIR8ybpa4ZbNTP+RukurY72tmBpuXx2/HnmmiSatzxzBul6tkVHBCwz6ZukM x2WvwACiLD55BNR8/NyhSw== <SEC-DOCUMENT>0000950131-97-000177.txt : 19970115 <SEC-HEADER>0000950131-97-000177.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950131-97-000177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERVALU INC CENTRAL INDEX KEY: 0000095521 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 410617000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0224 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05418 FILM NUMBER: 97505484 BUSINESS ADDRESS: STREET 1: 11840 VALLEY VIEW RD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6128284000 MAIL ADDRESS: STREET 1: 11840 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: SUPER VALU STORES INC DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period (12 weeks) ended November 30, 1996. [ ] 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 1-5418 SUPERVALU INC. (Exact name of registrant as specified in its Charter) DELAWARE 41-0617000 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11840 Valley View Road, Eden Prairie, Minnesota 55344 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 828-4000 ------------------------------ Former name, former address and former fiscal year, if changed since last report: N/A - -------------------------------------------------------------------------------- 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 ---------- ---------- The number of shares outstanding of each of the issuer's classes of Common Stock as of November 30, 1996 is as follows: Title of Each Class Shares Outstanding ------------------- ------------------ Common Shares 66,917,997 <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Item 1: Financial Statements - -------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - -------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------------- (In thousands, except per share data) Third Quarter (12 Weeks) Ended --------------------------------------- November 30, 1996 December 2, 1995 - -------------------------------------------------------------------------------------- <S> <C> <C> Net sales $ 3,904,841 $ 3,886,595 Costs and expenses: Cost of sales 3,519,631 3,519,750 Selling and administrative expenses 291,940 279,502 Amortization of goodwill 4,488 4,060 Interest Interest expense 32,523 31,076 Interest income 3,233 4,750 ------------------------------------ Interest expense, net 29,290 26,326 ------------------------------------ Total costs and expenses 3,845,349 3,829,638 ------------------------------------ Earnings before equity in earnings of ShopKo and income taxes 59,492 56,957 Equity in earnings of ShopKo 5,023 4,661 ------------------------------------ Earnings before income taxes 64,515 61,618 Provision for income taxes Current 22,624 5,333 Deferred 1,674 17,840 ------------------------------------ Income tax expense 24,298 23,173 ------------------------------------ Net earnings $ 40,217 $ 38,445 ==================================== Net earnings per common share $ .60 $ .57 Weighted average number of common shares outstanding 67,110 67,841 Dividends declared per common share $ .250 $ .245 Supplemental information: After-tax LIFO expense $ (3,300) $ (2,897) All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 2 <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Item 1: Financial Statements - ---------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - ---------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ---------------------------------------------------------------------------------- (In thousands, except per share data) Year-to-date (40 Weeks) Ended -------------------------------------- November 30, 1996 December 2, 1995 - ---------------------------------------------------------------------------------- <S> <C> <C> Net sales $ 12,662,347 $ 12,639,029 Costs and expenses: Cost of sales 11,417,484 11,460,135 Selling and administrative expenses 948,000 889,448 Amortization of goodwill 14,272 13,570 Interest Interest expense 105,057 107,966 Interest income 11,861 16,345 ------------------------------------ Interest expense, net 93,196 91,621 ------------------------------------ Total costs and expenses 12,472,952 12,454,774 ------------------------------------ Earnings before equity in earnings of ShopKo and income taxes 189,395 184,255 Equity in earnings of ShopKo 9,469 7,990 ----------------------------------- Earnings before income taxes 198,864 192,245 Provision for income taxes Current 68,401 36,599 Deferred 8,400 37,972 ----------------------------------- Income tax expense 76,801 74,571 ----------------------------------- Net earnings $ 122,063 $ 117,674 =================================== Net earnings per common share $ 1.81 $ 1.72 Weighted average number of common shares outstanding 67,366 68,509 Dividends declared per common share $ .745 $ .725 Supplemental information: After-tax LIFO expense $ (1,630) $ (5,214) All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 3 <PAGE> <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries Third Quarter as of Fiscal Year End - ---------------------------------------------------------------------------------------------------------------- (In thousands) November 30, December 2, February 24, Assets 1996 1995 1996 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current Assets Cash and cash equivalents $ 7,134 $ 5,396 $ 5,215 Receivables, less allowance for losses of $17,554 at November 30, 1996, $25,848 at December 2, 1995, and $22,064 at February 24, 1996 440,422 419,162 380,611 Inventories 1,285,973 1,179,209 1,029,911 Other current assets 126,973 125,134 137,972 --------------------------------------------- Total current assets 1,860,502 1,728,901 1,553,709 Long-term notes receivable 56,719 67,816 36,731 Long-term investment in direct financing leases 70,672 71,460 74,185 Property, plant and equipment Land 143,438 163,046 146,535 Buildings 960,780 921,502 903,621 Property under construction 21,841 58,747 53,775 Leasehold improvements 148,009 135,097 137,551 Equipment 1,072,010 982,428 988,963 Assets under capital leases 303,614 219,103 270,549 --------------------------------------------- 2,649,692 2,479,923 2,500,994 Less accumulated depreciation and amortization Owned property, plant and equipment 958,874 859,230 855,429 Assets under capital leases 55,211 42,118 45,399 --------------------------------------------- Net property, plant and equipment 1,635,607 1,578,575 1,600,166 Investment in ShopKo 198,582 185,967 193,975 Goodwill 495,528 503,689 499,688 Other assets 248,589 202,261 225,049 --------------------------------------------- Total assets $4,566,199 $4,338,669 $4,183,503 ============================================= Liabilities and Stockholders' Equity - ---------------------------------------------------------------------------------------------------------------- Current Liabilities Notes payable $ 291,095 $ 239,125 $ 158,027 Accounts payable 1,071,508 1,061,845 965,444 Current maturities of long-term debt 62,941 10,181 8,483 Current obligations under capital leases 21,313 18,030 17,955 Other current liabilities 203,772 175,856 176,793 --------------------------------------------- Total current liabilities 1,650,629 1,505,037 1,326,702 Long-term debt 1,099,130 1,202,572 1,144,600 Long-term obligations under capital leases 322,543 251,595 300,962 Deferred income taxes 56,201 - 37,076 Other liabilities 165,671 184,224 157,987 Stockholders' equity Preferred stock 5,908 5,908 5,908 Common stock 75,335 75,335 75,335 Capital in excess of par value 13,010 12,704 12,737 Retained earnings 1,408,715 1,304,853 1,336,942 Treasury stock, at cost (230,943) (203,559) (214,746) --------------------------------------------- Total stockholders' equity 1,272,025 1,195,241 1,216,176 --------------------------------------------- Total liabilities and stockholders' equity $4,566,199 $4,338,669 $4,183,503 ============================================= Quarterly data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 4 <PAGE> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------------------------- (In thousands, except per share data) Capital in Preferred Common Excess of Treasury Retained Stock Stock Par Value Stock Earnings Total - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balances at February 25, 1995 $5,908 $75,335 $12,717 $(137,245) $1,236,507 $1,193,222 Net earnings - - - - 166,433 166,433 Sales of common stock under option plans - - (84) 3,458 - 3,374 Cash dividends declared on common stock - $.970 per share - - - - (65,998) (65,998) Compensation under employee incentive plans - - 104 (869) - (765) Purchase of shares for treasury - - - (80,090) - (80,090) - -------------------------------------------------------------------------------------------------- Balances at February 24, 1996 5,908 75,335 12,737 (214,746) 1,336,942 1,216,176 Net earnings - - - - 122,063 122,063 Sales of common stock under option plans - - 159 2,322 - 2,481 Cash dividends declared on common stock - $.745 per share - - - - (50,290) (50,290) Compensation under employee incentive plans - - 114 326 - 440 Purchase of shares for treasury - - - (18,845) - (18,845) - -------------------------------------------------------------------------------------------------- Balances at November 30, 1996 $5,908 $75,335 $13,010 $(230,943) $1,408,715 $1,272,025 ================================================================================================== </TABLE> See notes to consolidated financial statements. Interim data subject to year-end audit. 5 <PAGE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------------- (In thousands) - --------------------------------------------------------------------------------------------------------------------------------- Year-to-date (40 weeks ended) - --------------------------------------------------------------------------------------------------------------------------------- November 30, December 2, 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash flows from operating activities Net earnings $ 122,063 $ 117,674 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in earnings of ShopKo (9,469) (7,990) Dividends received from ShopKo 4,862 4,862 Depreciation and amortization 176,906 168,097 Provision for losses on receivables 6,138 1,938 Gain on sale of property, plant and equipment (1,410) (13,322) Deferred income taxes 8,400 37,972 Treasury shares contributed to employee incentive plan 23 (64) Changes in assets and liabilities: Receivables (64,383 (37,642) Inventory (252,826) (69,418) Other current assets 21,226 (3,176) Direct finance leases 7,244 6,451 Accounts payable 102,639 54,855 Other liabilities 29,037 (34,545) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 150,450 225,692 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Additions to long-term notes receivable (41,209) (23,488) Payments received on long-term notes receivable 21,221 28,766 Proceeds from sale of property, plant and equipment 39,171 88,255 Purchase of property, plant and equipment (177,237) (186,366) Business acquisitions, net of cash acquired (4,996) - Other investing activities (31,777) (3,432) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (194,827) (96,265) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net issuance of short-term notes payable 133,068 12,957 Proceeds from issuance of long-term debt 3,193 147,500 Repayment of long-term debt (5,608) (159,208) Reduction of obligations under capital leases (17,562) (14,280) Proceeds for purchase of common stock under option plans 2,159 1,431 Dividends paid (50,109) (49,449) Payments for purchase of treasury stock (18,845) (67,821) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 46,296 (128,870) - ---------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,919 557 Cash and cash equivalents at beginning of year 5,215 4,839 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of third quarter $ 7,134 $ 5,396 ================================================================================================================================== All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 6 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting Policies - ------------------- The summary of significant accounting policies is included in the notes to consolidated financial statements in the 1996 annual report of SUPERVALU INC. ("SUPERVALU" or the "company"). Restructuring - ------------- A restructuring charge of $204.8 million was recognized in the third quarter of fiscal 1995. During the third quarter of fiscal 1997, the company utilized approximately $10 million of the reserve primarily for losses on disposition of property and carrying costs in both the food distribution and retail food segments as well as employee separation costs. Losses on disposition of property included the disposal of land and building for previously closed retail stores. ShopKo Stores, Inc. Sale - ------------------------ On September 9, 1996 the company announced that it had agreed to sell its 14.7 million shares of ShopKo Stores, Inc. under an agreement to combine ShopKo and Phar-Mor, Inc. under a holding company, Cabot Noble, Inc. Under the terms of the agreement, the company will receive approximately $223 million in cash and approximately $25 million in common stock, which represents approximately a 6 percent interest in Cabot Noble. The company expects to realize a gain on the transaction which is expected to close late in the fourth quarter, fiscal 1997, or early in the first quarter, fiscal 1998. Statement of Registrant - ----------------------- The data presented herein is unaudited but, in the opinion of management, includes all adjustments necessary for a fair presentation of the consolidated financial position of the company and its subsidiaries at November 30, 1996 and December 2, 1995 and the results of the company's operations and cash flows for the periods then ended. These interim results are not necessarily indicative of the results of the fiscal years as a whole. A limited review of this data has been performed by the company's independent certified public accountants, Deloitte & Touche LLP. A copy of their report is attached as an exhibit to this report. 7 <PAGE> Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - --------------------- Net earnings increased 5% in the quarter, driven by strong performance in the retail food segment. Net sales were even with last year as the company continued significant focus and investment in ADVANTAGE related activities. The following table sets forth items from the company's Consolidated Statements of Earnings as percentages of net sales: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- Third Quarter Year-to-Date (12 weeks) Ended (40 weeks) Ended - --------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal Fiscal 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales 100.00% 100.00% 100.00% 100.00% Cost of sales (90.14) (90.56) (90.17) (90.67) Selling and administrative expenses (7.59) (7.29) (7.60) (7.15) Interest expense (.83) (.80) (.83) (.85) Interest income .08 .12 .10 .13 - --------------------------------------------------------------------------------------------- Earnings before equity in earnings of ShopKo, and income taxes 1.52 1.47 1.50 1.46 Equity in earnings of ShopKo .13 .12 .07 .06 Provision for income taxes (.62) (.60) (.61) (.59) - --------------------------------------------------------------------------------------------- Net earnings 1.03% .99% .96% .93% ============================================================================================= </TABLE> NET SALES Net sales were even with last year for the quarter and year-to-date. Retail food sales increased 7.8% and 6.7% for the quarter and year-to-date, respectively, offset by a 1.0% decline in food distribution segment sales for both the quarter and year-to-date. Food distribution sales decreased slightly due to competitive market conditions at the wholesale and retail levels, the planned discontinuance of service to a major customer in the Southeast and the continuing impact of the liquidation of a major customer in the Northeast. This effect was partially mitigated by the addition of new retail customers in food distribution and the growth of Save-A- Lot limited assortment stores. Save-A-Lot acquired 21 limited assortment stores and a distribution facility during the quarter, marking its entry into the California market. Food price inflation, as measured by the company, was 1.4% and 1.1% for the quarter and year-to-date, respectively. Retail food sales increased over last year due primarily to new store openings. The increase in retail sales was partially offset by the closing of underperforming corporate-owned retail stores in the prior fiscal year pursuant to the restructuring plan. Same store sales increased .8% and 2.8% for the quarter and year-to-date, respectively. The same-store sales trend was caused by improved performance in the limited assortment stores and strong merchandising refocus in certain operations, offset somewhat by increased competition in the Cincinnati market. 8 <PAGE> <TABLE> <CAPTION> Net Sales by Segment - ------------------------------------------------------------------------------- (In thousands) Third Quarter (12 weeks) - ------------------------------------------------------------------------------- November 30, 1996 December 2, 1995 Net Sales % of Total Net Sales % of Total - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Food distribution $3,473,122 88.9% $3,509,225 90.3% Retail food 1,084,109 27.8 1,006,001 25.9 Less: Eliminations (652,390) (16.7) (628,631) (16.2) - ------------------------------------------------------------------------------- Total net sales $3,904,841 100.0% $3,886,595 100.0% =============================================================================== Net Sales by Segment - ------------------------------------------------------------------------------- (In thousands) Year-to-Date (40 weeks) - ------------------------------------------------------------------------------- November 30, 1996 December 2, 1995 Net Sales % of Total Net Sales % of Total - ------------------------------------------------------------------------------- Food distribution $11,202,722 88.5% $11,317,590 89.6% Retail food 3,494,220 27.6 3,275,281 25.9 Less: Eliminations (2,034,595) (16.1) (1,953,842) (15.5) - ------------------------------------------------------------------------------- Total net sales $12,662,347 100.0% $12,639,029 100.0% =============================================================================== </TABLE> GROSS PROFIT Gross profit as a percentage of net sales increased to 9.9% and 9.8% in the quarter and year-to-date, respectively, compared with 9.4% and 9.3%, respectively for the same periods last year. The increases were due principally to the growing proportion within the company's total sales mix of the higher- margined retail food business. Food distribution gross profit margin increased for the quarter and year-to-date due primarily to certain merchandising initiatives. Year-to-date gross profit margin also increased due to favorable LIFO expense. Retail food gross profit margin increased for the quarter and year-to-date as a result of pricing adjustments from price modeling, changed promotional practices, improved product mix and the closing of underperforming corporate-owned retail stores. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses were 7.6% of net sales for both the quarter and year-to-date, compared with 7.3% and 7.2% for the same periods last year. The higher percentage was primarily due to the increased proportion of the company's retail food segment, which operates at a higher selling and administrative expense percentage than the food distribution segment, and the increase in direct and indirect costs related to the transformation of the distribution operations through the ADVANTAGE program. Food distribution selling and administrative expenses as a percent of net sales were higher than last year due to 9 <PAGE> increased expenses associated with ADVANTAGE and the impact of fixed expenses as a percent of slightly decreased sales. Retail food selling and administrative expenses as a percent of net sales were lower than last year due primarily to fixed expenses as a percent of higher sales and tight expense control. The continuing ADVANTAGE expenses were incurred in connection with project implementation costs including, but not limited to, increased systems development costs, regional organizational realignment costs, employee training and relocation, consulting fees and retailer training and promotional programs. Substantial progress has been made in the company's ADVANTAGE initiatives. During fiscal 1997 the company has opened the Anniston, Alabama regional distribution facility and has begun the following: distributing general merchandise and health and beauty care products from the Anniston facility to most of the customers in the Southeast region; reconfiguring the existing local distribution centers in the Southeast region to achieve additional cost efficiencies; commencing construction of the Midwest regional distribution facility; training retailers for the category management program in the Midwest and Central regions; and category management program efforts in various phases of implementation across four of seven regions. Activity Based Sell efforts in the Midwest region have been rescheduled due to holidays and the company's desire to add new functionality with activities planned to resume in the Spring of fiscal 1998. OPERATING EARNINGS The company's pre-tax operating earnings (earnings before interest, corporate expenses, equity in earnings of ShopKo Stores, Inc. ("ShopKo"), and taxes) increased to $93.5 million in the quarter from $88.5 million last year and were $299.6 million year-to-date compared with $294.7 million last year. Food distribution operating earnings decreased 1.5% to $78.6 million and 8.5% to $237.6 million in the quarter and year-to-date, respectively, due to higher ADVANTAGE related expenses and the general softness in sales, partially offset by favorable bakery manufacturing earnings, increased sales at Save-A-Lot and for the year-to-date only a reduction in LIFO expense. Retail food operating earnings increased 71.3% to $14.9 million and 76.8% to $62.0 million in the quarter and year-to-date, respectively, due to strong gross margin resulting from pricing, promotional and product mix changes and the closing of underperforming corporate-owned retail stores, as well as an increase in sales. INTEREST EXPENSE AND INCOME Interest expense increased to $32.5 million for the third quarter compared with $31.1 million last year due to increased levels of short-term debt utilized to fund increased inventory levels. Interest expense decreased to $105.1 million year-to-date compared with $108.0 million for the same period last year, reflecting a reduction in debt levels earlier in the year and slightly lower short-term interest rates. Interest income decreased to $3.2 and $11.8 million for the quarter and year-to-date, respectively, compared with $4.7 and $16.3 million for the same periods last year, primarily due to the reduction of notes receivable as a result of the February, 1996 sale of notes in the ordinary course of business. 10 <PAGE> EQUITY IN EARNINGS OF SHOPKO SUPERVALU's share of ShopKo net earnings increased to $5.0 million and $9.5 million in the quarter and year-to-date, respectively, compared with $4.7 million and $8.0 million for the same periods last year. As reported by ShopKo, sales increased 20.4% to $591.2 million and net earnings increased 7.9% for the third quarter compared with last year. The increase in net earnings was primarily the result of increased sales related to the ProVantage prescription benefit management business. INCOME TAXES The effective tax rate was 37.7% and 38.6% in the quarter and year-to-date, respectively, compared with 37.6% and 38.8% for the same periods last year. NET EARNINGS Net earnings were $40.2 and $122.1 million for the quarter and year-to-date, respectively, compared with $38.4 and $117.7 million for the same periods last year. Net earnings were positively impacted by improved gross margin which more than offset increased expenses related to the ADVANTAGE project. The year-to- date variance was also positively impacted by decreased LIFO expense in the current year. Although ADVANTAGE initiatives are generating benefits, the company anticipates spending under ADVANTAGE to exceed benefits through fiscal 1997 and late into fiscal 1998, primarily due to information technology related expenses. The company is currently undergoing its annual budget and planning process and will further assess the costs and benefits anticipated under the ADVANTAGE program and the costs to address year 2000 issues. The company is utilizing a third party to assist in the assessment of the year 2000 expenses and potential business impact, either of which could affect the timing of certain ongoing ADVANTAGE efforts. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Internally generated funds, principally from the company's food distribution business, plus the issuance of short-term notes payable provided the major source of capital for liquidity and capital growth. Cash provided from operations year-to-date was $150.5 million compared with $225.7 million last year. The decrease was due to increased inventory levels caused by timing of the Thanksgiving holiday and new store openings, partially offset by a corresponding increase in accounts payable and increased levels of other liabilities. Cash provided from the issuance of short-term notes payable year-to-date was $133.1 million compared with $13.0 million last year. Cash generated was primarily used to finance capital expenditures of $177.2 million, pay dividends of $50.1 million and invest in long-term notes receivable of $41.2 million. 11 <PAGE> During the year, the Board of Directors rescinded the previous treasury stock purchase program and approved a new treasury stock purchase program authorizing the company to repurchase up to 5.0 million shares to fund stock related compensation plans. The company repurchased 395,900 and 653,900 shares at a cost of $11.6 million and $18.8 million for the quarter and year-to-date, respectively. There were no treasury stock purchases under the old program during fiscal 1997. On September 9, 1996 the company announced that it had agreed to sell its 14.7 million shares of ShopKo Stores, Inc. under an agreement to combine ShopKo and Phar-Mor, Inc. under a holding company, Cabot Noble, Inc. Under the terms of the agreement, the company will receive approximately $223 million in cash and approximately $25 million in common stock, which represents approximately a 6 percent interest in Cabot Noble. The company expects to realize a gain on the transaction which is expected to close late in the fourth quarter, fiscal 1997, or early in the first quarter, fiscal 1998. The use of the proceeds from the transaction may include growing the existing food distribution and retail businesses through internal initiatives or acquisitions, buying back company stock and paying off debt. SUPERVALU will continue to use short-term and long-term debt as a supplement to internally generated funds to finance its activities. The company has a $400 million "shelf registration" in effect pursuant to which the company could issue $242.5 million of additional debt securities. A $400 million revolving credit agreement also is in place and expires in May 2000. Short-term commercial paper totaling $100 million has been classified as long-term debt as the company has the ability and intent to renew these obligations beyond one year. Maturities of debt issued will depend on management's views with respect to the relative attractiveness of interest rates at the time of issuance. The company's financial position and long-term debt ratings remain strong, with a BBB+ rating from Standard and Poor's Ratings Group and a Baa1 long-term debt rating from Moody's Investors Services, Inc. The company's investment grade ratings, the available credit facilities and internally-generated funds provide the company with the financial flexibility to meet liquidity needs. CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The information in this 10Q includes forward-looking statements. Important risks and uncertainties that could cause actual results to differ materially from those discussed in such forward looking statements are detailed in Exhibit 99.1; other risks or uncertainties may be detailed from time to time in the company's future Securities and Exchange Commission filings. 12 <PAGE> PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K. - ------- --------------------------------- (a) Exhibits filed with this Form 10-Q: (15) Letters from Deloitte & Touche regarding unaudited interim financial information. (27) Financial Data Schedule containing a summary of financial information extracted from the Consolidated Balance Sheets as of November 30, 1996. (99.1) Cautionary Statements pursuant to the Securities Litigation Reform Act. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter. 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. SUPERVALU INC. (Registrant) Dated: January 14, 1997 By: /s/ Jeffrey C. Girard -------------------------------------- Jeffrey C. Girard Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized officer of Registrant) Dated: January 14, 1997 By: /s/ Isaiah Harris -------------------------------------- Isaiah Harris Vice President and Controller (Principal Accounting Officer and duly authorized officer of Registrant) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>2 <DESCRIPTION>DELOITTE & TOUCHE - INTERIM FINANCIAL INFORMATION <TEXT> <PAGE> LETTER REGARDING UNAUDITED INFORMATION Stockholders and Board of Directors SUPERVALU INC. Eden Prairie, Minnesota We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim information of SUPERVALU INC. and subsidiaries for the periods ended November 30, 1996 and December 2, 1995, as indicated in our report dated January 1, 1997. Because we did not perform an audit on such information, we expressed no opinion on it in our report. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended November 30, 1996, is incorporated by reference in the Registration Statements (No. 33-28310, No. 33- 16934, No. 2-56896, No. 33-50071, and No. 333-10151 on Form S-8 and No. 33-56415 on Form S-3). We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant within the meaning of Sections 7 and 11 of that act. /s/ Deloitte & Touche LLP January 9, 1997 <PAGE> INDEPENDENT ACCOUNTANTS' REVIEW REPORT Stockholders and Board of Directors SUPERVALU INC. Eden Prairie, Minnesota We have reviewed the accompanying consolidated balance sheets of SUPERVALU INC. (the Company) and subsidiaries as of November 30, 1996 and September 2, 1995 and the related consolidated statements of earnings and cash flows for the 12-week periods then ended and the consolidated statement of stockholders' equity for the interim period ended November 30, 1996. These consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of SUPERVALU INC. and subsidiaries as of February 24, 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 5, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 24, 1996 and the consolidated statement of stockholders' equity for the year then ended is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ Deloitte & Touche LLP Minneapolis, Minnesota January 9, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the Consolidated Balance Sheets as of November 30, 1996 and the Consolidated Statement of Earnings for the 40 weeks ended November 30, 1996 and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-22-1997 <PERIOD-START> FEB-25-1996 <PERIOD-END> NOV-30-1996 <CASH> 7,134 <SECURITIES> 0 <RECEIVABLES> 457,976 <ALLOWANCES> (17,554) <INVENTORY> 1,285,973 <CURRENT-ASSETS> 1,860,502 <PP&E> 2,649,692 <DEPRECIATION> (1,014,085) <TOTAL-ASSETS> 4,556,199 <CURRENT-LIABILITIES> 1,650,629 <BONDS> 1,421,673 <COMMON> 75,335 <PREFERRED-MANDATORY> 0 <PREFERRED> 5,908 <OTHER-SE> 1,190,782 <TOTAL-LIABILITY-AND-EQUITY> 4,556,199 <SALES> 12,662,347 <TOTAL-REVENUES> 12,662,347 <CGS> 11,417,484 <TOTAL-COSTS> 11,417,484 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 6,138 <INTEREST-EXPENSE> 105,057 <INCOME-PRETAX> 198,864 <INCOME-TAX> 76,801 <INCOME-CONTINUING> 122,063 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 122,063 <EPS-PRIMARY> 1.81 <EPS-DILUTED> 1.81 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99.1 <SEQUENCE>4 <DESCRIPTION>CAUTIONARY STATEMENT-SAFE HARBOR PROVISIONS <TEXT> <PAGE> EXHIBIT (99.1) CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 ("Act"), SUPERVALU INC. (the "Company") is filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward- looking statements made by, or on behalf of the Company. When used in this Quarterly Report on Form 10-Q for the quarterly period (12 weeks) ended November 30, 1996 and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, other communications, and in oral statements made by or with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify forward-looking statements within the meaning of the Act. The following cautionary statements are for use as a reference to a readily available written document in connection with forward looking statements as defined in the Act. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. WHOLESALE BUSINESS RISKS The Company's sales and earnings at wholesale are dependent on the Company's ability to retain existing customers and attract new customers, as well as its ability to control costs. While the Company believes that the ADVANTAGE initiative, including its new Activity Based Sell ("ABS") pricing, new market driving services, and regional logistics, will enable it to attain its goals, certain factors could adversely impact the Company's results, including: decline of its independent retailer customer base due to competition and other factors; loss of corporate retail sales due to increased competition and other risks detailed more fully below; consolidations of retailers or competitors; increased self-distribution by chain retailers; increase in operating costs; the possibility that the Company will incur additional costs and expenses due to further rationalization or consolidation of distribution centers; entry of new or non-traditional distribution systems into the industry; possible delays or increased costs in implementing the ADVANTAGE initiative; manufacturers do not change their pricing, transportation, and/or promotional programs in cooperation with the Company's new pricing methods; and possible loss of retailer customers who do not accept the ADVANTAGE changes. In addition, timing of certain ADVANTAGE efforts could be impacted by the information technology related expenses associated with addressing year 2000 issues. RISKS OF EXPANSION AND ACQUISITIONS The Company intends to continue to grow its retail and wholesale segments in part through acquisitions. Expansion is subject to a number of risks, including the adequacy of the Company's capital resources; the location of suitable store or distribution center sites and the negotiation of acceptable lease terms; ability to hire, train and integrate employees; and possible costs and other risks of integrating or adapting operational systems. In addition acquisitions involve a number of special risks, including: making acquisitions at acceptable <PAGE> rates of return; the diversion of management's attention to assimilation of the operations and personnel of the acquired business; potential adverse short-term effects on the Company's operating results; and amortization of acquired intangible assets. RETAIL BUSINESS RISKS The Company's retail segment faces risks which may prevent the Company from maintaining or increasing retail sales and earnings including: competition from other retail chains, supercenters, non-traditional competitors, and emerging alternative formats; operating risks of certain strategically important retail operations; and adverse impact from the entry of other retail chains, supercenters and non-traditional or emerging competitors into markets where the Company has a retail concentration. LIQUIDITY Management anticipates that ADVANTAGE capital spending will be funded in significant part through reductions in working capital. If ADVANTAGE capital spending significantly exceeds working capital reductions or other capital needs arise, additional funding could be required from cash flow or other sources. In addition, acquisitions could affect the Company's borrowing costs and future financial flexibility. LITIGATION While the Company believes that it is currently not subject to any material litigation, the costs and other effects of legal and administrative cases and proceedings and settlements are impossible to predict with certainty. The current environment for litigation involving food wholesalers may increase the risk of litigation being commenced against the Company. The Company would incur the costs of defending any such litigation whether or not any claim had merit. The foregoing should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

SYY

https://www.sec.gov/Archives/edgar/data/96021/0000096021-97-000002.txt

-----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, D3rZSt5S4NbKm34QRl55HpwFoB8KPsX4tFpO9oK7A0Wg1xZ2HN7UgVYQuChbyZVO Wtwa7i3qjkcdFfATd94wFA== <SEC-DOCUMENT>0000096021-97-000002.txt : 19970211 <SEC-HEADER>0000096021-97-000002.hdr.sgml : 19970211 ACCESSION NUMBER: 0000096021-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSCO CORP CENTRAL INDEX KEY: 0000096021 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 741648137 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06544 FILM NUMBER: 97520216 BUSINESS ADDRESS: STREET 1: 1390 ENCLAVE PKWY CITY: HOUSTON STATE: TX ZIP: 77077 BUSINESS PHONE: 7135841390 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>2ND QUARTER 10-Q <TEXT> <PAGE> Page 1 of 13 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 28, 1996 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 1-6544 SYSCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-1648137 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1390 Enclave Parkway Houston, Texas 77077-2099 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (281) 584-1390 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 [ ] 176,653,051 shares of common stock were outstanding as of January 31, 1997. <PAGE> 2 PART I. FINANCIAL INFORMATION --------------------------------------------------- Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company, without audit, with the exception of the June 29, 1996 consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1996 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. Certain amounts in the prior year have been reclassified to conform to the current presentation. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Fiscal 1996 Annual Report on Form 10-K. A review of the financial information herein has been made by Arthur Andersen LLP, independent public accountants, in accordance with established professional standards and procedures for such a review. A letter from Arthur Andersen LLP concerning their review is included as Exhibit 15. <PAGE> 3 <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) <CAPTION> Dec. 28, June 29, Dec. 30, 1996 1996 1995 ----------- --------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- <S> <C> <C> <C> Current assets Cash $ 87,651 $ 107,759 $ 117,193 Accounts and notes receivable, less allowances of $33,550, $16,380 and $27,521 1,094,169 1,039,759 1,018,231 Inventories 766,343 723,937 742,003 Deferred taxes 39,323 32,429 35,650 Prepaid expenses 22,541 18,443 22,809 ---------- ---------- ---------- Total current assets 2,010,027 1,922,327 1,935,886 Plant and equipment at cost, less depreciation 1,024,961 990,642 971,331 Goodwill and intangibles, less amortization 251,338 250,473 254,339 Other assets 165,524 161,963 160,375 ---------- ---------- ---------- Total assets $3,451,850 $3,325,405 $3,321,931 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 10,967 $ 9,390 $ 52,082 Accounts payable 806,773 779,124 766,744 Accrued expenses 211,654 212,746 196,044 Accrued income taxes 35,200 23,330 13,527 Current maturities of long-term debt 13,883 12,934 7,103 ---------- --------- ---------- Total current liabilities 1,078,477 1,037,524 1,035,500 Long-term debt 682,953 581,734 569,370 Deferred taxes 222,070 231,469 218,637 Shareholders' equity Preferred stock, par value $1 per share: Authorized 1,500,000 shares; issued none --- --- --- Common stock, par value $1 per share: Authorized 500,000,000 shares; issued 191,293,725 shares 191,294 191,294 191,294 Paid-in capital 34,763 35,179 36,988 Retained earnings 1,671,711 1,568,589 1,476,055 ---------- ---------- ---------- 1,897,768 1,795,062 1,704,337 Less cost of treasury stock, 14,113,937, 10,880,919 and 7,453,996 shares 429,418 320,384 205,913 ---------- ---------- ---------- Total shareholders' equity 1,468,350 1,474,678 1,498,424 ---------- ---------- ---------- Total liabilities and shareholders' equity $3,451,850 $3,325,405 $3,321,931 ========== ========== ========== <FN> Note: The June 29, 1996 balance sheet has been taken from the audited financial statements at that date. </TABLE> <PAGE> 4 <TABLE> SYSCO Corporation and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) <CAPTION> 26-Week Period Ended 13-Week Period Ended ---------------------------- ----------------------------- Dec. 28, Dec. 30, Dec. 28, Dec. 30, 1996 1995 1996 1995 ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> Sales $ 7,289,571 $ 6,593,495 $ 3,610,348 $ 3,301,585 Costs and expenses Cost of sales 5,982,959 5,410,459 2,954,481 2,705,801 Operating expenses 1,038,423 939,741 518,694 469,894 Interest expense 22,805 19,704 11,888 10,332 Other, net (259) (794) (18) (350) ------------ ----------- ------------ ------------ Total costs and expenses 7,043,928 6,369,110 3,485,045 3,185,677 ------------ ----------- ------------ ------------ Earnings before income taxes 245,643 224,385 125,303 115,908 Income taxes 95,801 87,510 48,868 45,204 ------------ ------------ ------------ ------------ Net earnings $ 149,842 $ 136,875 $ 76,435 $ 70,704 ============ ============ ============ ============ Average number of shares outstanding 179,233,095 182,970,451 178,412,247 183,156,420 ============ ============ ============ ============ Earnings per share $ 0.84 $ 0.75 $ 0.43 $ 0.39 ============ ============ ============ ============ Dividends paid per common share $ 0.26 $ 0.22 $ 0.13 $ 0.11 ============ ============ ============ ============ (/Table) <PAGE> 5 </TABLE> <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) <CAPTION> 26-Week Period Ended ------------------------ Dec. 28, Dec. 30, 1996 1995 --------- ---------- <S> <C> <C> Operating activities: Net earnings $ 149,842 $ 136,875 Add non-cash items: Depreciation and amortization 78,455 68,650 Interest on Liquid Yield Option Notes ---- 2,274 Deferred tax provision (16,369) 26 Provision for losses on accounts receivable 13,640 8,849 Additional investment in certain assets and liabilities net of effect of business acquired: (Increase) in receivables (61,466) (94,547) (Increase) in inventories (39,444) (74,142) (Increase) in prepaid expenses (3,646) (4,124) Increase in accounts payable 22,325 58,364 (Decrease) in accrued expenses (1,762) (10,087) Increase in accrued income taxes 11,870 3,152 (Increase) in other assets (7,715) (11,195) -------- -------- Net cash provided by operating activities 145,730 84,095 -------- -------- Investing activities: Additions to plant and equipment (101,778) (139,538) Sales and retirements of plant and equipment 885 2,171 Acquisition of business (5,330) --- -------- -------- Net cash used for investing activities (106,223) (137,367) Financing activities: Bank and commercial paper borrowings 94,237 164,608 Other debt borrowings 2,318 2,610 Common stock reissued from treasury 16,307 15,862 Treasury stock purchases (125,757) (106,276) Dividends paid (46,720) (40,225) -------- -------- Net cash (used for) provided by financing activities (59,615) 36,579 -------- -------- Net (decrease) in cash (20,108) (16,693) Cash at beginning of period 107,759 133,886 --------- -------- Cash at end of period $ 87,651 $ 117,193 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 22,801 $ 19,230 Income taxes 101,738 82,749 </TABLE> <PAGE> 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The liquidity and capital resources discussion included on page 11 of the Company's Fiscal 1996 Annual Report on Form 10-K remains applicable, other than the common stock repurchase program described below. In Fiscal 1992, the Company began a common stock repurchase program and purchased 8,000,000 shares in Fiscal 1992 and 1993. In September 1993, the Board of Directors authorized an additional 10,000,000 shares to be purchased under this stock repurchase program. Under this program, 3,000,000 shares were purchased in Fiscal 1994, 2,100,000 shares in Fiscal 1995, and 4,900,000 shares in Fiscal 1996. In February 1996, the Board of Directors authorized an additional 6,000,000 shares to be purchased under this program. All 6,000,000 shares have been purchased under this program during the first half of Fiscal 1997. In November 1996, the Board of Directors authorized an additional 6,000,000 shares to be purchased under this program. Under this latest authorization, 217,800 shares were purchased through December 28, 1996. Results of Operations --------------------- Sales increased 11% during the 26 weeks and 9% in the second quarter of Fiscal 1997 over comparable periods of the prior year. Cost of sales also increased 11% during the 26 weeks and 9% in the second quarter of Fiscal 1997 which is in line with the sales increases. Operating expenses for the 26 week periods presented remained approximately the same as a percent of sales, while the second quarter of Fiscal 1997 was above the same period in 1996, due primarily to a bad debt write-off in connection with a restaurant customer's bankruptcy. Interest expense in the current periods increased over the prior periods due to increased borrowings. Income taxes for the current periods reflect an effective rate of 39%, the same as in the prior year periods. Increases in pretax earnings, net earnings and earnings per share for the periods shown resulted from a combination of the above factors. <PAGE> 7 PART II. OTHER INFORMATION ------------------------- Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on November 1, 1996 ("1996 Annual Meeting"). At the 1996 Annual Meeting the following persons were elected to serve as directors of the Company for three year terms: John W. Anderson, Judith B. Craven, Bill M. Lindig, Richard G. Merrill and Phyllis S. Sewell The terms of the following persons as directors of the Company continued after the 1996 Annual Meeting: John F. Baugh, Colin G. Campbell, Charles H. Cotros, Frank A. Godchaux III, Jonathan Golden, Donald J. Keller, Frank H. Richardson, Arthur J. Swenka, Thomas B. Walker, Jr., and John F. Woodhouse. At the 1996 Annual Meeting, the stockholders voted upon the election of directors, as noted above, and on: (a) Approval of the reservation of 5,000,000 additional shares of Sysco Corporation Common Stock under the Sysco Corporation 1974 Employees' Stock Purchase Plan. The results of such vote were as follows: <PAGE> 8 <TABLE> <CAPTION> Number of Votes Cast -------------------- Withheld and Broker Matter Voted Upon For Against Abstained Non-votes ----------------- ----------- ---------- ------------ --------- <S> <C> <C> <C> <C> (a) Approval of the reservation of additional shares under the 1974 Employees' Stock Purchase Plan 150,929,968 3,259,826 1,784,418 None (b) Election as Director: John W. Anderson 149,309,290 6,665,121 None None Judith B. Craven 148,987,854 6,986,557 None None Bill M. Lindig 149,391,171 6,583,240 None None Richard G. Merrill 149,309,724 6,664,687 None None Phyllis S. Sewell 149,273,842 6,700,569 None None </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3(i) Restated Certification of Incorporation, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1991. 3(ii) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 11 Statement re computation of per share earnings. 15 Letter from Arthur Andersen LLP dated February 5, 1997, re unaudited financial statements. 27 Financial Data Schedule. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. <PAGE> 9 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. SYSCO CORPORATION (Registrant) By /s/ JOHN K. STUBBLEFIELD, JR. ----------------------------- John K. Stubblefield, Jr. Senior Vice President & Chief Financial Officer Date: February 5, 1997 <PAGE> 10 <TABLE> EXHIBIT INDEX ---------------------- <CAPTION> SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- <S> <C> <C> 3(i) Restated Certification of Incorporation, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1991. 3(ii) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 11 Sysco Corporation and its Consolidated Subsidiaries statement re computation of per share earnings. 11 15 Letter from Arthur Andersen LLP dated February 5, 1997, re unaudited financial statements. 12 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule. 13 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 EPS COMP <TEXT> <PAGE> 11 Exhibit 11 SYSCO CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS <TABLE> <CAPTION> 26-Week Period Ended 13-Week Period Ended ----------------------------- ----------------------------- Dec. 28, 1996 Dec. 30, 1995 Dec. 28, 1996 Dec. 30, 1995 ------------- -------------- ------------- -------------- Calculation of Primary Earnings Per Share: - ----------------------------------------- <S> <C> <C> <C> <C> Net earnings applicable to common stock $ 149,842,000 $ 136,875,000 $ 76,435,000 $ 70,704,000 ============= ============= ============= ============= Average number of common shares and common stock equivalents outstanding 179,233,095 182,970,451 178,412,247 183,156,420 Dilutive effect of stock options <F1> --- --- --- --- ------------- ------------- ------------- ------------- 179,233,095 182,970,451 178,412,247 183,156,420 ============= ============= ============= ============= Primary earnings per share $ 0.84 $ 0.75 $ 0.43 $ 0.39 ============= ============= ============= ============= Calculation of Fully Diluted Earnings Per Share: - ---------------------------- Net earnings applicable to common stock $ 149,842,000 $ 136,875,000 $ 76,435,000 $ 70,704,000 ============= ============= ============= ============= Average number of shares outstanding on a fully diluted basis - same as for calculation of primary earnings per share 179,233,095 182,970,451 178,412,247 183,156,420 Dilutive effect of stock options and Liquid Yield Option Notes <F2> --- --- --- --- ------------- ------------- ------------- ------------ 179,233,095 182,970,451 178,412,247 183,156,420 ============= ============= ============= ============ Fully diluted earnings per share $ 0.84 $ 0.75 $ 0.43 $ 0.39 ============= ============= ============= ============ <FN> <F1> Maximum possible dilutive effect of outstanding options in each period is less than 3%. <F2> Maximum possible dilutive effect of outstanding options and Liquid Yield Option Notes during each period is less than 3%. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>3 <DESCRIPTION>AA LETTER <TEXT> <PAGE> 12 Exhibit 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Sysco Corporation: We have reviewed the consolidated balance sheet of Sysco Corporation (a Delaware corporation) and its consolidated subsidiaries as of December 28, 1996, and the related consolidated statements of results of operations and cash flows for the twenty-six week and thirteen week periods then ended included in the Company's Quarterly Report on Form 10-Q. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Houston, Texas February 5, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from Item 1. Financial Statements and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-Mos <FISCAL-YEAR-END> JUN-28-1997 <PERIOD-END> DEC-28-1996 <CASH> 87,651 <SECURITIES> 0 <RECEIVABLES> 1,127,719 <ALLOWANCES> (33,550) <INVENTORY> 766,343 <CURRENT-ASSETS> 2,010,027 <PP&E> 1,838,800 <DEPRECIATION> (813,839) <TOTAL-ASSETS> 3,451,850 <CURRENT-LIABILITIES> 1,078,477 <BONDS> 682,953 <COMMON> 191,294 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,277,056 <TOTAL-LIABILITY-AND-EQUITY> 3,451,850 <SALES> 7,289,571 <TOTAL-REVENUES> 7,289,571 <CGS> 5,982,959 <TOTAL-COSTS> 7,043,928 <OTHER-EXPENSES> (259) <LOSS-PROVISION> 13,640 <INTEREST-EXPENSE> 22,805 <INCOME-PRETAX> 245,643 <INCOME-TAX> 95,801 <INCOME-CONTINUING> 149,842 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 149,842 <EPS-PRIMARY> 0.84 <EPS-DILUTED> 0.84 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

TEK

https://www.sec.gov/Archives/edgar/data/96879/0000096879-97-000002.txt

-----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, SlXtkIQEiKnI91iGwRX/CZOR8hdD3ciDT7OO5i2RzIt1rGc3E6lE2lLCKGuFFSHj JW6G06srsnkCVFh6VUzXNQ== <SEC-DOCUMENT>0000096879-97-000002.txt : 19970114 <SEC-HEADER>0000096879-97-000002.hdr.sgml : 19970114 ACCESSION NUMBER: 0000096879-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKTRONIX INC CENTRAL INDEX KEY: 0000096879 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 930343990 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04837 FILM NUMBER: 97504672 BUSINESS ADDRESS: STREET 1: 2660 SW PKWY CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036277111 MAIL ADDRESS: STREET 1: P O BOX 100 CITY: WILSONVILLE STATE: OR ZIP: 97070-1000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>1997 Q2 10-Q REPORT <TEXT> ================================================================================ <PAGE> SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended November 30, 1996, 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 1-4837 TEKTRONIX, INC. (Exact name of registrant as specified in its charter) OREGON 93-0343990 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26600 S.W. PARKWAY WILSONVILLE, OREGON 97070-1000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 627-7111 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No______ AT DECEMBER 28, 1996 THERE WERE 33,003,376 COMMON SHARES OF TEKTRONIX, INC. OUTSTANDING. (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.) <PAGE> TEKTRONIX, INC. AND SUBSIDIARIES - -------------------------------- INDEX - ----- PAGE NO. -------- Financial Statements: Condensed Consolidated Balance Sheets - 2 November 30, 1996 and May 25, 1996 Condensed Consolidated Statements of Operations - 3 for the Quarter Ended November 30, 1996 and the Quarter Ended November 25, 1995 Condensed Consolidated Statements of Cash Flows - 4 for the Quarter Ended November 30, 1996 and the Quarter Ended November 25, 1995 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial 6 Condition and Results of Operations Part II. Other Information 9 Signatures 10 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) Nov. 30, May 25, (In thousands) 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 35,777 $ 36,644 Accounts receivable - net 273,198 375,309 Inventories 261,104 264,624 Other current assets 72,688 77,003 ---------- ---------- Total current assets 642,767 753,580 Property, plant, and equipment 706,664 676,543 Accumulated depreciation and amortization (383,121) (368,980) ---------- ---------- Property, plant and equipment - net 323,543 307,563 Property held for sale 13,292 18,903 Deferred tax assets 23,135 28,247 Other long-term assets 225,562 220,203 ---------- ---------- Total assets $1,228,299 $1,328,496 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 14,684 $ 44,645 Accounts payable 162,290 178,353 Accrued compensation 72,117 120,044 Deferred revenue 18,199 22,295 ---------- ---------- Total current liabilities 267,290 365,337 Long-term debt 152,186 201,955 Other long-term liabilities 89,571 85,882 Shareholders' equity: Common stock 205,437 204,370 Retained earnings 417,939 378,606 Currency adjustment 48,756 52,069 Unrealized holding gains - net 47,120 40,277 ---------- ---------- Total shareholders' equity 719,252 675,322 ---------- ---------- Total liabilities and shareholders' equity $1,228,299 $1,328,496 ========== ========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 2 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Quarter ended Two quarters ended Nov. 30, Nov. 25, Nov. 30, Nov. 25, (In thousands except for per share amounts) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 477,166 $ 443,598 $ 917,281 $ 844,620 Cost of sales 277,404 256,926 526,247 488,008 ---------- ---------- ---------- ---------- Gross profit 199,762 186,672 391,034 356,612 Research and development expenses 45,616 40,572 92,063 79,051 Selling, general, and administrative expenses 115,944 108,732 228,039 207,541 Equity in business ventures' earnings 250 1,686 394 1,093 ---------- ---------- ---------- ---------- Operating income 38,542 39,054 71,326 71,113 Other income (expense) - net 453 (1,467) 984 (1,141) ---------- ---------- ---------- ---------- Earnings before taxes 38,905 37,587 72,310 69,972 Income taxes 12,449 11,277 23,139 20,992 ---------- ---------- ---------- ---------- Net earnings $ 26,456 $ 26,310 $ 49,171 $ 48,980 ========== ========== ========== ========== Earnings per share $ 0.81 $ 0.79 $ 1.50 $ 1.47 Dividends per share 0.15 0.15 0.30 0.30 Average shares outstanding 32,858 33,479 32,810 33,363 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Two quarters ended Nov. 30, Nov. 25, (In thousands) 1996 1995 - -------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 49,171 $ 48,980 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation expense 27,598 21,478 Deferred taxes -- 8,321 Accounts receivable 106,278 (10,188) Inventories 4,957 (30,613) Accounts payable (20,936) (9,907) Accrued compensation (48,016) (25,387) Other assets -- (9,469) Other-net 2,315 7,536 ---------- ---------- Net cash provided by operating activities 121,367 751 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (48,748) (46,461) Proceeds from sale of assets 513 9,936 Proceeds from sale of investments 12,599 4,704 ---------- ---------- Net cash used by investing activities (35,636) (31,821) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term debt (29,934) (21,957) Issuance of long-term debt 358 50,029 Repayment of long-term debt (50,004) (1,674) Issuance of common stock 1,067 13,039 Dividends (9,838) (10,059) ---------- ---------- Net cash provided (used) by financing activities (88,351) 29,378 Effect of exchange rate changes 1,753 (552) ---------- ---------- Decrease in cash and cash equivalents (867) (2,244) Cash and cash equivalents at beginning of year 36,644 31,761 ---------- ---------- Cash and cash equivalents at end of quarter $ 35,777 $ 29,517 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS: Income taxes paid - net $ 3,316 $ 18,493 Interest paid 8,274 7,456 NON-CASH INVESTING ACTIVITIES: Fair value adjustment to securities available-for-sale $ 9,759 $ 20,381 Income tax effect related to fair value adjustment (2,916) (8,153) </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4 <PAGE> TEKTRONIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The condensed consolidated financial statements and notes have been prepared by the Company without audit. Certain information and footnote disclosures normally included in annual financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted. Management believes that the condensed statements include all necessary adjustments which are of a normal and recurring nature and are adequate to present financial position, results of operations and cash flows for the interim periods. The condensed information should be read in conjunction with the financial statements and notes incorporated by reference in the Company's latest annual report on Form 10-K. The Company's fiscal year is the 52 or 53 weeks ending the last Saturday in May. Fiscal year 1997 is 53 weeks. The first half of 1997 is 27 weeks compared to 26 weeks in the first half of 1996. ACCOUNTS RECEIVABLE On September 10, 1996, the Company entered into a five year revolving Receivable Purchase Agreement with Citibank NA to sell, without recourse, an undivided interest of up to $50.0 million in a defined pool of trade accounts receivable. The amount of receivables sold under this agreement is reflected as a reduction of accounts receivable in the balance sheet at November 30, 1996 and as operating cash flows in the statements of cash flows for the two quarters ended November 30, 1996. INVENTORIES Inventories consisted of: <TABLE> <CAPTION> Nov. 30, May 25, (In thousands) 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> Materials and work in process $ 145,993 $ 141,798 Finished goods 115,111 122,826 ---------- ---------- Inventories $ 261,104 $ 264,624 ========== ========== </TABLE> INCOME TAXES The provision for income taxes consisted of: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 30, Nov. 25, Nov. 30, Nov. 25, (In thousands) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> United States $ 7,503 $ 6,553 $ 13,442 $ 8,089 State 1,876 1,639 3,361 2,029 Foreign 3,070 3,085 6,336 10,874 ---------- ---------- ---------- ---------- Income taxes $ 12,449 $ 11,277 $ 23,139 $ 20,992 ========== ========== ========== ========== </TABLE> The provision for income taxes was calculated at estimated annual effective rates of 32% and 30%, respectively, for the two quarters ended November 30, 1996 and November 25, 1995. 5 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The Company's financial condition is strong. Cash flow from operating activities and borrowing capacity from existing lines of credit are sufficient to meet current and anticipated future needs. At the end of the second quarter (November 30, 1996), the Company maintained bank credit facilities totaling $308.1 million, of which $295.4 million was unused. The unused facilities include $153.1 million in lines of credit and $142.3 million under revolving credit agreements from United States and foreign banks. During the quarter, the Company established a $50 million accounts receivable securitization facility to further diversify its access to the capital markets. Current assets decreased by $110.8 million, or 15%, from the year end balance at May 31, 1996, due primarily to reduced accounts receivable, resulting from improved collections and the $50 million securitization. Current liabilities declined by $98.0 million, or 27%. Short-term debt was reduced by $30.0 million due to strong operating cash flows. Accounts payable and accrued compensation declined due primarily to timing, including the payment of pension liabilities of $39 million and the payout of prior year-end accruals for incentives and commissions. Shareholders' equity increased by $43.9 million due primarily to earnings, net of dividends. Results of Operations TWO QUARTERS ENDED NOVEMBER 30, 1996 vs. TWO QUARTERS ENDED NOVEMBER 25,1995 In the first half of fiscal 1997, net earnings were $49.2 million, or $1.50 per share compared with $49.0 million, or $1.47 per share in the first half of fiscal 1996. Net sales were $917.3 million, an increase of 9% from the prior year's total of $844.6 million. Measurement Business Division sales of $410.1 million increased 6% from the prior year, with growth in telecommunications test products, partially offset by lower sales in Japan as discussed below. Product orders declined 2% from $383.2 million to $376.7 million. Color Printing and Imaging Division sales increased 8% to $281.8 million and product orders increased 9% from $242.3 million to $265.2 million, with the successful launch of the Phaser 350* during the second quarter, offset by the decline in sales into the specialty printer markets. *(Phaser is a registered trademark of Tektronix, Inc.). Video and Networking Division sales increased 14% to $225.4 million, led by strong sales of the Profile* video disk recorder. Product orders rose 16% from $187.6 million to $216.7 million. *(Profile is a registered trademard of Tektronix, Inc.). 6 <PAGE> Sales to customers in the United States increased 16% from $431.2 million to $500.1 million, and represented 55% of total sales. International sales of $417.1 million were up 1%, with strong growth in the Pacific region offset by weakness in Europe and Japan. Product orders from customers in the United States of $441.7 million were up 12% from last year while international product orders of $416.9 million were down 1% due primarily to a decline in orders from Sony/Tektronix, the Company's joint venture in Japan, which changed its inventory stocking policies in the current year. Cost of sales decreased as a percentage of net sales from 57.8% to 57.4% due primarily to lower costs for some components. Research and development and selling, general and administrative expenses increased slightly as a percentage of sales, from 9.4% to 10.0% and from 24.6% to 24.9%, respectively. Operating income as a percentage of sales declined from 8.4% in the first half of 1996 to 7.8% due to the higher operating expenses as a percentage of sales, partially offset by the slightly improved gross margins. The Company reported other income of $1.0 million compared to other expense of $1.1 million last year because of higher gains on sales of stock in other companies. The provision for income taxes increased from $21.0 million to $23.1 million due to increased earnings before taxes and a higher estimated effective annual tax rate of 32% for the current year, compared to 30% for the first half of last year. QUARTER ENDED NOVEMBER 30, 1996 vs. QUARTER ENDED NOVEMBER 25, 1995 In the second quarter of fiscal 1997, net earnings were $26.5 million, or $0.81 per share compared with $26.3 million, or $0.79 per share in the first quarter of fiscal 1996. Net sales were $477.2 million, up 8% from $443.6 million in the prior year. Measurement Business sales of $203.3 million were up 2% from the prior year. Product orders were $192.4, a decrease of 8% from product orders of $208.2 million in the first quarter of 1996, as a result of several product line transitions and of changing inventory stocking policies at Sony/Tektronix. Color Printing and Imaging sales increased 13% to $157.8 million and product orders rose 20% to $153.0 million, due to the excellent performance of the Company's products for the office market, particularly the Phaser 350. Video and Networking sales grew 12% to $116.1 million, with a strong performance from the Profile disk recorder and another major systems contract in the United Kingdom. Product orders were $99.5 million, an increase of 13% over 1996 product orders of $87.9 million. Sales to customers in the United States increased by 16% from $220.2 million to $256.4 million, representing 54% of total sales. International sales of $220.8 million were down slightly from $223.4 million in the prior year, with weakness in Europe and Japan, but good growth in the Pacific. Product orders from customers in the United States of $215.5 million were up 5% from last year's second quarter while international product orders of $229.4 million were also 5% ahead of last year. Cost of sales, as a percentage of net sales, increased slightly from 57.9% to 58.1% due primarily to the sales mix. Research and development expenses increased as a percentage of sales, from 9.1% to 9.6% due to the high level of new product development. 7 <PAGE> Selling, general and administrative expenses declined as a percentage of sales, from 24.5% to 24.3%, due to the higher sales level in the current quarter. Operating income as a percentage of sales declined from 8.8% in the second quarter of 1996 to 8.1% in the current quarter. Income taxes increased from $11.3 million to $12.4 million due to the higher estimated effective annual tax rate of 32% for the current year, compared to 30% for all of last year. Net earnings of $26.5 million were flat compared to the prior year's quarter as higher sales and gross margins were offset by higher operating expenses and taxes. Forward-looking Statements From time to time, information provided by the Company, or statements made by its employees, may contain forward-looking statements. As with many high technology companies, factors that could cause the Company's actual results or activities to differ materially from these forward- looking statements include but are not limited to: general economic conditions and business conditions in the electronics industry, including the effect on purchases by the Company's customers; competitive factors, including pricing pressures, technological developments and products offered by competitors; changes in product and sales mix, including an increase in indirect and systems sales by the Company and the related effects on gross margins; the Company's ability to deliver a timely flow of competitive new products and market acceptance of these products; the availability of parts and supplies from third party suppliers on a timely basis and at reasonable prices; inventory risks due to changes in market demand or the Company's business strategies; changes in effective tax rates; customer demand; currency fluctuations; the fact that a substantial portion of the Company's sales are generated from orders received during the quarter, making prediction of quarterly revenues and earnings difficult; and other risk factors listed from time to time in the Company's reports filed with the Securities and Exchange Commission and press releases. Additional risk factors specific to the Company's current plans and expectations that could cause the Company's actual results or activities to differ materially from those stated include: the significant organizational and operational challenges that could adversely affect continuing integration and transformation of its Video and Networking business successfully in the planned time frame; the Company's ability to effectively manage its growing systems integration business, particularly the large scale contracts in the Video and Networking Division; the timely introduction of new products scheduled during the Company's fiscal year, which could be affected by engineering or development program slippages and parts availability; the ability to ramp up production or to develop effective sales channels; and demand for and acceptance of those and other Company products by the Company's customers which could be affected by the current uncertainties in economic conditions around the world, and by activities of the Company's competitors. 8 <PAGE> PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) (i) Financial Data Schedule. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 9 <PAGE> 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. January 10, 1997 TEKTRONIX, INC. By /S/ CARL W. NEUN ------------------- Carl W. Neun Senior Vice President and Chief Financial Officer 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-END> NOV-30-1996 <CASH> 35,777 <SECURITIES> 0 <RECEIVABLES> 279,540 <ALLOWANCES> 6,342 <INVENTORY> 261,104 <CURRENT-ASSETS> 642,767 <PP&E> 706,664 <DEPRECIATION> 383,121 <TOTAL-ASSETS> 1,228,299 <CURRENT-LIABILITIES> 267,290 <BONDS> 152,186 <COMMON> 205,437 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 513,815 <TOTAL-LIABILITY-AND-EQUITY> 1,228,299 <SALES> 0 <TOTAL-REVENUES> 917,281 <CGS> 0 <TOTAL-COSTS> 526,247 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 6,888 <INCOME-PRETAX> 72,310 <INCOME-TAX> 23,139 <INCOME-CONTINUING> 49,171 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 49,171 <EPS-PRIMARY> 1.50 <EPS-DILUTED> 1.50 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

THC

https://www.sec.gov/Archives/edgar/data/70318/0000912057-97-000714.txt

-----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, Ro7M/eI2t/61MF1gUDJvowIj1uMKdKcQJSls9zP0Lq970BvmFqNU+gcy+lNdKqyC FWrIKzYyQi4/sLAh8UakcQ== <SEC-DOCUMENT>0000912057-97-000714.txt : 19970114 <SEC-HEADER>0000912057-97-000714.hdr.sgml : 19970114 ACCESSION NUMBER: 0000912057-97-000714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970113 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENET HEALTHCARE CORP CENTRAL INDEX KEY: 0000070318 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 952557091 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07293 FILM NUMBER: 97504570 BUSINESS ADDRESS: STREET 1: 3820 STATE STREET CITY: SANTA BARBARA STATE: CA ZIP: 93105- BUSINESS PHONE: 8055637000 MAIL ADDRESS: STREET 1: P O BOX 4070 CITY: SANTA MONICA STATE: CA ZIP: 90404 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL MEDICAL ENTERPRISES INC /NV/ DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> <PAGE> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1996. 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 I-7293 - -------------------------------------------------------------------------------- TENET HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- NEVADA 95-2557091 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3820 STATE STREET SANTA BARBARA, CA 93105 (Address of principal executive offices) (805) 563-7000 (Registrant's telephone number, including area code) ---------------------------- 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 AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO AS OF DECEMBER 31, 1996 THERE WERE 220,051,491 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TENET HEALTHCARE CORPORATION INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - May 31, 1996 and November 30, 1996. . . . . . . . . . . . . . . . . . 2 Condensed Consolidated Statements of Income - Three Months and Six Months Ended November 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1995 and 1996 . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 15 Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 16 - --------------- Note: Items 2, 3 and 5 of Part II are omitted because they are not applicable. 2 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS MAY 31, NOVEMBER 30, 1996 1996 --------- ----------- (DOLLARS IN MILLIONS) ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . $ 89.2 $ 56.8 Short-term investments, at cost which approximates market. . . . . . . . . . . . . . . . . . . . . . 111.8 103.1 Accounts and notes receivable, less allowance for doubtful accounts ($156.0 at May 31 and $182.2 at November 30). . . . . . . . . . . . . . 838.4 1,006.3 Inventories of supplies, at cost . . . . . . . . . . 127.6 134.7 Deferred income taxes. . . . . . . . . . . . . . . . 278.9 253.6 Prepaid expenses and other current assets. . . . . . 98.9 81.3 --------- -------- Total current assets. . . . . . . . . . . . . 1,544.8 1,635.8 --------- -------- Investments and other assets . . . . . . . . . . . . . 517.7 505.9 Property and equipment, at cost. . . . . . . . . . . . 4,597.7 4,789.9 Less accumulated depreciation and amortization . . . 948.9 1,051.8 --------- -------- Net property and equipment . . . . . . . . . . . . . 3,648.8 3,738.1 --------- -------- Intangible assets, at cost less accumulated amortization ($123.0 at May 31 and $160.5 at November 30) . . . . . . . . . . . . . . . . . 2,621.1 2,692.7 --------- -------- $8,332.4 $8,572.5 --------- -------- --------- -------- 3 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS MAY 31, NOVEMBER 30, 1996 1996 --------- ----------- (DOLLARS IN MILLIONS) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt . . . . . . . . . $ 60.0 $ 41.6 Short-term borrowings and notes . . . . . . . . . . 2.0 2.8 Accounts payable. . . . . . . . . . . . . . . . . . 380.4 266.7 Accrued employee compensation and benefits. . . . . 120.4 136.2 Accrued interest payable. . . . . . . . . . . . . . 68.1 71.0 Income taxes payable. . . . . . . . . . . . . . . . 32.8 16.0 Other current liabilities . . . . . . . . . . . . . 470.8 410.6 --------- -------- Total current liabilities . . . . . . . . . . 1,134.5 944.9 --------- -------- Long-term debt, net of current portion . . . . . . . . 3,191.1 3,332.5 Deferred income taxes. . . . . . . . . . . . . . . . . 394.0 424.5 Other long-term liabilities and minority interests . . 976.5 1,024.4 Shareholders' equity: Common stock, $0.075 par value; authorized 450,000,000 shares; 218,713,406 shares issued at May 31, 1996 and 219,981,043 shares issued at November 30, 1996. . . . . . 16.4 16.5 Other shareholders' equity. . . . . . . . . . . . . 2,660.3 2,868.4 Less common stock in treasury, at cost, 2,790,967 shares at May 31, 1996 and 2,676,091 shares at November 30, 1996 . . . . (40.4) (38.7) --------- -------- Total shareholders' equity. . . . . . . . . 2,636.3 2,846.2 --------- -------- $ 8,332.4 $ 8,572.5 --------- -------- --------- -------- See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 4 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1996 <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ------------------------- ------------------------- 1995 1996 1995 1996 ---------- ----------- ---------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS) <S> <C> <C> <C> <C> Net operating revenues . . . . . . . . . . . . . . . . $ 1,370.9 $ 1,476.1 $ 2,654.8 $ 2,914.7 ---------- ----------- ---------- ---------- Operating expenses: Salaries and benefits . . . . . . . . . . . . . . . 544.7 581.4 1,046.9 1,150.1 Supplies. . . . . . . . . . . . . . . . . . . . . . 186.0 204.1 364.7 395.1 Provision for doubtful accounts . . . . . . . . . . 69.7 78.7 137.0 153.2 Other operating expenses. . . . . . . . . . . . . . 296.7 320.2 578.3 641.9 Depreciation. . . . . . . . . . . . . . . . . . . . 61.3 63.8 122.7 127.0 Amortization. . . . . . . . . . . . . . . . . . . . 21.2 21.7 40.0 42.6 ---------- ----------- ---------- ---------- Operating income . . . . . . . . . . . . . . . . . . . 191.3 206.2 365.2 404.8 ---------- ----------- ---------- ---------- Interest expense, net of capitalized portion . . . . . (81.3) (70.1) (158.4) (141.1) Investment earnings. . . . . . . . . . . . . . . . . . 5.4 5.5 12.7 10.3 Equity in earnings of unconsolidated affiliates. . . . 7.1 0.7 14.0 1.3 Minority interests . . . . . . . . . . . . . . . . . . (5.0) (5.5) (10.6) (10.1) Gains on sales of facilities . . . . . . . . . . . . . 171.1 - 294.6 - Gain on subsidiary's sale of common stock . . . . . 17.3 - 17.3 - ---------- ----------- ---------- ---------- Income before income taxes . . . . . . . . . . . . . . 305.9 136.8 534.8 265.2 Taxes on income. . . . . . . . . . . . . . . . . . . . (123.1) (60.0) (233.7) (116.0) ---------- ----------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . $ 182.8 $ 76.8 $ 301.1 $ 149.2 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Earnings per share: Primary . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.35 $ 1.48 $ 0.68 Fully diluted . . . . . . . . . . . . . . . . . . . $ 0.85 $ 0.35 $ 1.41 $ 0.68 Weighted average shares and share equivalents outstanding - fully diluted (in thousands). . . . . 216,183 220,669 216,175 220,096 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 5 <PAGE> TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1996 1995 1996 -------- -------- (IN MILLIONS) Net cash provided by (used in) operating activities, including net expenditures for discontinued operations and restructuring charges. . . . . . . . $ 11.1 $ (14.2) -------- -------- Cash flows from investing activities: Proceeds from sales of facilities and other assets . . . . . . . . . . . . . . . . . . . 402.8 40.3 Purchases of property and equipment . . . . . . . . (160.5) (95.4) Purchases of new businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . (367.3) (159.7) Collection of note receivable . . . . . . . . . . . - 67.1 Other items . . . . . . . . . . . . . . . . . . . . (9.9) (0.8) -------- -------- Net cash used in investing activities. . . . . (134.9) (148.5) -------- -------- Cash flows from financing activities: Proceeds from borrowings. . . . . . . . . . . . . . 1,079.2 751.4 Payments of borrowings. . . . . . . . . . . . . . . (1,065.9) (636.2) Proceeds from stock options exercised . . . . . . . 9.4 14.6 Proceeds from exercises of performance investment options . . . . . . . . . . . . . . . . 44.9 - Sales of common stock under employee stock purchase plan. . . . . . . . . . . . . . . . . . . - 4.8 Dividends to minority interests . . . . . . . . . . - (4.3) -------- -------- Net cash provided by financing activities. . . 67.6 130.3 -------- -------- Net decrease in cash and cash equivalents. . . . . . . . (56.2) (32.4) Cash and cash equivalents at beginning of period . . . . 155.0 89.2 -------- -------- Cash and cash equivalents at end of period . . . . . . . $ 98.8 $ 56.8 -------- -------- -------- -------- Supplemental disclosures: Interest paid . . . . . . . . . . . . . . . . . . . $ 150.4 $ 130.9 Income taxes paid, net of refunds received. . . . . 19.7 97.4 See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 6 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited financial information furnished herein, in the opinion of management, reflects all adjustments that are necessary to fairly state the financial position of Tenet Healthcare Corporation, its cash flows and the results of its operations for the periods indicated. All the adjustments affecting net income are of a normal recurring nature. As used herein, the "Company" means Tenet Healthcare Corporation and its subsidiaries, unless the context requires otherwise. The Company presumes that users of this interim financial information have read or have access to the Company's audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnotes and other disclosure which would substantially duplicate the disclosure contained in the Company's most recent annual report to security holders have been omitted. The patient volumes and net operating revenues of the Company's domestic general hospitals are subject to seasonal variations caused by a number of factors, including but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Net income also is not necessarily representative of operations for a full year for various reasons, including interest rates, acquisitions and disposals of facilities and long-term assets, revenue allowances and discount fluctuations, the timing of price changes and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons. 2. On October 17, 1996, the Company announced the signing of a definitive merger agreement with OrNda HealthCorp ("OrNda"). Under the terms of the agreement, OrNda shareholders will receive 1.35 shares of Tenet Healthcare Corporation common stock (approximately 85.9 million shares in the aggregate) for each share of OrNda common stock in a tax-free exchange. The transaction includes the assumption of approximately $1.4 billion in OrNda debt, and is expected to close in late January 1997. Upon completion of the acquisition, which will be accounted for as a pooling of interests, the combined company will operate 125 facilities in 22 states (excluding transactions taking place after November 30, 1996). OrNda's net operating revenues and net income for its latest fiscal year ended August 31, 1996 were $2.1 billion and $99.9 million, respectively. The following unaudited pro forma data summarizes the combined results of operations of the Company and OrNda restated to reflect the combination as a pooling of interests. Six Months ended Year ended November 30, --------------------------- May 31, 1996 1995 1996 --------------- -------------- ---------- (in millions, except per share data) Net operating revenues $ 7,705.7 $ 3,632.4 $ 4,104.7 Net income 498.2 336.9 198.8 Earnings per share $1.70 $1.14 $0.66 7 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. During the three-month and six-month periods ended November 30, 1996, actual costs incurred and charged against the Company's reserves for discontinued operations were approximately $9.7 million and $23.2 million, respectively. Costs incurred and charged against restructuring reserves were approximately $13.4 million for the three months ended November 30, 1996 and $16.5 million for the six months then ended. These reserves are included in other current liabilities and other long-term liabilities in the Company's balance sheets at May 31, 1996 and November 30, 1996. 4. During the quarter ended November 30, 1996, the Company acquired Lloyd Noland Hospital, a 319-bed acute care hospital in Birmingham, Alabama, for $47.0 million in cash. The Company also acquired several physician practices. The results of operations of the acquired businesses have been included in the Company's consolidated statements of income from the dates of acquisition. In January 1997, the Company acquired North Shore Medical Center, a 357-bed acute care hospital in Miami, Florida. All of these transactions have been or will be accounted for as purchases. In December 1996, the Company sold its lease of the Kirksville Osteopathic Medical Center, a 119-bed hospital in Kirksville, Missouri. 5. As a result of the redemption and/or conversion of all of the Company's convertible subordinated floating-rate debentures during the year ended May 31, 1996, there are no potentially dilutive securities except for employee stock options. Consequently, primary and fully-diluted earnings per share for the quarter and six months ended November 30, 1996 are the same. Fully-diluted earnings per share for the quarter and six months ended November 30, 1995 include the effects of the convertible subordinated floating-rate debentures which were outstanding during the period. 6. The plaintiffs' motion to remand the Justin Love vs. National Medical Enterprises, et al. case (which case is described in Note 7B of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1996) from the U.S. District Court in Houston, Texas, to Texas state court has been denied. There have been no other material changes to the description of i) Professional and General Liability Insurance set forth in Note 7A of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1996 or ii) Significant Legal Proceedings set forth in Note 7B of the Notes to Consolidated Financial Statements of the Company for its fiscal year ended May 31, 1996. 8 <PAGE> TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Although, based upon information currently available to it, management believes that the amount of damages, if any, in excess of the reserves for unusual litigation costs that may be awarded in any of the unresolved legal proceedings cannot reasonably be estimated, management does not believe it is likely that any such damages will have a material adverse effect on the Company's results of operations, liquidity or capital resources. 9 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF THE MERGER On October 16, 1996, Tenet and OrNda entered into a merger agreement, pursuant to which OrNda will become a wholly owned subsidiary of Tenet in a transaction to be accounted for as a pooling of interests. Under the terms of the merger agreement, each share of OrNda common stock outstanding immediately prior to the effective time of the OrNda merger will be converted into the right to receive 1.35 shares of Tenet common stock and the associates Rights issued in accordance with the Rights Agreement. In connection with the consummation of the OrNda merger, the Company has registered for issuance approximately 85.9 million shares of its common stock to OrNda stockholders. The OrNda merger is expected to close in late January 1997. Tenet's subsidiaries operated 76 general hospitals and OrNda's subsidiaries operated 49 general hospitals at November 30, 1996. Management believes that joining together Tenet's general hospitals and related healthcare operations with OrNda's general hospitals and related healthcare operations will create a stronger, more geographically diverse company that will be better able to compete in certain key geographic areas, such as south Florida and southern California, and to grow through strategic acquisitions and partnerships. The healthcare industry has undergone, and continues to undergo, tremendous change, including cost-containment pressures by government payors, managed care providers and others, as well as technological advances that require increased capital expenditures. The combined company will continue to emphasize the creation of strong integrated healthcare delivery systems. The merger is expected to enable the combined company to realize certain cost savings. No assurances can be made as to the amount of cost savings, if any, that actually will be recognized. In connection with the consummation of the OrNda merger, the Company intends to refinance approximately $525.0 million of OrNda's outstanding public debt through a tender offer to repurchase such securities and to refinance the existing credit facilities of Tenet and OrNda with the proceeds of a $1.3 billion public offering of senior notes and senior subordinated notes together with borrowings under a new credit facility which is expected to provide for aggregate commitments of up to $2.5 billion. At November 30, 1996, borrowings under the existing credit facilities were $1.1 billion for Tenet and $792.6 million for OrNda. It is anticipated that loans under the new credit facility will mature in 2002 and generally will bear interest, at the option of the Company, at either (i) a base rate equal to the higher of the rate announced from time to time by Morgan Guaranty as its prime rate or the daily federal funds rate plus 0.50% or (ii) an adjusted London interbank offered rate ("LIBOR") for 1-, 2-, 3-, or 6-month periods plus an interest margin ranging from 22.50 to 68.75 basis points. The interest margins will be based on the ratio of the Company's consolidated total debt to net earnings before interest, taxes, depreciation and amortization. Facility fees also are expected to be payable to each lender based on the amount of such lender's commitment to make loans at rates ranging from 12.50 basis points to 31.25 basis points as determined by reference to the same ratio. 10 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS Income before income taxes was $305.9 million in the quarter ended November 30, 1995, compared with $136.8 million in the current year quarter. The prior-year quarter includes pre-tax net gains on disposals of assets of $188.4 million (approximately $.54 per share net of taxes, on a fully diluted basis). Income before income taxes was $534.8 million in the six months ended November 30, 1995, compared with $265.2 million for the current six-month period. The prior-year six-month results include pre-tax net gains on disposals of assets of $311.9 million (approximately $.82 per share net of taxes, on a fully diluted basis). Excluding these gains, pre-tax income for the six months ended November 30, 1995 was $222.9 million. The following is a summary of operations for the three months and six months ended November 30, 1995 and 1996: <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30 ----------------------------------------- 1995 1996 1995 1996 --------- -------- -------- -------- (DOLLARS IN (% OF NET MILLIONS) OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals.......... $ 1,264.8 $ 1,342.1 92.3% 90.9% Other domestic operations(1)........ 89.5 134.0 6.5 9.1 International operations............ 16.6 - 1.2 - -------- -------- ------ ------ Net operating revenues................. 1,370.9 1,476.1 100.0% 100.0% -------- -------- ------ ------ Operating expenses: Salaries and benefits............... (544.7) (581.4) 39.7% 39.4% Supplies............................ (186.0) (204.1) 13.6 13.8 Provision for doubtful accounts..... (69.7) (78.7) 5.1 5.3 Other operating expenses............ (296.7) (320.2) 21.6 21.7 Depreciation........................ (61.3) (63.8) 4.5 4.3 Amortization........................ (21.2) (21.7) 1.5 1.5 ------- -------- ------ ------ Operating income....................... $ 191.3 $ 206.2 14.0% 14.0% -------- -------- ------ ------ -------- -------- ------ ------ </TABLE> SIX MONTHS ENDED NOVEMBER 30 ------------------------------------------ 1995 1996 1995 1996 --------- -------- ------- -------- (DOLLARS IN (% OF NET MILLIONS) OPERATING REVENUES) Net operating revenues: Domestic general hospitals $ 2,440.0 $ 2,631.4 91.9% 90.3% 11 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Other domestic operations(1) . . . 164.3 283.3 6.2 9.7 International operations . . . . . 50.5 - 1.9 - -------- ------- ------- ------- Net operating revenues . . . . . . . 2,654.8 2,914.7 100.0% 100.0% -------- ------- ------- ------- Operating expenses: Salaries and benefits. . . . . . . (1,046.9) (1,150.1) 39.4% 39.5% Supplies . . . . . . . . . . . . . (364.7) (395.1) 13.7 13.5 Provision for doubtful accounts. . (137.0) (153.2) 5.2 5.3 Other operating expenses . . . . . (578.3) (641.9) 21.8 22.0 Depreciation . . . . . . . . . . . (122.7) (127.0) 4.6 4.3 Amortization . . . . . . . . . . . (40.0) (42.6) 1.5 1.5 -------- ------- ------- ------- Operating income. . . . . . . . . . . $ 365.2 $ 404.8 13.8% 13.9% -------- ------- ------- ------- -------- ------- ------- ------- (1) NET OPERATING REVENUES OF OTHER DOMESTIC OPERATIONS CONSIST PRIMARILY OF REVENUES FROM (I) PHYSICIAN PRACTICES, (II) THE COMPANY'S REHABILITATION HOSPITALS, LONG-TERM CARE FACILITIES AND PSYCHIATRIC HOSPITALS THAT ARE LOCATED ON OR NEAR THE SAME CAMPUSES AS THE COMPANY'S GENERAL HOSPITALS; (III) HEALTHCARE JOINT VENTURES OPERATED BY THE COMPANY; (IV) SUBSIDIARIES OF THE COMPANY OFFERING HEALTH MAINTENANCE ORGANIZATIONS, PREFERRED PROVIDER ORGANIZATIONS AND INDEMNITY PRODUCTS; AND (V) REVENUES EARNED BY THE COMPANY IN CONSIDERATION OF THE GUARANTEES OF CERTAIN INDEBTEDNESS AND LEASES OF THIRD PARTIES. Operating income increased by $39.6 million (or 10.8%) to $404.8 million for the six months ended November 30, 1996 from $365.2 million for the prior year six-month period. The operating margin for the current six-month period increased to 13.9% from 13.8% a year ago. The table below sets forth certain selected historical operating statistics for the Company's domestic general hospitals. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ----------------------------------------- ------------------------------------------ INCREASE INCREASE 1995 1996 (DECREASE) 1995 1996 (DECREASE) --------- --------- ----------- --------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period) 75 76 1 75 76 1 Licensed beds (at end of end of period. . . . . . . . . . . . . . 16,827 17,344 3.1% 16,827 17,344 3.1% Net inpatient revenues (in millions) . . . . . . . . . . . . $ 839.4 $ 884.5 5.4% $ 1,626.7 $ 1,742.7 7.1% Net outpatient revenues (in millions) . . . . . . . . . . $ 390.0 $ 425.7 9.2% $ 755.3 $ 836.2 10.7% Admissions . . . . . . . . . . . 120,363 124,564 3.5% 231,866 246,774 6.4% Equivalent admissions . . . . . . 166,564 179,602 7.8% 323,251 357,199 10.5% Average length of stay (days) . . 5.5 5.4 (0.1) * 5.5 5.4 (0.1) * Patient days . . . . . . . . . . 661,141 677,525 2.5% 1,280,367 1,342,531 4.9% Equivalent patient days . . . . . 894,989 968,680 8.2% 1,755,944 1,924,258 9.6% Net inpatient revenue per patient day. . . . . . . . . $ 1,270 $ 1,305 2.8% $ 1,270 $ 1,298 2.2% Net inpatient revenue per admission . . . . . . . . . . $ 6,974 $ 7,101 1.8% $ 7,016 $ 7,062 0.7% Utilization of licensed beds. . . 43.4% 43.2% (0.2)% * 43.1% 42.8% (0.3)% * Outpatient visits . . . . . . . . 1,387,899 1,615,945 16.4% 2,666,656 3,156,690 18.4% </TABLE> *The change is the difference between 1995 and 1996 amounts shown. 12 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued) The table below sets forth certain selected operating statistics for the Company's domestic general hospitals on a same-store basis: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ----------------------------------------- ------------------------------------------ INCREASE INCREASE 1995 1996 (DECREASE) 1995 1996 (DECREASE) --------- --------- ----------- --------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals . .. . . . . . 69 69 - 69 69 - Average licensed beds .. . . . . . 15,282 15,268 (0.1)% 15,285 15,269 (0.1)% Patient days . . . . .. . . . . . 606,616 608,787 0.4% 1,211,416 1,207,608 (0.3)% Net inpatient revenue per patient day. . . . . . . . . . . . $ 1,305 $ 1,326 1.6% $ 1,290 $ 1,317 2.1% Admissions . . . . .. . . . . . . 111,158 111,756 0.5% 220,534 221,961 0.6% Net inpatient revenue per admission. . . . . . . . . . . . . $ 7,122 $ 7,221 1.4% $ 7,085 $ 7,167 1.2% Outpatient visits . . .. . . . . . 1,293,724 1,438,239 11.2% 2,545,430 2,829,764 11.2% Average length of stay (days). . . 5.5 5.4 (0.1) * 5.5 5.4 (0.1) * </TABLE> *The change is the difference between 1995 and 1996 amounts shown. There continue to be increases in inpatient acuity and intensity as less intensive services shift from inpatient to outpatient settings or to alternative healthcare delivery services because of technological improvements and continued pressures by payors to reduce admissions and lengths of stay. The Medicare program accounted for 38.4% of the net patient revenues of the Company's domestic general hospitals for the quarter and six months ended November 30, 1995, compared with 41.7% and 40.0% for the quarter and six months ended November 30, 1996, respectively. Historically, rates paid under Medicare's prospective payment system for inpatient services have increased, but such increases have been less than cost increases. Payments for Medicare outpatient services presently are cost reimbursed, but there are certain proposals pending that would convert Medicare reimbursement for outpatient services to a prospective payment system which, if implemented, may result in reduced payments. Medicaid programs in certain states in which the Company operates also are undergoing changes that will result in reduced payments to hospitals. The Company has implemented hospital cost-control programs and overhead reductions and is forming integrated healthcare delivery systems to address the prospect of reduced payments. Pressures to control healthcare costs have resulted in an increase in the percentage of revenues attributable to managed care payors. The Company anticipates that its managed care business will increase in the future. The general hospital industry in the United States and the Company's general hospitals continue to have significant unused capacity, and thus there is substantial competition for patients. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Increased competition, admission constraints and payor pressures are expected to continue. The Company's general hospitals have been improving operating margins in a very competitive environment, due in large part to enhanced cost controls and efficiencies being achieved throughout the Company. 13 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net operating revenues from the Company's other domestic operations was $89.5 million for the three months ended November 30, 1995, compared to $134.0 million for the three months ended November 30, 1996, representing an increase of $44.5 million. Net operating revenues for the six months ended November 30, 1995 were $164.3 million, compared with $283.3 million for the current year six- month period, representing an increase of $119.0 million. This increase primarily reflects continued growth of physician practices and National Health Plans, the Company's HMO and insurance subsidiary. Net operating revenues from the Company's former international operations were $16.6 million and $50.5 million for the quarter and six months ended November 30, 1995, respectively. During and subsequent to the August 31, 1995 fiscal quarter, the Company sold all of its interests in hospitals and related healthcare businesses in Singapore, Malaysia, Thailand and Australia. Operating expenses, which include salaries and benefits, supplies, provision for doubtful accounts, depreciation and amortization, and other operating expenses, were $1,179.6 million for the quarter ended November 30, 1995 and $1,269.9 million for the current year quarter. Operating expenses for the prior and current year six months ended November 30, 1995 and 1996 were $2,289.6 million and $2,509.9 million, respectively. Operating margins for the prior and current year quarters ended November 30, 1995 and 1996 were 14.0%. Operating margins for the prior and current year six-month periods were 13.8% and 13.9%, respectively. 14 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Salaries and benefits expense as a percentage of net operating revenues was 39.7% in the quarter ended November 30, 1995 and 39.4% in the three months ended November 30, 1996. Salaries and benefits expense as a percentage of net operating revenues for the prior and current six-month periods were 39.4% and 39.5%, respectively. These improvements resulted from the cost reduction efforts discussed earlier herein. Supplies expense as a percentage of net operating revenues was 13.6% in the quarter ended November 30, 1995 and 13.8% in the three months ended November 30, 1996. Supplies expense as a percentage of net operating revenues for the prior and current six-month periods were 13.7% and 13.5%, respectively. The provision for doubtful accounts as a percentage of net operating revenues was 5.1% for the quarter ended November 30, 1995, and 5.3% in the three months ended November 30, 1996. The provision for doubtful accounts as a percentage of net operating revenues for the prior and current six-month periods were 5.2% and 5.3%, respectively. The increases primarily related to new acquisitions. Other operating expenses as a percentage of net operating revenues was 21.6% for the quarter ended November 30, 1995 and 21.7% in the three months ended November 30, 1996. Other operating expenses as a percentage of net operating revenues for the prior and current year six-month periods were 21.8% and 22.0%, respectively. Depreciation and amortization expense as a percentage of net operating revenues was 6.0% in the quarter ended November 30, 1995 and 5.8% in the three months ended November 30, 1996. Depreciation and amortization expense as a percentage of net operating revenues for the prior and current six-month periods were 6.1% and 5.8%, respectively. Interest expense, net of capitalized interest, was $81.3 million in the quarter ended November 30, 1995 and $70.1 million in the three months ended November 30, 1996. Interest expense, net of capitalized interest, for the prior and current six-month periods was $158.4 million and $141.1 million, respectively. The reduction is due to lower borrowings and interest rates in the quarter and six months ended November 30, 1996. Investment earnings were $5.4 million in the quarter ended November 30, 1995 and $5.5 million in the three months ended November 30, 1996. Investment earnings for the prior and current six-month periods were $12.7 million and $10.3 million, respectively. Investment earnings are derived primarily from notes receivable and investments in debt and equity securities. Equity in earnings of unconsolidated affiliates was $7.1 million in the quarter ended November 30, 1995 and $0.7 million in the three months ended November 30, 1996. Equity in earnings of unconsolidated affiliates for the prior and current year six-month periods was $14.0 million and $1.3 million, respectively. The prior year quarter and six-month period included $6.2 million and $12.3 million, respectively, in earnings from two unconsolidated affiliates that were sold during fiscal 1996 and two that are no longer accounted for on the equity method of accounting because the Company's ownership interest has been reduced below 20%. These latter two investments now are carried in the Company's balance sheet at their fair value. Minority interests in the income of consolidated subsidiaries was $5.0 million during the quarter ended November 30, 1995, compared to $5.5 million in the three months ended November 30, 1996. Minority interests in 15 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) the income of consolidated subsidiaries for the prior and current year six-month periods was $10.6 million and $10.1 million, respectively. Taxes on income as a percentage of income before income taxes were 43.7% in the six months ended November 30, 1995 and 1996. The difference between the Company's effective income tax rate and the statutory federal income tax rate is shown below: November 30, ----------------------------------------- 1995 1996 ----------------------------------------- Amount Percent Amount Percent -------- --------- -------- --------- (in millions of dollars and as a percent of pretax income) Tax provision at statutory federal rate . . . . . . . . $187.2 35.0% $92.8 35.0% State income taxes, net of federal income tax benefit . 19.7 3.7 10.9 4.1 Goodwill amortization. . . . . . 10.9 2.0 11.4 4.3 Gains on sales of foreign subsidiary's assets. . . . . 16.3 3.1 - - Other. . . . . . . . . . . . . . (0.4) (0.1) 0.9 0.3 --------- --------- ------- ------ Taxes on income and effective tax rates. . . . . $233.7 43.7% $116.0 43.7% --------- --------- ------- ------ --------- --------- ------- ------ Amortization of the goodwill resulting from the Company's March 1995 acquisition of American Medical Holdings, Inc. of approximately $32.0 million ($0.15 per share) for the six months ended November 30, 1996 is a noncash charge, and provides no income tax benefits. LIQUIDITY AND CAPITAL RESOURCES During the six months ended November 30, 1996, net cash used in operating activities was $14.2 million after expenditures of $30.0 million for discontinued operations and restructuring charges. For the prior year six-month period net cash provided by operating activities was $11.1 million after expenditures of $73.4 million for discontinued operations and restructuring charges. Cash flows from operating activities during the six months ended November 30, 1996 were adversely affected primarily because of i) billing delays due to conversions of patient accounting systems at several hospitals, ii) delays in cash flows at recently acquired facilities where accounts receivable were not purchased; iii) temporary slowdowns in the collection of Medicare receivables due to changes in fiscal intermediaries for recently acquired facilities; and iv) a general slowdown of payments received from other payors. Management believes that cash flow from operating activities in the future will return to the Company's historically positive levels. The above liquidity, along with the availability of credit under the Company's unsecured revolving bank credit agreement, should be adequate to meet debt service requirements and to finance planned capital expenditures, acquisitions and other known operating needs over the short-term (up to 18 months) and the long-term (18 months to three years). The Company's cash and cash equivalents at November 30, 1996 were $56.8 million, a decrease of $32.4 million over May 31, 1996. Working capital at November 30, 1996 was $690.9 million, compared to $410.3 million at May 31, 1996. Cash proceeds from the sale of property and equipment in the six months ended November 30, 1996 were $40.3 million, primarily from the sale of the Company's former corporate headquarters building in Santa Monica, California. Cash payments for property and equipment were $95.4 million in the six months ended November 30, 1996, compared to $160.5 million in the six months ended November 30, 1995. Capital expenditures for the Company, before any significant acquisitions of facilities and other healthcare operations, are expected to be approximately $300.0 million to $400.0 million annually. Such capital expenditures relate primarily to the development of healthcare services networks in selected geographic areas, design and construction of new buildings, expansion and renovation of existing facilities, equipment additions and replacements, introduction of new medical technologies and various other capital improvements. The Company's strategy includes the pursuit of growth through acquisitions and partnerships, including the development of integrated healthcare systems in certain strategic geographic areas, general hospital acquisitions and partnerships and physician practice acquisitions and partnerships. All or portions of this growth may be financed through available credit under the existing credit facility or, depending on capital market conditions, sale of additional debt or equity securities or other bank borrowings. The Company's unused borrowing capacity under its unsecured revolving bank credit agreement was $633.5 million as of November 30, 1996. The Company's existing unsecured revolving credit agreement and the indentures governing the senior notes and the senior subordinated notes have, among other requirements, affirmative, negative and financial covenants with which the Company must comply. These covenants include, among other requirements, limitations on borrowings by, and liens on the assets of, the Company and its subsidiaries, investments, the sale of all or substantially all assets and prepayment of subordinated debt, a prohibition against the Company declaring or paying dividends on or purchasing its common stock unless its senior long-term unsecured debt securities are rated BBB- or higher by Standard and Poors' Rating Services and Baa3 or higher by Moody's Investors Service, Inc. The Company must also comply with covenants regarding maintenance of specified levels of net worth, debt ratios and fixed-charge coverage ratios. The Company is in compliance with its loan covenants. In connection with the merger and refinancing described above, Morgan Guaranty Trust Company of New York, Bank of America NT&SA, the Bank of New York and the Bank of Nova Scotia and a syndicate of other lenders have committed to provide the Company with borrowings of aggregate commitments of up to $2.5 billion under the new credit facility. The new credit facility will replace the Company's existing credit facility and will rank PARI PASSU with the new senior notes and will constitute senior debt with respect to new senior subordinated and other subordinated debt of the Company. The Company anticipates that the new credit facility will include covenants similar to those contained in its existing unsecured revolving credit agreement described above. BUSINESS OUTLOOK The challenge facing the Company and the healthcare industry as a whole is to continue to provide quality patient care in an environment of rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and public payors. Because of national, state and private industry efforts to reform healthcare delivery and payment systems, the healthcare industry faces increased uncertainty. The Company is unable to predict whether any healthcare legislation at the federal or state level will be passed in the future, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate the Company's future business strategies. PART II. OTHER INFORMATION Item 1. Legal Proceedings Material Developments in Previously Reported Legal Proceedings: The plaintiffs' motion to remand the Justin Love vs. National Medical Enterprises, et al. case (which case 16 <PAGE> PART II. OTHER INFORMATION (continued) is described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1996) from the U.S. District Court in Houston, Texas, to Texas state court has been denied. There have been no other material developments in the legal proceedings described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1996. Items 2, 3 and 5 are not applicable. Item 4. Submissions of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on September 25, 1996. The shareholders elected all of the Company's nominees for director and ratified the selection of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ended May 31, 1997. The votes were as follows: 1. Election of Directors For Withheld --- -------- Bernice B. Bratter 188,792,700 2,139,759 Michael H. Focht Sr. 188,575,084 2,357,375 Lester B. Korn 188,781,151 2,151,308 2. Ratification of selection of KPMG Peat Marwick LLP: For: 190,616,083 Against: 139,924 Abstaining: 176,452 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. (11) (Page 19) Statement Re: Computation of Per Share Earnings for the three months and six months ended November 30, 1995 and 1996. (27) Financial Data Schedule (included only in the EDGAR filing). SIGNATURE 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. TENET HEALTHCARE CORPORATION 17 <PAGE> PART II. OTHER INFORMATION (continued) (Registrant) Date: January 10, 1997 /s/ TREVOR FETTER ---------------------------------- Trevor Fetter Executive Vice President, Chief Financial Officer (Principal Financial Officer) /s/ RAYMOND L. MATHIASEN ---------------------------------- Raymond L. Mathiasen Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 <TEXT> <PAGE> EXHIBIT 11 TENET HEALTHCARE CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS * (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ----------------------- ----------------------- 1995 1996 1995 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> FOR PRIMARY EARNINGS PER SHARE Shares outstanding at beginning of period. . . . . . . . . . . . 200,053 216,557 199,938 215,922 Shares issued upon exercise of stock options . . . . . . . . . . 251 286 209 518 Shares issued in connection with employee stock purchase plan. . . . . . . . . . . . . . . . . . . . . . . - 102 - 90 Dilutive effect of outstanding stock options . . . . . . . . . . 2,823 3,555 2,361 3,475 Shares issued upon exercises of performance investment options . . . . . . . . . . . . . . . . . . . . 718 - 357 - Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 169 - 91 -------- -------- -------- -------- Weighted average number of shares and share equivalents outstanding. . . . . . . . . . . . . . . . . . 203,845 220,669 202,865 220,096 -------- -------- -------- -------- -------- -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182,863 $ 76,822 $ 301,116 $ 149,223 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.35 $ 1.48 $ 0.68 -------- -------- -------- -------- -------- -------- -------- -------- FOR FULLY DILUTED EARNINGS PER SHARE Weighted average number of shares used in primary calculation. . . . . . . . . . . . . . . . . . . . . . . . 203,845 220,669 202,865 220,096 Additional dilutive effect of stock options. . . . . . . . . . . 197 - 307 - Assumed conversion of dilutive convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . 12,141 - 13,003 - -------- -------- -------- -------- Fully diluted weighted average number of shares. . . . . . . . . 216,183 220,669 216,175 220,096 -------- -------- -------- -------- -------- -------- -------- -------- Income used in primary calculation . . . . . . . . . . . . . . . $ 182,863 $ 76,822 $ 301,116 $ 149,223 Adjustments: Interest expense on convertible debentures. . . . . . . . . . . 3,716 - 7,652 - Reduced reimbursement of above interest expense by Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . (922) - (1,958) - Income taxes on interest less Medicare reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . (1,102) - (2,215) - -------- -------- -------- -------- Adjusted income used in fully diluted calculation. . . . . . . . $ 184,555 $ 76,822 $ 304,595 $ 149,223 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.85 $ 0.35 $ 1.41 $ 0.68 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> - ----------------- * All shares in these tables are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. 19 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-END> NOV-30-1996 <CASH> 56,800 <SECURITIES> 103,100 <RECEIVABLES> 1,905,600 <ALLOWANCES> 182,200 <INVENTORY> 134,700 <CURRENT-ASSETS> 1,635,800 <PP&E> 4,789,900 <DEPRECIATION> 1,051,800 <TOTAL-ASSETS> 8,572,500 <CURRENT-LIABILITIES> 944,900 <BONDS> 3,332,500 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 16,500 <OTHER-SE> 2,829,700 <TOTAL-LIABILITY-AND-EQUITY> 8,572,500 <SALES> 0 <TOTAL-REVENUES> 2,914,700 <CGS> 0 <TOTAL-COSTS> 2,356,700 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 153,200 <INTEREST-EXPENSE> 141,100 <INCOME-PRETAX> 265,200 <INCOME-TAX> 116,000 <INCOME-CONTINUING> 149,200 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 149,200 <EPS-PRIMARY> .68 <EPS-DILUTED> .68 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1997

0QTR1

WOR

https://www.sec.gov/Archives/edgar/data/108516/0000896463-97-000001.txt

-----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, KdxdEwvfXTUIIWyrAHfbh0Gfk6AS1XD/moJDWLeW1Qr98lmidZTOylx8Zi//jxqx eqPGxOTlT2pQuhvIX8BiaA== <SEC-DOCUMENT>0000896463-97-000001.txt : 19970115 <SEC-HEADER>0000896463-97-000001.hdr.sgml : 19970115 ACCESSION NUMBER: 0000896463-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORTHINGTON INDUSTRIES INC CENTRAL INDEX KEY: 0000108516 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 311189815 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04016 FILM NUMBER: 97505477 BUSINESS ADDRESS: STREET 1: 1205 DEARBORN DR CITY: COLUMBUS STATE: OH ZIP: 43085 BUSINESS PHONE: 6144383210 MAIL ADDRESS: STREET 1: 1205 DEARBORN DR CITY: COLUMBUS STATE: OH ZIP: 43085 FORMER COMPANY: FORMER CONFORMED NAME: WORTHINGTON STEEL CO DATE OF NAME CHANGE: 19720123 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: November 30, 1996 Commission File No. 0-4016 WORTHINGTON INDUSTRIES, INC. --------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) DELAWARE 31-1189815 - ------------------------- -------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 1205 DEARBORN DRIVE, COLUMBUS, OHIO 43085 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (614) 438-3210 ------------------------------------------------------------------------------ (Registrant's Telephone Number, Including Area Code) Not Applicable ---------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, If Changed From Last Report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO_____ Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 90,898,234 - ------------------------------------ ----------------------------- Class Outstanding December 31, 1996 Page 1 of 10 <PAGE> WORTHINGTON INDUSTRIES, INC. INDEX PAGE PART I. Financial Information Consolidated Condensed Balance Sheets - November 30, 1996 and May 31, 1996.............................3 Consolidated Condensed Statements of Earnings - Three and Six Months Ended November 30, 1996 and 1995 .........4 Consolidated Condensed Statements of Cash Flows - Six Months Ended November 30, 1996 and 1995....................5 Notes to Consolidated Condensed Financial Statements...........6 Management's Discussion and Analysis of Results of Operations and Financial Condition..................7 PART II. Other Information...............................................10 -2- <PAGE> PART I. FINANCIAL INFORMATION WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands, Except Per Share) November 30 May 31 1996 1996 ----------- --------- ASSETS (Unaudited) (Audited) Current Assets Cash and cash equivalents $ 342 $ 19,029 Accounts receivable - net 214,240 224,956 Raw materials 150,245 128,884 Work in process and finished products 83,654 79,141 ----------- ----------- Inventories 233,899 208,025 Prepaid expenses and other current assets 25,592 24,031 ----------- ----------- Total Current Assets 474,073 476,041 Investment in Unconsolidated Affiliates 37,735 138,212 Intangible Assets 68,921 65,256 Other Assets 160,320 28,280 Property, plant and equipment 867,721 793,274 Less accumulated depreciation 299,999 280,938 ----------- ----------- Property, Plant and Equipment - net 567,722 512,336 ----------- ----------- Total Assets $ 1,308,771 $ 1,220,125 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 69,644 $ 82,178 Notes payable 33,500 Accrued compensation, contributions to employee benefit plans and related taxes 30,963 33,234 Dividends payable 10,902 10,901 Other accrued items 14,983 17,652 Income taxes 3,819 5,829 Current maturities of long-term debt 2,034 1,475 ----------- ----------- Total Current Liabilities 165,845 151,269 Other Liabilities 17,046 17,912 Long-Term Debt 326,236 298,742 Deferred Income Taxes 122,683 112,662 Shareholders' Equity Common shares, $.01 par value 909 908 Additional paid-in capital 107,300 105,869 Unrealized gain on investment 18,811 Foreign currency translation (1,435) (1,437) Retained earnings 551,376 534,200 ----------- ----------- Total Shareholders' Equity 676,961 639,540 ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,308,771 $ 1,220,125 =========== =========== See notes to consolidated condensed financial statements. -3- <PAGE> <TABLE> WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In Thousands, Except Per Share) (Unaudited) Three Months Ended Six Months Ended November 30 November 30 ------------------ ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net sales $ 429,250 $ 354,544 $ 831,821 $ 680,280 Cost of goods sold 369,047 301,533 713,943 580,264 --------- --------- --------- --------- Gross Margin 60,203 53,011 117,878 100,016 Selling, general & administrative expense 28,063 21,499 53,287 41,368 --------- --------- --------- --------- Operating Income 32,140 31,512 64,591 58,648 Other income (expense): Miscellaneous income 299 139 723 386 Interest expense (3,172) (1,234) (6,897) (2,641) Equity in net income of unconsolidated affiliates - Joint Ventures 3,153 1,894 5,768 3,108 Equity in net income of unconsolidated affiliates - Rouge 9,548 16,770 --------- --------- --------- --------- Earnings Before Income Taxes 32,420 41,859 64,185 76,271 Income taxes 11,903 15,671 24,069 28,575 --------- --------- --------- --------- Net Earnings $ 20,517 $ 26,188 $ 40,116 $ 47,696 ========= ========= ========= ========= Average Common Shares Outstanding 90,835 90,748 90,836 90,817 Earnings Per Common Share $ .23 $ .29 $ .44 $ .53 --------- --------- --------- --------- Cash Dividends Declared Per Common Share $ .12 $ .11 $ .24 $ .22 --------- --------- --------- --------- See notes to consolidated condensed financial statements. </TABLE> -4- <PAGE> WORTHINGTON INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands, Unaudited) Six Months Ended November 30 1996 1995 ------ ------ Operating Activities Net earnings $ 40,116 $ 47,696 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 24,065 18,482 Deferred income taxes (108) 5,763 Equity in undistributed net income of unconsolidated affiliates (1,616) (19,576) Changes in assets and liabilities: Current assets (12,544) 52,675 Other assets (1,188) 1,364 Current liabilities (21,505) (8,472) Other liabilities (671) (584) -------- -------- Net Cash Provided By Operating Activities 26,549 97,348 Investing Activities Investment in property, plant and equipment, net (75,913) (45,277) Acquisitions, net of cash acquired (8,380) Investment in unconsolidated affiliates (8,290) -------- -------- Net Cash Used By Investing Activities (84,293) (53,567) Financing Activities Proceeds from (payments on) short-term borrowings 33,500 (38,200) Proceeds from long-term debt 28,459 43,000 Principal payments on long-term debt (1,159) (13,330) Proceeds from issuance of common shares 1,268 1,618 Repurchase of common shares (1,211) (4,024) Dividends paid (21,800) (19,992) -------- -------- Net Cash Provided (Used) By Financing Activities 39,057 (30,928) -------- -------- Increase (decrease) in cash and cash equivalents (18,687) 12,853 Cash and cash equivalents at beginning of period 19,029 2,003 -------- -------- Cash and cash equivalents at end of period $ 342 $ 14,856 ======== ======== See notes to consolidated condensed financial statements. -5- <PAGE> WORTHINGTON INDUSTRIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note A - MANAGEMENT'S OPINION In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of a normal recurring nature) necessary to present fairly the financial position of Worthington Industries, Inc. and Subsidiaries (the Company) as of November 30, 1996 and May 31, 1996, the results of operations for the three and six months ended November 30, 1996 and 1995, and cash flows for the six months ended November 30, 1996 and 1995. The accounting policies followed by the Company are set forth in Note A to the consolidated financial statements in the 1996 Worthington Industries, Inc. Annual Report to Shareholders which is incorporated by reference in the Company's 1996 Form 10-K. Note B - INCOME TAXES The income tax rate is based on statutory federal and state rates, and an estimate of annual earnings adjusted for the permanent differences between reported earnings and taxable income. Note C - EARNINGS PER SHARE Earnings per common share for the three and six months ended November 30, 1996 and 1995 are based on the weighted average common shares outstanding during each of the respective periods. Note D - RESULTS OF OPERATIONS The results of operations for the three and six months ended November 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. Note E - ACCOUNTING CHANGE During the first quarter ended August 31, 1996, the Company took certain steps relative to its investment in Rouge Steel, which resulted in the Company accounting for this investment on the cost method instead of the equity method. As a result, after May 31, 1996, the Company's equity share of Rouge earnings is no longer included in reported earnings or earnings per share. The investment in Rouge common stock has been reclassified to other assets and adjusted to market value as an "available-for-sale" security with a net of tax adjustment to shareholders' equity. Note F - SUBSEQUENT EVENT On December 3, 1996, the Company purchased the net assets of Plastics Manufacturing, Inc. (PMI). The acquisition will be recorded as a purchase under generally accepted accounting principles. -6- <PAGE> WORTHINGTON INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Sales for the three months ended November 30,1996 were a record $429.3 million, 21% higher than last year's second quarter. Net earnings were $20.5 million and earnings per share were $.23. Comparisons with last year's first quarter are discussed below. Sales for the six months ended November 30,1996 were a record $831.8 million, 22% higher than last year's first six months. Net earnings were $40.1 million and earnings per share were $.44. Comparisons with last year's first six months are discussed below. During the first quarter ended August 31, 1996, the Company took certain steps relative to its investment in Rouge Steel, which resulted in the Company accounting for this investment on the cost method instead of the equity method. As a result, after May 31, 1996, the Company's equity share of Rouge earnings is no longer included in reported earnings or earnings per share. The Company believes that to appropriately compare periods, fiscal 1996 results should be adjusted to eliminate the impact of Rouge equity earnings. In the second quarter of fiscal 1996, Rouge contributed $.07 to the Company's reported earnings per share of $.29, and the steel, plastics, castings and joint venture businesses contributed $.22 per share. This year's second quarter earnings per share of $.23 (which does not include Rouge equity earnings because of the accounting change), were 5% higher than last year's results, excluding Rouge, of $.22 per share. In the first six months of fiscal 1996, Rouge contributed $.12 to the Company's reported earnings per share of $.53, and the steel, plastics, castings and joint venture businesses contributed $.41 per share. This year's first six months earnings per share of $.44 (which does not include Rouge equity earnings because of the accounting change), were 7% higher than last year's results, excluding Rouge, of $.41 per share. The sales increase for the quarter and six months principally reflects the inclusion of the metal framing business in this year's results. Gross margin was up 14% for the quarter and 18% year-to-date. Gross margin as a percentage of sales for the quarter was 14.0% (15.0% last year) and for the six months was 14.2% (14.7% last year). The lower gross profit margins were due mostly to the inclusion of the metal framing business, reduced margins in cast products and higher profit-sharing. Selling, general and administrative expense increased 31% for the quarter and 29% for the six months because of higher profit-sharing and the inclusion of the metal framing business expenses this year. As a percentage of sales for the quarter, this expense was 6.5% (6.1% last year) and for the six months was 6.4% (6.1% last year). Operating income was 2% higher for the quarter and 10% higher year-to-date due to better performances in the custom products segment and the addition of the metal framing business. As a percentage of sales, operating income for the quarter was 7.5% (8.9% last year) and for the six months 7.8% (8.6% last year). -7- <PAGE> Interest expense increased 1-1/2 times for the three months and six months. Average debt rose because of increased borrowings to acquire the metal framing business and to support higher levels of capital expenditures. The average interest rate decreased to 5.8% from 6.7% last year. Interest of $1,968,000 was capitalized during the quarter and $2,897,000 year-to-date. Overall, interest expense will increase as the Company continues to fund its growth through debt financing. Equity in net income of unconsolidated affiliates was down approximately 70% for the quarter and year-to-date because of the elimination of equity earnings from the investment in Rouge due to the accounting change discussed above. Excluding Rouge, equity from unconsolidated affiliates was up 66% for the quarter and 86% year-to-date. Worthington Armstrong Venture was up significantly, principally due to increased demand. The effective income tax rate decreased to 36.7% from 37.4% last year for the second quarter due to a decrease in state taxes and remained at 37.5% for the six months. The processed steel products segment posted record sales with the inclusion of the metal framing business this year. Earnings were up for the quarter and six months as the effect of the automotive strikes were more than offset by pressure cylinders and metal framing profits. Steel processing shipments were up slightly for the quarter but earnings decreased due to the strikes and start-up of the new nickel line at the Malvern plant. Pressure cylinders had record sales for the second quarter and six months because of increased non-refillable refrigerant volume and the June 1996 purchase of SCM Technologies which designs, engineers and manufactures high pressure industrial, medical, halon and electronic gas cylinders. SCM, which is located just outside Windsor, Ontario, will enable the Company to increase its penetration in the high pressure cylinder market. The custom products segment continued to post record sales and earnings during the quarter. The plastics operation benefited from higher volume in its automotive contracts and improvement at its newer, non-automotive plants. During December, the Company purchased the assets of Plastics Manufacturing, Inc. (PMI). PMI, based in Harrisburg, North Carolina, is one of the largest manufacturers of plastic injection molded and thermoformed parts in the Southeastern United States. PMI primarily serves the business equipment, commercial airline and medical industries. Precision metals increased sales and operating income above last year for both periods. The cast products segment results were lower than in last year's second quarter and first six months. Improved industrial volume was more than offset by lower demand for freight railcars. Operating income was also lower due to the decrease in volume and the resulting decreases in production efficiencies and coverage of fixed costs. -8- <PAGE> LIQUIDITY AND CAPITAL RESOURCES At November 30, 1996, the Company's current ratio was 2.9:1, down from 3.2:1 at May 31, 1996. Long-term debt was 33% of total capital. Working capital was $308.2 million, 46% of the Company's total net worth, down from 51% at fiscal 1996 year-end. During the six months ended November 30, 1996, the Company's cash position decreased by $18.7 million. Cash provided by operations of $26.5 million, consisting mostly of cash from earnings, was offset by a $34.0 million increase in some working capital items. The working capital increase occurred principally due to higher inventory in anticipation of higher sales volume in the second half of the year. Capital expenditures and investments in acquisitions of $84.3 million and dividends paid of $21.8 million were funded by cash from operations, $18.7 million of beginning cash and $60.8 million of additional net borrowings. The Company expects its operating results and cash from normal operating activities to improve during the year. The Company has a $150 million committed, revolving credit agreement (the "Revolver"), of which $45 million was unused at November 30, 1996. However, as in the first six months of the year, borrowings may be needed to support additional anticipated capital expenditures. Uncommitted short-term lines of credit were used to finance the PMI acquisition. Immediate borrowing capacity plus cash generated from operations should be more than sufficient to fund expected normal operating cash needs, dividends, debt payments and capital expenditures for existing businesses. The Company intends to offer $75 to $100 million of three year notes exchangeable into Class A Common Stock of Rouge Steel Company in the form of DECS (SM) (Debt Exchangeable for Common Stock (SM)). At maturity, holders of the DECS will receive in exchange for the principle amount of the notes, shares of Rouge Steel held by the Company (or at the Company's option, cash in lieu of the shares). The number of Rouge shares (or the amount of cash) will be based upon the price of Rouge Steel Class A Common Stock shortly before the maturity of the DECS. The Company plans to use the proceeds from the DECS offering to pay down borrowings under the Revolver, to finance the investment in the galvanizing joint venture with Rouge or to finance other growth opportunities. -9- <PAGE> PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The Registrant's Annual Meeting of Shareholders was held on September 19, 1996. In connection with the meeting, proxies were solicited. Following are the voting results on proposals considered and voted upon. 1. All nominees for Class of Directors whose term expires in 1999 were elected by the stockholders who were present or represented by proxy. Votes for Votes the Election Withholding Shares of Director Authority to Vote Not Voted ------------ ----------------- --------- Pete A. Klisares 74,649,741 820,332 15,356,087 Donal H. Malenick 74,613,550 856,524 15,356,087 John H. McConnell 74,673,230 796,843 15,356,087 James Petropoulos 74,518,211 951,862 15,356,087 2. The appointment of Ernst & Young LLP as the Registrant's independent auditors for the year ending May 31, 1997 was ratified by a majority of the votes entitled to be cast by the stockholders who were present or represented by proxy. For: 75,258,859 Against: 63,776 Abstain: 147,439 Not Voted: 15,356,087 Item 6. Exhibits and Reports on Form 8-K. A. Exhibits - Exhibit 27 Financial Data Schedule B. Reports on Form 8-K. There were no reports on Form 8-K during the three months ended November 30, 1996. 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. WORTHINGTON INDUSTRIES, INC. Date: January 13, 1997 By: /s/Donald G. Barger, Jr. _________________________________________ Donald G. Barger, Jr. Vice President-Chief Financial Officer By: /s/Michael R. Sayre _________________________________________ Michael R. Sayre Controller </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-1997 <PERIOD-START> JUN-01-1996 <PERIOD-END> NOV-30-1996 <EXCHANGE-RATE> 1 <CASH> 342 <SECURITIES> 0 <RECEIVABLES> 217,397 <ALLOWANCES> 3,157 <INVENTORY> 233,899 <CURRENT-ASSETS> 474,073 <PP&E> 867,721 <DEPRECIATION> 299,999 <TOTAL-ASSETS> 1,308,771 <CURRENT-LIABILITIES> 165,845 <BONDS> 326,236 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 909 <OTHER-SE> 676,052 <TOTAL-LIABILITY-AND-EQUITY> 1,308,771 <SALES> 831,821 <TOTAL-REVENUES> 831,821 <CGS> 713,943 <TOTAL-COSTS> 713,943 <OTHER-EXPENSES> 53,287 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 6,897 <INCOME-PRETAX> 64,185 <INCOME-TAX> 24,069 <INCOME-CONTINUING> 40,116 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 40,116 <EPS-PRIMARY> .44 <EPS-DILUTED> .44 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1998

0QTR1

AAPL

https://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000003.txt

-----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, HYxzQWkjfi6BYVRvXvcbcwx4AYuQDwjlAayzCuZiU/KrgJosDTXoxOTb/A24W5JE SHWLG5wP+UiwUcMgCDC42w== <SEC-DOCUMENT>0000320193-98-000003.txt : 19980414 <SEC-HEADER>0000320193-98-000003.hdr.sgml : 19980414 ACCESSION NUMBER: 0000320193-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971226 FILED AS OF DATE: 19980209 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLE COMPUTER INC CENTRAL INDEX KEY: 0000320193 STANDARD INDUSTRIAL CLASSIFICATION: 3571 IRS NUMBER: 942404110 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10030 FILM NUMBER: 98524718 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 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________ Form 10-Q ___________ (Mark One) _X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 26, 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 942404110 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1 Infinite Loop 95014 Cupertino, California (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 996-1010 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Common Share Purchase Rights (Titles of classes) ___________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ 132,768,062 shares of Common Stock Issued and Outstanding as of January 30, 1998 1 <PAGE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in millions, except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED December 26, 1997 December 27, 1996 <S> <C> <C> Net sales $ 1,578 $ 2,129 Costs and expenses: Cost of sales 1,225 1,732 Research and development 79 149 Selling, general and administrative 234 372 1,538 2,253 Operating income (loss) 40 (124) Interest and other income (expense), net 7 4 Income (loss) before provision (benefit) for income taxes 47 (120) Provision (benefit) for income taxes -- -- Net income (loss) $ 47 $ (120) Basic earnings (loss) per share $ 0.37 $ (0.96) Diluted earnings (loss) per share $ 0.33 $ (0.96) Common shares used in the calculations of basic earnings (loss) per share (in thousands) 127,989 124,532 Common and common equivalent shares used in the calculations of diluted earnings (loss) per share (in thousands) 139,839 124,532 </TABLE> See accompanying notes to condensed consolidated financial statements (unaudited). 2 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (In millions) <TABLE> <CAPTION> December 26, 1997 September 26, 1997 (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 1,193 $ 1,230 Short-term investments 434 229 Accounts receivable, net of allowance for doubtful accounts of $96 ($99 at September 26, 1997) 902 1,035 Inventories: Purchased parts 99 141 Work in process 5 15 Finished goods 300 281 404 437 Deferred tax assets 233 259 Other current assets 207 234 Total current assets 3,373 3,424 Property, plant, and equipment: Land and buildings 402 453 Machinery and equipment 416 460 Office furniture and equipment 100 110 Leasehold improvements 151 172 1,069 1,195 Accumulated depreciation and amortization (640) (709) Net property, plant, and equipment 429 486 Other assets 324 323 $ 4,126 $ 4,233 </TABLE> See accompanying notes to condensed consolidated financial statements (unaudited). 3 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions) <TABLE> <CAPTION> December 26, 1997 September 26, 1997 (Unaudited) <S> <C> <C> Current liabilities: Notes payable to banks $ 24 $ 25 Accounts payable 655 685 Accrued compensation and employee benefits 92 99 Accrued marketing and distribution 261 278 Accrued warranty and related 126 128 Accrued restructuring costs 144 180 Other current liabilities 367 423 Total current liabilities 1,669 1,818 Long-term debt 952 951 Deferred tax liabilities 261 264 Commitments and contingencies Shareholders' equity: Series A non-voting convertible preferred stock, no par value; 150,000 shares authorized, issued and outstanding 150 150 Common stock, no par value; 320,000,000 shares authorized; 128,018,985 shares issued and outstanding at December 26, 1997 (127,949,220 shares at September 26, 1997) 499 498 Retained earnings 636 589 Other (41) (37) Total shareholders' equity 1,244 1,200 $ 4,126 $ 4,233 </TABLE> See accompanying notes to condensed consolidated financial statements (unaudited). 4 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> THREE MONTHS ENDED December 26, 1997 December 27, 1996 <S> <C> <C> Cash and cash equivalents, beginning of the period $ 1,230 $ 1,552 Operating: Net income (loss) 47 (120) Adjustments to reconcile net income (loss) to cash generated by operating activities: Depreciation and amortization 28 25 Changes in operating assets and liabilities: Accounts receivable 133 4 Inventories 33 174 Deferred tax assets 26 18 Other current assets 27 (38) Accounts payable (30) 29 Accrued restructuring costs (36) (12) Other current liabilities (82) 30 Deferred tax liabilities (3) (18) Cash generated by operating activities 143 92 Investing: Purchase of short-term investments (399) (542) Proceeds from sales and maturities of short-term investments 194 102 Net proceeds from sale of property, plant, and equipment 45 2 Purchase of property, plant, and equipment (7) (20) Other (14) (10) Cash used for investing activities (181) (468) Financing: Increase (decrease) in notes payable to banks (1) (6) Increase (decrease) in long-term borrowings 1 1 Increases in common stock, net of related tax benefits 1 3 Cash generated by (used for) financing activities 1 (2) Total cash used (37) (378) Cash and cash equivalents, end of the period $ 1,193 $ 1,174 Supplemental cash flow disclosures: Cash paid during the quarter for interest $ 20 $ 20 Cash paid(received) during the quarter for income taxes, net $ (18) $ 20 </TABLE> See accompanying notes to condensed consolidated financial statements (unaudited). 5 <PAGE> APPLE COMPUTER, INC. Notes to Condensed 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 Condensed 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 26, 1997, included in its Annual Report on Form 10-K for the year ended September 26, 1997 (the "1997 Form 10-K"). 2. The Company has adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". In accordance with SFAS 128, primary earnings per share have been replaced with basic earnings per share, and fully diluted earnings per share have been replaced with diluted earnings per share which includes potentially dilutive securities such as outstanding options and convertible securities. Prior periods have been presented to conform to SFAS 128, however, as the Company had a net loss in the prior period, basic and diluted loss per share are the same as the primary loss per share previously presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of convertible securities is reflected using the if-converted method. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except net income (loss) and per share amounts): <TABLE> <CAPTION> For the Quarter ended For the Quarter ended December 27, 1997 December 27, 1996 <S> <C> <C> Numerator: Net income (loss) $ 47 $ (120) Denominator: Denominator for basic earnings (loss) per share -- weighted average shares outstanding 127,989 124,532 Effect of Dilutive Securities: Convertible preferred stock 9,091 -- Dilutive options outstanding 2,759 -- Dilutive potential common shares 11,850 -- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 139,839 124,532 Basic earnings (loss) per share $ 0.37 $ (0.96) Diluted earnings (loss) per share $ 0.33 $ (0.96) </TABLE> 6 <PAGE> For purposes of calculating diluted earnings per share for the first quarter of 1998, the Company assumed that all employees exchanged their existing options (See Note 5 to the Condensed Consolidated Financial Statements) for new options with an exercise price of $13.6875 effective December 15, 1998. Therefore, all options outstanding as of December 26, 1997, were included in the computation of diluted earnings per share as they were all considered to have exercise prices less than $18.05, the average market price of common shares during the first quarter of 1998. However, the effect on dilutive earnings per share of approximately 8.5 million of the outstanding options was weighted to reflect that they were only considered outstanding and dilutive options from December 19, 1997, the date of the Company's option exchange offer to its employees, through the end of the quarter. The Company has outstanding $661 million of unsecured convertible subordinated notes (the "Notes") which are convertible by their holders into approximately 22.6 million shares of common stock at a conversion price of $29.205 per share subject to the adjustments as defined in the Note agreement. The common shares represented by these Notes were not included in the computation of diluted earnings per share because the effect of using the if-converted method would be anti-dilutive. For additional disclosures regarding the outstanding preferred stock, employee stock options and the Notes, see the 1997 Form 10-K. 3. In the second quarter of 1996, the Company announced and began to implement a restructuring plan aimed at reducing costs and restoring profitability to the Company's operations. The restructuring plan was necessitated by decreased demand for the Company's products and the Company's adoption of a new strategic direction. These actions resulted in a net charge of $179 million after subsequent adjustments recorded in the fourth quarter of 1996. During 1997, the Company announced and began to implement supplemental restructuring actions to meet the foregoing objectives of the plan. The Company recognized a $217 million charge during 1997 for the estimated incremental costs of those actions, including approximately $8 million of costs related to the termination of the Company's former Chief Executive Officer. The combined restructuring actions consist of terminating approximately 3,600 full-time employees, approximately 3,000 of whom have been terminated from the second quarter of 1996 through December 26, 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 $195 million and noncash asset write-downs of $57 million from the second quarter of 1996 through December 26, 1997. During the third quarter of 1997 and the first quarter of 1998, the Company made adjustments to the categories and timing of expected restructure spending based on revised estimates. The Company expects that the remaining $144 million accrued balance as of December 26, 1997 will result in cash expenditures of approximately $102 million over the next twelve months and $10 million thereafter. The Company expects that most of the contemplated restructuring actions related to the plan will be completed during fiscal 1998 and will be financed through current working capital and, if necessary, continued short-term borrowings. 7 <PAGE> The following table depicts the restructuring activity through December 26, 1997: <TABLE> <CAPTION> (In millions) Category Balance as of Spending Adjustments Balance as September During During of December 26, 1997 Q1'98 Q1'98 26, 1997 <S> <C> <C> <C> <C> Payments to employees involuntarily terminated (C) $ 76 $ 23 $ 1 $ 54 Payments on canceled or vacated facility leases (C) 25 2 3 26 Write-down of operating assets to be sold (N) 39 4 (3) 32 Payments on canceled contracts (C) 40 7 (1) 32 $180 $ 36 $ -- $144 </TABLE> (C): Cash; (N): Noncash. 4. In August 1997, the Company agreed to acquire certain assets of Power Computing Corporation ("PCC"), a company which Apple had licensed to distribute the Mac OS operating system. In addition to the acquisition of certain assets such as PCC's customer database and the license to distribute the Mac OS, the Company has the right to retain certain key employees of PCC. The agreement with PCC also includes a release of claims between the parties. On January 28, 1998, the Company completed its acquisition of certain assets of PCC. The total purchase price was approximately $115 million, which included 4,159,000 shares of the Company's common stock valued at $80 million, the forgiveness of approximately $28 million of receivables due from PCC, assumption by the Company of certain customer support liabilities of PCC, and closing and related costs. The difference between the total purchase price and the $75 million expensed as "Termination of License Agreement" in the fourth quarter of 1997 will be capitalized in the second quarter of 1998 and then amortized over a period of three years. 5. In order to address concerns regarding the retention of the Company's key employees, in December 1997 the Board of Directors approved an option exchange program which permits employees to exchange all (but not less than all) of their existing options (vested and unvested) with an exercise price of greater than $13.6875 on a one-for-one basis for new options with an exercise price of $13.6875, the fair market value of the Company's common stock on December 19, 1997, and a new four year vesting schedule beginning in December 1997. 6. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 establishes standards relating to the recognition of all aspects of software revenue. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997 and may require the Company to modify certain aspects of its revenue recognition policies. The Company does not expect the adoption of SOP 97-2 to have a material impact on the Company's consolidated results of operations. 7. The Internal Revenue Service ("IRS") has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although a substantial number of issues for these years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. 8. The information set forth in Item 1 of Part II hereof is hereby incorporated by reference. 8 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Factors That May Affect Operating Results and Financial Condition" below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information is based on the Company's fiscal calendar. Overview During the first quarter of 1998 the Company experienced significant improvement in its financial performance, reporting its first operating profit since the fourth quarter of 1996 and earning higher gross margins than in both the previous quarter and the same quarter of the prior year. Operating expenses were substantially lower than in the previous quarter and the same quarter from the prior year, reflecting reductions in all functional areas of the Company as a result of continued restructuring actions. However, both net sales and unit sales of Macintosh computer systems fell slightly from the previous quarter and fell substantially from the same quarter in the prior year. The second quarter has historically been the weakest for the Company. Therefore, sequential revenue growth is not expected until at least the third quarter, while year-over-year revenue growth is not expected until at least the fourth quarter. The Company believes that gross margin levels on its current products are sustainable for several quarters and that operating expenses will continue to trend downward through the third quarter. The foregoing statements are forward looking. The Company's actual results could differ because of several factors, including those set forth in the following paragraph, and those discussed in the subsection entitled "Factors That May Affect Operating Results and Financial Condition" below. The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns, and are also dependent upon its ability to effect a change in marketplace perception of the Company's prospects, including the viability of the Macintosh platform. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and a favorable financial condition. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, among other things, continued competitive pressures in the marketplace and the effect of any reaction by the Company to such competitive pressures, including pricing actions by the Company; 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 Mac OS and to make timely delivery of a new and substantially backward-compatible operating system; the Company's ability to successfully integrate the technologies, processes and employees of NeXT Software, Inc. ("NeXT") ,which was acquired by the Company in 1997, 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; the availability of third-party software for particular applications; and the impact on the Company's sales, market share and gross margins as a result of the Company winding down its Mac OS licensing program. 9 <PAGE> <TABLE> <CAPTION> Results of Operations First First First Fourth Quarter Quarter Quarter Quarter 1998 1997 Change 1998 1997 Change (Tabular information: Dollars in millions, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Net sales $1,578 $2,129 (26%) $1,578 $1,614 (2%) Gross margin $353 $397 (11%) $353 $320 10% Percentage of net sales 22% 19% 22% 20% Research and development $79 $149 (47%) $79 $94 (16%) Percentage of net sales 5% 7% 5% 6% Selling, general and administrative $234 $372 (37%) $234 $259 (10%) Percentage of net sales 15% 17% 15% 16% Special Charges Restructuring costs $-- $-- NM $-- $62 NM Percentage of net sales -- -- -- 4% Termination of license agreement $-- $-- NM $-- $75 NM Percentage of net sales -- -- -- 5% Interest and other income (expense), net $7 $4 75% $7 $9 (22%) Net income (loss) $47 $(120) 139% $47 $ (161) 129% Basic earnings (loss) per share $0.37 $(0.96) 139% $0.37 $(1.26) 129% Diluted earnings (loss) per share $0.33 $(0.96) 134% $0.33 $(1.26) 126% </TABLE> NM: Not Meaningful Net Sales Q1 98 Compared with Q1 97 Net sales represent the Company's gross sales net of returns, rebates and discounts. Net sales decreased 26% in the first quarter of 1998 compared with the same quarter of 1997. Total Macintosh computer unit sales and peripheral unit sales decreased 31% and 49%, respectively, in the first quarter of 1998, compared with the same period of 1997. The effect on net sales of this decline in computer and peripheral unit sales in the first quarter of 1998 was partially offset by the successful introduction of the Company's Power Macintosh G3 systems in November 1997, which accounted for approximately 21% of the 635,000 systems shipped during the first quarter of 1998. The average aggregate revenue per Macintosh unit increased 6% in the first quarter of 1998, compared with the same period of 1997, as a result of a shift in mix from the Company's "Value" (entry level Power Macintosh) products to its "Flagship" line of high-performance Power Macintosh computers and due to increases in the average aggregate revenue across all product lines. In general, the average aggregate revenue per Macintosh computer unit and per peripheral unit is expected to remain under significant downward pressure due to a variety of factors, including industry wide pricing pressures, increased competition, and the need to stimulate demand for the Company's products. International net sales represented 50% of total net sales in the first quarter of 1998 compared with 56% of total net sales in the same period of 1997. International net sales declined 34% in the first quarter of 1998 compared with the same period of 1997. Net sales decreased significantly in the European and Japanese markets during the first quarter of 1998 compared with the same period of 1997 as a result of decreases in Macintosh and peripheral unit sales. Further discussion relating to factors contributing to the decline in net sales in the Japanese market may be found in this Part I, Item 2 of Form 10-Q 10 <PAGE> under the subheading "Global Market Risks" included under the heading "Factors That May Affect Future Results and Financial Condition," which information is hereby incorporated by reference. Domestic net sales declined 16% in the first quarter of 1998 over the comparable period of 1997, due to decreases in unit sales of Macintosh computers and peripheral products, partially offset by increases in the average aggregate revenue per Macintosh and peripheral unit. During the first quarter of 1998 compared with the comparable period of 1997, the Company's estimated share of the worldwide and U.S. personal computer markets decreased to 2.6% from 4.3%, and to 3.3% from 5.2%, respectively, based upon current market information provided by industry sources. The Company believes that quarterly net sales will be below the level of the prior year's comparable periods through at least the third fiscal quarter of 1998, if not longer. Q1 98 Compared with Q4 97 Net sales decreased 2% in the first quarter of 1998 compared with the fourth quarter of 1997. Total Macintosh computer unit sales decreased 4% in the first quarter of 1998 compared with the prior quarter. The effect on net sales of this decline in unit sales was partially offset by the successful introduction of the Company's Power Macintosh G3 systems in November 1997, which accounted for approximately 21% of the 635,000 systems shipped during the first quarter of 1998. In addition, net sales were positively impacted as the Company began marketing many of its products directly to end users in the U.S. through the Company's on-line store, which opened in November 1997. The Company generated $15 million in revenue from its on-line store during the first quarter of 1998. Unit sales of peripheral products decreased 15% in the first quarter of 1998 compared with the prior quarter. The average aggregate revenue per Macintosh computer unit increased 5% as a result of a shift in mix from the Company's "Value" products to its "Flagship" line of high- performance Power Macintosh computers and due to increases in the average aggregate revenue across most other product lines. International net sales represented 50% of total net sales in the first quarter of 1998, compared with 42% in the fourth quarter of 1997. International net sales increased 16% in the first quarter of 1998 compared with the fourth quarter of 1997, primarily as a result of increases in Macintosh and peripheral unit net sales in Europe and increases in net sales of Macintosh units in Japan. Domestic net sales decreased 16% in the first quarter of 1998 compared with the prior quarter due to decreases in Macintosh and peripheral unit sales, slightly offset by increases in the average aggregate revenue per Macintosh and peripheral unit. During the first quarter of 1998 compared with the fourth quarter of 1997, the Company's estimated share of the worldwide and U.S. personal computer markets decreased to 2.6% from 3.3%, and to 3.3% from 4.6%, respectively, based upon current market information provided by industry sources. Backlog In the Company's experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases in anticipation of or immediately following introduction of new products because of overordering by dealers anticipating shortages. Backlog often is reduced once dealers and customers believe they can obtain sufficient supply. Because of the foregoing, 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. Further information regarding the Company's backlog may be found in Part I, Item 2 of this Form 10-Q under the subheading "Product Introductions and Transitions" included under the heading "Factors That May Affect Future Results and Financial Condition," which information is hereby incorporated by reference. 11 <PAGE> Gross Margin Gross margin represents the difference between the Company's net sales and its cost of goods sold. 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 industry wide competitive pressures. Gross margin increased from 18.6% to 22.4% of sales during the first quarter of 1998 compared to the same period of 1997, and increased from 19.8% to 22.4% of sales compared to the fourth quarter of 1997. This was primarily as a result of a shift in revenue mix towards the Company's higher margin "Flagship" line of high-performance Power Macintosh computers, including Power Macintosh G3 systems, with relatively stable margins quarter-to-quarter on the Company's "Value" product line. The gross margin levels in the first quarter of 1998 compared to the fourth quarter of 1997 were not significantly affected by changes in foreign exchange rates. 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. While the Company believes the overall gross margin levels achieved in the first quarter of 1998 are sustainable for several quarters, there can be no assurance that such margins will be maintained. In general, gross margins will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, and potential changes to the Company's product mix. In response to these downward pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage quality problems and warranty costs, and to stimulate demand for certain of its products. <TABLE> <CAPTION> Research and Development First First First Fourth Quarter Quarter Quarter Quarter 1998 1997 Change 1998 1997 Change <S> <C> <C> <C> <C> <C> <C> Research and development $79 $149 (47%) $79 $94 (16%) Percentage of net sales 5% 7% 5% 6% </TABLE> Research and development expenditures decreased in amount and as a percentage of net sales in the first quarter of 1998 compared with the fourth quarter of 1997 and the first quarter of 1997 due to various restructuring actions which resulted in reductions in headcount and cancellation of certain research and development related projects. The Company believes that continued and focused 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 anticipates that research and development expenditures in the second quarter of 1998 will be comparable to those in the first quarter. 12 <PAGE> <TABLE> <CAPTION> Selling, General and Administrative First First First Fourth Quarter Quarter Quarter Quarter 1998 1997 Change 1998 1997 Change <S> <C> <C> <C> <C> <C> <C> Selling, general and administrative $234 $372 (37%) $234 $259 (10%) Percentage of net sales 15% 17% 15% 16% </TABLE> Selling, general and administrative expenditures decreased in amount and as a percentage of net sales in the first quarter of 1998 when compared to the fourth quarter of 1997 and the first quarter of 1997 due to various restructuring actions which resulted in reductions in headcount, the closing of facilities, the write-down of assets, and lower ongoing variable expenses. The Company anticipates that selling, general and administrative expenditures will decline further during the second quarter of 1998 as compared to the first quarter of 1998 as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan and lower ongoing variable selling expenses. <TABLE> <CAPTION> Interest and Other Income (Expense), Net First First First Fourth Quarter Quarter Quarter Quarter 1998 1997 Change 1998 1997 Change <S> <C> <C> <C> <C> <C> <C> Interest and other income (expense), net $7 $4 75% $7 $9 (22%) </TABLE> Interest and other income (expense), net, is comprised of interest income on the Company's cash and investment balances, interest expense on the Company's debt, gains and losses recognized on investments accounted for using the equity method, foreign exchange gains and losses not allowed to be recognized as revenue or cost of sales, and other miscellaneous income and expense items. Over the last two years, the Company's debt ratings have been downgraded to non-investment grade. The Company's cost of funds may increase in future periods as a result of the downgrading in the second quarter of 1997 of its senior and subordinated long-term debt to B3 and Caa2, respectively, by Moody's Investor Services, and the downgrading in October 1997 of its senior and subordinated long-term debt to B- and CCC, respectively, by Standard and Poor's Rating Agency. Provision (Benefit) for Income Taxes As of December 26, 1997, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $696 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet. A substantial portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. As of December 26, 1997, a valuation allowance of $211 million was recorded against the deferred tax asset for the benefits of tax losses which may not be realized. Realization of approximately $85 million of the asset representing tax loss and credit carryforwards is dependent on the Company's ability to generate approximately $245 million of future U.S. taxable income. Management believes that it is more likely than not that forecasted U.S. income, including income that may be generated as a result of certain tax planning strategies, will be sufficient to utilize the tax carryforwards prior to their expiration in 2011 and 2012 to fully recover this asset. However, there can be no assurance that the Company will meet its expectations of future U.S. income. As a result, the amount of the deferred tax assets considered realizable could be reduced in the near and long term if estimates of future taxable U.S. income are reduced. Such an occurrence could materially adversely affect the Company's consolidated financial results. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. 13 <PAGE> Factors That May Affect Future Results and Financial Condition Restructuring of Operations During 1996, the Company began to implement certain restructuring actions aimed at reducing its cost structure, improving its competitiveness, and restoring sustainable profitability. During 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 sustainable profitability and the risk that cost-cutting initiatives will impair the Company's ability to innovate and remain competitive in the computer industry. Implementation of this restructuring involves several risks, including the risk that by simplifying and modifying its product line 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 restructuring 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 and distributed, or lose the flexibility to make timely changes in production schedules in order to respond to changing market conditions. As part of its restructuring, the Company announced and opened its on- line store in November 1997, which makes available most of its products to end-users in the U.S. There can be no assurance the on-line store will result in greater sales. The Company also began manufacturing products on a build-to-order basis in November 1997. There can be no assurance this manufacturing process will result in decreased costs or increased gross margins. The Company is also reducing the number of wholesale and retail channel partners, particularly in the Americas, which places a greater volume of sales through fewer partners. There can be no assurance that this will not adversely impact the Company. In addition, the actions taken in connection with the restructuring could adversely affect employee morale, thereby damaging the Company's ability to retain and motivate employees. Also, because the Company contemplates relying 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, there can be no assurance that the technologies acquired from NeXT will be successfully exploited, or that key NeXT employees and processes will be retained and successfully integrated with those at Apple. Also, the restructuring includes the winding down of the Company's Mac OS licensing program. There can be no assurance that the winding down of this program will result in greater sales, market share, and increased gross margins to the Company. In addition, there can be no assurance that this action will not result in the availability of fewer application software titles for the Mac OS, which may result in a decrease to the Company's sales, market share and gross margins. Finally, even if the restructuring is successfully implemented, there can be no assurance that it will effectively resolve the various issues currently facing the Company. Although the Company believes that the actions it is taking in connection with the restructuring, including its acquisition of NeXT and the winding down of its Mac OS licensing program, should help restore marketplace confidence in 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 sustainable profitability. The Company's future consolidated operating results and financial condition could be adversely affected should it encounter difficulty in effectively managing the restructuring and new cost structure. Additional information relating to the restructuring of operations may be found in Part I of this Form 10-Q in Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited), 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 must continuously introduce new products and technologies and enhance existing products in order to remain competitive. Recent introductions include certain PowerBook and Power Macintosh products, including the Power Macintosh G3 computers in November 1997, and the introduction of Mac OS 8 in July 1997. The success of new product introductions is dependent on a number of 14 <PAGE> 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 effect that new products will have on its sales or results of operations. In addition, although the number of new product introductions may decrease as a result of the Company's restructuring actions, 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 Company has in the past experienced difficulty in anticipating demand for new products, resulting in product shortages which have adversely affected the Company's operating results. The measurement of demand for newly introduced products is further complicated by the availability of different product configurations, which may include various types of built-in peripherals and software. Configurations may also require certain localization (such as language) for various markets and, as a result, demand in different geographic areas may be a function of the availability of third-party software in those localized versions. For example, the availability of European- language versions of software products manufactured by U.S. producers may lag behind the availability of U.S. versions by a quarter or more. This may result in lower initial demand for the Company's new products outside the U.S., even though localized versions of the Company's products may be available. The increasing integration of new or enhanced 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 operating system (code named "Rhapsody") which is expected to offer advanced functionality based on Apple and NeXT software technologies. However, the NeXT software technologies that 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 can be completed at reasonable cost or at all. In addition, Rhapsody may not be fully backward-compatible with all existing applications, which could result in a loss of existing customers. Finally, it is uncertain whether Rhapsody or the planned enhancements to the current Mac OS will gain developer support and market acceptance. Inability to successfully develop and make timely delivery of a substantially backward-compatible Rhapsody or of planned enhancements to the current Mac OS, or to gain developer support and market acceptance for those operating systems, may have an adverse impact on the Company's consolidated operating results and financial condition. 15 <PAGE> 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 consolidated results of operations and financial condition have been, and in the future may continue to be, adversely affected by industry wide pricing pressures and downward pressures on gross margins. The industry has also been characterized by rapid technological advances in software functionality 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, as well as broader product lines and larger installed customer bases than those of the Company. The Company's future consolidated operating results and financial condition may be affected by overall demand for personal computers and general customer preferences for one platform over another or one set of product features over another. 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 Microsoft Windows 95 and Windows NT operating systems. The Company believes that the Mac OS, with its perceived advantages over Windows, and the general reluctance of the Macintosh installed base to incur the costs of switching platforms, have been driving forces behind sales of 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 a new version of Windows to be introduced in 1998, have added features to the Windows platform that make the differences between the Mac OS and Microsoft's Windows operating systems less significant. 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 consolidated operating results and financial condition will be substantially dependent on its ability to maintain continuing improvements to the Macintosh platform in order to maintain perceived functional advantages over competing platforms. The Company had previously entered into agreements to license its Mac OS to other personal computer vendors (the "Clone Vendors") as part of an effort to increase the installed base for the Macintosh platform. The Company recently determined that the benefits of licensing the Mac OS to the Clone Vendors under these agreements were more than offset by the impact and costs of the licensing program. As a result, the Company agreed to acquire certain assets, including the license to distribute the Mac OS, of PCC, a Clone Vendor, and has no plans to renew its other Mac OS licensing agreements. Although the Company believes that this winding down of its licensing program will help reduce the adverse impact of the licensing program on the Company's sales, market share and gross margins, there can be no assurance that this will occur. In addition, there can be no assurance that this winding down of the licensing program will not result in the availability of fewer application software titles for the Mac OS, which may result in a decrease to the Company's sales, market share and gross margins. As a supplemental means of addressing the competition from Windows and other platforms, the Company had previously devoted substantial resources toward developing personal computer products capable of running application software designed for the Windows operating systems. These products include an add-on card containing a Pentium or 586-class microprocessor that enables users to run applications concurrently that require the Mac OS, Windows 3.1 or Windows 95 operating systems. The Company plans to transition the cross-platform business to third-parties during 1998. There can be no assurance that this transition will be successful. The Company, International Business Machines Corporation and Motorola, Inc. had agreed upon and announced the availability of specifications for a PowerPC microprocessor- based hardware platform (the "Platform"). These specifications defined a "unified" personal computer architecture that would have given the Clone Vendors broad access to the Power Macintosh platform and would have utilized standard industry components. The Company had intended to license the Mac OS to manufacturers of the Platform. However, the Company has decided it will no longer support the Platform based upon its decision to wind down its Mac OS licensing program, and because of 16 <PAGE> little industry support for the Platform. The decision not to further develop this Platform may affect the Company's ability to increase the installed base for the Macintosh 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. In August 1997, the Company and Microsoft entered into patent cross licensing and technology agreements. Under these agreements, the companies provided patent cross licenses to each other. In addition, for a period of five years from August 1997, Microsoft will make future versions of its Microsoft Office and Internet Explorer products for the Mac OS, and 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. In addition, Microsoft purchased 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, among other things, 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. Support from Third-Party Software Developers Decisions by customers to purchase the Company's personal computers, as opposed to Windows-based systems, are often based on the availability of third-party software for particular applications. The Company believes 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 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 products, as well as the Company's decision to wind down its Mac OS licensing program, 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 Windows market. Moreover, the Company's current plan to introduce a new operating system (code named "Rhapsody") could cause software developers to stop developing software for the current Mac OS. In addition, there can be no assurance that software developers will decide to develop software for the new operating system on a timely basis or at all. Microsoft is an important developer of application software for 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 the Company competes with Microsoft. Accordingly, Microsoft's interest in producing application software for the Mac OS not covered by the relationship or upon expiration of the relationship may be influenced by Microsoft's perception of its interests as the vendor of the Windows operating system. Global Market Risks A large portion of the Company's revenue is derived from its international operations. As a result, the Company's consolidated operations and financial results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in the value of the U.S. dollar versus the local currency in which the products are sold. Countries in the Asia Pacific region, including Japan, have recently experienced weaknesses in their currency, banking and equity markets. These weaknesses could adversely affect consumer demand for the Company's products, 17 <PAGE> the U.S. dollar value of the Company's foreign currency denominated sales, the availability and supply of product components to the Company, and ultimately the Company's consolidated results of operations. When the U.S. dollar strengthens against other currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens, the U.S. dollar value of non- U.S. dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, 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). 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 sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash, cash equivalents, and short-term investments as well as costs associated with foreign currency hedges. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest rate swap, collar, and floor transactions. 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 consolidated operating results and financial position. The Company does not engage in leveraged hedging. The Company's current financial condition may 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 makes a provision for inventories of products that have become obsolete or are in excess of anticipated demand, accrues for any cancellation fees of orders for inventories that have been canceled, and accrues for the estimated costs to correct any product quality problems. Although the Company believes its inventory and related provisions are adequate given the rapid and unpredictable pace of product obsolescence in the computer industry, no assurance can be given 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 consolidated 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 consolidated 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 sold its Fountain, Colorado, manufacturing facility to SCI and entered into a related manufacturing outsourcing agreement with SCI; sold its Singapore printed circuit board manufacturing assets to NatSteel Electronics Pte., Ltd., which is 18 <PAGE> expected to 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 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 and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions. 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 consolidated operating results and financial condition. Although certain components essential to the Company's business are generally available from multiple sources, other key components (including microprocessors and application specific integrated circuits ("ASICs")) are currently obtained by the Company from single sources. If the supply of a key single-sourced 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 consolidated operating results and financial condition. The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, the sole suppliers of the PowerPC RISC microprocessor for the Company's Macintosh computers, 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, and other developers and producers of the microprocessors used by most personal computers using the Windows operating systems. The desire of IBM and Motorola to continue producing these microprocessors may be influenced by Microsoft's decision not to adapt its Windows NT operating system software to run on the PowerPC microprocessor. IBM produces personal computers based on Intel microprocessors as well as workstations based on the PowerPC microprocessor, and is also the developer of OS/2, a competing operating system to 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. In addition, Motorola has recently announced its intention to stop producing Macintosh clones. As a result, Motorola may be less inclined to continue to produce PowerPC microprocessors. The Company's current financial condition and uncertainties related to recent events could affect 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 consolidated operating results and financial condition could be adversely affected if the Company is unable to continue to obtain key components on terms substantially similar to those currently available to the Company. 19 <PAGE> Marketing and Distribution A number of uncertainties may affect the marketing and distribution of the Company's products. Currently, the Company distributes its products through wholesalers, resellers, mass merchants, and cataloguers (collectively referred to as "resellers") and direct to higher education institutions. In addition, in November 1997 the Company began selling many of its products directly to end users in the U.S. through the Company's on-line store. Many of the Company's significant resellers operate on narrow product margins. Most such resellers also distribute products from competing manufacturers. The Company's business and financial results could be adversely affected if the financial condition of these resellers weakened 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 continue to cause resellers to reduce their ordering and marketing of the Company's products. In addition, the Company has in the past and may in the future experience delays in ordering by resellers in light of uncertain demand for 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 recently revised its channel program, including decreasing the number of resellers and reducing returns, price protection and certain rebate programs, in an effort to reduce channel inventory, increase inventory turns, increase product support within the channel and improve gross margins. In addition, in November 1997 the Company opened its on-line store in the U.S. which makes many of the Company's products available directly to the end-user. Although the Company believes the foregoing changes will improve its consolidated operating results and financial condition, there can be no assurance that this will occur. Change in Senior Management On July 9, 1997, 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 consolidated operating results and financial condition during the period until a new Chief Executive Officer is hired and afterward. In addition, certain members of the Company's senior management have been with the Company for less than twelve months. There can be no assurance that new members of the management team can be successfully assimilated, that the Company will be able to satisfactorily allocate responsibilities or that such new members of its management will succeed in their roles in a timely and efficient manner. The Company's failure to recruit, retain and assimilate new executives, or the failure of any such executive to perform effectively, or the loss of any such executive, could have a material adverse impact on the Company's business, financial condition and results of operations. 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 C.C. Chang, Corporate Senior Vice President, Marketing, Hughes Electronics and President, Hughes International, and Edgar S. Woolard, Jr., retired Chairman of E.I. DuPont de Nemours & Company. The new directors are William V. Campbell, President and CEO of Intuit Corp.; Lawrence J. Ellison, Chairman and Chief Executive Officer of Oracle Corp.; Steven P. Jobs, Chairman and Chief Executive Officer of Pixar Animation Studios; and Jerome B. York, Vice Chairman of Tracinda Corporation and former Chief Financial Officer of IBM and Chrysler Corporation. Dependence on Key Employees During the past several years, the Company has experienced significant voluntary employee turnover as a result of employees' concerns over the Company's prospects, as well as the abundance of career opportunities available elsewhere. The Company is dependent on its key employees in order to achieve its business plan. There can be no assurance the Company will be able to attract, motivate and retain key employees. Failure to do so may have a significant effect on the Company's consolidated operating results and financial condition. 20 <PAGE> Other Factors The Company is in the process of identifying operating and application software challenges related to the year 2000. While the Company expects to resolve year 2000 compliance issues substantially through normal replacement and upgrades of software, there can be no assurance that there will not be interruption of operations or other limitations of system functionality or that the Company will not incur substantial costs to avoid such limitations. Any failure to effectively monitor, implement or improve the Company's operational, financial, management and technical support systems could have a material adverse effect on the Company's business and consolidated results of operations. 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 consolidated 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 regulations will have on the Company's future consolidated operating results and financial condition. The Company recently decided to replace its existing transaction systems in the U.S. (which include order management, product procurement, distribution, and finance) with a single integrated system as part of its ongoing effort to increase operational efficiency. Substantially all of the transaction systems in the European operations were replaced with the same integrated system in 1997. The Company's future consolidated operating results and financial condition could be adversely affected if the Company is unable to implement and effectively manage the transition to this new integrated system. Because of the foregoing factors, as well as other factors affecting the Company's consolidated operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, the Company's participation in a highly dynamic industry often results in significant volatility of the Company's common stock price. 21 <PAGE> Liquidity and Capital Resources The Company's consolidated financial position with respect to cash, cash equivalents, and short-term investments increased to $1,627 million as of December 26, 1997, from $1,459 million as of September 26, 1997. The Company's cash and cash equivalent balances as of December 26, 1997 and September 26, 1997 include $164 million and $165 million, respectively, pledged as collateral to support letters of credit primarily associated with the Company's purchase commitments under the terms of the sale of the Company's Fountain, Colorado, manufacturing facility to SCI. Cash generated by operations during the first quarter of 1998 totaled $143 million. Cash generated by operations was primarily the result of positive earnings and decreases in accounts receivable and inventories, partially offset by decreases in accounts payable and other current liabilities and payments related to restructuring actions. Net cash used for the purchase of property, plant, and equipment totaled $7 million in the first quarter of 1998, and consisted primarily of increases in manufacturing machinery and equipment. The Company expects that the level of capital expenditures in the second quarter of 1998 will increase slightly as compared to the first quarter. Over the last two years, the Company's debt ratings have been downgraded to non-investment grade. In October 1997, the Company's senior and subordinated long-term debt were downgraded to B- and CCC, respectively, by Standard and Poor's Rating Agency. The Company's senior and subordinated long-term debt ratings by Moody's Investor Services remain unchanged from the second quarter of 1997, when they were downgraded to B3 and Caa2, respectively. Both Standard and Poor's Rating Agency and Moody's Investor Services have the Company on negative outlook. 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, and continued short- term borrowings from banks, will be sufficient to meet its cash requirements over the next twelve months. Expected cash requirements over the next twelve months include an estimated $102 million to effect actions under the restructuring plan, most of which will be effected during fiscal 1998. No assurance can be given that any additional required financing could be obtained should the restructuring plan take longer to implement than anticipated or be unsuccessful. If the Company is unable to obtain such financing, its liquidity, results of operations, and financial condition could be materially adversely affected. 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 U.S. 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. 22 <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings Abraham and Evelyn Kostick Trust v. Peter Crisp et al. In January 1996, a purported shareholder class action styled Abraham and Evelyn Kostick Trust v. Peter Crisp et. al was filed in the California Superior Court for Santa Clara County naming the Company and its then directors as defendants. The complaint sought injunctive relief and damages and alleged that acts of mismanagement resulted in a depressed price for the Company. In February 1996, the complaint was amended to add a former director as a defendant and to add purported class and derivative claims based on theories such as breach of fiduciary duty, misrepresentation, and insider trading. In July 1996, the Court sustained defendants' demurrer and dismissed the amended complaint on a variety of grounds and granted plaintiffs leave to amend the complaint. In October 1996, the plaintiffs filed a second amended complaint naming the Company's then directors and certain former directors as defendants and again alleging purported class and derivative claims, seeking injunctive relief and damages (compensatory and punitive) based on theories such as breach of fiduciary duty, misrepresentation, and insider trading. In July 1997, the Court 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 sustained the demurrer to plaintiffs' class claims but overruled the demurrer to the shareholder derivative claims. In September 1997, the Company brought a motion to reconsider portions of the court order. The Third Amended Complaint was filed in October 1997, and eliminated the class action claims and restated claims against certain directors and former directors. In November 1997, the Company's Board of Directors appointed a special investigation committee and engaged independent counsel to assist in the investigation of the claims made in the Third Amended Complaint. Also in November 1997, the Company filed a demurrer to the Third Amended Complaint. A hearing is set for February 1998. LS Men's Clothing Defined Benefit Pension Fund v. Michael Spindler et al. In May 1996, an action was filed in the California Superior Court for Alameda County naming as defendants the Company and certain of its current and former officers and directors. The complaint seeks compensatory and punitive damages and generally alleges that the defendants misrepresented or omitted material facts about the Company's operations and financial results, which plaintiff contends artificially inflated the price of the Company's stock. The case was transferred to the California Superior Court for Santa Clara County. In July 1997, the Court sustained the Company's demurrer dismissing the amended complaint with leave to amend, after which plaintiff served a second amended complaint. In September 1997, the Company and the two remaining individual defendants (former directors Markkula and Spindler) brought a motion to dismiss the second amended complaint. In October 1997, the Court granted the motion to dismiss in its entirety with leave to amend as to certain defendants and claims. In November 1997, the plaintiff filed a third amended complaint, adding a former director as a defendant and alleging further misrepresentations by the defendants about the Company's operations and financial results. In January 1998, the Company and the three individual defendants brought a motion to dismiss the third amended complaint, which is set for hearing in February 1998. "Repetitive Stress Injury" Litigation The Company is named in approximately 60 lawsuits, alleging that plaintiffs incurred so-called "repetitive stress" injuries to their upper extremities as a result of using keyboards and/or mouse input devices sold by the Company. These actions are similar to those filed against other major suppliers of personal computers. In October 1996, the Company prevailed in the first full trial to go to verdict against the Company. Since then, approximately ten lawsuits have been dismissed with prejudice by the plaintiffs, and two others have been dismissed by court order. The remaining actions are in various stages of pretrial activity. Ultimate resolution of these cases may depend on industry-wide progress in resolving similar litigation, as well as on the impact of the recent decision handed down by the New York Court of Appeals in the case of Blanco v. American Telephone and Telegraph Co. (a majority of the cases naming the Company as a defendant were filed in New York, and are subject to the decision). In that decision, the court announced a new standard for determining when the statute of limitations period begins to accrue in so- 23 <PAGE> called "repetitive stress" injury cases. While the decision could result in the revival of some cases which were previously dismissed, the decision will not cause the Company to alter its strategy in these cases. Monitor-Size Litigation In August 1995, the Company was named, along with 41 other entities, including computer manufacturers and computer monitor vendors, in a putative nationwide class action filed in the California Superior Court for Orange County, styled Keith Long et al. v. AAmazing Technologies Corp. et al. The complaint alleges that each of the defendants engaged in false or misleading advertising with respect to the size of computer monitor screens. Also in August 1995, the Company was named as the sole defendant in a purported class action alleging similar claims filed in the New Jersey Superior Court for Camden County, entitled Mahendri Shah v. Apple Computer, Inc. Subsequently, in November 1995, the Company, along with 26 other entities, was named in a purported class action alleging similar claims filed in the New Jersey Superior Court for Essex County, entitled Maizes & Maizes v. Apple Computer, Inc. et al. Similar putative class actions have been filed in other California counties in which the Company was not named as a defendant. The complaints in all of these cases seek restitution in the form of refunds or product exchange, damages, punitive damages, and attorneys fees. In December 1995, the California Judicial Council ordered all of the California actions, including Long, coordinated for purposes of pretrial proceedings and trial before a single judge, the Honorable William Cahill, sitting in the County of San Francisco. All of the California actions were subsequently coordinated under the name In re Computer Monitor Litigation, and a master consolidated complaint was filed superseding all of the individual complaints in those actions. In July 1996, Judge Cahill ordered all of the California cases dismissed without leave to amend as to plaintiffs residing in California on the ground that a stipulated judgment entered in September 1995 in a prior action brought by the California Attorney General alleging the same cause of action was res judicata as to the plaintiffs in the consolidated California class action suits. This order may be subject to appellate review at a later stage of the proceedings. Both the New Jersey cases and the consolidated California cases are at a preliminary stage, with no discovery having taken place. 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 consolidated results of operations or financial condition as reported in the accompanying financial statements. Exponential Technology v. Apple Plaintiff alleges in a lawsuit styled Exponential Technology, Inc. v. Apple Computer, Inc. that the Company, which was an investor in Exponential, breached its fiduciary duty to Exponential by misusing confidential information about its financial situation to cause Exponential to fail, and that the Company fraudulently misrepresented the facts about allowing Exponential to sell its processors to the Company Mac OS licensees. The lawsuit is filed in California State Court in Santa Clara County. In November 1997, the Company filed a demurrer to portions of the complaint, which the court granted in part. In January 1998, plaintiff filed an Amended Complaint. Other On August 21, 1997, the Federal Trade Commission issued its consent decree against the Company, regarding the Company's past processor upgrade practices, specifically certain advertisements which the Commission deemed to have misrepresented the Company's marketing of certain microprocessor upgrade products. Pursuant to the order, the Company is ordered to cease and desist from any such allegedly misleading advertising, to give notice to consumers, and to implement certain programs enabling consumers who are within the order's scope to obtain upgrade kits or rebates, in connection with any purchases within the scope of the order. The Company has complied with all provisions of the order currently effective, and has filed its 60-day compliance with the Commission on October 17, 1997. 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 is not determinable. 24 <PAGE> 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 consolidated results of operations or cash flows could be materially affected in a particular period. 25 <PAGE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 10.A.5 1990 Stock Option Plan, as amended through November 5, 1997. 27 Financial Data Schedule. 26 <PAGE> 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 February 6, 1998 27 <PAGE> INDEX TO EXHIBITS Exhibit Index Number Description Page 10.A.5 1990 Stock Option Plan, as amended through November 5, 1997. 29 27 Financial Data Schedule. 38 28 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>2 <TEXT> EXHIBIT 10.A.5 APPLE COMPUTER, INC. 1990 STOCK OPTION PLAN (as amended through 11/5/97) 1. Purposes of the Plan. The purposes of this 1990 Stock Option Plan are to attract and retain high quality personnel for positions of substantial responsibility, to provide additional incentive to Employees of the Company, its Subsidiaries and its Affiliated Companies and to promote the success of the Company's business. This Plan succeeds to and replaces the Company's 1981 Stock Option Plan. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non- statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, and the regulations promulgated thereunder. Stock appreciation rights ("SARs") may be granted under the Plan in connection with Options or independently of Options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees, as shall be administering the Plan from time to time pursuant to Section 4 of the Plan. (b) "Affiliated Company" means a corporation which is not a Subsidiary but with respect to which the Company owns, directly or indirectly through one or more Subsidiaries, at least 20% of the total voting power, unless the Administrator determines in its discretion that such corporation is not an Affiliated Company. (c) "Board" means the Board of Directors of the Company. (d) "Common Stock" means the Common Stock, no par value, of the Company. (e) "Company" means Apple Computer, Inc., a California corporation, or its successor. (f) "Committee" means a Committee, if any, appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (h) "Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary or Affiliated Company. Continuous Status as an Employee shall not be considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary or Affiliated Company, as the case may be, under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, its successor or its Affiliated Companies. (i) "Director" means a member of the Board. (j) "Employee" means any person, including Officers and Directors, employed by and on the payroll of the Company, any Subsidiary or any Affiliated Company. The payment of Directors' fees by the Company shall not be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. 29 <PAGE> (l) "Fair Market Value" means the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in The Wall Street Journal or such other source as the Administrator deems reliable. (ii) If the Common Stock is regularly quoted on the NASDAQ System (but not on the National Market System) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination. (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (m) "Officer" means an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (n) "Nonstatutory Stock Option" means an Option that is not an Incentive Stock Option. (o) "Incentive Stock Option" means an Option that satisfies the provisions of Section 422 of the Code and is expressly designated by the Administrator at the time of grant as an incentive stock option. (p) "Option" means an Option granted pursuant to the Plan. (q) "Optioned Stock" means the Common Stock subject to an Option or SAR. (r) "Optionee" means an Employee who receives an Option or SAR. (s) "Parent" corporation shall have the meaning defined in Section 424(e) of the Code. (t) "Plan" means this 1990 Stock Option Plan. (u) "SAR" means a stock appreciation right granted pursuant to Section 9 below. (v) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (w) "Subsidiary" corporation has the meaning defined in Section 424(f) of the Code. In addition, the terms "Rule 16b-3" and "Applicable Laws", the term "Insiders", the term "Tax Date" and the terms "Change in Control" and "Change in Control Price", shall have the meanings set forth, respectively, in Sections 4, 9, 10 and 12 below. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs may be granted and exercised is 52,200,000 Shares (including Shares issued under the 1981 Stock Option Plan, to which this Plan is a successor). The Shares may be authorized but unissued or reacquired Common Stock. In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan. 30 <PAGE> If an Option or SAR issued under this Plan or under the Company's 1981 Stock Option Plan should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless this Plan shall have been terminated, become available for other Options or SARs under this Plan. However, should the Company reacquire Shares which were issued pursuant to the exercise of an Option or SAR, such Shares shall not become available for future grant under the Plan. Anything in the Plan to the contrary notwithstanding, no Employee may be granted Options and SARs covering in the aggregate more than 1.5 million shares of Common Stock (the "Limit") in a fiscal year beginning on or after September 30, 1995. Each share underlying a SAR not granted in tandem with an Option shall be applied against the Limit, regardless of the number of shares deliverable or delivered upon exercise of the SAR; provided, however, that shares of Common Stock underlying a tandem grant of Options and SARs shall be counted only once in calculating the Limit. The Limit shall not apply to grants of Options and SARs made prior to September 30, 1995." 4. Administration of the Plan. (a) Composition of Administrator. (1) Multiple Administrative Bodies. If permitted by Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto, as in effect at the time that discretion is being exercised with respect to the Plan ("Rule 16b-3"), and by the legal requirements relating to the administration of stock plans such as the Plan, if any, of applicable securities laws, California corporate law and the Code (collectively, "Applicable Laws"), the Plan may (but need not) be administered by different administrative bodies with respect to (A) Directors who are not Employees, (B) Directors who are Employees, (C) Officers who are not Directors and (D) Employees who are neither Directors nor Officers. (2) Administration with respect to Directors and Officers. With respect to grants and awards to Employees who are also Officers or Directors of the Company, the Plan may be administered by (A) the Board, if the Board may administer the Plan in compliance with Rule 16b-3 as it applies to grants to Officers and Directors, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted (I) in such a manner as to permit the Plan and grants and awards thereunder to comply with Rule 16b-3 as it applies to grants to Officers and Directors and (II) in such a manner as to satisfy the Applicable Laws. (3) Administration with respect to Other Persons. With respect to grants and awards to Employees who are neither Directors nor Officers of the Company, the Plan may be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. (4) General. Once a Committee has been appointed pursuant to subsection (2) or (3) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under subsection (2) to the extent permitted by Rule 16b-3 as it applies to grants to Officers and Directors. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock in accordance with Section 2(l) of the Plan; (ii) to determine, in accordance with Section 8(a) of the Plan, the exercise price per Share of Options and SARs to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options and SARs shall be granted and the number of Shares to be represented by each Option or SAR (including without limitation whether or not a corporation shall be excluded from the definition of Affiliated Company under Section 2(b)); (iv) to interpret the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or SAR granted hereunder (including, but not limited to, any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or SAR and/or the Shares relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vi) to approve forms of agreement for use under the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to modify or amend each Option or SAR (with the consent of the Optionee) or accelerate the exercise date of any Option or SAR; (ix) to reduce the exercise price of any Option or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or SAR shall have declined since the date the Option or SAR was granted; (x) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or SAR previously granted by the Administrator; and (xi) to make all other determinations deemed necessary or advisable for the administration of the Plan. 31 <PAGE> (c) Effect of Decisions by the Administrator. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. (d) Anything in the Plan to the contrary notwithstanding, on and after September 30, 1995, grants of Options and SARs under the Plan to Officers shall be made only by a Committee consisting of at least two directors of the Company who qualify as "outside directors" within the meaning of Section 162(m) of the Code, and such Committee shall exercise all of the authority delegated under the Plan to the Administrator with respect to grants to Officers made on and after that date. 5. Eligibility. Options and SARs may be granted only to Employees. An Employee who has been granted an Option or SAR may, if he or she is otherwise eligible, be granted an additional Option or Options, SAR or SARs. Each Option shall be evidenced by a written Option agreement, which shall expressly identify the Options as Incentive Stock Options or as Nonstatutory Stock Options, and which shall be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options and options granted under other plans of the Company or any Parent or Subsidiary that are designated as incentive stock options are exercisable for the first time by an Optionee during any calendar year exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted, and (ii) the Fair Market Value of the Shares shall be determined as of the time the Option or other incentive stock option with respect to such Shares is granted. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options or Options in exchange for the surrender and cancellation of any or all outstanding Options, other options, SARs or other stock appreciation rights. Neither the Plan nor any Option or SAR agreement shall confer upon any Optionee any right with respect to continuation of employment by the Company (or any Parent, Subsidiary or Affiliated Company), nor shall it interfere in any way with the Optionee's right or the right of the Company (or any Parent, Subsidiary or Affiliated Company) to terminate the Optionee's employment at any time or for any reason. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board or its approval by vote of the holders of a majority of the outstanding Shares of the Company entitled to vote on the adoption of the Plan, whichever is earlier. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Option agreement. 32 <PAGE> 8. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator, but shall in no event be less than 100% of the Fair Market Value of Common Stock, determined as of the date of grant of the Option. In the event that the Administrator shall reduce the exercise price, the exercise price shall be no less than 100% of the Fair Market Value as of the date of that reduction. In no event shall the per Share exercise price be less than 110% of the Fair Market Value per Share as of the date of grant in the case of an Incentive Stock Option granted to an Optionee who, immediately before the grant of such Option, owns Shares representing more than 10% of the voting power or value of all classes of stock of the Company or any Parent or Subsidiary. (b) Method of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist of (i) cash, (ii) check, (iii) promissory note, (iv) other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, or (vi) any combination of the foregoing methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 9. Stock Appreciation Rights. (a) Granted in Connection with Options. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options: (i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of an SAR; provided, however, that such limit shall not restrict the exercisability of the related Option. (ii) When an SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable. (iii) An SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires. (iv) An SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option. (b) Independent SARs. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options: (i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; provided, however, that the Administrator may place limits on the amount that may be paid upon exercise of an SAR. 33 <PAGE> (ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's SAR agreement. (c) Form of Payment. The Company's obligation arising upon the exercise of an SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of an SAR shall be valued at their Fair Market Value as of the date of exercise. (d) Rule 16b-3. SARs granted to persons who are subject to Section 16 of the Exchange Act ("Insiders") shall contain such additional restrictions as may be required to be contained in the plan or SAR agreement in order for the SAR to qualify for the maximum exemption provided by Rule 16b-3. 10. Method of Exercise. (a) Procedure for Exercise; Rights as a Shareholder. Any Option or SAR granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan. An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option or SAR by the person entitled to exercise the Option or SAR and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator (and, in the case of an Incentive Stock Option, determined at the time of grant) and permitted by the Option agreement, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. An Option or SAR may not be exercised with respect to a fraction of a Share. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Exercise of an SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised. (b) Rule 16b-3. Options and SARs granted to Insiders must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to be contained in the Plan or the agreement to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (c) Termination of Continuous Employment. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (d) Death of Optionee. In the event of the death of an Optionee: (1) Who is at the time of death an Employee and who shall have been in Continuous Status as an Employee since the date of grant of the Option, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have 34 <PAGE> accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or (2) Within ninety (90) days after the termination of Continuous Status as an Employee, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (e) Stock Withholding to Satisfy Withholding Tax Obligations. When an Optionee incurs tax liability in connection with the exercise of an Option or SAR, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; and (ii) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option or SAR is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 11. Non-Transferability of Options. Options and SARs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, provided, however, that the Administrator may grant non-qualified stock options that are freely transferable. The designation of a beneficiary by an Optionee or holder of an SAR does not constitute a transfer. An Option or an SAR may be exercised, during the lifetime of the Optionee or SAR holder, only by the Optionee or SAR holder or by a transferee permitted by this Section 11. 12. Adjustments Upon Changes in Capitalization or Merger. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option and SAR, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options or SARs have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or SAR, as well as the price per Share covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose 35 <PAGE> determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option or SAR. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options and SARs will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option or SAR shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option or SAR as to all or any part of the Optioned Stock or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable. (c) Sale of Assets or Merger. Subject to the provisions of paragraph (d) hereof, in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option and SAR shall be assumed or an equivalent option or stock appreciation right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option or SAR as to all of the Optioned Stock, including Shares as to which the Option or SAR would not otherwise be exercisable. If the Administrator makes an Option or SAR fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Optionee that the Option or SAR shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option or SAR will terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the per share consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger. (d) Change in Control. In the event of a "Change in Control" of the Company, as defined in paragraph (e) below, unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply: (1) Any Options and SARs outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and (2) The value of all outstanding Options and SARs shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options and SARs shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option or SAR. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option or SAR by bequest or inheritance. (e) Definition of "Change in Control". For purposes of this Section 12, a "Change in Control" means the happening of any of the following: ( i ) When any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 36 <PAGE> under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. (f) Change in Control Price. For purposes of this Section 12, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the "60-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period. 13. Time of Granting Options and SARs. The date of grant of an Option or SAR shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or SAR. Notice of the determination shall be given to each Employee to whom an Option or SAR is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan, as it may deem advisable; provided that, to the extent necessary and desirable to comply with Applicable Laws, regulations or rules, including Section 422 of the Code, or, for periods on and after September 30, 1995, with Section 162(m) of the Code, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as is required. (b) Effect of Amendment or Termination. Any such amendment, alteration, suspension or termination of the Plan shall not impair the rights of any Optionee or SAR holder under any grant theretofore made without his or her consent. Such Options and SARs shall remain in full force and effect as if this Plan had not been amended or terminated. 15. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an Option or SAR unless the exercise of such Option or SAR and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option or SAR or the issuance of Shares upon exercise of an Option or SAR, the Company may require the person exercising such Option or SAR to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares as to which such requisite authority shall not have been obtained. 16. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 37 <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>ART. 5 FDS FOR FY98 FORM 10-K <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-25-1998 <PERIOD-END> DEC-26-1997 <CASH> 1,193 <SECURITIES> 434 <RECEIVABLES> 998 <ALLOWANCES> 96 <INVENTORY> 404 <CURRENT-ASSETS> 3,373 <PP&E> 1,069 <DEPRECIATION> 640 <TOTAL-ASSETS> 4,126 <CURRENT-LIABILITIES> 1,669 <BONDS> 952 <COMMON> 499 <PREFERRED-MANDATORY> 0 <PREFERRED> 150 <OTHER-SE> 595 <TOTAL-LIABILITY-AND-EQUITY> 4,126 <SALES> 1,578 <TOTAL-REVENUES> 1,578 <CGS> 1,225 <TOTAL-COSTS> 1,225 <OTHER-EXPENSES> 313 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 16 <INCOME-PRETAX> 47 <INCOME-TAX> 0 <INCOME-CONTINUING> 47 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 47 <EPS-PRIMARY> 0.37 <EPS-DILUTED> 0.33 <PAGE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1998

0QTR1

ADM

https://www.sec.gov/Archives/edgar/data/7084/0000007084-98-000007.txt

-----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, Uk6sM2DzBnzahS8Z6nHpaLl51bPp3H0YcUS2oh8YBYhZI3Y7zKFXtrrQFyN6NNVA GteE+zy2kpd0Vowlw5T1Jg== <SEC-DOCUMENT>0000007084-98-000007.txt : 19980218 <SEC-HEADER>0000007084-98-000007.hdr.sgml : 19980218 ACCESSION NUMBER: 0000007084-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980213 FILED AS OF DATE: 19980213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCHER DANIELS MIDLAND CO CENTRAL INDEX KEY: 0000007084 STANDARD INDUSTRIAL CLASSIFICATION: FATS & OILS [2070] IRS NUMBER: 410129150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00044 FILM NUMBER: 98540146 BUSINESS ADDRESS: STREET 1: 4666 FARIES PKWY CITY: DECATUR STATE: IL ZIP: 62526 BUSINESS PHONE: 2174245200 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q FOR 12/31/97 <TEXT> PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ________________________ TO ________________________ Commission file number 1-44 ARCHER-DANIELS-MIDLAND COMPANY (Exact name of registrant as specified in its charter) Delaware 41- 0129150 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 4666 Faries Parkway Box 1470 Decatur, Illinois 62525 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code217- 424-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value - 571,429,962 shares (January 31, 1998) 1 PAGE 2 PART I - FINANCIAL INFORMATION ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, 1997 1996 -------------- ----------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $4,130,29 8 $3,514,9 38 Cost of products sold and other operating costs 3,767,939 3 , 1 2 8 , 4 7 5 _________ ____ ____ _ Gross Profit 362,359 386,463 Selling, general and administrative 136,745 expenses 114,061 _________ ____ ____ _ Earnings From Operations 225,614 272,402 Other income (expense) (16,209) 15,386 _________ ________ _ Earnings Before Income Taxes 209,405 287,788 Income taxes 70,197 97,847 _________ ________ _ Net Earnings $ 139,2 $ 189,94 08 1 ========= ========= Average number of shares outstanding 557,806 571,258 Basic and diluted earnings per common $.25 $.33 share Dividends per common share $.05 $.048 </TABLE> See notes to consolidated financial statements. 2 PAGE 3 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBE R 31, 1997 1996 -------------- ----------- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $7,781,60 0 $6,845,4 13 Cost of products sold and other operating costs 7,094,073 6 , 0 8 8 , 9 5 0 _________ ____ ____ _ Gross Profit 687,527 756,463 Selling, general and administrative 271,731 expenses 425,393 _________ ____ ____ _ Earnings From Operations 415,796 331,070 Other income (expense) (7,376) 34,827 _________ ________ _ Earnings Before Income Taxes 408,420 365,897 Income taxes 137,862 172,403 _________ ________ _ Net Earnings $ 270,5 $ 193,49 58 4 ========= ========= Average number of shares outstanding 557,753 571,810 Basic and diluted earnings per common $.49 $.34 share Dividends per common share $.098 $.094 </TABLE> See notes to consolidated financial statements. 3 PAGE 4 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudi ted) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1997 1997 ------------- -- -- -- -- -- - -- (In thousands) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 447,412 $ 397,788 Marketable securities 407,980 330,208 Receivables 1,924,924 1,329,350 Inventories 2,560,249 2,094,092 Prepaid expenses 191,689 132,897 __________ __________ Total Current Assets 5,532,254 4,284,335 Investments and Other Assets Investments in and advances to 1,381,484 1,102,420 affiliates Long-term marketable securities 1,141,223 987,665 Other assets 377,809 271,352 __________ __________ 2,900,516 2,361,437 Property, Plant and Equipment Land 125,198 118,898 Buildings 1,567,456 1,448,945 Machinery and equipment 7,246,904 6,841,225 Construction in progress 919,545 765,720 Less allowances for depreciation (4,705,680) (4,466,193) __________ __________ 5,153,423 4,708,595 __________ __________ $13,586,193 $11,354,367 =========== =========== </TABLE> See notes to consolidated financial statements. 4 PAGE 5 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1997 1997 ------------ -- -- -- -- -- - -- (In thousands) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt $1,473,857 $ 604,831 Accounts payable 1,480,771 1,126,313 Accrued expenses 502,740 493,944 Current maturities of long-term debt 31,414 23,667 __________ __________ Total Current Liabilities 3,488,782 2,248,755 Long-term Debt 2,860,781 2,344,949 Deferred Credits Income taxes 613,128 597,514 Other 138,667 113,020 __________ __________ 751,795 710,534 Shareholders' Equity Common stock 4,477,298 4,192,321 Reinvested earnings 2,007,537 1,857,808 __________ __________ 6,484,835 6,050,129 __________ __________ $13,586,193 $11,354,367 ========== ========== </TABLE> See notes to consolidated financial statements. 5 PAGE 6 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMB ER, 31 1997 1996 ------------- ------- ----(In thousan ds) <S> <C> <C> Operating Activities Net earnings $ 270,558 $ 193,494 Adjustments to reconcile to net cash provided by operations Depreciation and amortization 241,530 215,135 Deferred income taxes 11,667 (24,350) Amortization of long-term debt discount 16,063 14,056 (Gain)loss on marketable securities transactions (36,147) (48,272) Other (8,393) 14,177 Changes in operating assets and liabilities Receivables (302,148) (159,998) Inventories (135,479) (405,795) Prepaid expenses (46,531) (28,496) Accounts payable and accrued expenses 144,188 355,598 ________ ________ Total Operating Activities 155,308 125,549 Investing Activities Purchases of property, plant and equipment (320,081) (400,249) Net assets of businesses acquired (368,371) (44,091) Investments in and advances to affiliates (253,142) (334,164) Purchases of marketable securities (696,257) (688,349) Proceeds from sales of marketable 489,413 1,105,50 securities 0 ________ ________ Total Investing Activities (1,148,438) (361,353 ) Financing Activities Long-term debt borrowings 441,464 - Long-term debt payments (7,316) (18,024) Net borrowings under line of credit 703,214 171,914 agreements Purchases of treasury stock (42,135) (63,212) Cash dividends and other (52,473) (52,322) ________ ________ Total Financing Activities 1,042,754 38,356 ________ ________ (Increase) Decrease In Cash and Cash 49,624 (197,448 Equivalents ) Cash and Cash Equivalents Beginning of 397,788 534,702 Period ________ ________ Cash and Cash Equivalents End of Period $ 447,412 $ 337,254 ======== ======== Supplemental Cash Flow Information Noncash Investing and Financing Activities Common stock issued in purchase $ 298,244 $ - acquisition </TABLE> See notes to consolidated financial statements. 6 PAGE 7 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1.The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the year ending June 30, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1997. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 128 (SFAS 128) "Earnings per Share." This statement, which is required to be adopted for financial statements issued for the first period ended after December 15, 1997 replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS 128 requirements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 130 (SFAS 130) "Reporting Comprehensive Income." This statement, which is required to be adopted for financial statements issued for periods beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. At that time, ADM will be required to report total comprehensive income, an amount that will include net income as well as other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles have previously been reported as separate components of equity in ADM's Consolidated Statements of Earnings. 7 PAGE 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information." This statement, which is required to be adopted for financial statements issued for periods beginning after December 15, 1997, establishes standards for the way that public business enterprises report information about operating segments in financial reports issued to shareholders. ADM has not yet determined the financial statement disclosure impact of SFAS 131. Certain items in prior year financial statements have been reclassified to conform to the current year's presentation. Note 2. Other Income (expense) <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ________________ ________________ ___ ___ (In thousands) (In thousands) <S> <C> <C> <C> <C> Investment income $ 25,602 $30,34 $ $69,21 8 53,804 5 Interest expense (72,334) (48,13 (127,75 (94,26 3) 3) 0) Gain on marketable securities transactions 12,449 17,983 36,150 48,284 Equity in earnings of 16,397 13,666 26,954 11,675 affiliates Other 1,677 1,522 3,469 (87) ______ ______ ______ ______ $(16,20 $15,38 $ $34,82 9) 6 (7,376) 7 ====== ====== ====== ====== </TABLE> Note 3. Per Share Data All references to share and per share information have been adjusted for the 5 percent stock dividend paid September 15, 1997. 8 PAGE 9 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4.Antitrust Investigation and Related Litigation Federal grand juries in the Northern Districts of Illinois, California and Georgia, under the direction of the United States Department of Justice ("DOJ"), have been investigating possible violations by the Company and others with respect to the sale of lysine, citric acid and high fructose corn syrup, respectively. In connection with an agreement with the DOJ, the Company has paid the United States a fine of $100 million. This agreement constitutes a global resolution of all matters between the DOJ and the Company and brings to a close all DOJ investigations of the Company. Following public announcement in June 1995 of these investigations, the Company and certain of its then current directors and executive officers were named as defendants in a number of putative class action suits for alleged violations of federal securities laws on behalf of all purchasers of securities of the Company during the period between certain dates in 1992 and 1995. The Company, along with other domestic and foreign companies, was named as a defendant in a number of putative class action antitrust suits and other proceedings involving the sale of lysine, citric acid, and high fructose corn syrup. The plaintiffs generally request unspecified compensatory damages, costs, expenses and unspecified relief. The Company and the individuals named as defendants intend to vigorously defend these actions and proceedings unless they can be settled on terms deemed acceptable by the parties. These matters have resulted and could result in the Company being subject to monetary damages, other sanctions and expenses. The Company has made provisions of $200 million in fiscal 1997 and $31 million in fiscal 1996 to cover the fine, litigation settlements related to the federal lysine class action, federal securities class action, the federal citric class action and certain state actions filed by indirect purchasers of lysine, certain actions filed by parties that opted-out of the class action settlements, and related costs and expenses associated with the litigation described in the proceeding paragraph. Because of the early stage of other putative class actions and proceedings, including those related to high fructose corn syrup, the ultimate outcome and materiality of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the unaudited consolidated financial statements. The Company and its directors have also been named as defendants in a putative class action suit which alleges violations of Delaware state law and seeks invalidation of the election of the Company's directors on the basis of alleged omissions from the proxy statement issued by the Company prior to its 1995 Annual Meeting of Shareholders. This case was dismissed, appealed and remanded to provide the plaintiffs an opportunity to replead. The plaintiffs filed an amended complaint on November 21, 1997. 9 PAGE 10 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION OPERATIONS The Company is in one business segment - procuring, transporting, storing, processing and merchandising agricultural commodities and products. A summary of net sales and other operating income by classes of products and services is as follows: <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1997 1996 1996 --------------- ----- ----------- -- (In millions) (In millions) <S> <C> <C> <C> <C> Oilseed products $2,587 $2,259 $4,896 $4,365 Corn products 556 574 1,091 1,123 Wheat and other 393 423 780 872 milled products Other products and 594 259 1,015 485 services ----- ----- ----- ----- $4,130 $3,515 $7,782 $6,845 ===== ===== ===== ===== </TABLE> Net sales and other operating income increased 18 percent for the quarter to $4.1 billion and increased 14 percent for the six months to $7.8 billion due primarily to sales attributable to recently acquired operations. Sales of oilseed products increased 15 percent for the quarter and 12 percent for the six months due principally to higher sales volumes reflecting strong worldwide protein meal and vegetable oil demand. Oilseed product sales also increased due to sales attributable to recently acquired operations. These increases were partially offset by lower average selling prices reflecting the lower cost of raw materials. Sales of corn products decreased 3 percent for both the quarter and six months due primarily to lower average selling prices for the Company's sweetener, fuel alcohol, and amino acid products. These decreases were partially offset by increased sales volumes of these same products. Sales of wheat and other milled products decreased 7 percent for the quarter and 11 percent for the six months due principally to lower average selling prices reflecting the lower cost of raw materials. These decreases were partially offset by sales attributable to recently acquired operations. The increase in other products and services for both the quarter and six months was due principally from sales related to the Company's recently acquired cocoa business. Cost of products sold and other operating costs increased $639 million for the quarter to $3.8 billion and increased $1 billion for the six months to $7.1 billion due principally to costs related to recently acquired operations. To a lesser extent, costs increased due to higher sales volumes partially offset by lower average raw material costs. 10 PAGE 11 Gross profit declined $24 million to $362 million for the quarter and declined $69 million to $688 million for the six months due primarily to the net effect of decreased sales prices versus lower raw material costs. For the six months, gross profit was also reduced due to decreased merchandising and transportation margins. These decreases were partially offset by increased sales volumes and gross profits of recently acquired operations. Selling, general and administrative expenses increased $23 million for the quarter to $137 million due primarily to $15 million of expenses attributable to recently acquired operations. Selling, general and administrative expenses decreased $154 million for the six months to $272 million due principally to decreased legal and litigation related costs of $200 million arising out of the United States Department of Justice antitrust investigation of the Company's lysine and citric acid products as well as a securities suit brought by shareholders (see note 4 to the financial statements). Partially offsetting this decrease for the six months was $28 million of selling, general and administrative expenses attributable to recently acquired operations. The decrease in other income for the quarter and six months was due to decreased investment income due to lower invested funds, increased interest expense due to higher borrowing levels and decreased gains on marketable securities transactions. These decreases were partially offset by increased equity in earnings of unconsolidated affiliates. The decrease in income taxes for the quarter was due principally to lower pretax earnings. The Company's effective income tax rate of 34 percent for the quarter was comparable to the same period a year ago. The decrease in income taxes for the six months was a result of a lower effective tax rate partially offset by higher pretax earnings. The decrease in the Company's effective income tax rate to 34 percent for the six months compared to an effective tax rate of 47 percent last year is due primarily to the non-deductibility for income tax purposes in fiscal 1997 of a portion of the Company's litigation settlements and fines. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company continued to show substantial liquidity with working capital of $2 billion. The Company's total cash and marketable securities net of short-term debt was $523 million. Capital resources remained strong as reflected in the Company's net worth of $6.5 billion. During the quarter, the Company issued $200 million of 6.75 percent debentures due in 2027, $250 million of 6.95 percent debentures due in 2097 and $298 million of common stock in a business acquisition. The Company's ratio of long-term debt to total capital at September 30, 1997 was approximately 28 percent. As discussed in Note 4 to the unaudited consolidated financial statements, various grand juries under the direction of the United States Department of Justice ("DOJ") have been conducting investigations into possible violations by the Company and others of federal antitrust laws and related matters with respect to the sale of lysine, citric acid and high fructose corn syrup. In connection with an agreement with the DOJ, the Company has paid the United States a fine of $100 million. This agreement constitutes a global resolution of all matters between the DOJ and the Company and brings to a close all DOJ investigations of the Company. In addition, related civil class actions and other proceedings have been filed against the Company, which could result in the Company being subject to monetary damages, other sanctions and expenses. As also discussed in Note 4 to the unaudited consolidated financial statements, the Company has settled certain civil federal class action suits involving lysine, citric acid, and securities, and certain state actions filed by indirect purchasers of lysine. The Company made provisions of $231 million in prior years to cover such fines and settlements and related costs and expenses. Because of the early stage of other putative class actions and proceedings, including those related to high fructose corn syrup, the ultimate outcome and materiality of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the unaudited consolidated financial statements. 11 PAGE 12 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS In 1993, the State of Illinois Environmental Protection Agency ("IEPA") brought administrative enforcement proceedings arising out of the Company's alleged failure to obtain permits for certain pollution control equipment at certain of the Company's processing facilities in Illinois. The Company and IEPA have executed a settlement agreement with respect to one of these proceedings. That agreement is currently before the Illinois Pollution Control Board for approval. The Company believes it has meritorious defenses to the remaining proceeding. In management's opinion this settlement and the remaining proceeding will not, either individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. The Company is involved in approximately 35 administrative and judicial proceedings in which it has been identified as a potentially responsible party (PRP) under the federal Superfund law and its state analogs for the study and clean-up of sites contaminated by material discharged into the environment. In all of these matters, there are numerous PRPs. Due to various factors such as the required level of remediation and participation in the clean-up effort by others, the Company's future clean-up costs at these sites cannot be reasonably estimated. However, in management's opinion these proceedings will not, either individually or in the aggregate, have a material adverse effect on the Company's financial condition or results of operations. LITIGATION REGARDING ALLEGED ANTICOMPETITIVE PRACTICES The Company and certain of its current and former officers and directors are currently defendants in various lawsuits related to alleged anticompetitive practices by the Company as described in more detail below. The Company and the individual defendants named in these actions intend to vigorously defend the actions unless they can be settled on terms deemed acceptable to the parties. The Company has paid and intends to continue to pay the legal expenses of its current and former officers and directors and to indemnify these persons with respect to these actions in accordance with Article X of the Bylaws of the Company. GOVERNMENTAL INVESTIGATIONS Federal grand juries in the Northern Districts of Illinois, California and Georgia, under the direction of the United States Department of Justice ("DOJ"), have been investigating possible violations by the Company and others with respect to the sale of lysine, citric acid and high fructose corn syrup, respectively. In connection with an agreement with the DOJ, the Company has paid the United States a fine of $100 million. This agreement constitutes a global resolution of all matters between the DOJ and the Company and brought to a close all DOJ investigations of the Company. The Company has received notice that certain foreign governmental entities were commencing investigations to determine whether anticompetitive practices occurred in their jurisdictions. In February 1997, the Company's three Mexican subsidiaries were notified that the Mexican Federal Competition Commission commenced an investigation as to whether the Company's marketing and sale of lysine in Mexico resulted in violations of that country's federal antitrust laws. In June 1997, the Company and several of its European subsidiaries were notified that the Commission of the European Communities initiated an investigation as to their possible anticompetitive practices in the amino acid markets, in particular the lysine market, in the European Union. In September 1997, the Company received a request for information from the Commission of the European Communities with respect to an investigation being conducted by that Commission into the possible existence of certain agreements and/or concerted practices in the citric acid market within the European Union. In December, 1997, the Company was notified by the Canadian Competition Bureau that it is among the subjects of a formal inquiry into an alleged conspiracy to fix prices and sales volumes in the production, sale and supply of lysine. Each of these investigations is in the early stages and, accordingly, their ultimate outcome and materiality cannot presently be determined. The Company may become the subject of similar antitrust investigations conducted by the applicable regulatory authorities of other countries. HIGH FRUCTOSE CORN SYRUP ACTIONS The Company, along with other companies, has been named as a defendant in thirty-one antitrust suits involving the sale of high fructose corn syrup. Thirty of these actions have been brought as putative class actions. FEDERAL ACTIONS. Twenty-two of these putative class actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek injunctions against continued alleged illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of high fructose corn syrup during certain periods in the 1990s. These twenty-two actions have been transferred to the United States District Court for the Central District of Illinois and consolidated under the caption In Re High Fructose Corn Syrup Antitrust Litigation, MDL No. 1087 and Master File No. 95-1477. The parties are in the midst of discovery in this action. 12 PAGE 13 On January 14, 1997, the Company, along with other companies, was named a defendant in a non-class action antitrust suit involving the sale of high fructose corn syrup and corn syrup. This action which is encaptioned Gray & Co. v. Archer Daniels Midland Co., et al, No. 97-69 AS, and was filed in federal court in Oregon, alleges violations of federal antitrust laws and Oregon and Michigan state antitrust laws, including allegations that defendants conspired to fix, raise, maintain and stabilize the price of corn syrup and high fructose corn syrup, and seeks treble damages, attorneys' fees and costs of an unspecified amount. The parties are in the midst of discovery in this action. STATE ACTIONS. The Company, along with other companies, also has been named as a defendant in seven putative class action antitrust suits filed in California state court involving the sale of high fructose corn syrup. These California actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. One of the California putative classes comprises certain direct purchasers of high fructose corn syrup in the State of California during certain periods in the 1990s. This action was filed on October 17, 1995 in Superior Court for the County of Stanislaus, California and encaptioned Kagome Foods, Inc. v Archer-Daniels-Midland Co. et al., Civil Action No. 37236. This action has been removed to federal court and consolidated with the federal class action litigation pending in the Central District of Illinois referred to above. The other six California putative classes comprise certain indirect purchasers of high fructose corn syrup and dextrose in the State of California during certain periods in the 1990s. One such action was filed on July 21, 1995 in the Superior Court of the County of Los Angeles, California and is encaptioned Borgeson v. Archer-Daniels-Midland Co., et al., Civil Action No. BC131940. This action and four other indirect purchaser actions have been coordinated before a single court in Stanislaus County, California under the caption, Food Additives (HFCS) cases, Master File No. 39693. The other four actions are encaptioned, Goings v. Archer Daniels Midland Co., et al., Civil Action No. 750276 (Filed on July 21, 1995, Orange County Superior Court); Rainbow Acres v. Archer Daniels Midland Co., et al., Civil Action No. 974271 (Filed on November 22, 1995, San Francisco County Superior Court); Patane v. Archer Daniels Midland Co., et al., Civil Action No. 212610 (Filed on January 17, 1996, Sonoma County Superior Court); and St. Stan's Brewing Co. v. Archer Daniels Midland Co., et al., Civil Action No. 37237 (Filed on October 17, 1995, Stanislaus County Superior Court). The parties are in the midst of discovery in the coordinated action. On October 8, 1997, Varni Brothers Corp. filed a complaint in intervention with respect to the coordinated action pending in Stanislaus County Superior Court, asserting the same claims as those advanced in the consolidated class action. 13 PAGE 14 The Company, along with other companies, also has been named a defendant in a putative class action antitrust suit filed in Alabama state court. The Alabama action alleges violations of the Alabama, Michigan and Minnesota antitrust laws, including allegations that defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, and seeks an injunction against continued illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Alabama action comprises certain indirect purchasers in Alabama, Michigan and Minnesota during the period March 18, 1994 to March 18, 1996. This action was filed on March 18, 1996 in the Circuit Court of Coosa County, Alabama, and is encaptioned Caldwell v. Archer-Daniels-Midland Co., et al., Civil Action No. 96- 17. On April 23, 1997, the court granted the defendants' motion to sever and dismiss the non-Alabama claims. The remaining parties are in the midst of discovery in this action. LYSINE ACTIONS The Company, along with other companies, had been named as a defendant in twenty-one putative class action antitrust suits involving the sale of lysine. Except for several plaintiffs that opted out of the federal class action settlement and the actions specifically described below, all such suits have been settled, dismissed or withdrawn. STATE ACTIONS. The Company has been named as a defendant, along with other companies, in two putative class action antitrust suits and one non-class action suit filed in Alabama state court, one putative class action antitrust suit filed in Tennessee state court and one putative class action antitrust suit filed in Michigan state court involving the sale of lysine. The two putative Alabama class actions allege violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of lysine, and seek an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The two putative classes in the Alabama actions comprise certain indirect purchasers of lysine in the State of Alabama during certain periods in the 1990s. One such action was filed on August 17, 1995 in the Circuit Court of DeKalb County, Alabama, and is encaptioned Ashley v. Archer-Daniels-Midland Co., et al., Civil Action No. 95- 336. The parties are in the midst of discovery in this action. The other Alabama action, encaptioned Bailey v. Archer Daniels Midland Co., et al., Civil Action No. 95-165, and filed on December 11, 1995 in the Circuit Court of Tallapoosa County, has been placed on the court's administrative docket pending the outcome of the Ashley action. The non-class action, encaptioned Kent v. Archer Daniels Midland Co., et al, No. CV 9701108, and filed on February 21, 1997 in the Circuit Court of Jefferson County, Alabama, includes allegations that are similar to these contained in the putative class actions and seeks monetary relief in the amount of $670,000, injunctive relief against alleged illegal conduct, attorneys fees and costs, punitive damages and other unspecified relief. This action was removed to federal court in the Northern District of Alabama and dismissed on December 15, 1997 pursuant to a settlement agreement that did not result in the Company paying plaintiff any consideration. The Tennessee action, encaptioned McCormack Farms v. Archer Daniels Midland Co., et al., Civil Action No. 96C-2190, and filed on June 11, 1996 in Davidson County Circuit Court, alleges a restraint of trade in violation of the Tennessee Trade Practices Act and Tennessee Consumer Protection Act. This action includes allegations that defendants conspired to fix, maintain or stabilize the prices of lysine and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, attorneys' fees and costs, and other unspecified relief. The putative class in this case comprises certain indirect purchasers of lysine within the State of Tennessee during the period June 10, 1992 through June 10, 1996. The Company has not yet filed a responsive pleading. The Michigan action alleges a restraint of trade in violation of the Michigan Antitrust Reform Act and include allegations that defendants conspired to fix, raise, maintain and stabilize the price of lysine and seeks an injunction against continued illegal conduct, treble damages of an unspecified amount, attorneys' fees and costs, and other unspecified relief. The putative class in this case comprises certain indirect purchasers of lysine within the State of Michigan during certain periods in the 1990s. This action, encaptioned Michigan Pork Producers Assn, et al. v. Archer Daniels Midland Co., et al., No. 906-10696-CZ, was filed on September 25, 1996 in Kent County Circuit Court. The Company has not yet filed a responsive pleading in this action. 14 PAGE 15 CITRIC ACID ACTIONS The Company, along with other companies, had been named as a defendant in eleven putative class action antitrust suits and two non-class action antitrust suits involving the sale of citric acid. Except for several plaintiffs that opted out of the federal class action settlement and the actions specifically described below, all such suits have been settled or dismissed. FEDERAL ACTIONS. On February 4, 1997, a class action complaint, encaptioned Galavan Supplements Ltd. v. Archer Daniels Midland Co., et al., No. 97-0704 JGD (VAPx), was filed in the United States District Court for the Central District of California. The Company, along with other companies, was named a defendant in this putative class action brought on behalf of a class consisting of all persons and entities outside of the United States who purchased citric acid directly from any defendants through their foreign facilities during the time period July 1, 1991 through June 30, 1995. This action alleges violations of the federal antitrust laws, including allegations that the defendants conspired to fix, maintain and stabilize the price of citric acid and to allocate amongst themselves their major citric acid customers, accounts and market shares on a worldwide basis. On November 18, 1997, the Court granted the defendants' motion to dismiss. The Company, along with other companies, also has been named as a defendant in a non-class action federal antitrust suit involving the sale of citric acid filed on June 9, 1997 in the United States District Court for the Northern District of California, encaptioned The Proctor & Gamble Manufacturing Co., et al. v. Archer-Daniels-Midland Company, et al., Civil Action No. 97-2155 (VRW).. This action alleges violations of federal antitrust laws, including allegations that defendants agreed to fix, raise and maintain the price of citric acid, and seek an injunction against continued alleged illegal conduct, treble damages of an unspecified amount, attorney's fees and costs, and other unspecified relief. This action was brought by entities that opted-out of a previously settled federal class action. The parties are in the midst of discovery in this action. STATE ACTIONS. The Company, along with other companies, also has been named as a defendant in one putative class action antitrust suit filed in Alabama state court involving the sale of citric acid. This action alleges violations of the Alabama antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of citric acid, and seeks an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Alabama action comprises certain indirect purchasers of citric acid in the State of Alabama from July 1993 until July 1995. This action was filed on July 27, 1995 in the Circuit Court of Walker County, Alabama and is encaptioned Seven Up Bottling Co. of Jasper, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-436. The Company currently is seeking appellate review of the denial of its motion to dismiss this action. The Company, along with other companies, also has been named as a defendant in two putative class action antitrust suits filed in California state court involving the sale of citric acid. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants conspired to fix, maintain or stabilize the price of citric acid, and seek injunctions against continued illegal conduct, treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain indirect purchasers of citric acid within the State of California during certain periods in the 1990s. One such action was filed on June 12, 1996 in the Superior Court of the County of San Francisco, California and is encaptioned Bianco v. Archer Daniels Midland Co., et al., Civil Action No. 978912. The second action was filed on June 28, 1996 in San Francisco County Superior Court and is encaptioned Wignall v. Archer Daniels Midland Co., et al., Civil Action No. 979360. These actions have been coordinated before a single court in San Francisco County, California under the caption, Food Additives (Lysine/Citric Acid) cases, Coordination Proceeding No. 3265. The Company, along with other companies, also has been named as a defendant in one putative class action antitrust suit filed in Wisconsin state court involving the sale of citric acid. This action alleges violations of the laws of Wisconsin, Minnesota, Alabama, Arizona, California, District of Columbia, Florida, Tennessee, West Virginia, Mississippi, New Mexico, North Carolina, South Dakota, North Dakota, Kansas, Louisiana, Michigan and Maine, including allegations that defendants conspired to maintain the price of citric acid at artificially high levels and seeks injunctive relief, treble damages of an unspecified amount, attorneys fees and costs and other unspecified relief. The putative class in this case comprises certain indirect purchasers of citric acid in the above referenced states during the period July 1, 1991 through June 27, 1995. This action was filed on December 20, 1996 in the Circuit Court for Milwaukee County, Wisconsin and is encaptioned Raz, et al. v. Archer-Daniels-Midland Co., et al., No. 96-CV-9729. 15 PAGE 16 HIGH FRUCTOSE CORN SYRUP/CITRIC ACID STATE CLASS ACTIONS The Company, along with other companies, has been named as a defendant in six putative class action antitrust suits involving the sale of both high fructose corn syrup and citric acid. Two of these actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. The putative class in one of these California cases comprises certain direct purchasers of high fructose corn syrup and citric acid in the State of California during the period January 1, 1992 until at least October 1995. This action was filed on October 11, 1995 in the Superior Court of Stanislaus County, California and is entitled Gangi Bros. Packing Co. v. Archer-Daniels- Midland Co., et al., Civil Action No. 37217. The putative class in the other California case comprises certain indirect purchasers of high fructose corn syrup and citric acid in the state of California during the period October 12, 1991 until November 20, 1995. This action was filed on November 20, 1995 in the Superior Court of San Francisco County and is encaptioned MCFH, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 974120. The California Judicial Council has bifurcated the citric acid and high fructose corn syrup claims in these actions and coordinated them with other actions in San Francisco County Superior Court and Stanislaus County Superior Court. The Company, along with other companies, also has been named as a defendant in at least one putative class action antitrust suit filed in West Virginia state court involving the sale of high fructose corn syrup and citric acid. This action also alleges violations of the West Virginia antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the West Virginia action comprises certain entities within the State of West Virginia that purchased products containing high fructose corn syrup and/or citric acid for resale from at least 1992 until 1994. This action was filed on October 26, 1995, in the Circuit Court for Boone County, West Virginia, and is encaptioned Freda's v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-C125. The Company, along with other companies, also has been named as defendant in a putative class action antitrust suit filed in Michigan state court involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the Michigan antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the Michigan action comprises certain persons within the State of Michigan that purchased products containing high fructose corn syrup and/or citric acid during the period January 1993 through June 27, 1995. This action was filed on February 26, 1996 in the Circuit Court for Ingham County, Michigan, and is encaptioned Wilcox v. Archer- Daniels-Midland Co., et al., Civil Action No. 9682473-CP. The parties are in the midst of discovery in this action. On September 29, 1997, the court denied the plaintiff's motion for class certification. The Company, along with other companies, also has been named as a defendant in a putative class action antitrust suit filed in the Superior Court for the District of Columbia involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the District of Columbia antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in the District of Columbia action comprises certain persons within the District of Columbia that purchased products containing high fructose corn syrup and/or citric acid during the period January 1, 1992 through December 31, 1994. This action was filed on April 12, 1996 in the Superior Court for the District of Columbia, and is encaptioned Holder v. Archer-Daniels-Midland Co., et al., Civil Action No. 962975. The parties are in the midst of discovery in this action. The Company, along with other companies, has been named as a defendant in a putative class action antitrust suit filed in Kansas state court involving the sale of high fructose corn syrup and citric acid. This action alleges violations of the Kansas antitrust laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup and citric acid, and seeks treble damages of an unspecified amount, court costs and other unspecified relief. The putative class in the Kansas action comprises certain persons within the State of Kansas that purchased products containing high fructose corn syrup and/or citric acid during at least the period January 1, 1992 through December 31, 1994. This action was filed on May 7, 1996 in the District Court of Wyandotte County, Kansas and is encaptioned Waugh v. Archer-Daniels Midland Co., et al., Case No. 96-C-2029. The parties are in the midst of discovery in this action. 16 PAGE 17 HIGH FRUCTOSE CORN SYRUP/CITRIC ACID/LYSINE STATE CLASS ACTIONS The Company, along with other companies, has been named as a defendant in six putative class action antitrust suits filed in California state court involving the sale of high fructose corn syrup, citric acid and/or lysine. These actions allege violations of the California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the prices of high fructose corn syrup, citric acid and/or lysine, and seek treble damages of an unspecified amount, attorneys fees and costs, restitution and other unspecified relief. One of the putative classes comprises certain direct purchasers of high fructose corn syrup, citric acid and/or lysine in the State of California during a certain period in the 1990s. This action was filed on December 18, 1995 in the Superior Court for Stanislaus County, California and is encaptioned Nu Laid Foods, Inc. v. Archer-Daniels-Midland Co., et al., Civil Action No. 39693. The other five putative classes comprise certain indirect purchasers of high fructose corn syrup, citric acid and/or lysine in the State of California during certain periods in the 1990s. One such action was filed on December 14, 1995 in the Superior Court for Stanislaus County, California and is encaptioned Batson v. Archer-Daniels-Midland Co., et al., Civil Action No. 39680. The other actions are encaptioned Nu Laid Foods, Inc. v. Archer Daniels Midland Co., et al., No 39693 (Filed on December 18, 1995 Stanislaus County Superior Court); Abbott v. Archer Daniels Midland Co., et al., No. 41014 (Filed on December 21, 1995, Stanislaus County Superior Court); Noldin v. Archer Daniels Midland Co., et al., No. 41015 (Filed on December 21, 1995, Stanislaus County Superior Court); Guzman v. Archer Daniels Midland Co., et al., No. 41013 (Filed on December 21, 1995, Stanislaus County Superior Court) and Ricci v. Archer Daniels Midland Co., et al., No. 96-AS-00383 (Filed on February 6, 1996, Sacramento County Superior Court). As noted in prior filings, the plaintiffs in these actions and the lysine defendants have executed a settlement agreement that has been approved by the court and the California Judicial Council has bifurcated the citric acid and high fructose corn syrup claims and coordinated them with other actions in San Francisco County Superior Court and Stanislaus County Superior Court. SODIUM GLUCONATE ACTIONS The Company, along with other companies, has been named as a defendant in two federal antitrust class actions involving the sale of sodium gluconate. These actions allege violations of federal antitrust laws, including allegations that the defendants agreed to fix, raise and maintain at artificially high levels the prices of sodium gluconate, and seek various relief, including treble damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative classes in these cases comprise certain direct purchasers of sodium gluconate during periods in the 1990s. One such action was filed on December 2, 1997, in the United States District Court for the Northern District of California and is encaptioned Chemical Distribution, Inc, v. Akzo Nobel Chemicals BV, et al., No. C -97-4141 (CW). The other action was filed on December 31, 1997, in the United States District Court for the District of Massachusetts and is encaptioned Stetson Chemicals, Inc. v. Akzo Nobel Chemicals BV, 97-CV- 1285 RCL. The Company has not yet filed a responsive pleading in either action. SHAREHOLDER DERIVATIVE ACTIONS Following the public announcement of the grand jury investigations in June 1995 discussed above, three shareholder derivative suits were filed against certain of the Company's then current directors and executive officers and nominally against the Company in the United States District Court for the Northern District of Illinois and fourteen similar shareholder derivative suits were filed in the Delaware Court of Chancery. The derivative suits filed in federal court in Illinois were consolidated under the name Felzen, et al. v. Andreas, et al., Civil Action No. 95C-4006, 95-C-4535, and a consolidated amended derivative complaint was filed on September 29, 1995. This complaint names all then current directors of the Company (except Mr. Coan) and one former director as defendants and names the Company as a nominal defendant. It alleges breach of fiduciary duty, waste of corporate assets, abuse of control and gross mismanagement, based on the antitrust allegations described above, as well as other alleged wrongdoing. On October 31, 1995, the Court granted the defendants' motion to transfer the Illinois consolidated derivative action to the Central District of Illinois, wherein it now bears the case number 95- 2279. On April 26, 1996, the court dismissed the suit without prejudice and permitted the plaintiffs twenty-one days to refile it. The plaintiffs refiled the complaint on May 17, 1996. The defendants again moved to dismiss the complaint on June 1, 1996. Plaintiffs have supplemented the complaint to include the antitrust settlements and guilty plea described above. The fourteen shareholder derivative suits filed in the Delaware Court of Chancery have been consolidated as In Re Archer Daniels Midland Derivative Litigation, Consolidated No. 14403. An amended and consolidated complaint was filed on November 19, 1996. ADM moved to dismiss the complaint on December 12, 1996. On May 29, 1997, the Company executed a Memorandum of Understanding with counsel for both the Illinois and Delaware shareholder derivative plaintiffs. This Memorandum of Understanding provides for, among other things, $8 million to be paid by or on behalf of certain defendants in these actions to the Company and certain changes in the structure and policies of the Company's Board of Directors. On May 30, 1997, the United States District Court for the Central District of Illinois preliminarily approved this settlement and on July 7, 1997 final approval was granted. Certain entities appealed the final settlement approval order to the United States Court of Appeals for the Seventh Circuit. On January 21, 1998 the Court of Appeals dismissed the appeal. The parties will jointly seek dismissal of the Delaware actions with prejudice once the federal action, including any further appeals, is concluded. 17 PAGE 18 DELAWARE STATE LAW ACTION The Company and certain of its current and former directors also have been named as defendants in a putative class action suit encaptioned Loudon v. Archer-DanielsMidland Co., et al., Civil Action No. 14638, filed in the Delaware Court of Chancery on October 20, 1995. This action alleges violations of Delaware state law and seeks invalidation of the 1995 election of the Company's directors and damages on the basis of alleged omissions from the proxy statement issued by the Company prior to its October 19, 1995 annual meeting of shareholders. The Delaware Court of Chancery dismissed this action on February 20, 1996. On September 17, 1997, the Supreme Court of Delaware affirmed the lower court's judgment and remanded the case to provide the plaintiffs an opportunity to replead. The revised complaint was filed on November 21, 1997. OTHER As described in the notes to the unaudited consolidated financial statements and management's discussion of operations and financial condition, the Company has made provisions to cover assessed fines, litigation settlements and related costs and expenses described above. However, because of the early stage of other putative class actions and proceedings described above, including those related to high fructose corn syrup, the ultimate outcome and materiality of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the consolidated financial statements. Item 4. Submission of matters to a vote of Security Holders: The Annual Meeting of Shareholders was held on October 16, 1997. Proxies for the Annual Meeting were solicited pursuant to Regulation 14. There was no solicitation in opposition to the Board of Director nominees as listed in the proxy statement and all of such nominees were elected as follows: Nominee Shares Cast Shares For Withheld D. O. Andreas 457,802,414 16,933,111 G. O. Coan 459,614,826 15,120,699 G. A. Andreas 458,493,047 16,242,478 S. M. Archer, Jr. 458,932,277 15,803,248 J. K. Vanier 459,533,892 15,201,633 R. Burt 459,388,806 15,346,719 A. Young 458,722,047 16,013,478 O. G. Webb 459,590,378 15,145,147 F. Ross Johnson 459,179,222 15,556,303 R. S. Strauss 458,978,561 15,756,964 M. B. Mulroney 458,952,914 15,782,611 J. R. Block 459,420,032 15,315,493 M. H. Carter 459,616,407 15,119,118 18 PAGE 19 There were no abstentions or broker non-votes regarding the election of directors. The appointment by the Board of Directors of Ernst & Young LLP as Independent Accountants to audit the accounts of the Company for the fiscal year ending June 30, 1998 was ratified as follows: For Against Abstain 471,604,072 2,112,483 1,018,970 Item 6. Exhibits and Reports on Form 8-K a) Exhibits (3) Articles of Incorporation and Bylaws Composite Certificate of Incorporation and Bylaws filed on November 7, 1986 as Exhibits 3(a) and 3(b), respectively, to Post Effective amendment No. 1 to Registration Statement on Form S-3, Registration No. 33-6721, are incorporated herein by reference. (10) Material Contracts Archer-Daniels-Midland Company Stock Unit Plan For Nonemployee Directors As Amemded. (27) Financial Data Schedules b) Reports on Form 8-K A Form 8-K was not filed during the quarter ended December 31, 1997. 19 PAGE 20 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARCHER-DANIELS-MIDLAND COMPANY /s/ D. J. Schmalz D. J. Schmalz Vice President and Chief Financial Officer /s/ D. J. Smith D. J. Smith Vice President, Secretary and General Counsel Dated: February 13, 1998 20 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE FOR 10-Q 12/31/97 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1998 <PERIOD-END> DEC-31-1997 <CASH> 447,412 <SECURITIES> 407,980 <RECEIVABLES> 1,924,924 <ALLOWANCES> 0 <INVENTORY> 2,560,249 <CURRENT-ASSETS> 5,532,254 <PP&E> 9,859,103 <DEPRECIATION> 4,705,680 <TOTAL-ASSETS> 13,586,193 <CURRENT-LIABILITIES> 3,488,782 <BONDS> 2,860,781 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 4,477,298 <OTHER-SE> 2,007,537 <TOTAL-LIABILITY-AND-EQUITY> 13,586,193 <SALES> 7,781,600 <TOTAL-REVENUES> 7,781,600 <CGS> 7,094,073 <TOTAL-COSTS> 7,094,073 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 127,753 <INCOME-PRETAX> 408,420 <INCOME-TAX> 137,862 <INCOME-CONTINUING> 270,558 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 270,558 <EPS-PRIMARY> .49 <EPS-DILUTED> .49 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <DESCRIPTION>STOCK UNIT PLAN FOR NONEMPLOYEE DIRECTORS <TEXT> PAGE 1 EXHIBIT 10 ARCHER-DANIELS-MIDLAND COMPANY STOCK UNIT PLAN FOR NONEMPLOYEE DIRECTORS AS AMENDED 1. INTRODUCTION The Archer-Daniels-Midland Company Stock Unit Plan for Nonemployee Directors, as amended, is intended to promote the interests of the Company and its Stockholders by paying part or all of the compensation of the Company's nonemployee directors in the form of an economic equivalent of an equity interest in the Company, thereby providing appropriate incentives and rewards to encourage nonemployee directors to take a long-term outlook when formulating policy applicable to the Company and encouraging them to remain on the Board. In general, the Plan provides for the conversion of at least 50 percent and up to 100 percent of a nonemployee director's fees for each calendar year into units of measurement relating to the value of the Company's common stock, and for payment to the director of the value of such units five full calendar years later (or upon termination from service on the Board, if earlier), so that a director will normally receive payment under the Plan each successive year in respect of the fees originally converted into units in the year preceding the fifth calendar year prior to the year of payment. A nonemployee director will participate in the Plan for all periods of service on the Board following the effective date of the Plan, notwithstanding any future payments to the director of any part of his interest under the Plan. The original Plan was approved by the Stockholders of the Company at its 1996 Annual Meeting and become effective on January 1, 1997. In July, 1997, the Board of Directors amended the original Plan by increasing the minimum portion of the nonemployee directors' fees to be converted into units from 25 percent to 50 percent. 2. DEFINITIONS (a) "Board" means the Board of Directors of the Company. (b) "Committee" means the Benefit Plans Committee of the Company, or any successor committee thereto. (c) "Common Stock" means the common stock of the Company, without par value. (d) "Company" means Archer-Daniels-Midland Company, a Delaware corporation. (e) "Director's Fees" means the annual retainer fee and all meeting fees, committee fees and other Director's fees earned by the Participant for his service on the Board. 1 PAGE 2 (f) "Fair Market Value" means, with respect to a share of the Common Stock, the average of the high and low reported sales price regular way per share of the Common Stock on the New York Stock Exchange Composite Tape for the relevant day, or, in the absence thereof, on the most recent prior day for which such sales are reported. If the Common Stock is not listed on the New York Stock Exchange as of any date that Fair Market Value is to be determined, Fair Market Value shall be determined by the Committee in its discretion in a manner consistently applied. (g) "Mandatory Conversion" means the required conversion of 50 percent of a Participant's Director's Fees into a Stock Unit Award pursuant to Section 4 hereof. (h) "Participant" means a member of the Board who is not an employee of the Company or any of its affiliates. (i) "Plan" means this Archer-Daniels- Midland Company Stock Unit Plan for Nonemployee Directors. (j) "Realization Date" means, with respect to each Stock Unit allocated to a Participant's Stock Unit Account, the first business day following the earlier of (i) the date five years after the end of the calendar year that includes the calendar quarter for which such Stock Unit is awarded to the Participant or in which such stock unit is credited to the Participant as a dividend equivalent, or (ii) the date the Participant ceases to be a member of the Board. (k) "Stock Unit" means a non-voting unit of measurement that is deemed for valuation and bookkeeping purposes to be equivalent to an outstanding share of Common Stock, and shall include fractional units. (l) "Stock Unit Account" means a book account maintained by the Company reflecting the Stock Units allocated to a Participant pursuant to Section 4 hereof as a result of the Participant's Mandatory Conversions and Voluntary Conversions and such additional Stock Units as shall be credited thereto in respect of dividends paid on the Common Stock. (m) "Stock Unit Award" means an award under Section 4(c) hereof of Stock Units as a result of a Participant's Mandatory Conversion and Voluntary Conversion for a calendar quarter. (n) "Voluntary Conversion" means the conversion based on the election of the Participant of all or part of a Participant's Director's Fees otherwise payable to the Participant in cash into a Stock Unit Award pursuant to Section 4 hereof. 2 PAGE 3 3. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have full authority to administer the Plan, including the discretionary authority to interpret and construe all provisions of the Plan, to resolve all questions of fact arising under the Plan, and to adopt such rules and regulations for administering the Plan as it may deem necessary or appropriate. Decisions of the Committee shall be final and binding on all parties. The Committee may delegate administrative responsibilities under the Plan to appropriate officers or employees of the Company. All expenses of the Plan shall be borne by the Company. 4. CREDITING OF STOCK UNITS (a) Mandatory Conversions For each calendar quarter in which the Plan is in effect, 50 percent of the aggregate dollar amount of a Participant's Director's Fees payable for such quarter shall be converted into a Stock Unit Award pursuant to Section 4(c) hereof. (b) Voluntary Conversions For each calendar quarter in which the Plan is in effect, a Participant may elect to convert all or any portion of his Director's Fees payable for such quarter (in addition to those required to be converted under Section 4(a) hereof) into a Stock Unit Award pursuant to Section 4(c) hereof. Each Voluntary Conversion shall be made on the basis of a Participant's written election stating the amount by which such Director's Fees shall be converted to a Stock Unit Award. Each such election shall be made in the form required by the Committee, shall be delivered to the Company no later than December 31 of the calendar year immediately preceding the calendar year for which the election is made, and shall be effective for each calendar quarter of such calendar year. In the case of a member of the Board who first becomes a Participant during a calendar year, such election for such year must be made within 30 days following such member becoming a Participant, and shall apply only to calendar quarters that begin following the date such election is made. (c) Stock Unit Awards A Participant shall receive a Stock Unit Award for each calendar quarter in respect of his Mandatory Conversion and any Voluntary Conversion applicable to such quarter. Such Stock Unit Award shall equal the number of the Stock Units determined by dividing (A) the aggregate dollar amount of the Participant's Director's Fees that are converted to a Stock Unit Award for the quarter by his Mandatory Conversion and Voluntary Conversion, by (B) the Fair Market Value of the Common Stock on the last business day of such calendar quarter. Each Stock Unit Award shall be credited to the Participant's Stock Unit Account as of the first day following the end of the calendar quarter for which such Stock Unit Award is granted. (d) Dividend Equivalents As of any date that cash dividends are paid with respect to the Common Stock from time to time, each Participant's Stock Unit Account shall be credited with an additional number of Stock Units determined by dividing (A) the aggregate dollar amount of the dividends that would have been paid on the Stock Units credited to the Participant's Stock Unit Account as of the record date for such dividend had such Stock Units been actual shares of Common Stock by (B) the Fair Market Value of the Common Stock on the dividend payment date. (e) Certain Adjustments In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger or consolidation, or the sale, conveyance, lease or other transfer by the Company of all or substantially all of its property, or any other change in the corporate structure or shares of the Company, pursuant to any of which events the then outstanding shares of the Common Stock are split up or combined or are changed into, become exchangeable at the holder's election for, or entitle the holder thereof to, other shares of stock, or similar change in the Common Stock or other similar event that the Committee, in its discretion, deems appropriate, each Participant's Stock Unit Account shall be adjusted as determined by the Committee in its sole discretion to reflect such change or other event. It is intended that in making such adjustments, the Committee will seek to treat each Participant as if he were a stockholder of the Common Stock of the number of Stock Units credited to his Stock Unit Account (but without duplication of any benefits that may be provided under Section 4(d) hereof). Except as is expressly provided in this Section, Participants shall have no rights as a result of any such change in the Common Stock or other event. 5. DISTRIBUTIONS OF BENEFITS (a) Valuation and Payment of Units Subject to Section 6 hereof, a Participant shall be entitled to a benefit under the Plan with respect to each Stock Unit Award upon the Realization Date for such Stock Unit Award. Such benefit shall be equal to the cash amount determined by multiplying (A) the number of Stock Units credited to the Participant's Stock Unit Account in respect of the Stock Unit Award for which the Realization Date has occurred (including additional Stock Units credited to the Participant's Stock Unit Account with respect thereto pursuant to Section 4(d) hereof) by (B) the Fair Market Value of the Common Stock on the Realization Date. Each such amount shall be paid to the Participant in cash within 30 days after the applicable Realization Date. 3 PAGE 4 (b) Payment of Additional Dividends Subject to Section 6 hereof, if, pursuant to Section 4(d) hereof, additional Stock Units are required to be credited to a Participant's Stock Unit Account in respect of Stock Units that were held in the Participant's Stock Unit Account as of the record date for dividends paid on the Common Stock that were paid after the payment to the Participant of a benefit in respect of such Stock Units, the Company shall pay to the Participant a cash amount in respect of such dividends equal to the dollar amount of such dividends. Such amount shall be paid to the Participant within 30 days after the dividend payment date. (c) Payment of Nonconverted Fees Subject to Section 6 hereof, in the event that a Participant ceases to be a member of the Board prior to the time that Stock Units are credited to his Stock Unit Account pursuant to Section 4(c) hereof in respect of his Mandatory Conversion or Voluntary Conversion for a calendar quarter, the amount of all Director's Fees earned by the Participant during such quarter shall be paid to the Participant in cash within 30 days after his termination of service as a director. (d) Section 16 Restrictions Notwithstanding any other provision hereof, if and to the extent required in order for Stock Units to meet the requirements for exemption under Rule 16b-3 (or any successor thereto) promulgated under the Securities Exchange Act of 1934, no amount in respect of any Stock Unit Award (including any additional Stock Units allocated to a Participant's Stock Unit Account pursuant to Section 4(d) hereof) shall be paid to a Participant until the expiration of 6 months after the Stock Units in respect of which the payment is to be made have been allocated to the Participant's Stock Unit Account, and the amount of such payment shall be determined based on the Fair Market Value of the Common Stock on the date such 6-month period expires. 6. FORFEITURE OF BENEFITS Each Participant's benefits hereunder shall be nonforfeitable, except that a Participant shall forfeit all rights to all benefits hereunder in respect of Mandatory Conversions, Voluntary Conversions and Stock Units credited to the Participant's Stock Unit Account if the Participant's status as a director of the Company is (or is deemed to have been) terminated for Cause. For purposes hereof, a Participant's status as a director shall have been terminated for "Cause" upon the voluntary or involuntary termination of the individual's service as a director on account of (i) the willful violation by the Participant of any federal or state law or any rule or regulation of any regulatory body to which the Company or its affiliates is subject, which violation would materially reflect on the Participant's character, competence or integrity or (ii) a breach by the Participant of the Participant's duty of loyalty to the Company and its affiliates. If, subsequent to the termination of a Participant's status as a director of the Company, it is determined by the Committee that the Participant's status as a director of the Company could have been terminated for Cause, such Participant's status as a director of the Company may be deemed to have been terminated for Cause. 4 PAGE 5 7. BENEFICIARIES Any payment required to be made to a Participant hereunder that cannot be made to the Participant because of his death shall be made to the Participant's beneficiary or beneficiaries, subject to applicable law. Each Participant shall have the right to designate in writing from time to time a beneficiary or beneficiaries by filing a written notice of such designation with the Committee. In the event a beneficiary designated by the Participant does not survive the Participant and no successor beneficiary is selected, or in the event no valid designation has been made, such Participant's beneficiary shall be such Participant's estate. 8. UNFUNDED STATUS OF THE PLAN The Plan shall be unfunded, and Mandatory Conversions, Voluntary Conversions, Stock Units credited to each Participant's Stock Unit Account and all benefits payable to Participants under the Plan represent merely unfunded, unsecured promises of the Company to pay a sum of money to the Participant in the future. 9. ALIENATION OF BENEFITS PROHIBITED No transfer (other than pursuant to Section 7 hereof) by a Participant of any right to any payment hereunder, whether voluntary or involuntary, by operation of law or otherwise, and whether by means of alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, or encumbrance of any kind, shall vest the transferee with any interest or right, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge, or otherwise encumber any such amount, whether presently or thereafter payable, shall be void and of no force or effect. 10. NO SPECIAL RIGHTS Nothing contained in the Plan shall confer upon any Participant any right with respect to the continuation of the Participant's status as a director of the Company. 11. TERMINATION AND AMENDMENT The Plan may be terminated at any time by the Board. The Plan may be amended by the Board from time to time in any respect; provided, however, that no such amendment may reduce the number of Stock Units theretofore credited or creditable to a Participant's Stock Unit Account without the affected Participant's prior written consent. 12. CHOICE OF LAW The Plan and all rights hereunder shall be subject to and interpreted in accordance with the laws of the State of Illinois, without reference to the principles of conflicts of laws, and to applicable federal securities laws. 5 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----